Calavo Growers Inc (CVGW) Q1 2023 Earnings Call Transcript

Calavo Growers Inc (NASDAQ:CVGW) Q1 2023 Earnings Call dated Mar. 06, 2023.

Corporate Participants:

Julie Kegley — Investor Relations Officer

Brian Kocher — President and Chief Executive Officer

Shawn Munsell — Chief Financial Officer

Analysts:

Ben Bienvenu — Stephens, Inc. — Analyst

Mitchell Pinheiro — Sturdivant & Co., Inc. — Analyst

Ben Klieve — Lake Street Capital Markets, LLC. — Analyst

Eric Larson — Seaport Research Partners — Analyst

Presentation:

Operator

Good afternoon, and welcome to the First Quarter 2023 Calavo Growers Earnings Conference Call and Webcast. [Operator Instructions]

I will now turn the conference over to your host, Julie Kegley, Investor Relations for Calavo. You may begin.

Julie Kegley — Investor Relations Officer

Good afternoon, and thank you for joining us today to discuss Calavo Growers’ financial results for the first quarter of fiscal 2023. 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, intends, 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 — President and Chief Executive Officer

Thank you, Julie, and good afternoon, everyone. We appreciate you joining us today. Our fiscal first-quarter results reflect challenging conditions in both segments. But we have taken action and expect that our results will improve as we progress through the fiscal year.

In the Grown segment, high volumes of Mexican avocados, especially small fruit, combined with still high retail shelf prices pressured wholesale prices and margins more than anticipated during the quarter. While we expected industry avocado volume to increase during the quarter, we did not anticipate prices and margins to contract as much as they did.

The average case price in our first quarter fell to about $28 versus around $34 in the fourth quarter and $43 in the prior year quarter. We also expected prices and margins to improve, approaching the Super Bowl. Although conditions did improve later in January, the impact was more muted than anticipated.

Prepared segment performance was better than the prior year, but was weaker than expected due to a combination of volume softness and winter weather. We expected a decline in Prepared segment earnings versus the fourth quarter due to seasonality in our fresh cut division. But we experienced softness in volume that exceeded typical seasonality with total Prepared segment volume down about 13%.

Velocity slowed in the quarter, which we partly attributed to a decline in volume sales across retail food categories, as consumers reacted to inflation and tough general economic conditions. Separately, we incurred weather events during the quarter, that caused about $1 million of unfavorable incremental cost in the fresh cut division. Mainly from the temporary closure of some of our manufacturing facilities.

Understanding our first quarter results in the context of the market around us is important. Avocado import volume from Mexico grew over 8% versus the same quarter in 2022. But retail sales volume only grew about 3%, while total U.S. inventories rose almost 7%. We attribute the relatively lower retail volumes in part to retail prices, which haven’t declined to the same extent as wholesale prices. Higher inventories also pressured wholesale prices of avocados and compressed margins as the industry worked through aging inventory.

During the quarter our Prepared segment faced the pressures from a declining category. In retail, dollar volume sales are up across almost all Prepared categories in which we participate. However, according to IRI, unit volumes declined in produce categories as a whole in almost every category in which we participate by anywhere from 2% to 5% in the second half of ’22. Consumers either traded down or on passed on certain convenience categories in the store perimeter.

As unit volume declines on a store-by-store basis our margins suffer in Prepared, as we lose benefits from fixed cost absorption. We believe the worst is behind us for the fiscal year and we expect to see sequential improvement in our results as we progress throughout the year. But margin volatility in Grown and volume softness in Prepared may persist in the near term. We did see conditions in the Grown segment improved in February and we have realized volume increases versus the prior year in the 7% to 9% range and avocado margins within our targeted range of $3 to $4 per case for most of the second quarter.

However, the start of the avocado seasons in California and Peru may lead to ongoing volatility in Grown margins. In our Prepared segment, the one perimeter of the store category that saw unit volume growth in the second half of 2002 was deli grab-n-go items. As mentioned during our last call, our new customer acquisition strategy has been focused on deli grab-n-go items and we are on schedule to onboard new Prepared deli and grab-n-go volume with two national customers in the second half of the year. We expect volume weakness to persist until then.

The operating environment, coupled with our first quarter results has caused us to lower our fiscal year margin expectations for both segments. For 2023, we estimate adjusted EBITDA in the range of $40 to $45 million. While we are not setting the precedent of giving annual EBITDA guidance, we believe it is important to provide an indication of our expectations for this year given the first quarter results.

