CALAVO GROWERS INC - Quarter Report: 2016 January (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

For the quarterly period ended January 31, 2016

 

OR

 

 

Commission file number: 000-33385

 

CALAVO GROWERS, INC.

(Exact name of registrant as specified in its charter)

 

 

1141-A Cummings Road

Santa Paula, California   93060

(Address of principal executive offices) (Zip code)

 

(805) 525-1245

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     

Yes ☒   No ☐

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,  a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒

 

Registrant's number of shares of common stock outstanding as of January 31, 2016 was 17,435,408

 

 

 

 

CAUTIONARY STATEMENT

 

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo Growers, Inc. and its consolidated subsidiaries (Calavo, the Company, we, us or our)  may differ materially from those expressed or implied by such forward-looking statements and assumptions.  All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flows, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, including execution of restructuring and integration plans; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Calavo and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic trends and events; the competitive pressures faced by Calavo's businesses; the development and transition of new products and services (and the enhancement of existing products and services) to meet customer needs; integration and other risks associated with business combinations; the hiring and retention of key employees; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including, but not limited to, the items discussed in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended October 31, 2015, and those detailed from time to time in our other filings with the Securities and Exchange Commission. Calavo assumes no obligation and does not intend to update these forward-looking statements.

 

CALAVO GROWERS, INC.

 

INDEX

 

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS 

 

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

 

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Description of the business

 

Business

 

Calavo Growers, Inc. (Calavo, the Company, we, us or our), is a global leader in the avocado industry and an expanding provider of value-added fresh food.  Our expertise in marketing and distributing avocados, prepared avocados, and other perishable foods allows us to deliver a wide array of fresh and prepared food products to food distributors, produce wholesalers, supermarkets, and restaurants on a worldwide basis.  We procure avocados principally from California and Mexico.  Through our various operating facilities, we (i) sort, pack, and/or ripen avocados, tomatoes and/or Hawaiian grown papayas, (ii) process and package fresh cut fruit and vegetables, salads, wraps, sandwiches, fresh snacking products and a variety of behind-the-glass deli items and (iii) produce and package guacamole and salsa. 

 

The accompanying unaudited consolidated condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of adjustments of a normal recurring nature necessary to present fairly the Company’s financial position, results of operations and cash flows.  The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year.  These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2015.

 

Recently Issued Accounting Standards 

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  ASU No. 2016-02 includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease.  New disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases are also required. These disclosures include qualitative and quantitative requirements, providing information about the amounts recorded in the financial statements. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal. The Company is still in the process of evaluating the impact of the adoption of this amendment.

 

In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We are required to adopt the amendments in the first quarter of fiscal 2018. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We do not expect the adoption of these amendments to have a material impact on our financial statements.

 

2.  Information regarding our operations in different segments

 

We report our operations in three different business segments: (1) Fresh products, (2) Calavo Foods, and (3) RFG.  These three business segments are presented based on how information is used by our Chief Executive Officer to measure performance and allocate resources. The Fresh products segment includes all operations that involve the distribution of avocados and other fresh produce products.  The Calavo Foods segment represents all operations related to the purchase, manufacturing, and distribution of prepared products, including guacamole and salsa. The RFG segment represents all operations related to the manufacturing and distribution of fresh-cut fruit, ready-to-eat vegetables, recipe-ready vegetables and deli products.  Selling, general and administrative expenses, as well as other non-operating income/expense items, are evaluated by our Chief Executive Officer in the aggregate.  We do not allocate assets, or specifically identify them to, our operating segments. The following table sets forth sales by product category, by segment (in thousands):

 

 

 

 

 

 

For the three months ended January 31, 2016 and 2015, inter-segment sales and cost of sales of $0.2 million and $0.1 million between Fresh products and RFG were eliminated.  For the three months ended January 31, 2016 and 2015, inter-segment sales and cost of sales of $0.7 million and $0.3 million between Calavo Foods and RFG were eliminated.

 

3.Inventories

 

Inventories consist of the following (in thousands):

 

 

Inventories are stated at the lower of cost or market. We periodically review the value of items in inventory and record any necessary reserves of inventory based on our assessment of market conditions.  No inventory reserve was considered necessary as of January 31, 2016 and October 31, 2015.

