CVGW - NASDAQ

Good afternoon, and welcome to the Third Quarter 2022 Calavo Growers Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] I will now turn the conference over to your host, Julie Kegley, Investor Relations for Calavo. Julie, you may begin.

Good afternoon. And thank you for joining us today to discuss Calavo Grower’s Financial Results for the Third Quarter of 2022. This afternoon, we issued our earnings release and it is available in the Investor Relations section of our website at ir.calavo.com. With me on today’s call are Brian Kocher, President and Chief Executive Officer; and Shawn Munsell, Chief Financial Officer. We will begin with prepared remarks and then open up the call for your questions. Before we begin, I would like to remind you that today’s comments will include forward-looking statements under 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 expected improvement in revenue and operating profit are also forward-looking statements. Our actual results may vary materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause a material difference in our results compared to these forward-looking statements is contained in our SEC filings, including reports on Form 10-K and 10-Q. As you saw in our earnings press release, we have begun our new segment reporting structure. What was the Fresh segment is now known as the Grown segment. The Foods and RFG segments have been combined into the new Prepared segment. In our discussion today, we may refer to the prior segment names as we make the transition. With that, I will now turn the call over to Brian Kocher.

Thank you, Julie, and good afternoon, everyone. We appreciate you joining us today. As we look back at Q3, we continued to make meaningful operational and structural progress. Compared to Q3 last year, gross profit more than doubled to $18.5 million, net income improved to $0.07 per share, compared to a loss of $0.74 a share last year and adjusted EBITDA improved by more than $7 million. Our liquidity and capital ratios all improved and we feel very key leadership roles with talent that allows us to fight above our weight class. On a sequential basis, from the second quarter, gross profit declined, while net income was up $0.08 per share versus a loss of a $0.01 a share in Q2. Adjusted EBITDA was down by $4.6 million. Unfortunately, one tough month of commodity volatility and continued input cost pressure in our guacamole product line masks tremendous improvement in the fresh cut portion of our Prepared segment, formerly known as RFG. The former RFG business achieved almost 8% gross margins in Q3 and I am excited about the structural changes in place to manage that business with an everyday intensity. Temporary avocado price volatility affected both the Grown and Prepared segments. Let me explain those impacts a little further. First, in the Grown segment, the Grown segment finished the quarter modestly down, compared to Q3 last year. Just think about the work that we did during the quarter to deliver gross profit that finished basically flat with Q3 of 2021. Avocado volume was down almost 20%, due a combination of short supply from Mexico and our intentional approach to mitigate losses as we were selling through high priced inventory. Mexican import volume also was down 34% versus the second quarter and 35% year-over-year for the quarter. But we managed to mitigate those declines by increasing our sourcing from California, Peru and Colombia. During July alone, market prices decreased over $20 a carton from the beginning of the month to the end of the month. Yet, through aggressive inventory management and minute-by-minute attention to sales prices, our team managed to squeak out positive gross profit during July and achieve our overall targeted margin per case for the quarter. Overall for the quarter, gross profit per carton was still around $3.65. However, with the market conditions and constraints on available fruit during the quarter, we simply did not have enough sellable volume to increase our gross margin in Grown sequentially from Q2. I am proud of how we managed commodity volatility in the market and already look forward to more normal conditions in Q4. As evidence of our ability to react quickly to temporary changes in the market, by August, we already recovered from the July decrease in avocado market prices and our margins have rebounded from the July levels. We expect the Grown segment to return to realizing margins per carton within a normalized range this quarter. But there is likely to be near-term volatility associated with volume. With the price of fruit as high as it was at the beginning of the third quarter, we did see the retail trade pull back on promotions and shrink display sizes. In August, supply and demand started rebalancing, and we are pushing volumes where appropriate, while tracking toward our overall targeted gross profit per carton. In August, we opened our Jalisco facility for exports to the U.S. market. We have another option to help us manage market exposures. With our network of grower partners, we now have access to the largest GLOBALG.A.P. acreage in Jalisco. This broadens our sourcing capability, has provided additional volume with which to promote and drive sales and provides us with optionality and flexibility, which should benefit the business both in the short- and the long-term. As mentioned, the Prepared segment also felt pressure from higher avocado costs. As we indicated during our call last quarter, our guacamole business within the Prepared segment, formerly known as the Foods segment, was pressured by the cost of fruit. Input costs in Q3 were up 50%, compared to last year. And while we implemented price increases, we could not keep up with the rising cost of inputs. Volume was down approximately 19% versus the prior year due to price and margin pressures and lingering COVID demand softness in the international markets. However, input costs consistently declined over the course of the quarter following the peak in May. We are now selling product for positive gross margin and expect margins to strengthen as we work through our frozen inventory. We also expect our alternative sourcing, process improvement initiatives, and price increases to support gross margin in the fourth quarter. As the Grown segment in the guacamole product line pressured adjusted EBITDA in the quarter, I am most excited about the progress in our Prepared segment. Despite facing challenges, the Prepared segment performed very well in Q3, showing an $11 million gross profit improvement year-over-year in addition to sequential improvement over Q2. We achieved 5% gross margin in Prepared. But that included a nearly 8% gross margin within the fresh cut product line, formerly known as RFG. We continue making steady progress toward our goal of 10% to 12% gross margin for the former RFG segment. Again, this improvement is structural and throughout the entire P&L. Pricing, cost mitigation, labor productivity, yield enhancements and transportation savings, all improved gross margins. Our team in Prepared is managing this business with an hour-by-hour urgency and the improvement in this segment is both confidence and momentum building. In addition, pricing and efficiency improvements from Project Uno gained steam, capturing $15 million in the third quarter and approximately $30 million of benefits year-to-date. I’d like to wrap up my remarks today by saying how thrilled I am to have our leadership team finalized and in place. We recently filled three key roles on the management team, including Shawn Munsell, who began in June as Chief Financial Officer; Danny Dumas, who started in July as Senior Vice President and General Manager of Grown; and Helen Kurtz, who joined in August as Senior Vice President and General Manager of Prepared. Each one of these individuals have been involved in broad international business. Nothing at Calavo is too big for these seasoned leaders, and even in a short period of time, I have seen their growth and profit orientation positively impact our business and team. We have the right people in these important roles. With the passion, energy and competitiveness of a full team driving Calavo, we are positioned to take our performance to the next level and demonstrate that progress through continued sequential profit improvement. With that, I will turn the call over to Shawn Munsell to report on the financials.