Investing to grow the business, resulting in long-term shareholder value is undeniably our top capital allocation priority. We are also committed to paying a dividend with competitive yield and payout metrics relative to benchmarks. However, the metrics associated with our current dividend rate have been elevated, since fiscal 2020 and remain elevated under the current operating environment. We plan to reset the dividend to a level that provides more market aligned metrics. We anticipate the Board of Directors will declare a dividend of $0.10 per share for the second quarter. Although, we remain committed to growing the business we also plan to reduce our fiscal 2023 capital expenditures, while we navigate near-term uncertainties. We now expect capital expenditures for fiscal 2023 of approximately $13 million.

These adjustments reflects deliberate fiscal discipline that allow us to continue prioritizing investment for growth while maintaining competitive dividend metrics. Although, the start to the fiscal year has been disappointing, we remain focused on making steady lasting improvement to the business. During the second quarter, we initiated activity on several fronts that will offer immediate benefits to earnings.

As an example, we recently went live with the first phase of a new transportation management system that enables RFPs on most of our outsourced freight, which will significantly improve the competitiveness of our freight costs. This system will be fully implemented during the second-quarter. In early March, we implemented a restructuring of our U.S. and Mexico operations that will allow us to upgrade essential organizational capabilities and to streamline and reduce costs related to certain functions.

We recently consolidated activities within our Grown distribution network to streamline operations and reduce cost. And we recently entered into an agreement to exit our non-core salsa business as we intend to direct more resources towards guacamole growth.

Pricing is always a focus for us. As you probably know, we priced our Grown products on a daily basis. However, our Prepared business has been comprised of almost exclusively annual or multiyear fixed-price contracts. Over the course of the last six months, we have converted more than 50% of our expected annual Prepared revenue stream to contractually committed pricing windows that range between 2 times and 4 times a year, allowing us to react quickly to changes we see in market dynamics inflation in the industry costs. These actions do not represent an exhaustive list of improvement activities that are underway. But I wanted to highlight some of the most influential and relevant items that will have immediate impacts.

I’d like to wrap up my prepared comments by saying that despite market and category performance that was less than our expectations, our commitment hasn’t wavered. We are still focused on performance improvement, on growth and on generating shareholder value. It’s our job to manage through a challenging market condition and we must be and are nimble in our response to changing market dynamics. The path to growth isn’t a straight line, and there are obstacles, but we will keep driving forward.

And now, I will turn the call over to Shawn to report on the financials.

Shawn Munsell — Chief Financial Officer

Thank you, Brian. As we stated on our full-year 2022 earnings call in December, seasonality plays a significant role in the cadence of our earnings. While the first quarter is typically our seasonally weakest quarter, this year, we experienced some additional market-driven pressures, which adversely impacted our results. But as Brian said, we do expect to deliver sequentially improving results as we progress through the fiscal year.

On a consolidated basis, first quarter revenue was $226 million, a decrease of $48 million from the first quarter of 2022. Grown segment revenue was $118 million, down $45 million from last year as the average selling price of avocados decreased by 35% as prices continue to adjust from their highs in the summer. Avocado sales volumes were up over 3% due to increased supply from Mexico. Industry imports from Mexico are estimated to be up over 8% versus the prior year quarter, while industry avocado retail sales were estimated to be up by about 3%.

Prepared segment revenue was $108 million, down $4 million from the prior year quarter as higher prices partly offset volume declines of about 13%. Consolidated gross profit was $14 million, up over $1 million from the prior year quarter, primarily driven by a $3 million increase in Prepared segment gross profit partially offset by a $2 million decline in Grown segment gross profit.

Grown segment gross profit for the first quarter was $9.5 million compared to $11.7 million for the first quarter last year. Our margin per case for avocados fell to about $2.20 in the quarter versus about $3 per case last year. Generally, tighter spreads between fuel costs and sales drove margins lower with avocado prices continuing to decline from the fourth quarter of fiscal 2022. Additionally, the strengthening of the peso relative to the U.S. dollar, increased operating costs in Mexico, in dollar terms, although that impact was mostly offset in the quarter by favorable balance sheet revaluation. We have seen an improvement in avocado margins within our targeted range of $3 to $4 per case for most of the second quarter.

The Prepared segment generated gross profit of $5 million, up from $1.6 million in the prior year quarter. Gross margin rose to 4.6%, which consisted of a gross margin of just over 1% in the fresh cut division and approximately 26% in the guacamole division. The improvement in fresh cut from a loss last year was driven by pricing, and other operating improvements that were partly offset by higher raw material costs as well as weather-related impacts of approximately $1 million, mainly from manufacturing facility closures. Gross margin in the guacamole division almost doubled from the prior year on lower fruit costs and yield improvements.