 

4.Related party transactions

 

Certain members of our Board of Directors market California avocados through Calavo pursuant to marketing agreements substantially similar to the marketing agreements that we enter into with other growers.  During the three months ended January 31, 2016 and 2015, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $0.2 million and $0.6 million.  Amounts payable to these board members were $0.2 million as of January 31, 2016.  We did not have any amounts due to Board members as of October 31, 2015.

 

During the three months ended January 31, 2016 and 2015, we received $0.1 million as dividend income from Limoneira Company (Limoneira).  In addition, we lease office space from Limoneira and paid rental expenses of $0.1 million for the three months ended January 31, 2016 and 2015. Harold Edwards, who is a member of our Board of Directors, is the Chief Executive Officer of Limoneira Company.

 

In December 2014, Calavo formed a wholly owned subsidiary Calavo Growers De Mexico, S. de R.L. de C.V. (Calavo Sub).  In July 2015, Calavo Sub entered into a Shareholder Agreement with Grupo Belo del Pacifico, S.A. de C.V., (Belo) a Mexican Company owned by Agricola Belher, and Agricola Don Memo, S.A. de C.V. (Don Memo). Belo and Calavo Sub have an equal one-half ownership interest in Don Memo in exchange for $2 million each.  Pursuant to a management service agreement, Belo, through its officers and employees, has day-to-day power and authority to manage the operations. Belo is entitled to a management fee, as defined, which is payable annually in July of each year.  Additionally, Calavo Sub is entitled to commission, for the sale of produce in the Mexican National Market, United States, Canada, and any other overseas market.

 

We loaned a total of $4.0 million to Don Memo since its formation. These monies, effectively a bridge loan, were replaced with a new loan to Don Memo from Bank of America, N.A. (BoA) during our first fiscal quarter of 2016 and our bridge loan was repaid from the proceeds of the new loan. Also, in January 2016, Calavo and BoA, entered into a Continuing and Unconditional Guaranty agreement (the Guaranty). Under the terms of the Guaranty, Calavo unconditionally guarantees and promises to pay BoA any and all Indebtedness, as defined therein, of our unconsolidated subsidiary Don Memo to BoA. Belo has also entered into a similar guarantee with BoA. These guarantees relate to a new loan in the amount of $4.5 million loan from BoA to Don Memo that closed in January 2016.

 

Additionally, $2.0 million, representing Calavo Sub’s 50% ownership in Don Memo, is included in investment in unconsolidated entities on our balance sheet.  We make advances to Don Memo for operating purposes, provide additional advances as shipments are made during the season, and return the proceeds from tomato sales under this program to Don Memo, net of our commission and aforementioned advances. As of January 31, 2016 and October 31, 2015, we advanced $1.1 million and $1.8 million to Don Memo, which is recorded in advances to suppliers and netted with payable to growers. During the three months ended January 31, 2016, we paid/accrued $1.9 million to Don Memo pursuant to our consignment agreement.

 

We had grower advances due from Belher of $3.3 million and $3.0 million as of January 31, 2016 and October 31, 2015.  In addition, we had infrastructure advances due from Belher of $1.8 million as of January 31, 2016 and October 31, 2015.  Of these infrastructure advances $1.0 million was recorded as receivable in prepaid and other current assets.  The remaining $0.8 million of these infrastructure advances are recorded in other assets. During the three months ended January 31, 2016 and 2015, we paid/accrued $12.1 million and $5.3 million to Belher pursuant to our consignment agreement.

 

In August 2015, we entered into Shareholder’s Agreement with various partners and created Avocados de Jalisco, S.A.P.I. de C.V. (“Avocados de Jalisco”).  Avocados de Jalisco is a Mexican corporation created to engage in procuring, packing and selling avocados.  This entity is approximately 80% owned by Calavo and was consolidated in our financial statements.  Avocados de Jalisco is currently building a packinghouse located in Jalisco, Mexico and such packinghouse is expected to be operational in the second quarter of 2016.  As of January 31, 2016 and October 31, 2015, we have made preseason advances of approximately $0.2 million and $0.3 million to various partners of Avocados de Jalisco.

