Q1 2023 Mission Produce Inc Earnings Call

Speaker 1: Good afternoon and welcome to the Mission Produce Fiscal First Quarter 2023 Conference Call. All participants will be in a lesson only mode.

Speaker 2: At this time, I would like to turn the conference over to Jeff Sonick, Investor Relations at ICR. So, 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 for the Private Securities Litigation Reform Act of 1995.

Speaker 2: All statements other than statements of historical facts are considered forward-looking statements.

Speaker 2: 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.

Speaker 3: This performance largely reflects the reversal of the strong pricing and low industry volumes that summarize most of 2022. As the New Mexican season kicked in during the first quarter of 2023, we were in a great position to drive volumes, and I'm pleased to report that our growth of 14 percent 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 percent.

Speaker 3: 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.

Speaker 3: that make for a more constructive pricing outlook as our fruit season comes online.

Speaker 3: 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.

Speaker 3: Furthermore, the 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 own and third-party sourcing capabilities and global footprint.

Speaker 3: But having access to diversified sourcing is only half the equation. You also need the distribution infrastructure, which is precisely where mission shines.

Speaker 3: We remain well positioned to manage higher volumes of product this year to our unmatched global network of distribution, rightening and other value added assets.

Speaker 3: 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.

Speaker 3: and diversification of our business by leveraging our core competencies in new and creative ways such as blueberries.

Speaker 3: 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.

Speaker 3: While the initial goal of our entry into the market was to optimize labor management for our seasonal avocado business...

Speaker 3: Our experience in operationalizing scaled production and unique high value crops put us in a position to make a broader impact on the industry.

Speaker 3: 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 Brian Giles for his financial commentary.

Speaker 4: 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.

Speaker 4: 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.

Speaker 4: 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 volume 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.

Speaker 4: 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.

Speaker 4: Normalizing for that impact in prior year, gross profit within the marketing distribution segment was relatively flat year over year.

Speaker 4: In the current year period, higher volumes had a favorable impact on fixed cost absorption in areas such as distribution, while the lower price environment limited our ability to generate per box margins on the buy-sell of avocados.

Speaker 4: While we experienced some sequential improvement versus fiscal fourth quarter, per box margins remained below our targeted range.

Speaker 4: 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 US markets driven by strong industry supply, as well as the amortization of purchase accounting adjustments associated with the business combination of Meruga during fiscal 2022.

Speaker 4: SGA expense for the 1st quarter of fiscal 2023 increased 0.4M dollars or 2% compared to the same period last year, primarily due to the consolidation of Maruga, which added approximately 1.6M dollars of expense.

Speaker 4: Normalizing for this accounting dynamic and excluding $0.9 million of non-recurring 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.

Speaker 4: Adjusted net loss for the first quarter of fiscal 2023 was $5 million, or 7 cents per diluted share, compared to $12.2 million, or 17 cents per diluted share for the same period last year.

Speaker 4: An 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.

Speaker 4: Turning to our segments, our marketing distribution segment net sales decreased 14 percent to $181.8 million for the quarter, and segment adjusted EBITDA increased $12.3 million, or 160 percent, to $4.6 million. Net sales declines were due to the avocado pricing and volume dynamics previously described.

Speaker 4: while the EBIT improvement was driven primarily by higher gross margin due to our ERP implementation challenges in the prior year quarter.

Speaker 4: Our international farming segment operates orchards from which substantially all fruit produced is sold to our marketing and distribution segment.

Speaker 4: Production from this segment is currently derived from Peru, though smaller operations are under development in other areas of Latin America.

Speaker 4: Segment revenues in EBITDA are concentrated in the second half of our fiscal year in alignment with the proven avocado harvest season, which typically runs from April through August of each year.

Speaker 4: With this in mind, total segment sales in the International Farming segment increased 73% to 5.7 million dollars for the quarter compared to the same period last year.

Speaker 4: due primarily to higher packing and cooling service revenue for blueberries.

Speaker 4: 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.

Speaker 4: Our blueberry segment reflects the results of Maruga's farming activities, which includes cultivating early stage blueberry plantings and harvesting mature bushes.

Speaker 4: This product is marketed globally by our partner in the Moruva 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 through January .

Speaker 4: 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.

Speaker 4: For the first quarter, our blueberry segment net sales were $29.8 million and segment adjusted to the EBITDA with a loss of $0.5 million.