SG&A was $16.4 million for the first quarter, up from $15.3 million in the prior year. The increase primarily was due to higher costs associated with employee compensation, including stock-based compensation. Adjusted EBITDA was $3.6 million for the first quarter, down from $4.7 million in the first quarter of 2022.

Now, turning to our financial position. During the quarter, we increased our line-of-credit borrowings to about $16 million to fund working capital needs. Cash and equivalents remained at about $2 million as of January 31. Available liquidity was approximately $26 million at quarter end, and additionally, we invested about $5 million in capex in the first quarter, which included investments to support volume additions in the second half in Prepared. Based on current market conditions and our outlook for the remainder of the year, we now expect capital expenditures of approximately $13 million.

Now, I’ll briefly share some thoughts on our outlook for the remainder of 2023. In the Grown segment, per case margins are expected to be at or near the low end of our $3 to $4 range as we anticipate ongoing margin volatility as the California and Peru seasons begin. Volume for the balance of the year is expected to increase and be approximately, commensurate with changes in supply from our primary sourcing regions.

In the Prepared segment, gross margins in the fresh cut division will be at or near the low end of the 10% to 12% range as we end the fiscal year, primarily due to softer volume in the near term. Although new customer distribution points in volume are scheduled to launch in the back half of the year. Gross margins in the guacamole division are expected to approximate 20%.

As Brian mentioned, we recently finalized plans to restructure some of our operations and to exit our salsa business. We expect onetime charges in the second quarter related to these activities to total approximately $3.2 million, including cash and non-cash costs associated with severance asset impairments and implementation expenses. The payback on cash cost is expected to be approximately 1.5 years or less.

And finally, I’ll wrap up by saying that we have a strong balance sheet and sufficient liquidity to manage through the current market challenges. We remain committed to investing to grow the business to strengthen our future earnings.

That concludes my prepared remarks and I will turn it back over to Brian.

Brian Kocher — President and Chief Executive Officer

Thanks, Shawn. As I said on the call last quarter, we have been undergoing a long-term strategic planning process. We have completed the majority of the work and will be presenting to our Board of Directors in May. We look forward to rolling it out to you later this year.

We spent the last year addressing foundational opportunities to stabilize our business including finding the right market-savvy talent to lead our organization. Now, our plan is to take Calavo from an improving company to a growing company, and despite the slow start to the year that’s still the plan. We have the right service levels, product portfolio and capabilities to grow. We have the right people in key roles who know how to execute and overcome the challenges of our dynamic business. We have the focus and determination to be successful and we will.

That concludes our prepared remarks, I’ll now turn the call over to the operator to begin the Q&A.

Questions and Answers:

Operator

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

Ben Bienvenu — Stephens, Inc. — Analyst

Hey, thanks so much. Appreciate you taking my questions.

Brian Kocher — President and Chief Executive Officer

Sure Ben. How can we help?

Ben Bienvenu — Stephens, Inc. — Analyst

I wanted to start on the Prepared business. You talked about volume down double-digits as a result of higher pricing year-over-year. Can you talk a little bit about the demand elasticities you’re seeing from consumers in the marketplace? And would you expect that as we start to see broader inflation normalize that these evolving volumes pick back up or is there something else along the critical path that you see needing to take place for the volume of that business to improve?

Brian Kocher — President and Chief Executive Officer

Yeah. We’ve been spending a lot of time on that Ben, and I think a couple of things to think about. One, certainly seasonally, we expected volume to at least decrease from the fourth quarter, the very normal part of our Prepared business cyclicality and seasonality. The thing that sort of was greater than we expected was the category performance itself.

So if you think about it during during the second half of ’22, overall produce was actually down. Value-added produce was down, on a volume basis, on a dollar basis, it’s up, but the category itself on a unit sales basis was actually down. Total produce was down 3% and in non-value add or whole commodity was down 4%. So value-added fared better but was still down.

There are some bright spots in that category performance, and they exist in the deli aisle. And what we saw in the deli aisle was, snacks, prepared meals, some of the prepared or pre sliced meats and cheeses have unit volume growth. So even though deli was down, we saw some some deli categories in which we participate, that on a unit basis we’re up.

We do see inflation moderating, and I certainly think that will help in long term. We still see growth in our Prepared categories, both guacamole and fresh cut, we see growth long term. And we hear it from the retail trade, we hear it from IRI, we see it in some of the planning that our customers are doing, but certainly, inflation in the last half of the year in the first part of this year, it caught up to the consumer, I’d say. And it did so in a matter that was probably more significant than we expected.

