Calavo Growers [CVGW] Conference call transcript for 2022 q3
2022-12-20 21:47:02
Fiscal: 2022 q4
Operator: Good afternoon. And welcome to the Fourth Quarter and Fiscal Year 2022 Calavo Growers Earnings Conference Call and Webcast. All participants will be in listen-only mode. I will now turn the conference over to your host, Julie Kegley, Investor Relations for Calavo. You may begin.
Julie Kegley: Good afternoon. And thank you for joining us today to discuss Calavo Growerâs Financial Results for the fourth quarter and fiscal year 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 todayâs 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 todayâs 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 our reports on Form 10-K and 10-Q. With that, I will now turn the call over to Brian Kocher.
Brian Kocher: Thank you, Julie, and good afternoon, everyone. We appreciate you joining us for the call. Today we reported fourth quarter earnings that demonstrated continued momentum, as gross profit and EBITDA, both improved sequentially and versus the fourth quarter of last year. Continued recovery in the Prepared segment, with better performance in both the Fresh Cut and guacamole divisions led our improvement by generating a segment margin of over 9%. Earnings were moderated by a slower than expected recovery in the Grown segment, as the excess Peruvian fruit that pressured market pricing at the end of Q3 remained in the market well until October. Gross profit was down sequentially for Grown, but higher than the prior year quarter. Just as a reminder, Grown is the new name of the segment formerly known as Fresh and Prepared is the new segment which represents the combinations of the old RFG and Food segments. When providing a little more detailed on the Prepared segment, you may also hear us refer to Fresh Cut as the former RFG and guacamole as the former Food segment. Looking at the full year, almost every relevant financial metric improved versus fiscal 2021. Shawn will discuss in more detail, but as some highlights, earnings improved compared to 2021 with gross profit of $16 million to $74 million, adjusted EBITDA up $8 million to $35 million and adjusted EPS of $0.15 a share to $0.50 a share. Gross profit increased in both segments, but particularly in Prepared where most of the Project Uno benefits have been concentrated. Prepared gross profit more than doubled to $23.7 million for the year as significant turnaround progress in the Fresh Cut division overcame lower profit from the guacamole division caused by input cost pressure. Grown gross profit increased by $2.4 million to about $50 million for the year, as higher gross profit per carton, resulting from our margin management efforts more than offset volume declines caused by lower supply from Mexico. In addition to the financial improvements that we achieved in fiscal 2022, it was also an important foundation setting year where we had some notable accomplishments. Among those, we reduce the size of our Board of Directors, while increasing its diversity and independence. The board also imposed minimum stock holding requirements for directors and officers that significantly increased our key leaders personal financial commitment to Calavo. We completed our executive leadership team and have aligned our compensation programs to company performance, so that at least 50% of our named executive officers total compensation is performance and/or stock based. We implemented controls, processes and procedures to run the company more efficiently and effectively. We also refreshed the Calavo brand, logo and website to support our One Calavo vision and future growth plans. In Mexico, our Jalisco avocado packing facility was officially certified for exportation to the U.S. and immediately began providing us with more optionality when buying fruit from Mexico. And most importantly, we are building a culture and a team that prioritizes continuous improvement. Although announced after the fiscal year end, Iâd also like to take a moment to talk about the long-term ESG goals we published last week. The goals are focused on four pillars, climate action, social responsibility, sustainable agriculture and sound governance. The overall ESG efforts embedded in these four pillars cover more than half of the United Nations Global Goals for Sustainable Development. Some of the key highlights include reducing our carbon footprint, reducing food waste, investing in our communities, supporting sustainable agricultural practices and transitioning to sustainable packaging. To embed these practices into our business, our governance structure and our enterprise risk management systems, we are committed to transparent ESG reporting. And we have committed to future independent third-party audits or verifications of our ESG disclosures. We are fortunate that we operate in an industry and service product lines that are inherently sustainable and responsible. So it is very easy for me to emphasize that our commitments to ESG are identical to and will complement our commitment to shareholder return and capital allocations discipline. Calavo can and should play a role in transforming the sustainability of the food industry and we believe these ESG goals will help us do more than our fair share. In other exciting news, Iâd like to share that Calavo has entered a licensing partnership with General Mills as the exclusive U.S. manufacturer of Old El Paso brand fresh guacamole and salsas. The product launched this fall and we are proud to be involved with the iconic number one Mexican brand in the U.S. About a third of all U.S. households purchase Old El Paso products on a regular basis and these new fresh products are a great brand extension for Old El Paso, as well as a consumer differentiator that Calavo can leverage for growth. While 2022 had its share of challenges, I am proud of all the work from the entire Calavo team that enabled us to deliver meaningful, improved financial results and set a solid foundation for growth in 2023. We are committed to achieve our strategic and financial goals, and we are excited about the future and about expanding our leadership position in both prepared foods and avocados. And now, I will turn the call over to Shawn Munsell to report on the financials. Shawn?