The three previous owners and current executives of RFG have a majority ownership of certain entities that provide various services to RFG.  RFG’s California operating facility leases a building from LIG partners, LLC (LIG) pursuant to an operating lease.  RFG’s Texas operating facility leases a building from THNC, LLC (THNC) pursuant to an operating lease.  Additionally, RFG sells cut produce and purchases raw materials, obtains transportation services, and shares costs for certain utilities with Third Coast Fresh Distribution (Third Coast).  LIG, THNC and Third Coast are majority owned by entities owned by three employees of Calavo (former/current executives of RFG). See the following tables for the related party activity and balances for fiscal year 2016 and 2015:

 

 

5.Other assets

 

Other assets consist of the following (in thousands):

 

 

Intangible assets consist of the following (in thousands):

 

 

We anticipate recording amortization expense of approximately $0.9 million for the remainder of fiscal 2016, with $1.1 million for fiscal year 2017 and 2018,  $0.7 million for each of the fiscal year 2019, and $0.2 million for years thereafter, through fiscal year 2023.

 

6.Stock-Based Compensation

 

In April 2011, our shareholders approved the Calavo Growers, Inc. 2011 Management Incentive Plan (the “2011 Plan”).  All directors, officers, employees and consultants (including prospective directors, officers, employees and consultants) of Calavo and its subsidiaries are eligible to receive awards under the 2011 Plan.  Up to 1,500,000 shares of common stock may be issued by Calavo under the 2011 Plan.

 

On January 4, 2016, all 12 of our non-employee directors were granted 1,750 restricted shares each (total of 21,000 shares).  These shares have full voting rights and participate in dividends as if unrestricted.  The closing price of our stock on such date was $48.46.  On January 3, 2017, as long as the directors are still serving on the board, these shares lose their restriction and become non-forfeitable and transferable.  These shares were granted pursuant to our 2011 Management Incentive Plan. The total recognized stock-based compensation expense for these grants was $0.1 million for the three months ended January 31, 2016. 

 

On January 8, 2016, our executive officers were granted a total of 24,582 restricted shares.  These shares have full voting rights and participate in dividends as if unrestricted.  The closing price of our stock on such date was $48.68.  These shares vest in one-third increments, on an annual basis, beginning January 8, 2017. These shares were granted pursuant to our 2011 Management Incentive Plan. The total recognized stock-based compensation expense for these grants was less than $0.1 million for the three months ended January 31, 2016. 

 

Stock options are granted with exercise prices of not less than the fair market value at grant date, generally vest over one to five years and generally expire two to five years after the grant date.  We settle stock option exercises with newly issued shares of common stock.

We measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in our consolidated statements of operations over the service period that the awards are expected to vest.  We measure the fair value of our stock based compensation awards on the date of grant.

A summary of stock option activity, related to our 2005 Stock Incentive Plan, is as follows (in thousands, except for per share amounts):

 

 

At January 31, 2016, outstanding and exercisable stock options had a weighted-average remaining contractual term of 2.9 years.  The total recognized and unrecognized stock-based compensation expense was insignificant for the three months ended January 31, 2016. 

 

A summary of stock option activity, related to our 2011 Management Incentive Plan, is as follows (in thousands, except for per share amounts):

 

 

At January 31, 2016, outstanding stock options had a weighted-average remaining contractual term of 5.1 years.  At January 31, 2016, exercisable stock options had a weighted-average remaining contractual term of 4.2 years. The total recognized and unrecognized stock-based compensation expense was insignificant for the three ended January 31, 2016. 

 

7.Other events

 

Dividend payment

 

On December 8, 2015, we paid a $0.80 per share dividend in the aggregate amount of $13.9 million to shareholders of record on November 17, 2015.

 

Contingencies

 

In January 2015, various class action lawsuits, which had been consolidated into a single lawsuit during our second fiscal quarter of 2015, were initiated against the company related to the restatement of previously-issued financial statements.  On February 24, 2016, the court agreed with our claim that this case was without merit and dismissed the case with prejudice. 