Ben Bienvenu — Stephens, Inc. — Analyst

Okay. That makes sense. My second question is related to the restructuring plans. You noted a handful of plans that you have, all of which makes sense. Is it your expectation that this is the last of the restructuring decisions that will be made or is it possible, there might be others?

And then along those lines. As you noted, you’ve positioned Calavo for growth again. When we think about kind of what you’ve done with capex for this year, which also makes sense. How should we think about kind of the arc of spending as we move forward down the line?

Brian Kocher — President and Chief Executive Officer

Okay. Great question. So a couple of things that I would say. As you remember, two years ago Calavo went through a year and a half — went through a significant restructuring, where a lot of assets, facility closures, things of that nature. This is certainly in order of magnitude is less but is needed. What I would say is, now we’re doing some of the finer more precise changes to the organization. We consolidated distribution centers in our avocado business, so that’s one of the changes that you make. Shawn mentioned that we’re exiting and transitioning out of a non-core salsa business which will provide us some mix benefits that that will help us.

I think the other big one is, if you’re going to grow, you have to have the talent and the amount of skills and capabilities that are growth-oriented. So what you see otherwise is us also reducing and streamlining some operations in the U.S. and Mexico and using those funds to put more skills and capabilities in growth areas and whether that’s international or guac or on our Prepared fresh cut or even in channel development, where we see club and national retailers as big opportunities, you see us reinvesting those funds.

So that’s what I would call the summary in context between the Project Uno launch and what we are communicating today. Ben I think it’s also appropriate, we will never be finished making changes in trying to make our organization more efficient. I don’t see big restructuring charges and things of that nature, but we will never be finished because our customers are always changing and the categories are changing, and we need to make sure that we are driving our organization to be efficient, effective and place our resources in the areas that have the biggest chance to grow.

Ben Bienvenu — Stephens, Inc. — Analyst

Okay. Very good. Thanks so much. Best of luck.

Operator

Our next question is from Mitch Pinheiro with Sturdivant. Please proceed.

Mitchell Pinheiro — Sturdivant & Co., Inc. — Analyst

Hey, good afternoon.

Brian Kocher — President and Chief Executive Officer

Good afternoon, Mitch.

Mitchell Pinheiro — Sturdivant & Co., Inc. — Analyst

I guess, my first question is — so I guess, with Project Uno and the whole, the plan was — it would take a couple of years, three years plus to get back to like your performance, your EBITDA generation back in fiscal ’19. And somewhere, you did, I think roughly $80 million in fiscal ’19. And what — you’re looking maybe around $40 million, $45 million this year. And so I guess — and then I see we’re lowering the dividend. We’re cutting capital spending a little bit, little disciplined here. But it doesn’t — are you — is this not getting back to fiscal ’19 levels any time soon? I don’t see in the cash flow, a drastic need to cut the dividend and capex, I mean, I can see being financially sort of conservative, but it doesn’t — it seems like you’re messaging that things are a lot worse at least in the climb out-of-the-bottom and back to the fiscal ’19 level. And I’m wondering, what has changed?

Brian Kocher — President and Chief Executive Officer

Well, let me try to take a shot at that and I’ll also let Shawn add in. I don’t know that we’re — let me refrain that. I know we’re not saying it’s worse. But I think in light of the first quarter performance and our outlook for the balance of the year, I think it’s fair to say that our progress towards where we believe we can be in terms of EBITDA and cash flow generation has slowed. It’s slowed. And we’ve got to adjust to now instead of a market that was growing at least in this quarter and probably in the next quarter is a market that’s not growing on a unit volume basis, maybe on price, but — in revenue, but not on unit volume basis.

So, I think it’s fair to say that it’s slowed our trajectory back to where we want to be. And therefore, we lowered some of our guidance, particularly in our prepared fresh cut on where we thought we’d be at the end of the year on a exit run rate, on gross profit. So, I do think that that’s one of the things that we’re recognizing is that this market will face some challenges, we faced some challenges with consumer performance. I think we’ll be in a period in avocados. We’ve probably been several weeks now, months where demand has exceeded — sorry, supply’s exceeded demand and we’ve got some volume coming on from California and Peru, and a heavy Mexican season. So, I think we’re trying to be cautious and respectful that there is some volatility in Grown margin as well.

