Q1 2022 Mission Produce Inc Earnings Call
Good afternoon, and welcome to the mission produce fiscal first quarter of 2022 conference call.
All participants will be in listen only mode.
After todays 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 over to Jeff Sonic 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 Brian 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.
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.
I'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 got mission produce dot 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 2021 first quarter earnings call. Our first quarter results were disappointing and do not demonstrate the level of execution that has defined our business since its founding.
On November one 2021, we implemented a new ERP system that impacted our entire marketing and distribution segment.
As every company, who has undergone an ERP implementation knows this is a highly complex exercise that requires extensive planning and testing all of which is designed to mitigate implementation risk. However.
However, despite the countless hours, we spent planning and preparing for this conversion, we nevertheless experienced significant challenges with the implementation.
As a result, we were unable to drive the per unit margins in the first quarter that we have historically delivered.
Well, we believe we've addressed the most acute issues that we faced in the first quarter. There's more work to be done before we get back to the level of efficiency and execution that we have come to expect of ourselves.
And perhaps most importantly, despite the challenges our team was able to quickly adjust to the disruption and largely protect our customers from many extended impact. It is our commitment to customer service that has been missions hallmark for nearly four decades.
As we've stressed time and again, our greatest competitive advantages is our ability to provide our diverse customer base with a year round supply of avocados from our vertically integrated firms and global network of growers, while also providing customized value added services that precisely fit their needs.
As simple as it sounds it is anything but when you consider the sheer volume of fruit, we're moving through the supply chain on any given day.
On a weekly basis, we can move between 240 and 300 truckloads of fruit through our network.
And to move that kind of volume you need extensive operational capabilities, which is precisely what we have.
Our network covers for packing houses in California, Mexico, and Peru, and 12 forward distribution and ripening centers with operations across nine countries on four different continents to serve customers in over 25 different countries.
Michigan has built a set of unique capabilities over the last 38 years piece by piece asset by asset.
The global leader we are today.
But growth has complexities for many years and it's been apparent that our organization will need to upgrade our ERP infrastructure to be able to execute on our strategic growth plans.
The new ERP system provides the necessary infrastructure for our growing business and establishes a security and control environment. We need now that we are a public company.
He was also designed to enhance our operational visibility so that we can scale our business to support an even greater breadth of customers across larger geography, while maintaining our unparalleled standard of service.
Well, we weren't naive to the risk of disruption to the business the extent and magnitude was greater than we anticipated I'll provide a.
A few examples out of the ERP implementation impacted our operations in the first quarter.
First there was a lack of sufficient visibility into on hand inventory, which resulted in considerable fruit that was moved up below average returns or not fit for sale.
In addition, due to the struggles with visibility on inventory, we sourced a disproportionately large amount of fruit from third party providers, where we typically do not recognize meaningful margins in order to fulfill customer commitments.
Separately first quarter results were also negatively impacted by the smaller Mexican harvest and difficulties of sourcing the needed size curve and grades which led to significant use of expensive co packer fruit to meet commitments.
Although we largely met our commitments to our customers, which is our first priority the product of these operational complexities was exceptional margin erosion.
And working capital inefficiencies.
So what are we doing about it and as I noted at the top of my remarks, we believe the worst is behind us as part of our preparation for the ERP conversion, we hired a third party firm to work with us on the implementation.
We remain actively engaged with their teams on a daily basis to identify and remediate remaining issues.
Additionally, we have activated additional protocols and develop new processes to enhance the needed functionality and reporting capabilities that provide visibility and insight into key aspects of the business at.
At the same time, we deployed our operational excellence teams to our distribution centers to assist with training and execution.
Importantly, we are also heavily ramped up our cross functional communication and collaboration so that the entire enterprise on the same page and moving in the same direction at an accelerated pace.
We are making progress during the month of February our per box margins have returned to historical levels.
Despite the challenges the fundamentals of our business remain intact.
<unk> supporting the industry and our business continued to be decidedly favorable.
The demographics are advantageous and our ability to help retailers and foodservice customers capture demand for avocados will be a key element of driving consumption trends in growth markets, such as Europe and Asia that are at fractions of what we experience here in North America <unk>.