Thank you, Brian. It’s good to be here as part of the Calavo team. We provided year-over-year comparisons in our press release. So, I will focus my discussion on a sequential basis from the second quarter. On a consolidated basis, third quarter revenue was $342 million, an increase of $10.6 million from the second quarter of 2022. Grown segment revenue was $207.6 million, down about $3 million from the second quarter, as the average selling price of avocados increased by 14%, while avocado volumes were about 10% lower due to supply constraints in Mexico and intentional steps taken to maintain margins. Prepared segment revenue was $134.9 million, up $14 million from the second quarter, benefiting from price and mix initiatives. Consolidated gross profit was $18.5 million, down $3.2 million from the second quarter. The decrease primarily was due to a $6.4 million decline in gross profits in the Grown segment from the volume constraints, inventory sell-through challenges and margin management decisions Brian outlined. The decline in Grown was partly offset by a $3.2 million sequential improvement in Prepared. Within Prepared, the former RFG portion of the segment realized a significant increase in gross profit from ongoing operational initiatives, achieving a 7.7% gross margin from just over 2% in the prior quarter. The improvement was even more pronounced relative to the negative 5.4% gross margin in the prior-year quarter, which included some unfavorable one-time adjustments, representing a recovery of almost $15 million year-over-year. However, as we shared, negative gross profits in our guacamole line in the third quarter caused by input cost increases tempered overall Prepared gross profit. For additional perspective on segment performance, year-to-date gross profit through the third quarter totaled $53.5 million, up from $48.3 million for the prior year. The $5 million increase year-to-date is attributed to gross profit increases of approximately $1 million and $4 million in our Grown and Prepared segments, respectively. In the Grown segment, year-to-date gross profit per carton for avocados increased by over 20% or almost $10 million. However, the benefit was mostly offset by a 15% decline in volume and an unfavorable foreign exchange impact. The gross profit increase of $4 million in Prepared consisted of a $14 million recovery in the former RFG portion of the segment, much of which occurred in the third quarter, partly offset by an almost $10 million decline attributed to our guacamole line from input cost pressure. Year-to-date fruit input costs are up over 70%, which has exceeded the pace of price increases. SG&A was $16.7 million for the quarter, or 4.9% of sales, while about in line with $16.6 million from the second quarter of 2022, the third quarter also included an increase of $800,000 associated with our new performance based bonus plan. Adjusted EBITDA was $8.1 million for the third quarter, down from $12.7 million in the second quarter of 2022, mainly driven by lower gross profit in the Grown segment, partly offset by higher gross profit in Prepared. Relative to prior year, third quarter adjusted EBITDA was up $7 million, primarily on higher gross profit in Prepared. On a year-to-date basis, adjusted EBITDA totaled $25.5 million, about flat to prior year, as higher segment gross profit of about $5 million was offset mostly by higher SG&A, attributed primarily to increased compensation and bonus expense and other costs. Now, turning to our financial position, during the quarter, we generated strong cash from operations of over $20 million, including from improvements in cycle times for working capital. We further strengthened our balance sheet by paying down debt by $16 million in the third quarter and $38 million since the end of the first quarter. As a result, net debt to adjusted EBITDA was about 1 time as of July 31. Continuing our disciplined use of cash, we invested $3.9 million in CapEx in the quarter, mostly focused on efficiency. We expect full year CapEx to approximate $12 million. The company ended the quarter with $31.4 million of total debt, which included $25.6 million of borrowing under our line of credit, plus other long-term obligations and finance leases. Unrestricted cash and equivalents totaled about $3 million as of July 31 and available liquidity was approximately $20 million, providing ample resources for investment. The volatility that affected the third quarter is subsiding in the fourth quarter and we expect more normal conditions to persist over the balance of the quarter. In Grown, gross profit per carton has started to recover in August, and margins are now tracking toward the historical range of $3 per carton to $4 per carton, but volume will remain challenged in the near term. We are focused on growing this business. The recently announced opening of our Jalisco facility for exports to the U.S. underscores our growth plans. In Prepared, we started buying fruit in August for our guacamole line at prices that will generate more normalized gross margins as a flow-through inventory over the balance of the quarter. We will continue implementing operating improvements within our Prepared-RFG business as planned, although we typically experienced some seasonal softness in the business in the fourth quarter as food availability and demand moderate. We still expect the Prepared-RFG business to attain ongoing gross margins of 10% to 12% by the end of fiscal 2023. That concludes my prepared remarks and I will turn it back over to Brian.