Shawn Munsell: Thank you, Brian. Consistent with prior quarters we provided year-over-year comparisons in our press release. So I will focus my discussion on a sequential basis from the third quarter. On a consolidated basis fourth quarter revenue was $244 million, a decrease of $98 million from the third quarter of 2022. Grown segment revenue was $119 million, down $88 million from the third quarter, as the average selling price of avocados decreased by 45% from historically high summer prices, while avocado volumes were about 2% lower as a result of our margin management efforts. Prepared segment revenue was $125 million, down $10 million from the third quarter, primarily due to seasonally weak volume in the Fresh Cut division. Consolidated gross profit was $20.4 million, up $1.8 million from the third quarter, primarily driven by a $5 million increase in gross profits in the Prepared segment, partially offset by a $3 million sequential decrease in Grown. The Prepared segment benefited from significantly improved results in the guacamole division, where margins rebounded from Q3 levels as fruit cost declined and we started to see the impact of yield improvements from operational changes. Although, we achieved an average gross margin in the mid-teens for guacamole for the quarter, by October margins had reached the mid-20% range. Our Fresh Cut division posted an average gross margin of over 8% in the fourth quarter. Grown gross profit fell sequentially, as avocado volume declined about 2% and we manage the business for margin during the quarter, amid still challenging supply/demand conditions for most of the quarter. With the Peruvian season in full swing and new crop Mexican harvest hitting the market, avocado prices fell sharply from Q3 levels down about 45% for the quarter. Profit per carton declined from Q3 and average below our targeted range for the quarter, but began to recover in October as the Peruvian supply tapered off. For the fiscal year gross profit totaled $73.8 million, up about 29% from $57.4 million in the prior year. The $16.4 million increase is attributed to a $14 million increase in the Prepared segment and a $2.4 million increase in the Grown segment. The $14 million gross profit increase in Prepared for the year consisted of an increase of over $23 million in the Fresh Cut division offset by declining gross profit in the guacamole division. The rebound in the Fresh Cut division reflects the benefits of the various initiatives executed through Project Uno, which totaled approximately $46 million for the year. The decline in earnings in the guacamole division for the full year was largely a function of higher fruit input cost, which average more than 40% higher than the prior year. The $2.4 million gross profit increased in Grown for the year primarily was driven by an increase in per carton profitability for avocados that more than offset a 12% avocado volume decline and unfavorable foreign exchange impacts. For the full year avocado volume was down about 12% as we source more volume from California, Peru and other origins to compensate for a decline in Mexico supply. For the year total supply from Mexico was down an estimated 15%, while our Mexico volume was down about 17%. SG&A was $17.1 million for the quarter, up from $16.7 million in the third quarter of 2022. Higher SG&A included the impact of short-term incentive expense that was disproportionately higher in Q4 of 2022. Adjusted EBITDA was $9.6 million for the quarter, up from $8.1 million in the third quarter of 2022, mainly driven by the gross profit increase in Prepared. Relative to prior year, fourth quarter adjusted EBITDA was up $8.2 million, primarily driven by a $10.1 million gross profit increase in Prepared. For the year adjusted EBITDA totaled $35.1 million, up from $26.8 million in the prior year, as higher gross profit in both Prepared and Grown was partly offset by higher SG&A costs. Now turning to our financial position. During the quarter we sold our Limoneira shares for gross proceeds of approximately $18.5 million. We use the proceeds to pay down debt and ended the quarter with about $7 million of total debt, which included about $1 million of borrowings under our line of credit, plus other long-term obligations and finance leases. Unrestricted cash and equivalents totaled about $2 million as of year-end, which left us with a negligible net debt level at year end. In total, we reduced our net debt position by about $38 million for the full year, available liquidity was approximately $30 million at year-end. We invested $2 million in CapEx in the fourth quarter, which brought our full year CapEx investment to approximately $10 million. Now we will briefly share some thoughts on fiscal 2023. We expect Grown volume to rebound in 2023, as various industry sources estimate the Mexican avocado crop to be 10% to 20%, larger in 2023. Additionally, Jalisco fruit will be available for export to the United States for