Speaker 4: While the blueberries business experienced pricing compression in the European and US markets during the quarter due to significant growth in industry volumes, we continue to be bullish on the long term prospects for this business.

Speaker 4: 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.

Speaker 4: This creates an ideal opportunity to deliver value to customers while driving improved margins over time. Single Series

Speaker 4: 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.

Speaker 4: 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.

Speaker 4: During the current year period, our working capital position benefited from the impact of lower per unit price points.

Speaker 4: 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.

Speaker 4: Capital expenditures were $17.6 million for the three months ended January 31, 2023, compared to $20.9 million last year.

Speaker 4: Current year expenditures include 4.4M dollars 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.

Speaker 4: Capital expenditures in both years included avocado orchard development, pre-production orchard maintenance, and land improvements in Peru and Guatemala.

Speaker 4: 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.

Speaker 4: For the full year fiscal 2023, we continue to expect CapEx related to our core avocado business to be lower than fiscal 2022.

Speaker 4: That being said, we will incur additional costs as we ramp up development of the Moruga Blueberries project in the Olmos region of Peru.

Speaker 4: In terms of our near-term outlook, we are providing some context around our expectations for industry conditions to help inform your modeling assumptions.

Speaker 4: 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.

Speaker 4: 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.

Speaker 4: We believe pricing will be higher on a sequential basis, but lower on a year-over-year basis by 30 to 35 percent, 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.

Speaker 4: 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 adjust to EBITDA.

Speaker 4: That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A.

Speaker 5: Thank you.

Speaker 1: Ladies and Chairman, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Speaker 1: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker 1: Ladies and Gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Jerry Sweeney from Roth Capital. Please go ahead. begin.

Speaker 1: Ladies and Gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Jerry Sweeney from Ross Capital. Please go ahead. Good afternoon Steve and Brian . Thanks for taking my call. I heard you were a whitewe Physics Teacher Files 24 and professionals started adding

Speaker 6: Hey Jerry. 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, make sure I'm thinking about this the right way.

Speaker 6: Last year, we had different issues, anything from fruit sizes, production cost, logistics, even pricing, all which in some ways drove or impacted consumption.

Speaker 6: sort of as we're looking at this year, it sounds as though you may be seeing, and I'm gonna stress at the beginning, of maybe a regression to the mean in terms of.

Speaker 6: Some normalcy around size, we're even seeing some cost stabilization if not mitigation, special logistics.

Speaker 6: If this continues, along with volumes, if this continues, we should see EPDAS begin to improve throughout the years. Am I sort of looking at this all correctly? Well, volume in Mexico is up.

Speaker 3: inflation appears to be easing

Speaker 3: with the exception of Peru. And yeah, I would agree. It's a it's nice

Speaker 3: I'm feeling a lot better going into where we are. I mean, there's still.

Speaker 3: saying they're retreating as far as the inflationary issues.

Speaker 4: Yeah, Jerry, I think we're seeing some positive signs as we've been moving in through the early part of Q2. Volumes do feel, you know, they gained 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, you know, at high levels and pricing is increasing in conjunction with that.

Speaker 4: You know, 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 that we're seeing right now. We're seeing production yields up for our farms. We're seeing improved size curve over what we saw last year.

Speaker 4: for commercial sizes and most importantly we're seeing some of the freight rates that hurt us.

Speaker 4: so significantly last year subside and revert back closer to levels that we saw in 2021.

Speaker 4: 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.

Speaker 6: Got it. This question, I'm going to throw it out there. I'm not sure if it's really answerable, but obviously food inflation is...

Speaker 6: Got it. This question, I'm going 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.

Speaker 6: seeing some

Speaker 6: Even in my own personal consumption, maybe trading down different, you know, when you go to a supermarket.

Speaker 6: and maybe trading down different, you know, when you go to the supermarket. You know, is there.

Speaker 6: a price level that you've seen or that drives consumption a little bit higher, a little bit lower, you know, above or below a certain level. You know, 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.

Speaker 3: Yeah, 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

Speaker 3: 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. It's been pretty.

Speaker 3: 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.

Speaker 3: I would say, are 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.

Speaker 6: Got it. Oh, I was gonna say Mexico stable in general not just price but Price the rest of it's there on you. I'm gonna comment on that I appreciate I'll see you early next week

Speaker 7: Thanks, Sherry.

Speaker 5: Thank you.