So it’s really the combination of those two. I would also just be totally clear Mitch, there is not a capex project that we’re cutting, that we think is a high-yield, high-return and high-growth initiative. In fact, most of the capex that we’ve launched and spent in the first quarter is associated with new customer launches in the second half and we will cut short investments, if it’s a really good return. I do think we’re tightening things up and we want to be — we want to be disciplined, we want to be responsible. We want to make sure that it is a high-returning project. And then on the dividend, as I mentioned, we want to make sure we’re paying a dividend that has yield and payout metrics, that are consistent with the peer group. And frankly with cash flow and earnings generation over the last several years, our dividend payout ratios have been twice our peer group. And so now it’s the time to make all of those adjustments.

Mitchell Pinheiro — Sturdivant & Co., Inc. — Analyst

Very helpful. Are you seeing anything in the Grown business that is structurally different? Do you see any anything structure in the industry that that might — that would impede your ability to get back to where you were four years ago?

Brian Kocher — President and Chief Executive Officer

Well, I think there are things that have changed in the Grown business from four years ago. And let’s just look at a sourcing perspective, Mexico, Peru and Colombia are all bigger in terms of volume available to export to the U.S. than they were four years ago. All of the supply is greater. Now that being said, the demand has been greater as well. We can’t see the demand, because it’s been constrained for a couple of years with COVID for a year, foodservice gone down for a year. Last year it was constrained because Mexican export volume was historically low or certainly lower than than the prior year. But we do believe that demand has been constrained and we’ll see demand that keeps up and keeps pace with supply.

I do think supply and demand will — if you compare to 10 years ago, I think, supply and demand is more balanced today than it was 10 years ago, demand exceeded supply. Again, I think that’s also a strength of the market or model. We’ve got an opportunity to buy and sell on a daily basis. We have an opportunity to flex our inventory up and down, and we have an opportunity to take some risk when we want to or think it’s opportunistic to take advantage of volume growth. We also have the opportunity to dial back some volume if the profit profile isn’t right.

So I feel really confident that our model allows us to deliver that $3 to $4, pace of gross margin over time, over time. And — so I don’t see big structural changes that would prevent that. But when you have a little bit more balanced supply and demand, I think that brings in some volatility that maybe we didn’t have 10 years ago, I’m going to say, or five years ago. And that’s the case of any evolving commodity market.

Shawn Munsell — Chief Financial Officer

Yeah, the other thing too, Mitch, I’d say that was unusual in the quarter is that retail prices were more stubborn than wholesale prices. Right? And we started to see inventory buildup that put more pressure on wholesale prices and that in part narrow those margins.

Mitchell Pinheiro — Sturdivant & Co., Inc. — Analyst

Well, just — is this just a function of the grocery trade, having that type of margin or is it they’re just — why is it stubbornly high?

Shawn Munsell — Chief Financial Officer

Yeah, just retailers hold margin.

Brian Kocher — President and Chief Executive Officer

Yeah. I think to be fair, retailers were also slower to price up last year when the wholesale prices were going up. So, I think they moved a little slower on the front-end and are moving a little slower on the backend. We see more promotional activity going on and investment in price. We continue looking at it. Consumers are certainly looking at it. There’s been some recent data by our IRI, that would suggest consumers, almost half of of consumers are looking for products that are on sale now. So consumers are certainly looking for what they believe is a deal and we’ve been working with our retailers and our customers on how to drive promotional activity that make sense for them and make sense for the category. And we probably — because of the shelf lives we can do that more in Grown and we can do that more in walk, then we can in our prepared fresh cut business.

Mitchell Pinheiro — Sturdivant & Co., Inc. — Analyst

Right. Just last question is on the Prepared side. So it’s sounds good, you have a couple of new customers coming on in the second-half. That should help your fixed cost leverage a bit. So if — so a lot of this, you should — all things being equal, we should see a gradually improving gross margin in Prepared throughout the year. is that fair?

Shawn Munsell — Chief Financial Officer

Yeah. That’s completely fair.

Mitchell Pinheiro — Sturdivant & Co., Inc. — Analyst

Okay. Okay. That’s all I have. I’ll get back in the queue. Thank you.

Brian Kocher — President and Chief Executive Officer

Thanks, Mitch.

Operator

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

Ben Klieve — Lake Street Capital Markets, LLC. — Analyst

All right. Thanks for taking my questions. Just a couple from me. First, want to ask about the decision to divert the business of the salsa line, particularly in the context of the news last quarter about securing the relationship with Old El Paso. Can you just talk about kind of the decision to get to this point that you thought this needs to get divested, particularly in light of the big one that came in — late in ’22?