Strategically investing in our own production to ensure a year round global sourcing is the key to maintaining long term organic growth and is a key component of our long term growth plans.
Summary, we in our business remained resilient despite the challenges we faced with the ERP implementation.
We continue to believe that the ERP conversion was a necessary step as we further scale our global footprint.
We are focused on our long term strategy of generating consistent growth and enhancing market share by increasing capabilities and capacities, while continuing to mitigate and adapt to industry dynamics.
We are excited about what's ahead and we believe we have an undisputed advantage with our global network of value added assets that will drive sustainable long term shareholder value.
With that I'll pass the call over to our CFO , Brian 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 ended January 31, 2022, and touch on some of the drivers within our two operating segments.
Then I'll provide a snapshot of our financial position and conclude with some thoughts on some of the current industry conditions that we're seeing and how performance is tracking in February .
Total revenue for the first quarter of fiscal 2022 increased 25% to $216.6 million as compared to $173 $2 million for the same period last year.
Growth was driven by a 50% increase in average per unit avocado sales prices due to lower industry supply out of Mexico, as well as inflationary pressures.
Partially offsetting price gains was an 18% decrease in avocado volumes sold which was primarily driven by lower supply.
Yeah.
In the first quarter industry supply was negatively impacted by the smaller Mexican harvest, our estimates indicate that Mexican supply to the U S market was approximately 10% lower than prior year, which was consistent with the reduction we experienced in our own domestic volumes.
In addition, the industry continued to experience challenges with abnormal grading and sizing of harvested fruit.
To provide further perspective on the Mexican supply situation approximately 97% of U S distributed volume was Mexican fruit in the first quarter.
While missions global footprint provides sourcing advantages relative to the industry as a whole they are not ample sources of fruit available at this time of the year to meaningfully offset the impact of Mexico supply shortages.
This is an example of why emission has been proactive in investing in global supply sources to fill these supply gaps and reduce industry volatility.
As previously mentioned the lack of supply drove per unit pricing substantially higher during the first quarter, indicating that demand for avocados remains strong.
The lower supply and higher pricing had a larger impact on the volume of food that we were able to sell in international markets, where demand is more sensitive to pricing and we typically see in the domestic market due to lower levels of consumption per capita in those international markets.
Such year over year volume reductions in international markets were more significant than those experienced in the U S market.
So well ERP was the overwhelming variable in our first quarter performance I wanted to be clear on how the market is influencing the business and provide a reminder of the impact that volume has on our ability to generate per unit margin in other words when industry conditions limit our volume, we have less ability to absorb fixed costs.
First quarter gross profit was <unk> $5 million versus prior year period, where we generated $22 $7 million as Steve shared we experienced extreme margin erosion due to temporary and unforeseen challenges created by the company's ERP implementation.
These challenges limited our ability to effectively manage our supply chain during the first quarter of 2022 .
Inventory management problems and unusually large fruit disposables, coupled with the low industry volume resulted in a high reliance on both third party fruit co Packer fruit, which have higher price points relative to fruit, we source directly in the field and pack in our facilities.
This unfavorable sourcing mix combined with transportation inflation and lower fixed cost absorption, resulting in a significant increase in per box cost eroding gross profit.
SG&A for the first quarter increased $4 $1 million to $18 $7 million due primarily to non capitalized costs associated with the implementation of our new ERP system, and the marketing and distribution segment, which included approximately $1 million of consulting costs incurred during the quarter.
Importantly, I'd note that we expect this to be peak spend on the consulting component and we foresee a more rational amount of spend as we move through the second quarter and beyond.
Additionally, we incurred higher professional fees travel expenses and certain transaction costs higher.
Higher professional fees were primarily related to our change in SEC filer status from an emerging growth company to a large accelerated filer on October 31 2021.
I'd note that these cost increases will ease in the physical second half as we anniversary the step up in spending associated with those items.
Net loss for the first quarter was $13 $4 million or <unk> 19 cents per diluted share compared to net income of $2 $2 million or three cents per diluted share for the same period last year.