Thanks, Shawn. Since the day I sat in the CEO chair, I have made a big deal about and focused on continuous improvement. The third quarter brought some tough challenges and before we go to questions, I just want to give you some perspective of how I feel about our performance. I am thrilled with the progress we are making in the fresh cut product lines of our Prepared segment, formerly RFG. We are delivering profit improvement throughout the P&L. We are making structural changes to the management and oversight of the business so that our profit improvement is sustainable. These aren’t one-off events where we are just getting a little lucky. I am proud of the way we managed significant commodity volatility in a historically high priced avocado market. We tightened our inventory starting in June, we managed to get out of the inventory over the course of a three-week or four-week period and kept our avocado customers serviced and priced right in the market. As a total company, I am excited that we somehow managed to deliver improved adjusted EBITDA and adjusted net income versus 3Q 2021, when avocado volume was down 19%. If you would have told me that market prices on avocados would decline $20 a case over the course of a month, volume would be off by 19% for the quarter. Guacamole and processed products would have had negative gross margins and we still improved adjusted EBITDA and net income versus the year ago period, then I would have been shocked. This is a great example of why a healthy and profitable Prepared segment balances some of the commodity risk that we have in our Grown segment. I am encouraged that in the midst of driving all our change, we improved days sales on hand in receivables, days payable on hand, inventory levels and other balance sheet areas to pay down debt in the quarter. We paid down almost $40 million of debt in the last six months, which is fantastic. So, actually, I am really proud of this quarter. I am disappointed that we didn’t deliver sequential improvement, but proud of the progress we made in our efforts to control what we can control. I am not satisfied or happy unless we are improving every single day. We have work to do. But shareholders have both the management team and an entire organization that are trying to get better each and every day. My promise to you is I will be restlessly discontent until we are delivering sequential quarter-over-quarter improvements in adjusted EBITDA. We just want to get better each and every day. Sometimes the market allows us to do so. But when it doesn’t, we still compete, we still fight, and we still work to optimize the market conditions in our favor. Simply, that’s our job. So, with that summary, we will turn it over to questions. Operator?

