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CEO's Message

  

     LETTER TO OUR SHAREHOLDERS
     FISCAL 2019


 

Calavo Growers, Inc. posted record revenue of $1.1 billion in fiscal 2018—the eighth consecutive year in which our top line registered a new all-time high.  Your company also surpassed previous bests for adjusted net income and adjusted earnings per share, while posting gross profit virtually equal to the record set in fiscal 2017. It was, in short, another very successful year.


Let me drill down on these operating results. Adjusted net income for the fiscal year ended October 31, 2018, which excludes certain items impacting comparability, increased by 15 percent to $43.7 million, equal to $2.49 per diluted share, which compares with adjusted net income of $38.0 million, or $2.17 per diluted share, in the prior year. (Net income for the most recent year totaled $32.3 million, or $1.84 per diluted share, which compares with $37.3 million, or $2.13 per diluted share, last year.) 

Revenues for the most-recent year slightly edged the company’s top line in fiscal 2017. Gross profit totaled $113.6 million, or 10.4 percent of revenues, versus $114.5 million, equal to 10.6 percent of revenues, in the prior year. Operating income measured $56.5 million as compared with $57.9 million in fiscal 2017.

In recognition of our sustained profitability, our board of directors declared a $1.00 per share annual cash dividend on Calavo’s common stock, the 17th consecutive payout since becoming publicly traded in 2002. The most-recent award was a 5.3 percent increase from one year earlier and reflects a steady, consistent 400 percent climb since our listing on the Nasdaq Market.  Nothing underscores Calavo’s commitment to delivering the highest possible shareholder returns than the upward trendline of the company dividend.

Consider another significant aspect of value creation for our owners. During the past decade alone, Calavo’s stock price has appreciated at a compound annual growth rate of 25 percent—directly reflective of our success building a larger, more profitable enterprise. In dollars and cents, $10,000 of company shares at the time Calavo began trading on Nasdaq, along with reinvested cash dividends, would have risen to $195,000 at October 31, 2018.

Last year did present a series of transitory operating challenges in each of Calavo’s

three principal business segments. All were comparatively short-lived market or industry conditions. Nothing makes me prouder than to write that despite these unique circumstances, we continued to execute well across our businesses to deliver strong operating results.  Our success in navigating through turbulent cross currents is attributable, above all else, to one factor: experience. Calavo’s senior management team collectively possesses about 200 years of know-how in the agribusiness and fresh food sectors. 

The incalculable value of experience, especially in last year’s operating environment, cannot be overstated.

We bring to bear that same breadth and depth of management experience in the disciplined and focused execution of Calavo’s strategic agenda.  Our core expertise and category leadership in the fresh avocado industry has provided the springboard into higher margin, faster growth categories—specifically, our Calavo Foods and RFG business segments—that have each become outstanding contributors to overall revenue and profit. In sum, these three segments also contribute to consistency in our operating performance, “smoothing out” overall results and offsetting macro industry and market conditions that can invariably arise in any of our segments.

How else have we applied this experience?  Consider our deeply rooted understanding of complex distribution and logistics amassed from decades-long experience shipping perishable produce.  That expertise was born out of necessity: the requirement to move hundreds of millions of pounds of fresh avocados and other commodity goods from our packinghouses and value-added depots so it reaches our customers fresh and equal to our quality standards and, just as importantly, theirs.  The same know-how has been invaluable in RFG’s rapid expansion under Calavo ownership.  Not only have we injected Calavo financial resources to speed RFG’s growth, but also our operating experience.

The result is a seamless national network of seven strategically placed RFG production facilities across the U.S. with the capabilities to fulfill retail-grocery customers’ orders on a just-in-time basis—as quickly as the next day. The distribution footprint we have cast is arguably unrivaled in the fresh refrigerated produce industry.

We enter fiscal 2019 in a very strong position. The fresh avocado industry continues its extended consumption-growth curve. Last year, all-source fresh avocado volume in the U.S. grew by 21 percent from the prior year to reach 2.6 billion pounds. These numbers are predicted to rise again in fiscal 2019. As an early indication of further growth, in January 2019 all-source fruit volume reached a new high, surpassing 70 million pounds in a single week. As an industry leader, Calavo is well positioned in both sourcing and customer relationships—as well as through hallmarks such as production management and distribution—to be a prime beneficiary of this ascending consumption trend line.

We have put in place the packing capacity for long-term growth—selling domestically and abroad. The company sees rapidly expanding potential in emerging avocado markets such as China and Korea where our fresh fruit sales increased by double digits last year. 

RFG is primed to re-accelerate sales and gross profit growth this year as we attain improved capacity utilization and gain operating efficiencies at our newer and expanded production facilities. Last year, the industry confronted a series of food-safety events, including recalls of romaine lettuce, melon and sweet corn. While RFG was not responsible for any of these recalls, they impacted its sales and gross profit. Nonetheless sales rose by more than seven percent last year; since being acquired by Calavo in 2011, RFG revenues have quadrupled. 

The fresh refrigerated packaged goods category is the fastest-growing segment of the retail grocery business, with the cut fruit and vegetable product segment alone growing eight to nine percent annually and presently totaling $12 billion in industry sales, according to research data. It’s no surprise then that we are continuing to invest in RFG’s future growth to keep pace. With its outstanding and expanding line-up of products, as well as the addition of some of the nation’s leading food retailers as customers, RFG is exceedingly well situated. This year, we will add a new production facility in Portland, Oregon, which will also include a Calavo value-added depot for fresh avocados, to deepen our penetration into the Pacific Northwest.  Previously serving the region through co-packing arrangements, RFG’s new facility will bring operations under direct company control and facilitate more rapid expansion.