Adjusted net loss was $12 $2 million or 17 cents per diluted share compared to adjusted net income of $7 $9 million or 11 cents per diluted share for the same period last year.
Adjusted EBITDA was negative $10.4 million for the first quarter of fiscal 2022 compared to a positive $12 $5 million for the same period last year, driven primarily by the lower gross margin and higher SG&A costs described previously.
In terms of our segments, our marketing and distribution segment net sales increased 25% to $212 $3 million for the quarter and segment adjusted EBITDA was negative $7 $7 million.
Drivers for the marketing and distribution segment are similar to those that I described for the consolidated results.
Our international farming segment, primarily represents our owned farms that we manage in Peru.
As a reminder, the avocado harvest season for our Peruvian farms typically runs from April through August of each year and as a result, you see the international farming segment emerge in third and fourth quarters and contribute to adjusted EBITDA in a significant fashion.
For the first quarter International farming segment net sales increased 19% to $4 $3 million segment sales growth was driven by higher third party service revenues.
Segment, adjusted EBITDA was negative $2 $7 million, primarily due to higher costs associated with strategic initiatives and farming maintenance and operations that are intended to drive yield enhancements.
Shifting to our financial position cash and cash equivalents were $25 $3 million as of January 31, 2022, compared to $84 $5 million as of October 31, 2021.
Net cash used in operating activities was $41.4 million for the first quarter of fiscal 2022 compared to $9 $7 million in the same period last year.
The company's 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 source regions.
In addition, the company is building its growing crops inventory and its international farm segment. During the first half of the year broken that harvest and sell that will occur during the second half of the fiscal year.
The $31 7 billion dollar change reflects the net loss in the first quarter and an unfavorable net change in working capital.
Within working capital unfavorable changes in inventory and accounts receivable were partially offset by favorable changes in grower payables.
Orange is an inventory were driven by higher per unit cost of Mexican fruit on hand, and the buildup of growing crop inventory and Peru compared to the prior year.
The growing crop increases were due to higher per acre farm in costs and higher productive acreage.
Changes in accounts receivable and grower payables were correlated with the pricing factors noted previously.
Additionally increases in accounts receivable were due to delayed customer payments related to automated invoicing challenges in our new ERP system.
While we are still working through these accounts receivable challenges, we have seen a noticeable reduction in our days sales outstanding during February and early March.
Capital expenditures were $29 million for the first quarter of fiscal 2022 compared to $22 $4 million in the same period last year.
Current year expenditures were concentrated in the purchase of farmland in Peru, as well as land improvements in Orchard development in Peru and Guatemala.
In terms of our near term outlook similar to prior practice, we are providing some context around our expectations for industry conditions to help inform your modeling assumptions, but are not providing formal guidance due to the fluidity of the market at this point in the year.
We are expecting Mexico industry volumes to remain lower than prior year during our second quarter by amounts comparable to those experienced in the first quarter as we move through the remainder of the current year crop.
Further our current expectations are for pricing to be steady to slightly higher on a sequential basis, the fiscal first quarter, which would imply a year over year increase of approximately 10% to 15% compared to the dollar 42 per pound average we experienced in the second quarter of the prior year.
From a profitability perspective absent the ERP challenges that we described today, which we feel we have a handle on we are battling the same inflationary pressures that have been well documented. These include freight labor and packaging among others and we are driving mitigating actions to help contain them.
However, we are also absorbing other costs as well, including higher public company costs, and our Laredo facility, which in a lower volume environment create a headwind to our ability to drive per unit margins and adjusted EBITDA.
During the month of February our avocado volumes sold totaled approximately 42 million pounds. These figures were nominally impacted by the USDA shutdown of Mexican avocado imports during the middle of the month.
As Steve mentioned earlier, our February per box margins have returned to historical levels.
Cost noted above will continue to post some headwinds over the near term.
That concludes our prepared remarks, operator now over to you. Please open the call to Q&A.
Okay.
Thank you very much.
At this time, we'll be conducting a question answer session.
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One moment, please while we poll for questions.
Yeah.
We have our first question from the line of Ben Van menu.
With Stephens. Please go ahead.