the entire season. With the current supply estimates, we also expect pricing on a per unit basis to be less than 2023 than in 2022. Despite expectations for increased avocado supply and lower prices, with our model as a marketer of fruit, expect deli buying a fruit and deli pricing of fruit and inventory management that will allow us to again achieve avocado gross profit within our targeted range for the year as we did in 2022. Lower avocado prices will also reduce input costs for the guacamole division in fiscal 2023, which, when combined with production efficiencies already in place and from some capital projects underway, we expect to generate guacamole division gross margins that approximate 25%. We will work to continue improving our Fresh Cut operations and expect to exit 2023 delivering a gross margin run rate of 10% to 12%, but keep in mind that the first quarter will be seasonally weaker. We also plan to increase the proportion of deli business in our Fresh Cut division starting in mid 2023, which will support earnings and help to dampen seasonality. There may be some transitional impacts as we onboard the new business. Seasonality plays a significant role in the cadence of our earnings. Although, we expect to continue improving the business in 2023, Q1 is seasonally our weakest and we expect around 15% to 20% of our full year earnings to be generated in Q1. We expect our Q1 Prepared earnings to declined by about a third from the Q4 level. We also expect to invest approximately $18 million in CapEx in 2023, as we pursue more profit improvement and growth projects primarily in our Prepared business. That concludes my prepared remarks and I will turn it back over to Brian.
Brian Kocher: Thanks, Shawn. To build on Seanâs comments regarding our outlook for fiscal 2023. In addition to increased avocado volume coming from Mexico, we expect our Prepared segment volume to benefit from our growth initiatives, as we onboard new products and new customers. Some of them we have already successfully closed the sales process. We expect continued improvement in our Fresh Cut business as we work to further refine processes and gain efficiencies through Project Uno. Please keep in mind, we do experience seasonality as Shawn mentioned, that will soften earnings in Q1. To-date, we have achieved $46 million in annualized savings of the $70 million we set out to generate when Project Uno was announced last year. And we are on track to deliver the balance of the savings by the time we close the books on fiscal 2023. Even before then, I suspect the title Project Uno wonât be needed, because it is simply our way of operating. Itâs not a project with an expiration date. Itâs a systematic ongoing process to manage our business for success. Pricing optimization will always be our focus, labor efficiencies will always be our focus, controlling input costs will always be our focus. Those things are not going away, when we reach the $70 million mark. They arenât ever going away. I am really proud of our team for how they have embraced change to achieve the best results for the company. In fact, I am counting on our organizationâs agility to further accelerate change. We currently are in the process of developing our long-term strategic plan that will take Calavo into the future. Up to this point, I have kept things very simple by focusing on being better today than we were yesterday and by being better tomorrow than we were today. Continuous improvement will always be an expectation at Calavo. But we need to have a fixed point on the horizon that guide us and we will have that with a good strategic plan. I will present the plan in more detail in the coming months, but after stabilizing operations and creating a structure thatâs now scalable, we are planning to shift Calavo from a company thatâs improving to a company thatâs growing. That concludes our prepared remarks. I will now turn the call over to the Operator to begin the Q&A. Operator?
Operator: Thank you. Our first question comes from the line of Ben Bienvenu with Stephens. Please proceed with your question.
Ben Bienvenu: Hey. Good evening. Thanks for taking my question.
Brian Kocher: Hey, Ben. How are you?
Ben Bienvenu: Doing fine. So I want to ask with respect to your 2023 outlook, the cadence comment -- commentary is helpful when thinking about the Prepared business in 1Q versus 4Q. I am intrigued by your commentary, which you have provided before, but I want to dig into a little bit, about a run rate margin in the Fresh Cut fruit business of 10% to 12% exiting 2023. And I want to ask, is that an annual run rate you expect or should we interpret that as what you will margin -- your margin will be in the fourth quarter as you exit 2023. And I asked, because, as you highlighted in your comments 1Q and 4Q are generally seasonally lower margins that we should we be thinking about like a 2024 margin thatâs between 10% and 12% or is actually potentially higher than that?