Thank you. [Operator Instructions] Thank you. Our first question is from Ben Bienvenu with Stephens. Please proceed with your question.

Hey, guys. Jim Salera on for Ben. You mentioned the fall in avocado prices. I wanted to ask, how should we be thinking about supply-demand setup as we pivot into the fall? Is the recent fall-off in avocado pricing just a function of supply picking back up, or are you seeing any evidence of the planned restructure from the consumer side?

Well, I think, first of all, Jim, thanks for dialing in. This is Brian. I do think what we have seen is supply and demand rebalancing. The summer harvest -- the summer bloom was significantly more than the prior year. That put some pressure on prices but also allowed us to reduce our purchase costs. I think one of the great values that you have in our business model is that, we are buying and selling on an everyday basis. So, when we have inventory and we have a couple of weeks inventory, we are able to move quickly as the market forces change. So we actually got out of some very high-priced inventory, twice as much as it is today, over the span of three weeks to four weeks and we did it in the month of July and somehow still managed to deliver gross profit in July. It wasn’t a lot, but we managed to deliver gross profit. And if you think of us for the quarter, we are at the higher end of our range. I think we ended up somewhere around $3.65 a case in terms of gross profit per unit. We just didn’t have enough sellable units to generate sequential quarter-over-quarter profit improvement. Now, looking forward, I do think you see the summer bloom that was bigger and which has brought some relief on prices. The estimates that we see for Mexico in the coming fall and harvest season continue to increase. So we are using some of that to promote, to go out and drive volume where we can. I think that our addition of Jalisco in August has allowed us another source to: A, get fruit available for promotion; and B, arbitrage between growing areas, if there is a cost advantage in one or the other. So, I think, the overall supply and demand economics are -- you never want to say normal in a commodity trading environment, but are more typical of this time of the year, and therefore, you see acquisition cost in a more typical range and you see sales price per case in a more typical range.

Great. And on the consumer side, the demand disruption, I mean, I know price has come down, but they are still up pretty materially year-over-year. Have you seen anything just with the consumer feeling inflation pressures everywhere changing their buying behavior at all?

I think it’s really hard for us to see that, Jim, for two reasons. One, we are in a supply constrained environment. So I don’t know that we see real demand. We see whatever we have available to sell sells out. So it’s hard I think for us to say really what the consumer is doing or not doing relative to retail price, because there is not enough fruit to gauge elasticity. That’s one. Now, on the flip side and to be transparent, and I think, I included this in my prepared remarks, we did see at the beginning of the quarter when the prices were at their highest, we saw some retailers who stopped promoting and we saw some that shrunk display sizes. So we did see some retailers back off a little bit, I think, that had some things to do with volume. But, again, if we had more volume or, sorry, if we have more demand, we couldn’t have sell -- sold more because we didn’t have more volume. So it’s a little bit of a tricky analysis to walk through, but again, I like our model. If you look at it now, we are buying the fruit we need now on a daily basis. I don’t have to sell fruit coming off my own farm, whether I like it or not into a bad market, as an example. So, there is pluses and minuses, but I like the fact that we are a marketer of fruit and because of that, we can move with the market quickly and we can keep our overall gross profit per box -- gross profit per carton, we can keep that in our historical range and I think we have done a really good job about it. I mean, think of it this way, Jim. We managed to deliver the same gross margin in this quarter with 19% less volume and negative currency impact. That’s pretty impressive versus the same quarter of last year. So I think there is some value in our model that you are seeing in the quarter.

Great. I appreciate the additional color. If I can sneak one more in, you guys have added a lot of talent to the team as of late and just where are you in building out the team? Are you guys almost where you want to be or where you want to be? And then what new ability does it give you now that you are kind of playing with a full desk?

