Q2 2023 Mission Produce Inc. Earnings Call
Good afternoon, and welcome to the admission produce fiscal second quarter 2023 conference call.
All participants will be in a 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 call over to Jeff.
Agency relations at ICR.
Sure.
Go ahead.
Thank you and good afternoon, today's presentation will be hosted by Steve Berrard, Chief Executive Officer, and Brian Giles Chief Financial Officer the.
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 1095.
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 Dot mission produce dot com for reconciliations of non-GAAP financial measures.
Their most directly comparable GAAP measures with that I'd now like to turn the call over to Steve Barnard CEO , Steve go ahead.
Thank you for joining us for our fiscal 2023 second quarter's earnings call.
We delivered a solid second quarter with revenue of $221 $1 million and adjusted EBITDA of 7.6 million driven by a 19% increase in sales volumes.
These metrics also demonstrate a sequential improvement in both volumes and per unit margins relative to fiscal first quarter.
We realized increased market stability in the second quarter, which was a continuation of the conditions that returned to the industry in the first quarter earlier this fiscal year.
We saw fairly consistent pricing through the Mexicans things and those conditions have continued into our current fiscal third quarter as well.
Notably this is a departure from the prior year were low industry volumes and inconsistent harvest timing led to significant price volatility.
This prompted a swift and disproportionate increase in pricing to record levels, which in turn led.
Led to per box margins that were toward the high end of our normal historic ranges.
Well this year, a stable market environment doesn't afford us the same opportunity to drive per unit margins in the short term the more rational pricing environment is advantageous for a long term consumption growth.
How's mission to leverage our global distribution footprint to penetrate new growth markets.
As we celebrate our 40th anniversary this year.
We continue to demonstrate how our world class vertically integrated model of sourcing producing and distributing hass avocados and other produce differentiates us from the competitors.
Our focus remains on driving consumption growth globally by bringing a consistent year round diversified sourcing capabilities to new growth markets.
On that note. We are excited about the opening of our former distribution centre in the U K in April .
This facility is strategically located with direct access to a major international ports and transportation networks and will strengthen his mission expanding international footprint and optimize product distribution.
Our growing European customer base with direct access to our global sourcing network.
We're very excited about this facility and although it is still early we are pleased with the progress we're making in the U K.
We're committed to further developing our efficient and cost effective model and it's important long term growth region.
Our ability to support these global growth markets is bolstered by the vertical integration of our own farming operations in Peru.
As we entered the Peruvian season in our own production comes online in the second half of the fiscal year mission is very well positioned.
Despite the lower pricing the combination of easing inflationary pressures relative to prior year and higher distribution volumes.
Born from our own production.
So that's the basis to continue improving our per unit margins on a sequential basis and support the seasonal step up in adjusted EBITDA in the second half of the fiscal year.
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 second 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're seeing.
Total revenue for the second quarter of fiscal 2023 was $221 $1 million, a 20% decrease compared to the same period last year, driven by lower per unit avocado sales pricing.
Our average per unit sales pricing decreased 36% during the quarter the impact of which was partially offset by a 19% increase in avocado volumes sold.
Both the higher volume and lower pricing were driven by higher industry supply out of Mexico relative to the limited supply in the same period last year that drove pricing to near record levels.
Gross profit decreased by $1.7 million to $18 $1 million in the second quarter, while gross profit percentage increased 110 basis points to eight 2% of revenue.
The decrease was driven by lower per unit margins on avocado sales, which was substantially offset by the higher volumes noted above.
Per unit margins were negatively impacted by the mix of volume from source regions.
Your volumes were heavily concentrated in Mexico source fruit, whereas the prior year period was advantaged by the positive influence from the accelerated California harvest brought about by high market prices.
Per box margins did not match the elevated levels from the prior year, we experienced meaningful sequential improvement versus fiscal first quarter and ended the quarter at a high point.
SG&A expense increased $6 million or 3% compared to the same period last year, primarily due to the consolidation of expenses from the blueberries segment nor.
Normalizing for this accounting dynamic our core SG&A expenses were consistent with the prior year period, which is a positive signal that made this inflationary environment.
Adjusted net income was point $5 million or one cent per diluted share compared to $2 $6 million or four cents per diluted share for the same period last year.