Brian Kocher: Hey, Ben. Thanks. Itâs a great question. And Iâd like to, if you donât mind that, we will answer that question. But one of the things that I want to try to do is put all of this in perspective and we will put some perspective of 2023 as well. I have been here almost a year now, and in fact, since I was announced the CEO, it has been a year. And if I think about the change thatâs happened over the course of the last year, thereâs been a lot of things that that this business has been able to manage and go through and still drive improvement. I mean, think about the Grown segment, we had an avocado business that saw 15% less Mexican volume in the market, market prices that went from $35 a case to $70 a case back to $30 a case. So extreme volatility. And somehow in all of that, in that Grown business, we managed to deliver gross profit per case, that was what -- for the year anyway, over a course of time, right in the middle of our guidance of $3 a case to $4 a case. We managed to increase the gross profit dollars and we managed to do that when volume was down almost 12% for the year. So I mean a lot of good resiliency there. I think, most importantly, and this gets to some of your question regarding 2023 and the run rate. The Prepared Fresh Cut business really has been a bright spot for us. If you think about it, when I took the seat, I think there was a large part of our investment community that didnât even know if this was a legitimate business. Could we even make money at that? And we have gone from zero gross profit to a business, at least for the last half of this year, average right around 8% gross margin percent for the last half of the year. So as we think about heading into 2023 and then exiting 2023. Think about that number of 10% to 12% as an annualized number. They will still be a little bit of seasonality and it will be less than that, and I am sure in the first quarter, probably, less than that in the fourth quarter, but annually, very similar to how we guide annually to the gross margin per case in avocado business, annually we ought to think about that Fresh Cut business as 10% to 12% exit rate headed into 2024.
Ben Bienvenu: Okay. Very helpful. Yeah. The 9.4% margin in the fourth quarter, I mean, thatâs the highest Prepared. If you look back historically, one of the highest margins you guys have had in the combined businesses in a long time looks to me like since 2018. And what -- I am imagining the seasonally a lower margin quarter, and then you mentioned, the higher avocado costs, which would come down, but the exit rate is stronger out of 4Q. So definitely see the progress occurring and you haveâ¦
Brian Kocher: Yeah. Ben, think about that when we talk about inflation that we probably havenât seen in 30 years, I donât know. Think about it in -- as we have swapped out an entire management team, changed compensation plans to incentive performance-based compensation plans, restructured our balance sheet and really reduced net debt to almost zero. I mean, thereâs a lot of good things that happened this year. And certainly that that run rate and the results so far in our Prepared segment have been -- that Prepared Fresh Cut division has been really good. We still have a ways to go and we are not happy and that last bit will be harder than the first chunk of margin enhancement. But we are proud of what we have done in Fresh Cut.
Shawn Munsell: Yeah. And Ben, this is Shawn. Just o add on. If you look at the performance for Prepared in the quarter, I mean, it wasnât just the Fresh Cut business, it was also the guacamole business, but it wasnât just the price relief in the guacamole business from the input cost. We saw a meaningful improvement in our operations from some of the operational initiatives that were undertaken in the summer, we saw that really start to take hold, call it, in September and October. So, we should see the full benefit of that in the current quarter and beyond, but it wasnât just Fresh Cut.
Ben Bienvenu: Okay. Okay. Great. Yeah. Definitely stands out as a positive in the quarter and for the year. I want to shift gears a little bit to, in the quarter, which stands out as a little bit of a negative volume on the Grown side, which is a little bit antithetical to kind of what we saw in the industry where volumes grew substantially. So could you talk about nuance that might be involved in in your volume declines in the quarter versus the market that looks like it grew and help us understand what happens there, because next year you are highlighting that business growing in line with the market?