Hey, Thank you good afternoon.
So I wanted to ask as it relates to the ERP.
Does that you faced when you think about the kind of the go forward from here you described it as you've got your arms around it maybe theres still some lingering issues. There are advisory consulting cost that youre paying is there any way to quantify kind of what sort of lingering impact we should see either as a result of excel.
As you are paying to fix the issue or a lingering issues associated with the.
The ERP system that we should see.
In the subsequent quarter and then should we expect it to extend beyond us that'd be helpful. That's my first question.
Sure thing then you know I I think that the issues that caused us to lose gross margin have substantially been resolved at this point I think that you know that there's things that we still need to do to improve efficiency and how the system is used is being used but we've got our arms around the day to day problems.
That caused the losses, we had before and I don't anticipate that we'll continue to see erodes erosion of gross margin as a result of.
Inability to make quick decisions.
Decisions with information that's at hand.
I do think we will continue to incur some costs or we will certainly continue with some curse some costs with outside consultants to get us through we made reference in the call that we incurred about $1 million. During Q1 that number will taper off in Q2, it will be less than that and then should continue to taper down thereafter.
We are beginning to scale back the level of support effort that we're getting from that group at this point as we're transitioning more of that work to two in house resources and getting many of those issues resolved.
Okay great.
My second question is related to your comment around February per box margins returning to historical average.
Is that a function when you look at the market as its presented to you now would you continue to expect margins to remain in that range and as you think about that commentary about February was the the suspension of imports from Mexico are net positive such that maybe it.
Boys that number that you'd describe in February and maybe the underlying number is a little weaker than that or is that may be off base. How should we think about kind of how back to equilibrium. We are relative to the market that you're navigating right now.
And I would say that there was probably towards the back into the month a bit of a pick up that resulted.
From at the higher price environment I don't think it was it wasn't significant but it certainly helped them I would say that you know when we say it returned to a range you know we're looking at we probably came in a little bit above our historical ranges as a result of that for the month of February alone I don't.
I believe that the you know as we look at March and April that the it it's hard to say, whether the margins will stay elevated at that level, but I do believe that we feel confidence that margins will stay.
Stay somewhat close to the range that we've worked within historically I think the bigger challenge is tests going forward are going to be volume I'm until we get through the current Mexico crop, which has been down in Q1 and will continue to be have an impact in Q2, we're going to have issues with volume and the issues that that crew.
It's around cost absorption you know, we we talk about the investments we've made in capacity in our network over the last year, particularly at the border for Mexican fruit and then having the first year come around it actually see volume declines for fruit that are coming into the U S market have certainly created headwinds for us.
That being said, we don't feel like it changes it really has an impact on the long term decision of why Laredo is going to be important for our business. We just have to work through kind of this current harvest season, where you know you kind of had this abnormal decline in volumes is something we really haven't seen to this magnitude.
During my time at mission.
Okay understood Alright, Thanks, Eric Yeah go ahead, Steve.
I was going to say have been they are alternate bearing so keep in mind. They kind of go in cycles as the steak, Mexico as an example.
A year ago July .
Supply dried up.
Slightly and it drove those prices up and that has continued and as we get into the back half.
'twenty two.
You'll see it go the other way because the crop is larger as his last year's late crop was light. This like this year's late crop is heavier so.
It's going to it's going to shift and go the other way here in a few months yeah I would agree with Steve There I think some of the things in the past some of that's been buffered by the fact that there's been a lot of new acreage coming online I think that that's kind of muted the impact of some of that Ausberry nature.
So, but yeah. They they typically do have that that feature to that similar to what we see in California.
Okay. Thanks very much.
Okay.
Thank you.
To ask a question thoughts defensive press star one on your Touchstone phone now.
We have next question from the line up Tom partner with J.
J P. Morgan. Please go ahead.
Hey, Steve and Brian Thanks for the question.
Sure thing.
I guess just to start off maybe talking on the sourcing environment at what point do you start to move past. The current Mexico crop is it not really until the third quarter is there flexibility to maybe push that up a little bit.
And in sourcing maybe an early harvest from other areas just trying to get a.
