AVO - NASDAQ

Good afternoon, and welcome to the Mission Produce Fiscal Third Quarter 2023 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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. 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 our 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. Steve?

Thank you for joining us for our fiscal 2023 third quarter earnings call. Our top line performance of $261.4 million was generally consistent with expectations, and reflects a continuation of the conditions that returned to the industry earlier this fiscal year, where higher industry volumes were offset by lower average selling prices following last year's elevated market conditions. However, adjusted EBITDA of $21.2 million came in below expectations, while we drove a significant increase in sales volumes during the quarter, and achieved continued sequential improvement in per unit margins relative to the fiscal second quarter, despite the lower pricing environment, our sites were set higher based on initial estimates that suggested a strong and substantial Peruvian harvest. Furthermore, with the rapid completion of the Mexican harvest, prices began to accelerate. At the time, we still believe that we would be experiencing a strong Peruvian harvest, so we took advantage to lock in pricing with our customers ahead of the seasonal increase in volume and also made a decision to distribute some early volume to secondary markets to optimize our position in key export markets. However, the industry experienced an abrupt change in growing conditions midway through the quarter, with the onset of excessive heat that negatively impacted anticipated volumes and fruit size across the Peruvian growing region. The lower volumes from our own production combined with a suboptimal mix of fruit sizes to service key export markets and the fixed cost nature of our farming operations pressured segment margins and were the primary source of our lower than expected adjusted EBITDA performance during the fiscal third quarter. Industry pricing has since responded to these events and moved higher which we expect to help lessen the impact of our fiscal fourth quarter margins. As a large global player in the agricultural business, we are all too familiar with the impacts that weather can have, both good and bad, and mitigating this risk through sound strategy as a core fundamental philosophy of Mission. This is visible in our global diversified sourcing capabilities and our efficient distribution network that can manage significant volume in an efficient and thoughtful fashion, that maximizes our per unit margins under any set of circumstances. For instance, we were able to generate 23% growth in volume during the quarter, which reflects our ability to support our marketing and distribution segment for an extended period, following the completion of the Mexican harvest. Moreover, we were able to deliver volume growth across each of our key export markets. Other industry players with more limited supply options faced greater challenges during the third quarter due to rapid completion of the Mexican harvest season this July. This demonstrates the value of our vertically integrated and diversified global sourcing and distribution network, which allows Mission to remain in position to service new and existing customers regardless of the circumstances. We bring to bear our 14 forward distribution centers in North America, the UK, the EU and China, and in managing our year-round sourcing from eight primary growing regions for the benefit of our customers who are seeking ripening and other value added services. While the current market environment doesn't afford us the same opportunity to drive the level of per unit margins that we had hoped for during the fiscal second half of the year, we were encouraged by the rational pricing environment through the first half of the fiscal third quarter, which is a key element that allows us to open new growth markets to help drive demand and support long-term consumption growth. Our new forward distribution center in the UK opened in April and continues to perform well. We are already seeing the benefits of this strategic location with its direct access to major international ports and transportation networks. In summary, we remain focused on maximizing the opportunities we have despite the curve ball we encountered with the Peruvian crop development. Although volumes and size are lower than we initially expected, we remain in a great position to utilize this route to service our global customer base during the Mexican counter season. 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 third 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 third quarter of fiscal 2023 was $261.4 million, a 17% decrease compared to the same period last year, driven by a 33% decrease in average per unit avocado sales prices, partially offset by a 23% increase in avocado volumes sold. Both the lower pricing and higher volume were driven by higher industry supply out of Mexico during the quarter, which contrast with the same period last year when there was limited supply that drove pricing to near record levels. Gross profit decreased by $14.2 million to $28.4 million in the third quarter. The decrease was concentrated in our International Farming segment, driven by lower pricing on avocados sold from our own production. Within the Marketing and Distribution segment, while per unit margins were below the elevated levels from the prior year, we’re pleased to see meaningful sequential improvement versus fiscal second quarter. The improvement in per unit margins was driven by higher mix of California sourced fruit relative to last year, and the impact of higher avocado volume sold. We are pleased to deliver volume growth across all our end markets, driven by the strength of our Peruvian programs in our international export markets and further supported by a larger Mexican