AVO - NASDAQ

Good afternoon and welcome to the Mission Produce Fiscal First Quarter 2023 Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead.

Thank you, and good afternoon. Today's presentation will be hosted by Steve Barnard, Chief Executive Officer; and Bryan Giles, Chief Financial Officer. The comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release which can be found on the Investor Relations website, investors.missionproduce.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. With that, I'd now like to turn the call over to Steve Barnard, CEO.

Thank you for joining us for our fiscal 2023 first quarter earnings call. We produced total revenue of $213.5 million and adjusted EBITDA of $2.3 million in the first quarter. This performance largely reflects the reversal of the strong pricing and low industry volumes that summarized most of 2022. As the new Mexican season kicked in during first quarter of 2023, we were in a great position to drive volumes, and I'm pleased to report that our growth of 14% exceeded that of the industry, which is a testament to our distribution capabilities and infrastructure that supports our global customer base. However, with these higher industry volumes, the pricing environment reversed, decreasing 27% ultimately outpacing the volume growth we had realized, although the velocity of the price deceleration created unfavorable circumstances to drive per unit margin, the market has since found some pricing stability, which is more conducive to generating improved profitability and looking ahead to the balance of the year we believe conditions exist that make for a more constructive pricing outlook as our fruit season comes online. While the price volatility during the first quarter was unfavorable, we are optimistic that this new equilibrium of lower fruit pricing will ultimately drive greater consumption in the coming year compared to the depressed consumption rates we saw last year. Furthermore, this shift to a more rational environment facilitates our ability to penetrate new growth markets such as Europe and Asia, and drive per capita consumption in these emerging markets with improved access to year round high quality fruit that we are uniquely able to deliver via our owned and third party sourcing capabilities and global footprint. But having access to diversified sourcing is only half the equation. You also need the distribution infrastructure, which is precisely where Mission shines. We remain well positioned to manage higher volume volumes of product this year to our unmatched global network of distribution ripening and other value added assets. Looking ahead, our focus remains on the advancement of our global presence to investments in new global facilities, such as our forward distribution center in the United Kingdom and diversification of our business by leveraging our core competencies in new and creative ways such as Blueberries. We expect that the improved stability in the avocado market, coupled with easing of cost inflation, will also allow us to generate sequential improvements in our per unit margins, albeit below what has been our historical targeted range. With this backdrop, we expect to deliver a better year of operating performance in fiscal 2023. Our forward distribution center in the United Kingdom is expected to become operational in April. It is strategically located with direct access to major international ports and transportation networks and will strengthen mission's expanding international footprint and optimize product distribution to our growing European customer base with direct access to our global source network. This project represents a strategic investment in physical assets and people that will help us scale up quickly in this market in the coming years. We are very excited to get this facility open and elevate our ability to service this region properly with our efficient and cost effective model. With respect to our Blueberry business, although our first quarter performance was impacted by an unfavorable pricing environment, we continue to be optimistic about the long term opportunity given our access to new premium varietals, which are in the early stages of disrupting the status quo. These new varietals are not only expected to sell at a premium, but also provide us with the added benefit of extending the marketing window with an elongated harvest. While the initial goal of our entry into the market was to optimize labor management for our seasonal avocado business, our experience in operationalizing scaled production and unique high value crops put us in a position to make a broader impact on the industry. This is a long-term play for us, but one that we think will prove to be quite valuable over time. With that, I'll pass the call over to our CFO Bryan Giles for his financial commentary.