Well, I am really excited about our team. We are complete. We filled the CFO role with Shawn, who many of you have met over the course of the quarter and some will continue meeting. We filled our General Manager for -- and Senior VP for our Grown division with Danny Dumas. Danny is a long-time global commodity player. He’s been in bananas, he’s been in pines, he’s been in avocados, he knows the game and the system and so, I am excited about that. And then we filled the General Manager of our Prepared segment with Helen Kurtz, who has not as much experience in produce directly, but Helen has tremendous experience in very tough, tight margin agricultural products within the chicken industry. She’s got a lot of brand and CPG experience from her General Mills days. So I am really excited about the talent that we have. We are onboarding that talent. Some of them have just a couple of days of experience now. So - but we have got a really good team. I think the other aspect of this is this was a very structured transition. So, we have Rob Wedin, who formerly managed our avocado business for years and years and years, who is on a transition plan -- a structured transition plan with Danny. We have Ron Araiza, who has been involved in our Prepared segment for years and years and years, who has a very structured transition plan with Helen. So I like that this is -- that -- we have the assistance of players who have helped deliver results. We have the assistance of them in transitioning our new leaders. So I am excited about where we are a team. I am excited to have sort of a group that’s profit oriented, but also growth oriented. We have got our facility stable. We can produce very high-quality product with high fill rates. We have got the right cost profile. Now we need people that can help us grow, and I think, with Helen and Danny running the P&Ls and Shawn helping us with providing access to investment where we need, I am really excited about the leadership team we have in place.

That’s great. I appreciate your time and I will pass it on.

[Operator Instructions] Our next question comes from Ben Klieve with Lake Street Capital Markets. Please proceed with your question.

All right. Thanks for taking my questions. First, I have a couple on the kind of processed avocado side. First, I have just kind of a high-level question about kind of the how you source your supply for that business and how that’s changed throughout Project Uno. I am really kind of curious how nimble that process is and then great to watch you build up inventory as when prices fall to capitalize on that kind of environment when prices are high. Can you talk about that part of the business and really how it’s changed over the last year?

Sure. So, first of all, Ben, thanks again for calling in. I appreciate it and hope you are doing well. This processed avocado business. We have tried to transition over the course of the last several months. Predominantly if you go back a year ago, we were predominantly buying fruit from our own packing house, buying -- transitioning fruit from our own packing house that were the remnants of the pack out that -- of our own harvest and over the course of the last six months in particular, we really tried to diversify that portfolio. So, in the old model, you could see basically whatever we were paying for the product, we were selling in the market as whole fruit, we would be paying for our processed fruit as well, just as the remainder, a weighted average would be the same. So we have expanded that geographically. So we have gone to now Jalisco and we are sourcing fruit out of Jalisco. We have gone to that to some other states in Mexico. We have sought out volume from other countries, be it Peru or guacamole even when prices or, sorry, Peru or Guatemala, even when prices were really high we were buying partially processed avocado to blend it in or blend it in with our finished good products. So the whole sourcing environment has changed over the course of the last six months, I would say, Ben and that’s really helped. I think just transparently, a couple of other things have helped. One, the overall supply/demand dynamics have changed. We are now buying raw product for our processed business that is roughly 35% of what it was eight weeks ago, nine weeks ago. And we have got some productivity initiatives, so we have got a host of initiatives that are all centered around, how do I drive one more pound through the system per day with one less FTE and producing one less pound of shrink when I do it. So we have got a lot of that going. And of course, the price increases have helped now that the input costs have come down. But frankly, we raised prices 4 times. We just couldn’t keep up and the market couldn’t bear more price increases and we tested that to make sure. Hopefully, that helps.

Yeah. That -- Brian, that was really helpful. And then I -- that stimulates a follow-up. I mean this kind of shift in strategy over the last six months to diversify your inputs. What are your expectations for what that can deliver in, let’s call, I don’t know if you can even say the word normalized anymore, but you know what I mean. In a more regular operating environment than you encountered in July. I mean, do you think that you can get back to the kind of profitability levels that this company saw in this business in 2019 or somewhere between the -- between here and there kind of a realistic target?

Yeah. Ben, this is Shawn. I will take that question. So, like Brian said, we are now buying fruit that’s probably a third of what we were paying at its peak back in the summer. And it’s going to take a few weeks for that to flow through inventory. But when it does, I would expect that in this month in September, we are going to start to really see gross margins that are consistent with what we would expect on a historical basis.

Okay. Thank you. And one more for me and I will get back…

Hey, Ben.

… in queue.

Hey, Ben. Sorry. Just one more thing, because you brought it up in your first question, so here’s the other thing that we are doing, just from a management perspective. Now that the price of raw product is in a range where if we were -- if we had no inventory, if we had no accumulated inventory and we were selling it today we would be at our target margins, right? But the other thing that we are doing is trying to take advantage of capacity. So we are building frozen inventory back up at these raw product costs, not at the raw product costs from eight weeks ago. And I think that’s another just important part of how you manage a business, how you manage a P&L, how you manage your kind of the risks as they come down the pipe is, we are building frozen inventory now at today’s prices, so that we can smooth some of the challenges that we may face in the future as supply and demand dynamics change.