harvest, which helped contribute to a 15% increase in North American volume. The later growth helped us leverage our facility in Laredo, Texas and achieve improvement in fixed cost absorption. SG&A expense decreased $3.2 million or 16% compared to the same period last year, primarily due to lower employee-related incentive compensation accruals, lower ERP process reengineering costs, and lower professional fees due to the maturation of our public company processes. Adjusted net income was $10.3 million or $0.15 per diluted share compared to $18.9 million or $0.27 per diluted share for the same period last year. Adjusted EBITDA was $21.2 million, compared to $31.6 million for the same period last year, a decrease in both of these figures was due to lower per unit margins within the International Farming segment as a result of lower market pricing. Turning to our segments. Our Marketing and Distribution segment net sales decreased 17% to $256.6 million for the quarter due to the avocado pricing and volume dynamics previously described. Segment adjusted EBITDA increased $0.6 million or 4% to $16.1 million, primarily due to lower SG&A. The impact of lower per unit gross margin was largely offset by higher avocado volumes sold. 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 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 were $38.2 million, and decreased by 41% compared to the same period last year, due primarily to lower pricing on avocados sold from company-owned farms, as compared to the elevated levels in the year ago period, which were brought about by constrained industry supply. Segment adjusted EBITDA decreased $11.4 million to $4.9 million, driven primarily by lower gross margin resulting from the lower pricing environment, as compared to last year's elevated pricing which resulted from limited Mexican supply. Activity in our Blueberry segment is concentrated in the first and fourth quarters of our fiscal year, in alignment with the Peruvian blueberry harvest season, which typically runs from July through January. As a result, our Blueberry segment results were negligible, yet higher in the third quarter due to an early start of the blueberry harvest relative to last year. Net sales were $1.4 million and segment adjusted EBITDA was $0.2 million, which compared to $0.3 million and negative $0.2 million in the same period last year, respectively. Shifting to our financial position, cash and cash equivalents were $23 million as of July 31, 2023, compared to $52.8 million as of October 31, 2022. As a reminder, our operating cash flows are seasonal in nature, and can be temporarily influenced by working capital shifts resulting from varying payment terms to growers in different sourced regions. In addition, the Company is building its growing crops inventory in its International Farming segment during the first half of the year for ultimate harvest and sale that will occur during the second half of the fiscal year. Thus, when looking at operating cash flow on a three-month period for fiscal third quarter, we generated approximately $19 million in cash. However, on a year-to-date basis, given the seasonal nature of our working capital, net cash used in operating activities was $7.3 million compared to $3 million for the same period last year. The $4.3 million change was driven by a combination of lower net income due to a decrease in our International Farming segment performance relative to prior year, and slightly unfavorable movement in working capital. Overall working capital movements were comparable to the prior year, with offsetting changes in inventory and grower payable balances being driven by the lower pricing environment in the current year. Capital expenditures were $47 million for the nine months ended July 31, 2023 compared to $42 million last year. Current year expenditures were concentrated in pre-production avocado orchard maintenance in Guatemala and Peru and construction costs on our new distribution facility in the UK. Capital expenditures also included $11.1 million related to the development of our Blueberry’s operation, compared to $3.7 million in the prior year. Excluding the influence of our Blueberry's operation, core CapEx associated with our avocado business decreased 6% or $2.4 million versus the prior year-to-date period. We expect this trend to hold for the balance of fiscal 2023. With respect to our capital allocation framework, I'd point out that our Board approved a stock repurchase program last week, which is our first as a public company. The primary [intend] (ph) is to mitigate the dilutive impact of our stock incentive plans and as appropriate, provide a tool for the Company to support the stock in the open market. This authorization permits the Company to repurchase up to $20 million of our common stock over the next 36 months. There have been no shares repurchase since the approval, and the entire authorization remains outstanding as of today. In terms of our near-term outlook, we are providing some context around our expectations for industry conditions to help inform your modeling assumptions. Pricing is expected to be flat to slightly higher on a sequential basis and higher on a year-over-year basis by approximately 10% compared to the $1.28 per pound average experienced in the fourth quarter of fiscal 2022. The industry expects volumes to be flat to slightly lower in the fiscal 2023 fourth quarter, versus the prior year period, due to reduced supply from Peru brought about by the impact of weather on growing conditions. In terms of our owned farm production in Peru, we now anticipate exportable volumes to be in the range of 105 million pounds to 115 million pounds for the 2023 harvest season, which is a decrease from our initial expectations, reflecting the decline in growing conditions throughout the region. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Ben Bienvenu with Stephens. Please proceed with your question.