Thank you Steve, and good afternoon to everyone on the call. I'll start with a brief review of our fiscal first quarter performance and touch on some of the drivers within our three reportable segments. Then I'll provide a snapshot of our financial position and conclude with some thoughts on the current industry conditions that we are seeing. Total revenue for the first quarter of fiscal 2023 were essentially flat with the prior year at $213.5 million. However, note that the first quarter was advantaged by approximately $30 million due to the Blueberry consolidation that took place beginning in the fiscal third quarter of last year, but isn't yet reflected in the comparable prior year first quarter period. Thus, when looking at the drivers of our lower avocado revenue within the marketing and distribution segment, it was largely a function of a 27% decrease in average per unit avocado sales prices, being partially offset by an increase in avocado volumes sold to 14%, both of which were driven by higher industry supply out of Mexico during the quarter. Gross profit increased by $8.5 million to $9 million in the first quarter, and gross profit percentage increased 400 basis points to 4.2% of revenue. As a reminder, prior year gross profit and margin percentage were negatively affected by operational challenges created by the implementation of a new ERP system within our marketing and distribution segment that led to inventory management issues and unusually large fruit disposals. Normalizing for that impact in prior year gross profit within the marketing and distribution segment was relatively flat year-over-year. In the current year period, higher volumes had a favorable impact on fixed cost absorption in areas such as distribution, while the lower pricing environment limited our ability to generate per box margins on the buy sell of avocados. While we experienced some sequential improvement versus fiscal fourth quarter per box margins remained below our targeted range. In addition, our Blueberry segment experienced negative gross margin of approximately $3 million during the first quarter as a result of weak sales prices within the European and U.S. markets driven by strong industry supply as well as the amortization of purchase accounting adjustments associated with the business combination of Maruga during fiscal 2022. SG&A expense for the first quarter of fiscal 2023 increased $0.4 million, or 2% compared to the same period last year, primarily due to the consolidation of Maruga, which added approximately $1.6 million of expense. Normalizing for this accounting dynamic and excluding $0.9 million of nonrecurring ERP implementation costs in the prior year period we are pleased to see stabilization in our core SG&A expenses, which is a positive signal amid this inflationary period. Adjusted net loss for the first quarter of fiscal 2023 was $5 million, or $0.07 per diluted share, compared to $12.2 million, or $0.17 per diluted share, for the same period last year. And adjusted EBITDA was $2.3 million for the first quarter of fiscal 2023, compared to a loss of $10.4 million for the same period last year. The improvement of which was primarily attributed to higher gross margin. Turning to our segments. Our marketing distribution segment net sales decreased 14% to $181.8 million for the quarter and segment adjusted EBITDA increased $12.3 million or 160% to $4.6 million. Net sales declines were due to the avocado pricing and volume dynamics previously described, while the EBIT improvement was driven primarily by higher gross margin due to our ERP implementation challenges in the prior year quarter. Our international farming segment operates orchards from which substantially all fruit produced is sold to our marketing and distribution segment. Production from this segment is currently derived from Peru, though smaller operations are under development in other areas of Latin America. Segment revenues and EBITDA are concentrated in the second half of our fiscal year in alignment with the Peruvian avocado harvest season, which typically runs from April through August of each year. With this in mind, total segment sales in the international farming segment increased 73% to $5.7 million for the quarter compared to the same period last year due primarily to higher packing and cooling service revenue for Blueberries. Segment adjusted EBITDA improved $0.9 million to a loss of $1.8 million as a result of higher segment sales and lower SG&A expense. Our Blueberry segment reflects the results of Maruga's farming activities, which includes cultivating early stage Blueberry plantings and harvesting mature bushes. This product is marketed globally by our partner in the Maruga joint venture. Sales in our blueberry segment are concentrated in the first and fourth quarters of our fiscal year in alignment with the Peruvian blueberry harvest season, which typically runs from July to January. Furthermore, the Blueberry harvesting season is asynchronous with the avocado harvesting season, allowing us to leverage our resources in Peru during the off season for avocados. For the first quarter, our blueberry segment net sales were $29.8 million and segment adjusted EBITDA was a loss of $0.5 million. While the blueberries business experienced pricing compression in the European and U.S. markets during the quarter, due to significant growth in industry volumes, we continue to be bullish on the long-term prospects for this business. We are working alongside our partner to introduce new premium varietals to the market that also have advantages with respect to our ability to stretch the harvest and extend the marketing window. This creates an ideal opportunity to deliver value to customers while driving improved margins over time. Shifting to our financial position. Cash and cash equivalents were $39.2 million as of January 31, 2023 compared to $52.8 million as of October 31, 2022. Net cash used in operating activities was $1.3 million for the three months ended January 31, 2023, compared to $41.4 million for the same period last year. During the current year period, our working capital position benefited from the impact of lower per unit price points. Lower prices had a favorable effect on both accounts receivable and inventory balances and substantially offset the impact of typical working capital growth we see in the first quarter as a result of heavy sourcing of Mexican fruit with shorter payment terms and the build of growing crops inventory within our international farming segment for harvest and sale during the second half of our fiscal year. Capital expenditures were $17.6 million for the three months ended January 31, 2023 compared to $20.9 million last year. Current year expenditures include $4.4 million of spend related to irrigation installation and early stage plant cultivation in our Maruga Blueberry operation. This spend was not included in capital in the prior year when the operation was not consolidated. Capital expenditures in both years included avocado orchid development, pre-production, orchid maintenance, and land improvements in Peru and Guatemala. In addition, capital expenditures in the first quarter of fiscal 2023 included construction costs on our new UK distribution facility that is scheduled to open in spring 2023. For the full year fiscal 2023, we continue to expect CapEx related to our core avocado business to be lower than fiscal 2022. That being said, we will incur additional costs as we ramp up development of the Maruga Blueberries project in the almost region of Peru. In terms of our near term outlook we are providing some context around our expectations for industry conditions to help inform your modeling assumptions. The industry is expecting volumes to be higher in the fiscal 2023 second quarter versus the prior year period, primarily due to continued expectations for a larger Mexican harvest. We expect the overall Mexican crop to be approximately 20% higher than the prior harvest season. With year-over-year volume increases from Mexico ticking up during the quarter, we expect the quarterly uptick to be partially offset by lower California volumes due to a later start to the harvest season. We believe pricing will be higher on a sequential basis, but lower on a year-over-year basis by 30% to 35%, compared to the $2.04 per pound average experienced in the second quarter of fiscal 2022. This movement is primarily due to the volume dynamics noted above and while the inflationary impact on our cost structure has shown signs of stabilization, we are still contending with higher expense run rates that are compromising our ability to drive higher per unit margins and adjusted EBITDA. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q& A.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Gerry Sweeney from Roth Capital. Please go ahead.

