Lee Cole – BIOGRAPHY
Chairman of the Board, President and CEO
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To Our Shareholders:
I historically devote this space to a recap and analysis of the recently concluded year. For those looking forward to that, I will not disappoint, because fiscal 2007 was a great year for Calavo Growers. Our company registered record operating results, setting new all-time highs across nearly all key metrics.
Instead of dwelling excessively in the past, however, I want the focus of this communication to be forward-looking with eyes trained squarely on the future. Specifically, Calavo’s course moving ahead and the profound, positive implications of our series of agreements effected during and immediately subsequent to fiscal 2007.
This expansion beyond avocados and papayas—adding initially tomatoes, pineapples and mushrooms—offers an impetus for growth, extending our respected brand name across a cornucopia of other fresh produce products and affording new opportunities for our established core businesses. Particularly impressive, our company implemented this aggressive strategic agenda while delivering these record-breaking operating results, which makes last year doubly gratifying. It’s as exciting a time as any in Calavo’s 84-year history—indeed fruitful and multiplying—and I am delighted to weigh in with my perspective.
Financial Review: Our Most Fruitful Year
Turning first to the fiscal year ended October 31, 2007, our company posted record net income of $7.3 million, equal to $0.51 per diluted share, an increase of 27 percent from $5.8 million, or $0.40 per diluted share in fiscal 2006. Revenues advanced 11 percent to $303.0 million, a new all-time high, from $273.7 million the previous year. Gross margin climbed nine percent to a record $31.8 million from $29.1 million in fiscal 2006.
Operating income jumped from $9.3 million to $12.0 million in the most recent year, a jump of 29 percent to reach a new historic level. Income from operations clearly benefited from Calavo’s rigorous cost-containment discipline, which resulted in sales, general and administrative (SG&A) expense actually decreasing slightly from fiscal 2006, even as we grew net sales by $29.3 million. As a result, SG&A as percentage of total revenues dropped nearly 100 basis points from 7.2 percent to 6.5 percent in the most recent year.
Calavo’s financial condition is exceptionally strong: We possess a flexible balance sheet with considerable capacity for leverage, specifically for strategic acquisition opportunities that we evaluate routinely and remain an integral component of our growth agenda. Shareholders’ equity totaled $74.0 million at the close of fiscal 2007, up 26 percent from $58.9 million one-year earlier. This translates to book value per common share of $5.15 versus $4.12 per common share at fiscal 2006 year end.
In recognition of these outstanding results, our board of directors increased the annual cash dividend on our common stock by nine percent to $0.35 per share, which was paid in January 2008. As point of considerable note, our company’s cash dividend has risen 75 percent since Calavo became publicly traded company in 2002.
Fresh and Processed Avocados: Growth Begins Here
Consumer demand is an interesting phenomenon: Once established it does not quickly disappear. Let me share two examples of how this relates to Calavo’s fresh avocado operations.
First, programs to stimulate avocado consumption—including making ready-to-eat fruit widely available to consumers—are integral revenue-growth drivers in our core business unit. With Calavo’s network of Value Added Depots (we call them VADs) fully in place last year, enabling seamless national distribution coverage, we redoubled emphasis on premium programs and services, namely our ProRipeVIP™, avocado preconditioning and bagged-fruit initiatives. ProRipeVIP® technology is truly unparalleled in our industry and attracting the highest-quality customers who are willing to pay a premium for superior fruit. This top-tier portion of the business grew a staggering 152 percent last year and accounts for a rapidly increasing percentage of our overall avocado sales. Similarly, we shipped more than 10 million individual bags of avocados in fiscal 2007—a steadily growing figure. To meet this growing demand, plans are already in motion to expand capacity at our existing VADs by 50 percent, including the addition of more ripening capabilities, as Calavo pushes further into value-added services. More facilities—adding to the network of VADs—are presently under consideration, too. We anticipate incremental revenue and profit contribution from these value-added programs to accelerate moving forward, as we strive to satisfy demand from hungry avocado devotees.
This second case illustrates how Calavo is well-acquitted to gear up avocado supply in even the most challenging circumstances. A cyclically smaller California avocado crop last year—approximately 320 million pounds—further impacted by catastrophic winter frosts and fall wildfires, followed a record harvest in 2006 nearly double that size. During that earlier 600-million-pound harvest, of which Calavo packed about 35 percent of all California avocados, mouths were found for every piece of fruit. Once hooked, these same consumers continue to clamor for fresh avocados largely unaware the crop size dropped by half. Product demand remains constant and unabated.