Hi, thanks. Good afternoon, everybody.

Hi, Ben.

Hi, Ben.

So, I want to ask, recognizing that, the International Farming operations harbored the concentration of the margin pressure in the quarter. Can you talk about what you're seeing outside of that segment? Obviously, nice sequential improvement in margins, you're managing SG&A fairly nicely. Can you talk about what trends you expect to persist into the fourth quarter? And then to the degree that, and you alluded to this that you could see some improvement in the International Farming segment in the fourth quarter. What are the things that could amplify that improvement or diminish it?

Hi, Ben. When I look at, kind of, look at our Marketing and Distribution segment, I think the things that we're happy with during the third quarter, certainly the volume growth that we saw year-over-year close to $7.4 million lug equivalents sold through. So, very much on the high-end. We saw a lot of growth. Because of the lower price points, I think the way we looked at it with more Mexican fruit available, that Mexican fruit came into the U.S. market, and that's really what helped drive our volume growth in North America about 15%. And when that -- with that happening, a lot of the Peruvian fruit that we brought to the U.S. last year, we were able to utilize to support our export markets in Asia and Europe primarily, which grew at much faster rates than that. So, I think we were pleased to the extent that our vertical integration strategy worked. We had the fruit available that we needed for the marketing segment. I think as we look through the third quarter, certainly we were -- we had a nice balance between sourcing from Mexico, California and Peru as we transition to the fourth quarter, we're probably looking at California crop is coming to an end. You're looking at the new crop out of Mexico coming online during the second half of the quarter, and you're looking at the Peruvian season kind of coming to a close as we move through the quarter. So all-in-all, I mean, we think that volume will be a little bit lower than what it was last year, from what we're hearing at this point, Mexico industry supply for the coming season, maybe a little bit lighter than what it was last year. So, we're preparing for that. And we think that that could help drive pricing up a little bit during the fourth quarter. But again, with California coming to an end and that generally, it tends to be the piece of our business has the highest contribution margin. I think we've referred to that in the past. It probably -- it creates a different set of challenges with our per box margins. It's not as favorable per se in the fourth quarter as what we would typically in the third quarter, but higher pricing will help to some extent. And when we look at the Farming segment, yes, typically, I think when we talked in the past about a third of the volume that we market, comes in the third quarter and 30%, 35%, 40% somewhere in that neighborhood, and then we have a larger proportion in the fourth quarter. I think, it won't be as extreme of a variance this year, but I think we do expect to have more volume in the fourth quarter than we had in the third quarter. So, that should be beneficial. And a market environment where pricing is sitting a little bit higher will be helpful as well. Now again, as Steve alluded to, good portion of our U.S. volume is in programs, but that isn't so much the case with Europe and Asia. So --

And China.

And China, yes. So, there could be some benefit there.

When you look at some of the positives that came out of this, the shipments to China tripled in one year, they've obviously got a lot of people over there and we now have -- while we're building two more ripe centers. So, we're pretty well-positioned to help that growth market over there. The kids are drinking avocado smoothies like crazy. So, it's kind of a runaway train in a positive way. And then the EU and the UK, again, we're in position there and we're built for the future and we're just waiting on mother nature to leave us alone.

Yes. Okay. Fair enough. Understood. On SG&A expense, down quite a bit sequentially and versus what the run rate we've seen in the first half of the year, down quite a bit year-over-year. Is this a reasonable baseline expectation in terms of absolute dollars for SG&A? And maybe if you could talk about some of the things that you all are doing there to manage SG&A in a bit more tightly than what we've seen over the last couple of years?

Ben, probably the -- I wouldn't say that this is necessarily a sustainable level. Part of the reason for the decreases this year, related to incentive-based compensation. Certainly, we haven't delivered on the performance we expected to, internally, through the first nine months of this year. So, there's been adjustments made kind of as a management team to our accruals, which we would hope as we go forward isn't the case. But also in some of our foreign operations, both in Peru and in Mexico, there's government mandated profit sharing that geared around profitability of those specific operations. And with the big drop off in earnings down in the Farming segment, it resulted in significantly lower profit sharing accruals in our Peru or in our Farming segment as well. So, that component of SG&A, I think is more isolated to the performance of the current year. I think some of the other things, ERP coming off, after last year where we had big challenges after go live, that's sustainable. We don't see that repeating itself. And then some of the other consulting-related professional fees, there might be more opportunity for those to come down as -- in all honesty as we move forward.

Okay. Very good. Thanks so much for taking my questions.

Okay. No problem.

Thank you. Our next question is from Tom Palmer with JPMorgan. Please proceed with your question.

Hi, good afternoon. Thanks for the questions.

Hi, Tom.

Wanted to maybe just start off on the Peru side, and get an idea of what we're looking at just from a volume split. I think a quarter ago, the discussion was a relatively even balance in terms of sell-through between 3Q and 4Q. Is that still the case or is it a bit more skewed toward the fourth quarter perhaps?