Shawn Munsell — Chief Financial Officer

Yeah. Sure. Yeah, so that — essentially the salsa business it’s a fined product. It has some good potential, but essentially, it just didn’t have the critical mass in the portfolio. And given the the economics of that business just made sense for us to divert those resources to our guac business and that’s what we’re doing. So, it’s going to be — it’s frankly we’re going to be better by about $400,000 a year by making that divestiture.

Brian Kocher — President and Chief Executive Officer

Ben, I think the other thing that’s important to know is that we’ve arranged co-packing relationship. So remember, I think last year we talked about or last — sorry, last quarter we talked about that relationship with General Mills, think of it as another arrow in our quiver, another tool, not be only tool. And we still have that tool available. So, we arrange capacity in co-packing capabilities, so that as we continue to sell Old El Paso brand product, whether it’s guac which obviously we do ourselves or salsa, which will have with now what will be a third-party, we retain the capabilities to do that.

Ben Klieve — Lake Street Capital Markets, LLC. — Analyst

Got it. Okay. Thank you. And then another question on the capex expectations that you have. $13 million for this year, $5 million in the first quarter. And Brian, you noted that a lot of that was attributable to the two new contracts coming online. $8 million over the next few quarters, that’s not an awful lot of capex. Can you talk about how much of that capex is related to just kind of the basic maintenance capex adjusted versus any investments in growth that are coming here over the next three quarters?

Shawn Munsell — Chief Financial Officer

Yeah. Sure. So I’d say that most of the deferral of the capex versus that original $18 million, Ben, that was — like Brian said, that was kind of the lower-performing kind of growth and profit-improvement projects that we can reactivate at anytime. So just felt like it was prudent given the Q1 performance and given the current outlook, just to plan to defer that until we see conditions change. But as far as the kind of composition of maintenance capex, it’s going to be about $4 million, $5 million this year about in line with what we guided last year.

Ben Klieve — Lake Street Capital Markets, LLC. — Analyst

Okay.

Brian Kocher — President and Chief Executive Officer

Ben, I think the other thing that’s really important for for you and other listeners on the call to remember is we have a really good balance sheet. We added basically season working capital debt, that we funded through our credit facility. We’ve got plenty of liquidity and access to capital. So, if we find a compelling growth opportunity, we’re certainly not going to let the guidance that we gave pull back a really smart investment. We’re going to be — we don’t want to be penny wise and pound foolish here. We’re going to invest when it’s right, but I think it’s also a good signal to our entire organization that we want to be disciplined, and we want to be responsible and we want the returns to be really good for us to make an investment. But we’ve got capital, and if we find something that’s accretive and exciting, we won’t be held back.

Ben Klieve — Lake Street Capital Markets, LLC. — Analyst

Got it. All right. Thank you for that. Thanks for taking my questions. I’ll get back in queue.

Operator

Our next question is from Eric Larson with Seaport Research. Please proceed.

Eric Larson — Seaport Research Partners — Analyst

Yeah, thanks for taking my questions. The first one, in your prepared comments about the quarter, you said that there was lot of fruit coming out of Mexico. And it was of a smaller size, did that impact pricing, did you have a really bad mix of avocado sizes in the quarter too that hurt you? Can you give a little clarity to that?

Brian Kocher — President and Chief Executive Officer

Eric, I think it’s a really good question and an insightful question. So yes, we did have more volume. Think of it this way and forgive me because I’m not an agronomist okay, forgive me. But when you have more fruit on the tree, each individual piece of fruit gets less nutrients, right? The root systems didn’t all of the sudden grow and magically convey more nutrients. So the size curve did work against us a little bit, smaller fruit came out. Because the mix was a little off we had more large-sized fruit business than we had available large-sized fruit and we didn’t have enough small-sized fruit business.

So, we certainly saw it impact the margin on the small fruit where we were really working hard to get rid of some excess small fruit and overall that weighed down gross profit per case. Makes sense?

Eric Larson — Seaport Research Partners — Analyst

Yep. No, it does. I just noticed that you had made a point of it in your comments and I know that mix can be important. So that’s why I asked. So, this one is really for the Prepared side, and maybe I’m missing something here, but if you averaged $28 a carton and your avocado prices in the quarter, I mean, it wasn’t that long ago, we were talking $70, $80, right? And I think you said in the last quarter sequentially, it was $43 a carton.

So, in your Prepared business, I mean, a novice looking at your business would say, “Wow, your ingredients cost for Prepared should have given you quite a bit of margin headway.” So, talk to me, what am I missing in this with the fruit prices coming down, why should your margins have been better in Prepared?