Yeah. And…

Got you.

And just one more thing to add there too, Ben is, Brian alluded to it, we have got some efficiency projects that were kicking off that we expect should be installed and operational kind of in early 2023 and that’s going to give us a couple of points of lift too once they are up and running. So efficiency, yield improvement, so we should see some benefit from that in the not too distant future.

Got it. Got it. That’s all helpful color. One more quick one from me and it gets to kind of building on something you just said about all the various improvements in place. RFG, the sequential gross margin improvement really was pretty dramatic from the second quarter to the third quarter, I think you said, from 2% to 8% in that legacy RFG business, was there anything kind of one-time in nature from the -- to lead to that increase and/or was that really kind of progression as you expected and now that’s kind of the, call it, the new floor for that business may be heading into the next quarter?

Yeah. There -- this is Shawn. There wasn’t anything, I would say, kind of unusual or like non-recurring in nature there, Ben. We are just making steady progress across the P&L. I will say the vast majority of the improvement from the second quarter was price related. But we also had some labor and productivity improvements and also starting to see more of the benefits from our transportation and warehousing initiatives as well.

Got it. Okay. Very good. Well, I appreciate it.

Hey, Ben.

Yeah. Go ahead, Brian.

Sorry. Just before we leave RFG, I am really proud of RFG this quarter, really proud. I -- and then transparently I’d say, we saw this coming kind of in the June-ish timeframe. But this is the culmination -- and I don’t want to say culmination, really, it’s a cumulative effect, let’s say, not combination, because we still have work to do to get to our target margins. But this is across the P&L. Shawn mentioned it. I am not sure you have got many other of your accounts that you are following, I am not sure that you have got many other of them that are -- have year-over-year savings in transportation. We have got savings in transportation. We have got labor productivity. We have got yield enhancements. Sure, we have got raw product material costs, but as Shawn mentioned, pricing has been able to offset that. This is just some good old fashioned leadership grinding. We have got every plant manager who is grinding on this every day. We have got every salesperson who is out there grinding on pricing every day. We are working with the customers to make sure that we have got a great solution for them. So I am really proud. I would say, if you would have asked me on this call last quarter, I knew we would improve. I didn’t know that we would get to almost 8%, but we see a -- we saw it sort of the middle of June and then we just kept driving it. So it’s a -- this is really, really significant. Now, the other aspect, the two other things that I will kind of remind you about. One, we still have a ways to go to get to our 10% target margin for this legacy RFG business. And the fact of the matter is the last 25% of improvement is always tougher than the first 75% and -- but we are here and we are going to take it and grind it every single day. The second thing that I would say is just kind of remember, there is some seasonality to this business, you go into the winter months and you go to winter sourcing for fruit. You have winter pricing too, but things get a little tougher and dicier. So I don’t know that I’d necessarily say, all right, 8% is the rock the absolute floor. But we are going to try to continually march to that 10% to 12% coming out of 2023. If you remember, that’s what we talked about, by the time we come out of 2023, that legacy RFG business would be somewhere in the range of 10% to 12%.

Got it. Got it. That all was very helpful, and yeah, plenty of -- a lot of improvement has been made already. Congratulations to you all on that progress. I think that does it for me. Thanks for taking my questions. I will get back in queue.

Thanks a lot, Ben.

Thanks, Ben.

Thank you. Our next question is from Ben Bienvenu from Stephens. Please proceed with your question.

Hey, guys. Jim Salera, back on for Ben. I wanted to ask a follow-up on Jalisco. How much -- if you can tell us, how much fruit did you pull out of Jalisco in August, as you guys got everything kind of up and running?

It was probably -- it started off slow, Jim, and then I’d probably say, of our Mexican volume, it got up to about 10%, 12%. I think going forward for the next month or so, you might see it as high as 25% of our Mexican volume.

Do you have a target range or a target contribution that it should make up kind of as like a go-forward run rate?