Typically, as I mentioned, we're about 35% in the first half and about 65% in the second, in terms of the profit impact of the sell-through of that fruit to customers, not so much harvest, but sell-through. This year, it'll probably be not quite as back loaded as what we typically see. I would say we might be based on our full-year projections of where volume is going to land, compared to what we ran during the third quarter, it would probably put us at a split of around 45% in Q3 and 55% in the third quarter, with the potential for some amount to slip over into to Q1 fiscal 2024 as well. But that would be a relatively small amount if it did.

Oh, great. Okay. Thank you. And then just on you gave some indication of what you expect industry volumes to be from a distribution standpoint. And then you've also got Peru coming in lighter than you expected, sounds like California, which was solid as winding down. So, would you expect to grow in-line with the industry as we look at fourth quarter? I know longer term it's at least in-line, but just for the fourth quarter, is the expectation in-line or is that going to be a little tougher given Peru?

I mean, I think if we look at our fourth quarter and if we -- after the fact when we look at what the actual growth is, both in North America and abroad, I would think with Peru still being even with the smaller crop Peru, we'll still make up a pretty significant portion of the overall consumption in Q4. And with our position in Peru, I would think that it's advantageous for us from a share perspective. Certainly with Mexico transitioning from their off bloom to the new crop and we'll see more of that in the later part of the quarter. I don't -- when we're in Mexico, I don't necessarily think that that has a dramatic influence on our share one way or the other. But I think it could be, again, Peru is lower than what we saw last year, in the fourth quarter and it's lower than what we had initially expected. But it's still a meaningful amount of fruit, and it definitely gives us an advantage over our peers by having it.

Understood. Thank you.

Thank you. Our next question is from Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

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

Hi, Gerry.

Hi, Gerry.

I apologize, I'm on my mobile, but just wanted to dig in a little bit more on Peru, and I understand volumes were down, but you also discussed that, I think you made some movements or decision making. You had some decisions during the quarter where you allocated fruit. And I'm just curious, and obviously you can't play Monday morning quarterback, but I'm just curious if you were to change anything in the quarter, but more importantly, does -- what happened with this harvest maybe changed from a process or decision making processes in the future with Peru and would that be potentially beneficial?

Well, we had two extremes. We had cold weather early and very hot weather. We had cold weather in the summer and hot weather in the winter, and it really -- and plus a lot of rain due to that El Niño situation that went from California all the way down to Peru and further. But early on, it affected the set to start with the fruit, the fruit flowering because it was cold. And then when they did set, which was a little late, due to the cold weather and rain. It looked good at the beginning, but it got extremely hot. I can't give you the exact temperatures, but for Peru and the mid of winter, it was probably close to 90 degrees or higher. And it's -- what it does, it stunts tree or stuns the growth of the fruit on the tree, because it's kind of in survival mode at that point with the hot summer and or hot temperature and it's trying to suck up the water as fast as possible to stay hydrated, etcetera. So, we had two extremes that just effected the overall production for the season, as did everybody else.

Yes, I mean --

Got it. Yes.

I'd like to say Gerry, if we knew, we were going to have a higher pricing environment, say later in the year, we would have liked to have extended our harvest. But on the flip side, because of the weather conditions where we had issues with fruit drop off the trees, I'm not sure if that's the decision, we would have made. I think there's data here, there's data points that we're going to track going forward, but I'm not sure if we have a clear cut that we would definitely do something differently in the future, but we have a lot of data at hand that we're going to need to utilize as we move forward.

Got it. Okay. That's helpful. I just wasn't sure if there was -- exactly what the situation was and, that's helpful in terms of understand what --

Yes. We were

I appreciate. Yes.

We were trying to hold the fruit later because there's usually a pretty good market, wait everybody out, but this, the fruit started dropping at a pretty rapid pace. So, we didn't want to wake up and not have anything on the tree.

That because -- and it was dropping both the heat and the tree was trapped overall, correct?

Exactly. It sheds everything. It's like getting your kids out of the house, get out of here.

I got you. All right. I can relate to that. Got it. Okay. No, that's super helpful. I wasn't sure if you made -- listening to the commentary, I caught some of it. I wasn't sure if you made a like a strategic decision to maybe harvest a little earlier and move some stuff around, but I understand now it was it was either pick or drop.

Yes.

Got it. Okay. Thanks, guys.

Ladies and gentlemen, at this time, I'm showing no further questions. I'd like to end the question and answer session and turn the call back over to management and a closing remark.

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