Good afternoon, Steve and Bryan. Thanks for taking my call.

Hey, Gerry.

Hey Jerry.

Hey. So lots of detail there on your prepared remarks, but I'm just trying to maybe think a little bit out louder to make sure I'm thinking about this the right way. Last year wave of different issues, anything from fruit sizes, production cost, logistics, even pricing, all which in some ways drove or impact the consumption. Sort of as we're looking at this year, it sounds as though you may be seeing, and I'm going to stress to the beginning of maybe a regression to the mean in terms of some normalcy around size. We're even seeing some cost stabilization, if not mitigation, especially on logistics. If this continues along with volumes, if this continues, we should see EBITDA begin to improve throughout the years. Am I sort of looking at this all correctly?

Well, volume in Mexico is up. Inflation appears to be easing on all fronts. We're based off of volume. We're built for volume. And last year we were light on volume, the exception of Peru and, yes, I would agree it's feeling a lot better going into where we are. I mean, there's still challenges everywhere, but some of the major things that we're seeing, they're retreating as far as the inflationary issues.

Yes, Gerry, I think we're seeing some positive signs as we've moving in through the early part of Q2 volumes. I do feel they gain some traction, seems to be more pull through at retail than we saw for much of the first quarter. So we're seeing volumes at high levels and pricing is increasing in conjunction with that. So I think we feel good about where the industry is going through the second quarter. I think we're excited about seeing some of the other countries of origin, like California and Peru, start to come on and that will happen as we move close to the end of the second quarter, give us more options for sourcing fruit for our customer base. Certainly some of the inflationary pressures are starting to subside. I think when we look at kind of our farming operations, which are going to kick in later in the year, I think we've got a lot of favorable things we're seeing right now. We're seeing production yields up for our farms. We're seeing an improved size curve over what we saw last year for commercial sizes. And most importantly, we're seeing some of the freight rates that hurt us so significantly last year, subside and revert back closer to levels that we saw in 2021. So I think certainly a big variable is still what the market prices will be at during those summer months. But we definitely feel better. There's a lot of positives that we see out there kind of heading towards the summer.