Not -- I wouldn’t think of that way -- think of it that way, Jim, if you bear with me. What we want to think about is selling Mexican fruit into the U.S. market and whether it comes from Michoacan or Jalisco, that’s our opportunity to arbitrage on acquisition price, on efficiency of our packing houses, how does one dilute fixed costs more than the other. The transportation to the border is about the same, so that’s not an impact. So we are trying to be a little fluid in there. Our -- remember, we make these buy decisions every day and so we will place an order. In fact, I think, we probably just placed in order an hour ago for tomorrow’s volume and every day, we are deciding how much from Michoacan, how much from Jalisco and trying to do that in what’s the best interest of our business. Remember, in this commodity business, pennies matter and so we will fight it out for pennies every single day and that’s what we are doing. So it’s hard for me to say that there is a target for Jalisco. What there is a target for is our return in the market and we have said that consistently, it’s in that $3 to $4 per case range in the market and our opportunities to operate in that range to deliver that range is based upon a wide range of sources, including Peru, including California, including Colombia, including Jalisco, including Michoacan. And so, our job is to make sure we are balancing and arbitraging amongst all those sources to, A, get the fruit we require, and B, do it at a cost profile that allows us to deliver our targeted margins per case.

Okay. Appreciate the follow-up question. Thanks, guys.

Thank you.

Thank you. Our next question is from Mitch Pinheiro with Sturdivant and Company. Please proceed with your question.

Yeah. Hi. Good afternoon.

Hi, Mitch.

A couple of questions. Just curious, staying on the avocado side, I may have misheard you, but you said you might be volume challenged in the near-term. I just see -- I see the volumes coming in from Mexico and up very nicely here in August. Is there -- has there been a slowdown or why would you say that?

Yeah. The near-term volume challenge, Mitch, what we were referring to there is, just as we are working through kind of the inventory levels, as prices are stabilizing and costs are stabilizing, just ensuring that we are managing our margin as we are transitioning to a more kind of normal environment.

Mitch, I think, the other thing that we also have to transparently face and we did this, I mentioned this a little bit earlier. We saw during the beginning of the quarter that retailers stopped promotions and shrunk display sizes and now we are getting them to ramp promotions back up and in large display sizes. So, there is a little bit of that that we have to restart the category on and retrain the consumer that product’s available now. So, what we were alluding to is that, I don’t think we can go from 19% down on a volume basis year-over-year to breakeven or 10% higher year-over-year, right? There is a ramp-up period that we wanted to make sure that we…

Yeah.

… articulated.

Okay. And then can you remind me, on the Grown side, what percentage of your business is retail versus foodservice and then if you could talk about any differences in demand or any changes among those channels?

Yeah. It’s about 60-40 favoring retail.

And I mean, so, how has foodservice performed? I mean, are we saying, is there -- has there been a volume decline there because of lack of good fruit or because the prices and can you -- they are backing off on the menu there, can you talk a little bit about that?

Yeah. If you look at the volume decline that we experienced in the third quarter, Mitch, it was -- we probably saw a little bit more impact on the retail side than we did the foodservice side. And again, for the reasons primarily that Brian cited, kind of a lack of promotions, but it was, to be honest with you, the difference between the two was fairly modest.

Okay. And then how about this…

Hey, Mitch. Mitch, I would say, the other aspect of that is, again, we were in a volume constrained environment. So foodservice can be a little more flexible in terms of size, because it’s an ingredient for their finished product. So sometimes, they will chase a better price size of product. But general, they are trying -- and we are in big Mexican themed foodservice players as well, and again, they are not going to take guacamole or avocados off the menu, but we have got to work with them to try to get it at that price point.

Right. And then on guacamole side, any differences between foodservice and retail?

No. Nothing really to speak of there, Mitch.

Okay. Finally on RFG, it looks like, I am -- I just -- I was doing the quick math. It looks like sales year-over-year was up about 14%. Is that about right?

I -- Shawn, I didn’t think it was 14%, was it, maybe.

I…

Yeah.

But you don’t break it out, I was just trying to back into it, but I was doing it quickly and that’s hard for me to do.

But -- yeah. You are -- yeah. So, sorry, Mitch. You are trying to do it for RFG itself, the RFG portion of the business --

Yeah. Just trying to get a sense -- I mean, I am just basically trying to get a sense for…

Yeah.

…it seemed like it was mostly pricing versus volume. I was curious about how that was.

