Message To Our Shareholders - Fiscal 2012:
SHAREHOLDERS
In business and in life, timing is critical. Hence expressions such as, "There's a time and place for everything." Or, "It'll happen when the time is right."
For the fiscal year ended October 21, 2012, net income reached $17.1 million, equal to $1.15 per diluted share, an increase of 54 percent from $11.1 million, or $0.75 per share, one year earlier. Net income before the effect of the extraordinary Mexican tax charge equaled $18.9 million, or $1.27 per diluted share. Revenues expanded five percent to $551.1 million from the previous historic high of $522.5 million reached in fiscal 2011. Total gross margin benefited from improvements in each business unit, rising to $60.7 million, a 43 percent increase from $42.3 million 12 months earlier. On the strength of this performance, Calavo’s board of directors increased the annual cash dividend for our common stock by 18 percent to $0.65 per share. Over the past decade, our company’s annual cash dividend has risen 225 percent from $0.20 in fiscal 2002, indicative of Calavo’s unwavering commitment to shareholder returns. Elsewhere in this annual report, we discuss specifically how the company has built share value, delivering outstanding returns during its first decade as a public company. The figures are formidable and we are duly proud of them, particularly when considered in the context that these results have been achieved: the worst recession since the Great Depression and a fragile and still-tentative economic recovery. The preceding reinforces what our management team has believed all along: we have created outstanding business platforms and will continue executing them with focus and discipline. As the unrivaled avocado-market leader, Calavo is, inarguably, the prime beneficiary of an industry experiencing explosive growth. We played a significant role in creating the market for avocados and continue to drive this industry nearly 90 years later. The available avocado supply is estimated to reach 1.65 billion pounds in 2013, up from 1.4 billion pounds last year and an increase from 1 billion pounds just five years ago. Demographic shifts, specifically a growing Hispanic population, and an emphasis on healthful eating are driving the rise in consumption. Factor in effective industry advertising and promotion—with events including the Super Bowl and Cinco de Mayo generating record avocado sales each year—and the trend line rises further. As someone who has personally spent nearly 50 years in the avocado business, I confidently can say that as the industry burgeons around us, expanding faster than ever, Calavo is at its epicenter and best positioned to capitalize on growth. In 2012, in anticipation of this continued avocado-market expansion, we doubled the capacity of our Mexican packing operations in Uruapan, Michoacán. Calavo now possesses company-wide capacity to pack approximately 600 million pounds of fresh avocados through its three facilities. We will not be content to simply maintain our current market leadership. Instead, we intend to seize a still-larger share of the fresh avocado market and pursue growth aggressively. With Calavo’s infrastructure, distribution and marketing strength, we believe capturing an outsized slice of this year’s expected additional 250-million-plus pounds of fresh avocados is well within our reach. Each year, our value-added fresh avocados—bagged and ProRipeVIP® fruit—account for a larger portion of the business segment’s sales. Moreover, our added capacity in Mexico enables us to supply rapidly growing markets for avocados, such as Asia-Pacific, and most notably Japan, where our fresh sales could prospectively double this year. The amazing avocado revolution’s benefit to our Calavo Foods unit is equally notable. Consumption trends are on the rise in prepared avocado products, as well. Strong results last year in our Calavo Foods business segment bear this out, with gross margins snapping back to record levels in fiscal 2012 from the prior year, owing to a larger supply of available fruit in the marketplace at more favorable prices. Fiscal 2013 should look even better, as we expect continued strong margins to be accompanied by significant market penetration among retail and food service customers alike to jump-start revenue growth in the unit. At the core of Calavo Foods are, simply put, outstanding prepared products: healthy, delicious and innovative. We were at the forefront of bringing ultra-high-pressure (UHP) food preparation to the avocado industry. These fresh-tasting, long-shelf-life products continue to draw the interest of retail and food service clients and reinforce that the future of this business segment resides squarely in UHP. We continue to innovate to those ends. Specifically, during fiscal 201, we are rolling out commercially to the retail grocery channel our latest advancement: UHP Avocado Halves. Granted, I find more beauty in the avocado than the “average Joe” on the street. However, the new halves are simply stunning and must be seen to be appreciated. The packaging is cutting-edge, almost futuristic, and showcases vacuum-sealed seedless halves with a 75-day shelf life if unopened. The product is attracting considerable “buzz.” It is a boon to consumer convenience and a further indication that great things come in Calavo packages. Fiscal 2012 marked the first full year of Renaissance Food Group (RFG) being part of the Calavo Family of brands. RFG—whose results we now report as its own business unit distinct from the legacy Calavo Foods segment—performed to our expectations. We integrated RFG seamlessly into our company and look continuously for ways to leverage our ownership. “Synergies” is a tired and overused word in business, especially when trying to justify acquisitions. But, franklyit truly fits and is appropriate in the context of Calavo and RFG. Consider commodities such as fresh pineapple. RFG requires tons in its various refrigerated fresh packaged products each year and Calavo is able to source and supply the best available frit for its operating subsidiary. This sort of vertical integration is indicative of how the RFG acquisition is benefitting us and the synergies we’re deriving. Beyond our complementary distribution strengths, RFG is an energizing presence – showcasing clock speed in everything from time-to-market to new-product innovation. Turning to diversified fresh produce, we see these highly complementary extensions to our avocado business providing greater incremental contributions in the new year. We anticipate growth in fresh tomato volume and recovery in pricing from fiscal 2012, when an extreme industry oversupply from Mexico resulted in the bottom falling out of the market. Fresh papayas and aforementioned pineapple performed favorably for Calavo last year and we anticipate maintaining that upward ar. Consumption grows for both – demand is there in the marketplace – and we are able to source outstanding product in each category: pineapples from Costa Rica and papayas from the eastern slopes of the island of Hawaii. Both reinforce the Calavo brand’s reputation for quality. The question I am asked more than any other is, “Lee, when can we expect Calavo to make another significant acquisition?” The short answer is we are always on the look-out. To elaborate further, though, big transactions that fit our specific criteria are very difficult to come by. While we possess the financial resources and track record of success, we are judicious and disciplined – and that is not going to change. Consequently, we take a lot of “passed balls” before swinging at the “right pitch,” such as an RFG. That said, with the rapid growth of the avocado industry and our “sweet spot” market position, we see opportunities on the horizon to fold-in smaller competitors which will find themselves increasingly marginalized and at a disadvantage in a fast-moving industry. We expect to principally expand our avocado operations organically through internal growth – and are poised to do so – but do not rule out the prospect of complementary, accretive acquisitions either. The next several years will undoubtedly result in consolidation across the avocado industry. From an operating standpoint, expect Calavo to stay the course. Our strategic blueprint serves us well and we will not be deviating from it. I have never been more confident about the future of the industry or our company. From all indicators, I expect Calavo again to deliver record operating results in fiscal 2013. In every respect, It’s Our Time, a most fitting theme message for this year’s annual report. The second half of that theme, It’s Your Time, applies equally to our customers, consumers who enjoy our outstanding array of products, and to you, our shareholders. In closing, let me extend appreciation not only to the above-mentioned stakeholders, but also single out for praise our senior management team, 1,500-plus employees and sage board of directors. Calavo’s sustained success is, in large measure, a testament to their dedication and indefatigable efforts. I am enormously grateful and look forward to new heights ahead.
Sincerely, |
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Chairman of the Board, President and CEO Calavo Growers, Inc. 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” 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
Unlocking Value 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.
Nurturing Grower Relationships 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 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 almost 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. |