Shawn Munsell — Chief Financial Officer

Yeah, and your observation is spot on. So the cost of the fruit, going into the guacamole business is absolutely improved certainly versus prior year but also versus the prior — the fourth quarter. And you can see that in the gross margin that we achieved in the quarter, it was about 26%. And that 26% I mean it’s not exclusively the improvement in the fruit, but it’s also the improvement in the operations. I mean, that plant is running as well as it’s ever run given some of the investments and the changes in operations that we made last year. So 26% gross margin in the first quarter for the guacamole division. But remember that guacamole division is about a fifth of our total prepared. Right? So we did see the benefits, but it’s on it’s on a smaller portion of that total Prepared portfolio.

Eric Larson — Seaport Research Partners — Analyst

Right. Okay. That makes sense. For some reasons I was thinking that — I’m still not quite used to thinking about you as Grown and Prepared yet. I’m still —

Brian Kocher — President and Chief Executive Officer

Yeah. Right.

Eric Larson — Seaport Research Partners — Analyst

In your old format. And so that last comment made a lot of sense. So going forward, you kind of gave us some ideas of what adjusted EBITDA is going to look like, and so forth. But you still have — you will still have those relatively easy comps for ingredients yet for your guac, and — but you’re taking pricing up in other areas that had a lot of elasticity is what I’m reading. Could you go into a little bit more detail on the elasticity part?

Brian Kocher — President and Chief Executive Officer

So, yeah, Eric, let me make sure that I understand, your basic question is you’re getting — you will have some favorability in unit cost on guac, input cost on guac, where is the other improvement coming?

Eric Larson — Seaport Research Partners — Analyst

Right.

Brian Kocher — President and Chief Executive Officer

Okay. So, I think we’ve got a couple of things. One, remember, I really believe, for the balance of the year, volume is going to be important part of our story. We’ve got some deli customers coming on, two national deli customers coming on in the second half. It won’t help the second quarter, we’ll see Prepared fresh cut challenges in volume throughout the second quarter. So it won’t help the second quarter, but it will help the second half. And with that, we’ll see absorption benefits and we’ll see some other things that happen in the second half of the year.

I think we will get some positive unit cost benefits in our guacamole business, but we also need volume to help us there. The guac category for the first time, in a long time, over the course of the last three months anyway was down on a unit volume basis as well. Up on a dollar basis, down on a unit volume basis. So one of the other things that I think it’s hard to see is we made great progress in getting lower input cost and taking advantage of that market. We made really good progress in yield and labor efficiency in our guac plant, but some of that was, let’s say, used up by lower fixed cost absorption because of lower volume.

So really, really the Prepared story from now on. I mean the fact of the matter is we had year-over-year labor productivity improvements from what we did from the fourth quarter. So, first quarter ’22 to first quarter of ’23, we had labor productivity, but with reduced volume fourth quarter of ’22 to to the first quarter of ’23, we lost a little bit of labor productivity, again because of the unit volume. So, I think as you look at Prepared, it is growing the volume with the category, but also with new distribution, continuing to manage our cost profile, labor productivity, all the things that we’re talking about. So that new volume is leveraged disproportionately.

Eric Larson — Seaport Research Partners — Analyst

Got it. Okay. So — and I apologize maybe for the ambiguity towards the end of that — to that question. But historically, this is historically what has been sort of attractive for the fresh avocado business, right? Is that even at high prices, consumers would pay absurdly high prices for an avocado. It seemed that demand was more inelastic and what it sounds like today, you said that retail prices were very sticky on the upside, much stickier than wholesale, but in past years, the price wouldn’t have been that big of a deal. So if customers aren’t buying your avocados and there’s not — and you had down volumes, what are they switching into? What’s your competitive group for avocados that consumers seem to be going to now that they might be more price sensitive?

Brian Kocher — President and Chief Executive Officer

Well, let me try to clarify a couple of things. First of all, the category for produce was down. Avocados were still up in the first quarter year-over-year. I think it was about — on a unit volume basis, I think it was 2.7%. I think we’re up, Shawn, 3.3% or 3.4% something like that. So we know we held our share and one could say maybe even we grew 1 point. So I think that’s one thing to think about.

The other thing that I would think about is it’s not just a question of price elasticity or inelasticity. If you remember, in the third quarter, when prices were extraordinarily high, retail stopped promoting and even started shrinking display sizes. So it wasn’t just a pricing story and whether it’s inelastic or elastic. But they also reduced display sizes, reduced the amount of available volume. As we are fighting to get that back, right, the rest of the commodities don’t stand still. I’m making this up at this point. But if it’s strawberries or potatoes or tomatoes or whatever, they moved in and took that retail shelf space. So now, we’re trying to gain back retail sales space, gain back promotional activity, and it’s just taking a little bit of time.