Yeah. Yeah. Your math is about right there and year-over-year volume is down just a little in RFG. So, yeah, year-over-year when you look at that topline number, that was mostly the impact of pricing.

And what are your conversations like with your customers in the RFG segment now?

Oh! I think the good news for us is our customer -- now our discussion with customers is about growth. I mean, if you think about this time last year, RFG was having trouble fulfilling orders, having trouble finding the right profit profile, having trouble getting the right labor mix in the facility. We stabilized all of our facilities. We are still -- our fill rate over the course of the last quarter was something like 99% or 99.1%. I mean, it’s something crazy good for a perishable product. So we are excited about the service. We have stabilize the operation. We mentioned some of the metrics that we talked about in terms of labor productivity, yield improvements, fill rate consistency and so now we get a chance to talk to them about how do we work together to grow the category again. So I am excited about turning from stabilization phase to growth and leverage phase in RFG, formerly known as RFG,

So…

…let’s say.

Right. So in that business, do you think -- so I understand sort of the seasonality of the business and what that could do to margins in the quarter and maybe first quarter. But are we -- do you see sort of a stabilization in volume in that business going into the fourth quarter and first quarter of next year?

Yeah. I think it’s stabilized, probably, a little bit of softening, just seasonal softening as we go into the fourth quarter. But, yeah, otherwise, roughly in line with what we are seeing this quarter. And just one other comment too, Mitch, going back to your earlier point about the topline. Keep in mind, that’s a combination of price, but there is also some mix benefits that are flowing through as well as we are working through our SKU optimization process, and of course, that’s going to be an ongoing process for it. So you are seeing some of those benefits as well and that bleeds into those conversations that we are having with our customers.

Okay. And then one more thing, to get to -- from the 8% range in gross margin to double-digit range, I know it’s going to take a lot of work. But I mean how much of that is going to be dependent on just fixed cost leverage, just simple more volume through your facilities, is it most of it, half of it, any way to think about that?

Yeah. I’d say that it would be less than half of that, Mitch. I mean, really kind of the path forward for us, if you think about what got us to the 8%, specifically 7.7% in the past quarter, what’s going to take us to 10% to 12%, that’s going to be a component of it. But, frankly, just like the path here, it’s going to be a lot -- completely across the P&L. So we are going to continue to see pricing benefits, more mix benefits, labor optimization, productivity, but absolutely pushing more volume to those plants.

All right. Well, thank you for your time.

Hey, Mitch. Thanks a lot for…

Thank you, Mitch.

…dialing in. And let me just -- we will just talk a little bit until unless there is another -- until there is another question. But, Mitch, I think an important part of thinking about RFG in this volume piece. Yes, volume will help and leveraging fixed costs will help. But we have structurally changed the way we manage this business so significantly. And just to give you an example on labor, in every plant, at every hour of the day, our plant manager knows the labor that they have deployed so far. They know that, they know the productivity they are getting and they can make on the fly line balancing decisions. That didn’t exist a year ago. We have a seasonal calendar of sourcing raw products now, where 93% of our raw products in the legacy RFG business are now sourced under contract methodology using an online sourcing tool. That didn’t exist a year ago. We have got a transportation network, where 70% odd of our transportation spend is under RFP, where most -- where we have built carrier depth and consistency in our carriers. That didn’t exist a year ago. So the point that -- we have launched a training program, a system-wide training program for plant managers, assistant plant managers and line supervisors to tell them exactly how they react when the metrics go one way or another. That didn’t exist and wasn’t in place a year ago. So the -- when I talk about the sustainability of the improvements in RFG, that is not ever meant to say one quarter we might go backwards a little bit and then go forward a little bit. But the fact of the matter is, we put structure in place to manage this business every single hour every single day. And frankly, that’s the only way that I know how to do it is, we have just got to grind and our leaders know it, they are incented to do it, we are all incented the same way so that we are all pulling in the same direction as a team and I am just -- I want to make sure we get across the sustainability of these improvements. We didn’t just get lucky this quarter. Paul, do we have any more questions?

At this time, there are no further questions. I’d like to turn the floor back over to Brian Kocher for any closing comments.

Okay. Thanks, Paul. Thank you all for dialing in. We appreciate your support. We appreciate you have given us a chance to help us explain our business and where we are making the opportunities and where we are driving the results. So thank you very much. We look forward to talking to you next quarter, and again, appreciate all your support.