Brian Kocher: Yeah. Ben, I think, the one little wrinkle that I would say that we really tried to manage in the fourth quarter was, if you remember, at the end of the third quarter, we mentioned that there was quite a bit of fruit in the market that prices had decreased dramatically. In fact, I think, in July, we even said prices decreased $20 a case in four weeks. We saw some of that still lingering probably longer than we expected in our fourth quarter. That was proving fruit that was available in the marketplace well until October, some of the Mexican fruit started arriving. So at least short-term, we really switch to a philosophy of margin management as opposed to necessarily volume management. Every now -- in a commodity trading environment, thereâs some volume that I would call transitory. You can give up and when you want, you can get it back with the right pricing methodologies. And so thereâs a little bit of our volume decreased that that went down in the quarter when the industry went up, because we wanted it to, we were managing for a better gross profit per case, as opposed to just pushing volume through. And again, through the course of the year that will adjust and that will change. There will be times when the dynamics are right on the supply side and the pricing side that will push as much volume as we can. This one was a quarter that it just made more financial sense for us to be disciplined in managing margin versus market share.
Ben Bienvenu: Yeah. Okay. Make sense and totally get it. If I could ask, well, I know you are going to provide us the detail on a few months. Could you talk a little bit about kind of what you think is in the architecture of your long-term plan that serves as kind of guiderails for you guys, as you think about the long-term goals of the business? Even if you canât give us the components of it?
Brian Kocher: Yeah. I -- you are right. We wonât give you the guts today. But if you think of this business, think of the foundation -- foundational change we did in Calavo. We now have a Prepared segment that is delivering best-in-class customer service and fill rate numbers. We have a infrastructure in our Grown business that that is running effectively, efficiently and servicing the customer as well and both of which have capacity. We operate in categories that are growing on a unit volume and a consumption basis may not be as growing as fast as it was 10 years ago, but growing, both avocado, as well as the convenient, ready-to-eat, Fresh Cut and guacamole segments, so growing. So, in general, I think, you are going to see a strategy that comes out thatâs based on growth across all of our segments, Grown, Prepared, and then even in Prepared in both Fresh Cut, as well as guacamole, and then you will see a segment that or at least a guardrail based upon return on invested capital, because we think, thereâs really smart investments that we can make and then thereâs some investments that might get us growth, but none of us would be happy about and I am not interested in those. We are -- Shawn and I are really disciplined. We want to make sure that when we make an investment, itâs got a really good chance to be accretive to our overall return on invested capital. But think of Calavo is switching from stabilization and level setting to growth now and growth across all segments. And I will tell you a couple areas. We have already made investments in the international sales group. We are under indexed in international sales. And I think thatâs an opportunity that, that we probably havenât devoted much time and attention to at Calavo over the last three years or four years. But the market is right. The supply environment is right. Our operational structure is now right. And so you are going to see a lot of emphasis on international growth. And then you are going to see a lot of emphasis on growth within our existing categories too in capturing more than our fair share of the category growth. So hopefully that helps a little bit.
Ben Bienvenu: It does. I look forward to learning more. Thanks and best of luck.
Brian Kocher: Thank you, Ben.
Operator: Our next question comes from the line of Eric Larson with Seaport Research Partners. Please proceed with your question.
Eric Larson: Yeah. Thanks, guys. So just a quick follow up on one of Benâs questions. So we had a pretty sticky excess Peruvian supply coming in and I also know that thatâs typically lower quality fruit. But it -- but obviously it will affect the pricing in the market. Is this something that that would -- is this now going to be an annual issue something we will have to deal with, are they adding capacity in Peru and how is -- is this going to be somewhat of a structural change in the market?
Brian Kocher: Eric, that -- first of all, thanks for calling in and good to hear from you. It is a great question and itâs one that we started preparing for six months ago. And the reason I say that is, we have been expanding our sourcing regions for the last several months. I think we have had a little bit of Peruvian volume, but I wouldnât say, we are as efficient or as in-depth in Peru as maybe some of the other marketers. So we have grown our Peruvian volume this year. We will grow our Peruvian volume next year, not only increase when I say grow, I mean increase. Not only will we have our current supplier, but we have got three others that are lined up for Peru. We -- in fact, we were 33% higher out of Peru this year than we were the year before and I suspect that will at least be half as high again next year. Colombia, we went from a couple of test loads last year to a significant volume and we want to expand Colombia again as well. Jalisco opening up, gives us at least another option in Mexico and a chance to take optionality in our favor when the conditions are right. So Eric, I think, the -- yes, Peruvian overall volume is growing. Remember, itâs about the size or now a little bigger than California. So we are preparing as if thatâs a regular part of our business and our market. We are preparing our supply chain to address and adapt to that. I will tell you one thing thatâs interesting, though, when you think about growing supply. We believe the Mexican crop will be higher. When you are growing in supply, I really like a model of buying and selling every day. I really like the fact that we can control our inventory every day. If we donât like the price, if we believe we are good on inventory, if we are a little long, we donât have to buy. We donât have to keep bringing fruit to them to what could be a rough market and thatâs why we continue to believe that we can deliver $3 a case to $4 a case in gross profit, is that we have got this model as a marketer and it allows us to bob and weave and ebb and flow like a commodity trader shoot and diversifying our supply is just one more path to allow us to do that.