Got it. This question, I got to throw it out there. I'm not sure if it's really answerable, but obviously food inflation is a hot topic. We're seeing it across the board and seeing some even in my own personal consumption, maybe trading down different when you go to a supermarket. Is there a price level that you've seen or that drives consumption a little bit higher, a little bit lower, above or below a certain level? We haven't seen an inflation a market like this with inflation for years. I'm just curious if there's any data, any thoughts around that?

Yes, I mean, if it gets under a dollar, it usually attracts a lot more people, at least on an average size. One of the issues we had in the first quarter was there was a disconnect between the market in Mexico and what the retail price was. So there was a big gap in there that slowed demand down. That has since changed ever since Super Bowl has been pretty normal, I would say, or competitive. And we're seeing substantially improved volumes throughput as an industry. Mexico is picking record numbers, and it seems to be stable price wise.

Got it. I was going to say Mexico is stable in general, not just price but --

[indiscernible] I am going to comment on that.

That's what I figured. I appreciate, I'll see you early next week.

Okay. Thanks, Jerry.

Thank you. [Operator Instructions] Our next question comes from the line of Tom Palmer from JPMorgan. Please go ahead.

Hey, guys. Thanks for the question.

Hi, Tom.

Hi, Tom.

Maybe we can just kick off on maybe the supply outlook as we move past the Mexico harvest. I mean you noted California harvest coming in maybe a little bit later, but do you have any early indication in terms of how the quality, how the size of that might be coming through and then anything on Peru for the same?

Sure. As you may know, we've been getting a lot of rain here in California. So that will help that crop size up. They like rain. They haven't seen it in a while. We're starting to pick a little bit here now. it's kind of size picking in some areas. A lot of pruning going on and that type of thing. I really don't see much volume really, until April coming out of California. We have already started our Peru harvest, although slowly this past week. Most of that's going overseas, but our crops up about 10% and the sizing, as Bryan mentioned in his remarks, is a much more normal situation. So it's quite positive in those regards.

Okay, thanks for that detail. And then maybe just check in on the blueberry side. If I looked at some of the disclosures right, I think this was a business that kind of fair value assumed something in the $6 million range for annual EBITDA. And it looks like for this year, this growing season at least, it was a little under a million. I guess first is, am I looking at that right? And then how abnormal was this year? I mean, is the 6 million a number that you've been seeing in recent years? And then this year just kind of suddenly fell off and was unusual in nature? Or was maybe some of the other years leading up to this one a bit challenged too?

Hi, Tom. We certainly had some challenging years in the past. I think this one was more extreme than what we've seen. I don't think you're looking at it wrong. I think we've had years where we've generated EBITDA in the $5 million to $6 million range for that operation. I think certainly as the business has grown, the acreage is planted, the yields have improved. We've seen volume increases over time. But the one thing that we have seen is, as the industry crop as a [whole increased] that pricing has come down over time. I think one of the big challenges that we have right now is that some of the initial plans at things we did of older varieties aren't considered kind of a premium varietals, and they're limited in terms of which markets they can make their way into, and they generally generate a lower average sales price. And when you're looking at a market, Peru's become the largest exporter of blueberries in the world over the last couple of years. You're seeing the pressure on pricing as a result of that. The ways that we're trying to control that going forward, I think we alluded to in the call. A lot of the we've replaced some of the plants we have today with newer varieties, larger blueberries with a better taste profile that should be able to get them into premium markets like China, which will generate a stronger return. On top of that, some of the new varieties through pruning, we have more options in terms of altering the harvesting window. Right now, we're hearing north of 80% of the fruit, blueberries in Peru are harvested between October and December. And what we really want to see over time is that season getting stretched out. So I think we're still pretty happy. I think we're happy with the outlook. We weren't happy with the results from this last year, but I think we're still bullish on where this is going to go, that the genetics that we're planting with are going to truly have a distinctive advantage over kind of the traditional varieties that most of the people of the growers in Peru are planting or have planted. So I think that our biggest driver there is to, again get our fruit into those premium customers so we can generate those higher returns and continue to grow yield so we can lower our average cost and kind of stretch out that harvest window as much as we can.