Calavo Foods will remain a solid incremental contributor to overall company results. This proven, high-margin business accounted for eight percent of total revenues last year but added a significant 23 percent of the company’s overall gross profit. In the current year, we once again expect Calavo Foods segment sales to grow by double digits as its top line closes in on $100 million, while gross profit dollars should rise by a mid-teen rate

With so much to build upon, the year ahead looks exceedingly promising.  Our strong, largely unlevered balance sheet provides us flexibility to reinvest cash to grow our businesses. We routinely evaluate possible acquisition opportunities, but judiciously maintain our rigorous criteria that any deal fit within our core businesses and must be accretive to operating results.

Let me conclude by expressing gratitude to our senior management team and employees across the company for their dedication. I extend thanks to our board of directors for sound counsel. I offer appreciation to our customers for choosing to partner with us. And to you, my fellow shareholders, your loyalty is greatly valued and we will work tirelessly to justify your continued confidence.

 

Sincerely,

 

Lee E. Cole

Chairman, President and Chief Executive Officer

March 4, 2019


    
       CHAIRMAN, PRESIDENT AND CEO

      Lee Cole has been called a maverick, a risk-taker, a visionary and a savvy entrepreneur, and indeed, he is all these things. But first and foremost, he is a grower—whether he is tending his 400-acre avocado farm in Santa Paula, California or transforming a local, grower-owned cooperative into a publicly traded, diversified, world-class agribusiness.

Deep Roots in “Calavo Country”
      Born to Oklahoma cattle ranchers, Lecil Edward Cole decided early in life that he would follow his father’s footsteps into ranching. At age 13, he moved with his parents to Santa Paula, and set his sights on owning his own ranch. After a stint in the U.S. Army, he went home to Santa Paula to put his plan into action.

      Cole took a job with Safeway Stores to support himself, and quickly rose through the ranks. At age 21, he became the youngest store manager in Company history. Soon he was promoted to District Manager, overseeing all aspects of operations in 18 stores. All the while, Cole was purchasing land and water rights in Santa Paula. At age 33, with 80 acres of producing avocado trees and 100 head of cattle, Cole left his Safeway career to become a full-time rancher, avocado grower and entrepreneur. Before long, the avocado trees had taken over his ranch, eventually displacing the cattle.

      Then, as now, Santa Paula was “Calavo Country,” and Cole was quickly recruited to join the growers’ cooperative. Seeing a need for improved customer service, he campaigned for the director’s seat and won. Next, he leveraged his 15 years of retailing experience to win election to the directorship in 1982. He has remained on Calavo's board ever since, becoming Chairman and CEO in 1998, and assuming the added role of president in 1999.

A Grower’s Perspective
      Implementing an aggressive strategic agenda while also maintaining strong profitability is key to Cole’s leadership style. From the beginning, he applied his grower’s perspective to retool the Company to compete as an efficient, global enterprise in the 21st century. As a grower as well as a shareholder, he strives to maximize both corporate profit and returns to the farm. As a result, Calavo’s grower returns rank among the industry’s best.

Unlocking Value
      To unlock the Company’s value and pave the way for future growth, Cole spearheaded the co-op’s conversion to a for-profit corporation in 2001 and its listing on the NASDAQ in 2002. This forward-thinking transaction created a currency to use for all-stock acquisitions without needing to leverage Calavo’s strong balance sheet.

      In 2003, Cole led Calavo in its first strategic acquisition, Maui Fresh International, Inc., a multi-product distributor of specialty produce. The transaction extended Calavo’s brand equity and market stature into new perishable product categories and broadened Calavo’s product offerings to dozens of items, ranging from tropical fruits to fresh cut vegetables.  Since then, several acquisitions followed, the most recent being Renaissance Food Group.

Nurturing Grower Relationships
      Understanding that packinghouses thrive on volume, Cole made grower recruitment and retention Calavo’s number one priority. Accordingly, he instituted a strategic grower recruitment plan that resulted in a record 38 to 40 percent of the domestic market share. In 2005, he piloted the Company through an equity cross-investment with Limoneira Company. Calavo now packs and distributes the crops of the number one and number two domestic producers of avocados—Irvine Company and Limoneira, respectively—and has forged alliances with growers in Mexico, Chile, New Zealand and the Dominican Republic.

      To bring new operating efficiencies to its processed-products unit, Cole instituted a comprehensive restructuring of Calavo’s processed products unit, with a 90,000-square- foot production facility in Uruapan, Michaocan, Mexico, ending an inefficient two-step process of pulping and converting to finished product in separate plants. 

A Family Business
      More than 90 years after its founding as a grower-owned cooperative—and numerous years after Cole assumed leadership of the Company—Calavo is growing and profitable. As he continues to move the Company ahead, Cole’s family business continues to blossom as well.

     In addition to his Santa Paula avocado ranch, where he resided with wife, Jeannette, Cole owns a papaya farm and papaya processing plant on Hawaii’s Big Island. Cole’s papayas are sold domestically under the label, "Calavo Gold", his own "Cole" label, and internationally under the "Jeanette" label. Cole’s son, Guy, manages the avocado farm and his daughter, Suzanne, manages the papaya processing plant, which sells papaya purée worldwide.

     As he looks back over 90 years of Calavo history, Cole is characteristically humbled about his stewardship. “I never forget that I am charged with the oversight of a formidable legacy, and I am proud, humbled and even awed to be at its reins,” he says. “I do not feel that I inherited this company from those who preceded me; instead, I am borrowing it from those who will follow me.”

     Thanks to Cole’s leadership, those who follow will enjoy the fruits of a bigger, more broadly based Calavo, solidly positioned to lead the industry for the next 90 years and beyond.


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