 

Revolving credit facilities

 

In January 2016, we entered into separate loan amendments with Bank of America, N.A. and Farm Credit West, PCA that extended the expiration dates for our existing revolving credit facilities from February 1, 2016 to June 1, 2016.  We are currently engaged in discussions with prospective lenders regarding a new credit facility. We expect to complete these discussions and finalize a new credit facility before June 1, 2016.

 

8.Fair value measurements

 

A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability.  A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).

 

The following table sets forth our financial assets and liabilities as of January 31, 2016 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:

 

 

 

9.Noncontrolling interest

 

The following table reconciles shareholders’ equity attributable to noncontrolling interest related to Salsa Lisa and Avocados de Jalisco (in thousands). 

 

 

 

 

 

 

 

10.Subsequent events

 

We have evaluated subsequent events to assess the need for potential recognition or disclosure in this Quarterly Report on Form 10-Q.  Such events were evaluated through the date these financial statements were issued. 

 

 

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the year ended October 31, 2015 of Calavo Growers, Inc. (we, Calavo, or the Company). 

 

Recent Developments

 

Dividend payment

 

On December 8, 2015, we paid a $0.80 per share dividend in the aggregate amount of $13.9 million to shareholders of record on November 17, 2015.

 

Net Sales

 

The following table summarizes our net sales by business segment for each of the three month periods ended January 31, 2016 and 2015:

 

 

Summary

 

Net sales for the three months ended January 31, 2016, compared to fiscal 2015, increased by $9.8 million, or 5.0%.  The increases in sales, when compared to the same corresponding prior year period, are related to increases in sales from all segments. 

 

For the quarter ended January 31, 2016, our largest percentage increase in sales was RFG sales, followed by our Calavo Foods segment and Fresh Products segment, as shown above.  The increase in RFG sales was due primarily to increased sales from deli products, vegetables platters and cut fruit. Our increase in Calavo Foods sales during the first quarter of fiscal 2016, was due primarily to increased sales of our salsa and guacamole products. Our increase in Fresh product sales during the first quarter of fiscal 2016, was due primarily to increased sales of tomatoes.  Partially offsetting this increase in Fresh product sales for the first quarter of fiscal 2016, however, were decreases in sales of Mexican and California sourced avocados.  See discussion below for further details.

 

While the procurement of fresh avocados related to our Fresh products segment is seasonal, our Calavo Foods business is generally not as seasonal. 

 

Net sales to third parties by segment exclude value-added services billed by our Uruapan packinghouse and our Uruapan processing plant to the parent company.  All intercompany sales are eliminated in our consolidated results of operations.

 

Fresh products

 

First Quarter 2016 vs. First Quarter 2015

 

Net sales delivered by the Fresh products business increased by approximately $1.5 million, or 1.3%, for the first quarter of fiscal 2016, when compared to the same period for fiscal 2015.  As discussed above, this increase in Fresh product sales during the first quarter of fiscal 2016 was primarily related to increased sales of tomatoes, partially offset by decreases in sales from Mexican and California sourced avocados.

 

Sales of tomatoes increased to $16.0 million for the first quarter of fiscal 2016, compared to $6.1 million for the same period for fiscal 2015.  The increase in sales for tomatoes is due to an increase in the sales price per carton and an increase in cartons sold.   The sales price per carton increased by approximately 127.4%, due to lower availability of tomatoes in the market, primarily due to a change in weather patterns.  In addition, we had an increase in cartons sold to 0.8 million cartons from 0.7 million cartons.

 

Partially offsetting this increase was a decrease in sales of Mexican sourced avocados, which decreased $6.1 million, or 6.1%, for the first quarter of 2016, when compared to the same prior year period.  The decrease in Mexican sourced avocados was primarily due to a decrease in the average sales price per carton, which decreased approximately 15.2% from the same prior period. The decrease in the average sales price per carton is primarily due to a higher supply of avocados in the market.  Partially offsetting this decrease is an increase in pounds sold of Mexican sourced avocados, which increased approximately 9.1 million pounds or 10.7%.

