Message To Our Shareholders - Fiscal 2011:
FORWARD Fiscal 2011 marked Calavo’s tenth year as a public company. Reflecting on the past decade, I am immensely proud that, as our company has grown, we have remained single-minded in creating value for you, our loyal owners. Consider that:The company’s market capitalization has risen nearly 400 percent from about $86 million at October 31, 2002 to more than $420 million (subsequent to the close of the most recent fiscal year); Calavo’s annual cash dividend on its common shares during that same period has increased 175 percent to 55 cents from 20 cents; and, a $1,000 investment in Calavo shares at October 31, 2002, along with reinvestment of your annual dividends, would have grown nearly to more than $3,900—an almost four-fold return over that span. These achievements are gratifying to me. But I prefer to focus on the road ahead—Calavo’s next decade—rather than spend undue time looking back. The fiscal year ended October 31, 2011 was perhaps the most transformative in our company’s history, setting in place key strategic cornerstones to power Calavo’s future growth. These initiatives across our Fresh and Calavo Foods business segments—including our accretive acquisition of Renaissance Food Group, LLC—will be instrumental revenue and profit drivers moving forward. In the most recent fiscal year, however, operating results were constrained by a set of unique factors—a smaller supply of fresh avocados in the marketplace and a winter freeze that limited tomato availability—which underscore the unpredictable nature of agribusiness. Revenues advanced 31 percent to a record $522.5 million from $398.4 million in fiscal 2010, principally on sharply higher fresh avocado prices and top-line contribution from RFG, which became part of Calavo on June 1, 2011. Net income ebbed to $11.1 million, or 75 cents per diluted share, from $17.8 million, equal to $1.22 per diluted share, a year earlier. High avocado prices and smaller volume pulled down gross margin to $42.9 million, or 8.2 percent of total revenues, from $51.5 million, or 12.9 percent of revenues, in fiscal 2010. Despite these challenges, subsequent to fiscal-year end Calavo distributed more than $8 million to shareholders in the form of our annual cash dividend, reflecting the company’s underlying financial strength and the aforementioned commitment to returning value. Last year in this space, I laid out Calavo’s planned path for reaching $1 billion in revenue and commensurate growth in net income, and emphasized that an active mergers and acquisitions component would complement the company’s organic growth. Our purchase of RFG, the largest transaction in Calavo’s history, is a meaningful first step in that direction. Expected this year to contribute more than $100 million to Calavo’s top line and about 15 cents to earnings per share, RFG exemplifies our criteria for a strategic, accretive transaction. Subsequently in this annual report, we discuss RFG extensively—its sterling brands, high-quality product offerings, quick-turn distribution and product innovation, among other strong suits. We also enumerate on its strategic fit within the Calavo family of fresh brands and our successful integration of this sizable acquisition. RFG is a great beginning to the stepped up M&A efforts, but we’re not stopping there. Expect to see Calavo make additional acquisitions in the future—we’re continuously evaluating prospective deals brought our way—some possibly even larger than RFG. We are judicious in this pursuit; transactions will meet our stringent criteria, first and foremost being accretive to operating results. In the recast Calavo Foods business segment, our legacy products—fresh salsa, guacamole and hummus—will benefit from being sold alongside RFG’s own lineup. Speaking to synergies, there are great opportunities for us to sell more of the RFG product offerings through established Calavo Foods channels, too. We anticipate improvement in legacy food product gross margins—possibly to record levels—after being severely impacted last year by high fresh fruit prices. The expected substantially larger avocado harvest will ease fruit pricing in the prepared foods segment. The 2012 available avocado supply is forecast to reach 1.4 billion pounds, about 25 percent larger than last year’s. Consumer demand for fresh avocados continues to increase. Calavo is poised to expand its leadership position, which accounts for one out of nearly every four avocados sold into the U.S. market—a 23 percent share. Demographic shifts, the $45 million spent annually by the industry on marketing and healthful eating awareness are propelling avocado consumption. As a company, we’ve done a great job leading the industry with pre-ripened and bagged avocados that further drive purchase at retail. Almost 43 percent of total Calavo fresh avocado carton volume last year was in value-added products. With avocado market size and per capita consumption continuing to trend upward, Calavo is making the significant capital investments to ensure we are ready. To that end and as indication of its strategic importance to Fresh business segment operations, we are currently at work doubling the capacity of our Uruapan, Mexico packinghouse, scheduled for completion this July. When finished, Calavo will have the capability as a company to pack approximately 600 million pounds of fresh avocados via its three facilities in California and Mexico. Indicators in Calavo’s diversified fresh produce categories appear encouraging, as well. Tomatoes volumes will snap back, recovering from the impact of last year’s adverse weather and benefitting from an additional growing source to augment supply. Papayas and pineapples round out diversified produce—both showed good volume growth last year. And, as always, we’re on the watch for additions to our Fresh lineup. One promising item, the purple sweet potato from Hawaii, is growing in popularity, especially in the Asian market. All of this leaves me more confident than ever about Calavo’s future. With our focused, disciplined business agenda, depth and breadth of financial and human resources, and operational strength, Calavo is ready for the next decade. With sincere thanks, I close with this thought: The best is yet to come.
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 20-plus items, ranging from tropical fruits to chilies.
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 85-plus years of Calavo history, Cole is characteristically humble 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 85 years and beyond. |