So I would suggest the category is not only reacting to price and the change in price, but also promotional activity and display sizes. And we’re starting to see that come back. In fact, Shawn, in so far in the second quarter, we might be up…

Shawn Munsell — Chief Financial Officer

9%.

Brian Kocher — President and Chief Executive Officer

9%, we’re up in the second quarter on a unit volume basis for avocados.

Shawn Munsell — Chief Financial Officer

Yeah. So that’s worth emphasizing that once we rolled into February, we did start to see a median improvement in conditions in the Grown segment. Not just an improvement in the gross profit, but the volume as well, so just kind of better flow-through of the volume. But you listen to the prepared remarks, the cautionary side of that is we know that there’s a lot of fruit coming in from Mexico. We know that the California season is getting underway. The Peruvian season is right around the corner. And so there’s a potential for some ongoing volatility with that supply coming.

Eric Larson — Seaport Research Partners — Analyst

Okay. Yeah. No, that — I mean, that makes some sense. And it’s just a little bit different thinking than what we’ve always had because retailers have always — they’ve been expanding their display of avocados. It’s done a very hot item. It’s very healthy oriented. And to hear that maybe the retailers even took display away from it’s just kind of the first time I’ve heard that in the sort of the fresh avocado market. So that’s the dynamic I’m unaware of. So I’ll get back in the queue and maybe we can discuss a little bit of this a little bit later.

Brian Kocher — President and Chief Executive Officer

But Eric, I would also remember, even last year, supply was constrained. And so consumers are fickle. If supply is constrained and maybe they just can’t get in avocado out of that day, and it’s not the high-usage consumer. The high-usage consumer is going to look, going to go buy, going to buy their avocados every day, twice a week, whatever the rhythm is. But some of the low-usage consumers, to the extent that it’s not available or potentially not available because it’s not seen as promoted or not seen on the shelf side like it was, I think there’s a little bit of what I’d call winning them back, let’s say. But the category remember, just to be clear, produce for the second half of the year, total produce unit sales was down 3%, avocados was still, that last quarter was up 3%.

Eric Larson — Seaport Research Partners — Analyst

Okay. Okay. That’s the important factor. Okay. Thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Brian for closing comments.

Brian Kocher — President and Chief Executive Officer

Look, we really appreciate you dialing in, asking the questions, giving Shawn and I a chance to talk to you about the business and where we’re headed. The fact of the matter is we didn’t deliver the earnings we expected in the first quarter, and the market conditions that our business faced caused us to reevaluate the landscape for the balance of the year. We need earnings growth, and we need unit volume growth across our platforms. However, I’ll tell you why I have hope. We’re investing in sales talent, where the market has the biggest opportunities for growth. Club channel, international, guacamole and deli resources are all being funded by repurposing and/or reducing expenses in other areas. We must gain new customers and gain new distribution with our existing customers.

Our distributor model for avocados is strong and it’s flexible. And over time, we’ve been able to consistently deliver our targeted gross profit per box. And so that gives me help and comfort. We mentioned in our fourth quarter earnings release that we expect growth in our deli product lines. We are on track to launch two national customers with deli items in our third quarter. We know the value proposition in deli is promising. Our value proposition in deli is promising. And that volume growth will help us in the second half as we look at fixed cost absorption and really maximizing the efficiency that we’ve been able to drive in production and yields in labor hours.

We will continue, and we have to beat that and drive improvement in every cost line of the P&L. And we’re making this organization more efficient every day. There isn’t a day that goes by that we don’t worry about yield, input costs, transportation, labor productivity and SG&A, and we’re going to continue beating them on that every day. And ultimately, even though we see some short-term challenges, the categories in which we play, are performing at the better end of the spectrum of all of produce and deli SKUs. Across produce, value-added products perform better than whole commodities. Avocados are one of only the few commodities that delivered year-over-year unit volume growth in Q1. And finally, convenient deli snacks and meal kits led the pack in the deli aisle. So those things give me hope.

Our business model is right. We’re working on the right things. We need to be agile, but we didn’t deliver the results that we expected in this quarter. We need to get better each and every day. And while these challenges have slowed the progress that we expected, we’re quickly repurposing resources. We’re quickly making this organization leaner, we’re focused on gaining sales distribution and continue to deliver sequential cash flow and earnings improvement. And that’s what I’d like to leave you today.

I thank you for your time today, and thank you for your continued support of Calavo.

Operator

[Operator Closing Remarks]