Great. Thanks for all the details.

Sure thing.

Thank you. Our next question comes from the line of Bryan Spillane from Bank of America. Please go ahead.

Thanks operator, good morning or good afternoon, guys. So I just had one question. I guess you talked a little we're talking about in marketing and distribution and we talked a bit about maybe the profit per box or profit per carton beginning to sort of maybe normalize, I guess is what I heard. But I guess we talked a bit about this. I think on the last earnings call there's just other inflation, labor, transportation costs, right. So as we're all trying to sort of fixate on kind of a mean reversion, if you will, on profitability in both the farming segment and in marketing and distribution, are you at a point yet where your pricing discussions have also incorporated starting to cover some of the non fruit costs? Or will that take more time and will that affect sort of getting back to a more normalized profit per box?

Well, we're in the process actually just this week of looking at freight rates. We're kind of dragging our feet as it continued to fall, say specifically out of Peru to either Asia, U.S. or Europe. And it seems like the longer we wait, the better they get. So we're getting close to where we could meet our expectations on cost of something comparable to two years ago on freight rates out of the Peru. So we're seeing some improvement in that on truck rates too on improvement and that on truck rates too, on internal truck rates across the country. It's not probably coming down as fast as the ocean freight is, but they are concerned continuing to creep down a little bit every week in certain specific lanes for sure.

And I will say, Bryan we have made some alterations to our pricing structure since the beginning of our fiscal year. I think we're used to freight prices moving around quite a bit in our customers, we adjust pricing regularly for that. But for some of the other value added services we provide, like ripening and distribution that are intended to cover some of our over head infrastructure related to those operations. We have gone back and kind of made some pricing adjustments there, acknowledging that we've seen inflationary cost pressures in those operations and the volume growth over the last few years hasn't been there to absorb it. So we're pushing, I think it's something that we've been doing over the last few months. I think we're making progress in getting customers to accept it. I still don't think we're kind of outside of the range of what our competitors are doing, but we're kind of pushing ourselves, I think, kind of up to the higher end. And we expect, over time, that we'll likely see everyone kind of need to do that.

Okay, and then, actually, just one additional question that there is, now I guess, the prediction that we may end up with an [almeno] at some point this year. So, Steve, can you just remind us again how that might affect Peru, how that might affect California and Mexico? Just flipping from [lanino] which where we've been for the last couple of years, to [almeno] is there anything that we should be thinking about there?

Yes, I mean it’s – we’ve had almost twice the normal rainfall here in California already this year. And starting tonight, we're getting another couple of inches, much needed, by the way. And it actually helps the trees as long as it stops at some point, but they're very healthy. The fruit is sizing up quicker because the water. I call it sweet water. It's rainwater. It doesn't have all some of the salts and whatnot in it, but so far it's been a positive here. It is raining in Peru. We actually have our Peru team here this week, but it's not a flooding situation, it's just raining. So it held up harvest a couple of afternoon. It's mostly in the afternoon. So as long as it stays where it is there, it doesn't wash the bridges out and whatnot we're good. And I don't think there's any prediction of that from what I know today.

Okay, thank you.

Thanks, Bryan.

Thank you. Ladies and gentlemen, at this time, I am showing no further questions. I just like to end the question-and-answer session and turn the conference call back over to Steve Barnard, CEO for any closing remarks.

Thank you very much for your interest in Mission Produce and we look forward to speaking you again soon.