 

Sales of California sourced avocados decreased $0.9 million, or 59.7%, for the first quarter of 2016, when compared to the same prior year period.  California sourced avocados sales reflect a decrease in 0.5 million pounds of avocados sold, or 44.6%, when compared to the same prior year period.  We attribute most of this decrease in volume to the timing of deliveries as compared to fiscal 2015. Due to weather conditions, growers opted to pick fruit earlier in fiscal 2015.  Further contributing to this decrease, was a decrease in the sales price per carton, which decreased by approximately 27.3%.  We attribute much of this change to a higher supply of avocados in the market.

 

Sales of papayas decreased to $2.2 million for the first quarter of fiscal 2016, compared to $2.5 million for the same period for fiscal 2015.  The decrease in sales of papayas is due to a decrease in cartons sold.  This decrease is mostly due to weather conditions that impacted the overall supply of Hawaiian papayas.

 

We anticipate that California avocado sales will experience an increase during our second fiscal quarter of 2016, as compared to the first quarter of 2016.  Additionally, we believe that the sales volume of California grown avocados will increase in second quarter of fiscal 2016, when compared to the same prior year period.  This increase is due to a larger expected California avocado crop during fiscal 2016.

 

We anticipate that net sales related to tomatoes will increase during our second fiscal quarter of 2016, as compared to the same prior year period.  We anticipate that sales volume of Mexican grown avocados will increase in the second quarter of fiscal 2016, when compared to the same prior year period.

 

 

Calavo Foods

 

First Quarter 2016 vs. First Quarter 2015

 

Sales for Calavo Foods for the quarter ended January 31, 2016, when compared to the same period for fiscal 2015, increased $0.9 million, or 5.9%.  This increase is primarily due to an increase in sales of salsa products which increased

approximately $0.6 million, or 167.3%, in the first quarter of fiscal year 2016, when compared to the same prior year period. The increase in sales of salsa was primarily related to an increase in overall pounds sold.  In addition, there was an increase in sales of guacamole products which increased approximately $0.3 million, or 1.9%, in the first quarter of fiscal year 2016, when compared to the same prior year period. 

 

RFG

 

First Quarter 2016 vs. First Quarter 2015

 

Sales for RFG for the quarter ended January 31, 2016, when compared to the same period for fiscal 2015, increased $7.4 million, or 10.8%.  This increase is due primarily to increased sales from deli products, vegetables platters and cut fruit. The overall increase in sales is primarily due to an increase in sales volume. We believe the overall increase in sales volume is primarily due to an increase in demand for the variety of innovative products that we offer. 

 

Gross Margins

 

The following table summarizes our gross margins and gross profit percentages by business segment for the three months period ended January 31, 2016 and 2015:

 

 

Summary

 

Our cost of goods sold consists predominantly of fruit costs, packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products and other direct expenses pertaining to products sold.  Gross margins increased by approximately $3.2 million, or 17.9%, for the first quarter of fiscal 2016, when compared to the same period for fiscal 2015.  This increase in our gross margin, when compared to the same corresponding prior year period,  is related to increases in gross margin across the Fresh products and Calavo Foods segments.  Partially offsetting these increases is a decrease in gross margin for RFG.

 

Fresh products

 

During our three months ended January 31, 2016, as compared to the same prior year period, the increase in our Fresh products segment gross margin percentage was primarily the result of increased margins for Mexican sourced avocados.  For the first quarter of 2016, compared to the same prior year period, Mexican sourced avocados gross margin increased from 9.5% in 2015 to 10.3% in 2016. In fiscal 2016, we were able to manage the spread between the sales price and the fruit cost of Mexican sourced avocados more effectively. For the first quarter of 2016, compared to the same prior year period, average fruit/production costs decreased 15.9%, while the average sales price per carton decreased by only 15.2%. In addition, the U.S. Dollar to Mexican Peso exchange rate continues to strengthen in fiscal 2016. Note that any significant fluctuations in the exchange rate between the U.S. Dollar and the Mexican Peso may have a material impact on future gross margins for our Fresh products segment.