Speaker 1: Ladies and Chairman if you wish to ask a question please press star 1. Our next question comes from the line of Tom Palmer from JP Morgan. Please go ahead.

Speaker 8: Hey guys, thanks for the question. Hi Tom. Maybe we can just kick off on maybe the supply outlook as we move past the Mexico harvest. We noted California harvest coming in maybe a little bit later, but...

Speaker 8: 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 SAM?

Speaker 3: Sure, as you may know we've been getting a lot of rain here in California so that'll help that crop size up. They like rain, they haven't seen it in a while.

Speaker 3: lot of rain here in California so that'll help that crop size up. They like rain they haven't seen it in a while.

Speaker 3: We're starting to pick a little bit here now. It's just 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.

Speaker 3: Most of that's going overseas, but our crop's up about 10%, and the sizing is...

Speaker 3: as Brian mentioned in his remarks, is a much more normal situation. So it's

Speaker 3: remarks is a much more normal situation. So it's quite positive in those regards.

Speaker 8: 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.

Speaker 8: 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 six 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...

Speaker 4: was maybe some of the other years leading up to this one a bit challenged too? Hi Tom. We've certainly had some challenges 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 to $6 million range for that operation. I think certainly as the business has grown,

Speaker 9: I'm.

Speaker 4: aren't considered kind of a premium varietal 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 that you know Peru's become the largest exporter of blueberries in the world over the last you know couple of years you're seeing the pressure on pricing as a result of that.

Speaker 4: One, I mean the ways that we're trying to control that going forward, I think we allude to in the call, a lot of the, you know, 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.

Speaker 4: On top of that, some of the new varieties through pruning, we have a better, more options in terms of altering the harvesting window. Right now, we're hearing north of 80% of the fruit in blueberries and prunes are harvested between October and December . What we really want to see over time is that season getting stretched out.

Speaker 4: 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...

Speaker 4: the people and you know the growers in Peru are planting or have planted so yeah I think that you know 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 in kind of stretch out that harvest window as much as we can.

Speaker 4: Great. Thanks for all the detail.

Speaker 4: Great. Thanks for all the detail. Sure thing.

Speaker 1: Our next question comes from the line of Brian Spillane from Bank of America. Please go ahead.

Speaker 10: Thanks operator. Good morning or good afternoon guys. So I just had one question. I guess you talked a little more talk about in marking and distribution and we talked a bit about.

Speaker 10: You know, maybe the profit per box or profit per carton beginning to sort of maybe normalize, I guess is what I heard.

Speaker 10: I guess when we talked a bit about this, I think on the last earnings call, there's just other inflation, labor, transportation costs. We're all trying to fixate on a mean reversion, if you will, on profitability in both the farming segment and in marketing and distribution.

Speaker 10: Are you at a point yet where your pricing discussions have also incorporated starting to cover some of the non-fruit costs?

Speaker 10: Or will that take more time and will that affect sort of getting back to a more normalized profit per box?

Speaker 3: 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...

Speaker 3: to either Asia, US, 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 Peru. So we're seeing some improvement in that on truck rates too, on internal truck rates across the country.

Speaker 4: structure since the beginning of our fiscal year. I think we're used to freight prices moving around quite a bit and 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 overhead infrastructure.

Speaker 4: related to those operations. We have gone back and kind of made some pricing adjustments there, acknowledging that, you know, 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, I think we're pushing. I think, you know, it's something that we've been doing over the last few months.

Speaker 10: And then, actually, just one additional question. You know, there's, you know, now I guess the prediction that we may end up with an El Nino 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, just.

Speaker 3: flipping from La Nina, which where we've been for the last couple of years, to El Nino, is there anything we should be thinking about there? Yeah, I mean, we've had almost twice the normal rainfall here in California already this year, and starting tonight we're getting another couple inches.

Speaker 3: 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 rain water, it doesn't have all 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 and but it's

Speaker 3: not a flooding situation, it's just raining. So it held up harvest a couple after, 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.

Speaker 3: It's just raining, so it held up harvest a couple after. 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. OK, thank you. Thanks, Brian .

Speaker 1: Thank you. Ladies and gentlemen, at this time I am showing no further questions. I did like to end the Q&A session and turn the conference call back over to Steve Barnard, CEO for any closing remarks.

Speaker 3: Thank you very much for your interest in emission produce and we look forward to speaking to you again soon.

Speaker 1: Thank you so much. Ladies and Gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your lines.

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