Eric Larson: Okay. Thanks for that. So I have just two more questions. The second one here is and we havenât heard any discussion on this in some time, but I would think that you are pulling -- putting together some longer term plans. The previous management for a whole number of years, they basically look at the U.S. market as being a 4 billion pound -- they said the U.S. market could absorb and eat all of about a 4 billion pound avocado market. I think right now, I donât know where this year ended, help me with this number, it might be in that 2.3 million pound to 2.4 billion pound range, but maybe itâs a little higher, maybe itâs a little lower, if you have got an answer that would be helpful. But do you still believe this market has the potential of growing to, letâs say, that in the proximity of 4 billion pounds?
Brian Kocher: Hold on, Eric. We are doing some quick math. But hereâs what I will tell you about overall growth. I think that the U.S. market has the opportunity for continued growth, both in terms of consumption, but also in terms of consumption per capita in geographic regions. If you think about it, consumption per capita in the East Coast is about one-third of what it is on the West Coast. And so there are consumption opportunities. There are overall growth opportunities. We see growth in food service with either avocado or avocado comprised products. So I do think the market can grow. If I -- when we do our quick math, we see the -- we say the market is somewhere around $3 billion in pounds. Can it grow more from there? Absolutely, it can grow. That being said, the world is a big place and there are pockets and places in the world that are growing faster than the U.S. market, both in terms of penetration, as well as consumption for capital. And we are investing in infrastructure, both on the supply side and the sales side to take advantage of some of those opportunities for growth.
Eric Larson: Okay. Fantastic. So the other question that I have and I have been kind of asking for right quite a few years, why you folks havenât tried to get a better presence in guacamole. And now with your announcement with General Mills, that sounds -- it sounds like you are on a path to maybe being a better competitor -- bigger competitor in that Prepared market at retail. So what is the -- does -- is General Mills going to be doing the marketing? What are some of the things you can share with us regarding how you approach the business with General Mills?
Brian Kocher: Well, a good, great, another good question. Thanks, Eric. One, we probably have been under indexed as Calavo and retail and guacamole and missed a lot of growth the last several years. Thereâs no use trying to sugar cut that. A couple of things, we recognize that thereâs an opportunity still that guac is a growing business and that we recognize the value of our guacamole business. It is not just a byproduct of the avocados that we buy and sell on the bulk market. So thatâs I think one thing. This relationship with General Mills is new. We just started marketing the product. But I love the fact that this is a brand thatâs already frequent in a third of the U.S. households and itâs anonymous with Mexican or Latin food. And so here, we get to take advantage on the guacamole and salsa side of a trusted Latino brand in the U.S. and where someone else has done the investment dollars to create that brand recognition. Itâs a great line extension for General Mills, itâs a great consumer differentiator for us and we are excited to keep it going. Itâs early, Eric. I donât want to sound too bullish here. Itâs early. We are in the sales process. We have launched a few products already and we will continue driving that process forward.
Eric Larson: Okay. Thank you very much.
Operator: Our next question comes from the line of Ben Klieve with Lake Street Capital Markets. Please proceed with your question.
Ben Klieve: Hi. Thanks for taking my questions. I have got a couple here. First, piggybacking off of Eric, piggyback up a better initially on the kind of volume side, the intentional volume that was left on the table here kind of throughout the year, not necessarily just in Q4, but really throughout the year. Can you kind of characterize the degree to which that volume is perpetually off the table or do you think of pricing dynamics change that, that volume will come back into play in 2023 and beyond?