Nothing validates Calavo’s Mexican avocado operations and multiple-source business model more vividly than the ability to adapt to last year’s industry challenges without missing a beat. With the ebb in California avocados, we kicked up volumes through our Uruapan, Michoacan packinghouse to satisfy demand and marketed a record amount of fruit sourced from Mexico. In all, Calavo’s total fresh avocado sales rose 10 percent last year and, despite the diminished California crop, our growers here enjoyed extremely strong returns for their fruit.
On the processed avocado side, this operating segment remains a source of considerable personal pride. While we were challenged somewhat last year by margin pressures resulting from high Mexican avocado prices, top-line growth continued to be solid. Compound annual revenue growth in our processed products unit has averaged 21 percent over the past three fiscal years. It’s a testament to a streamlined manufacturing process, outstanding products and aggressive sales and marketing—we’ve brought this unit a long way. In a section elsewhere in this book you can find more about our expanding production capacity and growing customer base. It’s a fulfilling read.
The Case For Diversification
So now the commonly asked question: With dominant market positions in both fresh and processed avocados, is Calavo turning away from its core businesses by diversifying? The answer, in a word, is a resounding no! Expanding into new commodity-produce classifications actually fortifies our avocado business considerably. Opportunities increase to cross-sell avocados to customers procuring other fresh-produce items. We build a protective moat around our largest operating unit—fresh avocados—creating a more broadly based business better situated to weather unexpected downturns in any particular segment and which are inherent to this industry.
This management’s mandate has always been intelligent growth acquired on favorable terms that is immediately accretive to earnings and, in turn, can further enhance shareholder value. It’s a highly disciplined approach: We take a lot of passed balls before ultimately swinging at the right pitch. Our recent agreements—with Agricola Belher for tomatoes, Maui Pineapple Co. and Farmers’ Fresh Mushrooms—provide blueprints for future diversification deals like them. We leverage our truly world-class sales and distribution capabilities—including considerable resources of the aforementioned VADs—allowing us to fold-in and market virtually any fresh commodity product with comparatively few incremental costs.
With systems and infrastructure already in place, such distributions deals require no further capital expenditures and offer the potential to immediately bolster Calavo’s top and bottom lines. And, with an expanding plate of product offerings, we make ourselves increasingly indispensable to customers seeking a single source for multiple commodity-produce items. Further, this formula presents a myriad of potential line extensions as we further diversify—we’re eager to put the Calavo name on more products and the possibilities are vast. One absolute remains the company’s abiding commitment to and reputation for quality. New product classifications offer fertile opportunities to unlock Calavo’s formidable brand equity—but we are judicious to place our well-respected name only on products that meet uniformly high standards for excellence. There never will be simply growth for growth’s sake.
Clear Vision And Able Execution
Branded-tomato, pineapple and mushroom sales are anticipated to contribute somewhere between $52 million to $68 million in our current fiscal year ending October 31, 2008. In concert principally with anticipated growth in our fresh and processed avocado business, I am confidently forecasting revenues to increase by 25 percent over fiscal 2007.
Moreover, our management team has set an ambitious growth plan in motion—the initial evidences of which I shared above—that will seek compound growth in revenues of 25 percent per year for the next five years. At that rate, Calavo is on target to become a company with sales approaching $1 billion by the end of fiscal 2012. It’s a bold vision, to be sure, but an attainable one. Our plan for getting there will remain a disciplined combination of internal growth, folding in of additional commodity-produce items and an eye trained on opportunistic acquisitions. I am certain our operating expertise, not to mention significant financial, human and strategic resources, will serve us well in achieving this goal. As I wrote at the outset, it is an exciting time and I am deeply honored to lead Calavo at this pivotal juncture in its history.
In closing, let me extend sincere thanks to our management team and employees for their tireless hard work and dedication—each of you pulls the laboring oars that have made our current and future success possible. Our estimable board directors provide counsel and judgment for which I am enormously grateful. To our customers, I thank you for continued patronage and commitment to the brand. My most profound appreciation goes to our loyal shareowners—new and old. This is your company and I and my colleagues remain committed to building an even stronger, more valuable Calavo.
Sincerely,
Lee E. Cole
Chairman, President and Chief Executive Officer
March 4, 2008
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