Picture of what maybe how long the supply overhang might last.
Yeah, well, we're looking at now is the Peru crop more than we are Mexico, Mexico's pretty well.
Well said I think on their schedule, but we've got some.
Pretty good amount of hector's up in the north of Peru that.
Could start coming off around the first of April .
I'm not sure exactly what week. It is because we haven't started testing yet, but there's that possibility that would help.
Help complement the supply base appear a little earlier than just waiting on Mexico at this time.
Yeah, I think that.
So it'll probably be Q3 before we see a substantial impact I think in Q2 we're.
We're looking at areas like California, we do believe that there'll be an earlier harvest will look for opportunities to accelerate Peru and look for other countries of origin, but when we in the big scheme of things the the magnitude of Mexico, just overwhelms. It. So I think we will see increases in these other markets during Q2, but are there.
10% decline in Mexico will wipe out a 30 or 40% increase in some of these other areas.
Yeah.
Thanks for that.
And then I just wanted to confirm you've really talked on the supply side about volume headwinds what are you seeing on the demand side it seems like.
That wasn't mentioned as much in the prepared remarks, but you you mentioned internationally some price sensitivity, but it's domestic demand making up for that it sounds like you have.
<unk> pricing rising here in recent months.
Well, let's just take the U S here for a minute.
Mexico after the.
This stoppage there for a week and even beforehand, but for shipping between 50 and.
55 million pounds, a week into the U S plus with California was picking which I don't know the exact number there, but it was probably five or $7 million.
Uh huh.
At very high prices I mean prices today are.
You know around $60 or better.
So I mean, it's showing that there's increased demand for product with numbers of that magnitude on volume, there's still have a high price level is.
$60 Bill compared to.
Not sure what we were about a year ago, but it's probably in the thirties.
So we are seeing growth in this space in the category, but.
Just trying.
Trying to even it out with the supply is the.
The trick and that's why we continue to invest in vertical integration around the world to help.
Have options when.
Certain crops are down or up and in certain spots definitely areas like Columbia, and Guatemala would've filled in the calendar at this time of the year. That's their harvest window. So I think the investments, we're making there not not only will support international markets will but overtime will should be able to support the U S market.
As well, but I did want to make a quick comment on the international I think what tends to happen is that.
The U S market, it's more of the fact that the U S. Market is is more inelastic demand as is more inelastic that they'll continue to pay higher pricing here. So a larger proportion of the Mexico crop just ends up coming into the U S market and it leaves less fruit available to go into those international markets.
That probably has a it has a greater impact on a company like mission that has a global reach and has a great bigger international or export program with Mexico product than it does with some of the other marketers that maybe are focused solely on on the U S. So I think what we were trying to say is that you know programs that we had in.
The prior year to say South America or in Asia were cut back dramatically because of where the price points are at and that fruit ended up coming to the U S market instead.
Okay understood. Thank you for all that detail guys.
Thank you.
We have next question from the line up N V and venue with Stephens. Please go ahead.
Hey, guys just a follow up question for me you alluded to in your.
Press release, some customer wins.
And the addition that might contribute to volume as we move forward can you put any magnitude or quantification around what sort of contribution that looks like the duration of it. If it is bound by a term and then if you could talk about either who it is or which end markets are they.
Come from that'd be helpful. Thank you.
Right I don't want to tell you the name, but they're major retailers are.
We have been doing business with before but we've just picked up out of distribution centers.
Actually.
It started.
During that shut down in Mexico, I mean, we've been working on them to add to our list and we pick those up because we actually had product and are able to.
Ripen and distribute to it the.
The good thing about this to these these three distribution centers, we picked up again, our major retailers and they wont approve program on top of that so it was a double win for us.
Yeah.
They're on the East coast.
Okay. Thanks.
Thank you.
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 for closing remarks over to you gentlemen.
Okay.
Well thanks, everyone for your interest in mission, obviously, we had a challenging quarter, but we will get this thing turned around and be back in the game soon.
Interest. Thank you for your time.
Yeah.
Thank you very much ladies and gentlemen that concludes today's conference call. We thank you for attending you may now disconnect your lines.
Okay.
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