Brian Kocher: Well, letâs -- let me break this down for you, Ben, to make sure that we answer it fulsomely. Through the first nine months of the year, our sales volume was down about the amount that overall imports were down for the year. So in general, that first nine months, I would say, our market share stayed relatively flat to what itâs been historically. Unfortunately, itâs been relatively flat for the last three years. It was really this last period and we are -- look, we try to be smart about this and we try to be strategic about this. We are not going to lose and not going to manage the margin so tightly that we lose one of our core customers or lose one of the opportunities with our core customers. But I think if you look at our portfolio, we have a range of customers that buy in all sizes and all quality levels. There are some of those that are more transactional than strategic and the ones that are transactional, they will be there again, because they are transactional. And so our -- I think this quarter, we did the right thing to maximize the margin and forego some volume. We are also confident that if the conditions are different and we have an opportunity to go get that margin or get that volume at a reasonable investment that itâs there for the getting again, because itâs transactional in nature.
Ben Klieve: Got it. Okay. Very good. Thank you. Next question. You talked about the CapEx expectations next year. Can you characterize the intention there by growth versus maintenance and maybe high level initiatives you can talk about at this point?
Shawn Munsell: Yeah. So, yeah, CapEx expectations next year about $18 million versus about $10 million this year and so think of that, probably, call it, $1 million to $2 million that is just a matter of timing, so spend that we expected to make in 2022 that slipped into 2023. But the remaining increment, call it, between $12 million and $18 million, that represents incremental profit improvement projects in 2023 versus 2022, most of that is going to be concentrated in the Prepared business. On an ongoing basis, you can think of our sustaining and maintenance investment in the neighborhood of $5 million.
Ben Klieve: Okay. Very good. Thank you. And the -- whatâs about -- the last question I had for you, the Old El Paso relationship. I just want to -- I want to make sure I got this right. So the non -- the exclusive relationship that was just announced, Brian, I believe you said that is an entirely new relationship, correct? So, this is not something that was non-exclusive historically that is now exclusive, is that correct?
Brian Kocher: Hey, Ben. I am sorry. You cut up a little bit at the first part of that question. Could you repeat that?
Ben Klieve: Yeah. The Old El Paso relationship...
Brian Kocher: Okay.
Ben Klieve: I just want to make sure, was that -- you said this is an entirely new relationship as of this announcement. That -- is that correct or was this non-exclusive before and now is exclusive?
Brian Kocher: No. New relationship that we basically started marketing during the quarter.
Ben Klieve: Okay. Very good. I thought I heard that right, but I just wanted to make sure. Okay. Very good. That does it for me. Thanks for taking my questions. I will get back in line.
Brian Kocher: Thanks, Ben.
Operator: There are no further questions in the queue. Iâd like to hand the call back to management for closing remarks.
Brian Kocher: Hey, Doug. Thank you very much. Again, thanks for all of the support and the time that you spent listening today. We really appreciate that. We gave you some guidance and thoughts on 2023. And we try to do that to help you shape your understanding of our EBITDA profile, as well as some of the things that we will be focused on over the course of the year. If we are having this call a year from now, I would like to think we will have accomplished a couple of things. We will have formally communicated a strategic plan that provides our organization, our customers and our investors a North Star, so to speak, for this company and where we are headed. We will have managed our avocado business and avocado business that we believe will grow commensurate with and maybe more than the market itself and manage that business in a way that we believe we can deliver gross margin per carton in the $3 a case to $4 a case range. We will have a Prepared Fresh Cut business that grows distribution with its existing customers and new customers, and exits the year on a 10% to 12% gross profit margin run rate. And remember, we said earlier in the call, think of that 10% to 12% as an annualized gross profit run rate. It might be a little lower, a little higher in certain quarters, but annualized in there. And we will have a Prepared guacamole business thatâs growing market share, both in the U.S. and internationally, and delivers gross profit margins approximately 25% or so in that range. And we will do all of that while having a return on invested capital thatâs appropriate for our business and appropriate for our customers and based on very disciplined capital allocation and capital management processes. If we can discuss all of that on next yearâs call, I think, all of us will be really pleased. I am happy with the amount of change we have been able to drive, the foundation we have been able to build in 2022 and still drive meaningful improvement in our profit metrics. But I am not satisfied in 2022. If we can do what I just outlined for 2023, I think we are going to be really happy at the end of 2023 and I can guarantee you one thing. I still will not be satisfied with where we are headed. Thank you for listening. Thanks for your time. We wish all of you a happy holiday, a healthy holiday season and look forward to speaking to you at the next opportunity. Thanks all.
Operator: Ladies and gentlemen, this does conclude todayâs teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