Adjusted EBITDA was $7 $6 million compared to $9 $2 million for the same period last year.
The decreases in both of these figures were primarily due to lower gross profit attributed to lower per unit margins.
Turning to our segments, our marketing and distribution segment net sales decreased 21% to $215 $3 million for the quarter and segment, adjusted EBITDA decreased $3 $1 million or 26% to $8 $6 million.
Net sales and adjusted EBITDA declines were due to the avocado pricing and volume dynamics previously described.
Our international farming segment operates orchards from which substantially all free produced is sold through our marketing and distribution segment.
Production from this segment is currently derived from Peru. The operations are under development in other areas of Latin America.
Segment revenues and EBITDA are concentrated in the second half of our fiscal year and alignment with the Peruvian avocado harvest season, which typically runs from April through August of each year.
The segment's contributions in the first half of our fiscal year tend to be smaller on an absolute and relative basis.
With this in mind total segment sales in the international farming segment were $6 million and decreased by 14% compared to the same period last year due primarily to lower packaging cooling service revenue.
Adjusted EBITDA improved $1.4 million to negative $1 $1 million due primarily to the impact of lower losses generated at our early stage mango farms during the quarter.
Activity in our Blueberries segment is concentrated in the first and fourth quarters of our fiscal year and alignment with the Peruvian blueberry harvest season, which typically runs from July through January .
As a result for the second quarter ended April our blueberries segment results were negligible with net sales of $1.7 million and segment adjusted EBITDA appoint $1 million.
Yeah.
Shifting to our financial position cash and cash equivalents were $20 $9 million as of April 30 of 2023 compared to $52.8 million at October 31st 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 source regions.
In addition, the company is building its growing crops inventory and 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.
While these increases in working capital can cause operating cash flows to be unfavorable in individual quarters. It is not indicative of operating cash performance that management expects to realize for the full year.
That said net.
Net cash used in operating activities was $26 $1 million for the six months ended April 32023, compared to $37 million for the same period last year.
The improvement was primarily driven by the effect of better operating performance net of noncash items combined with favorable net changes in working capital.
During the current year period, our working capital position benefited from the impact of relatively stable per unit price points on Mexican fruit.
<unk> prices limited the movement in accounts receivable inventory and CRO or payable balances, whereas prior year working capital movement was negatively impacted by the rising price environment that we experienced during the first half of the year.
Capital expenditures were $34 $9 million for the six months ended April 32023, compared to $29 $1 million last year.
Expenditures include $9 $1 million of spend associated with irrigation installation and early stage plant cultivation, and our blueberries segment, which was not consolidated in the prior year.
Capital expenditures in both years included avocado Orchard development, preproduction Orchard maintenance and land improvements in Peru and Guatemala.
In addition fiscal 2023 capital expenditures included construction costs on our new U K distribution facility that opened in April of this year.
For the full year of 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 Maruca 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.
Pricing is expected to be consistent on a sequential basis, but lower on a year over year basis by approximately 35% to 40% compared to the $2 three per pound average experienced in third quarter of fiscal 2022.
The industry continues to expect volumes to be approximately 20% higher than the fiscal 2023 third quarter versus the prior year period, primarily due to the combination of California's harvest shifting to the third quarter versus the second quarter last year.
Our strong Peruvian harvest outlook, and a larger off blue Mexican harvest.
In terms of our own farm production in Peru, we anticipate volumes to be in the range of 125 million to 135 million pounds for the 2023 harvest season.
We expect sales of our own fruit to be more heavily weighted to the fiscal fourth quarter, which should have a corresponding effect on the cadence of our adjusted EBITDA generation.
Note that while the inflationary impact on our cost structure has peaked those costs remain at elevated levels and remain a headwind to driving higher per unit margins and adjusted EBITDA, assuming pricing remains consistent with levels realized in the fiscal first half.
That concludes our prepared remarks, operator now over to you. Please open the call to Q&A.
Thank you and at this time, we will be conducting a question and answer session.
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And one moment, while we poll for questions.
Yeah.
Our first question comes from the line of Dan.
With Stephens Inc.
Proceed with your question.
Hey, guys. Thanks, so much for taking my questions.
And no problem good talking to you.
So I wanted to first start with the volume growth story, obviously, a building momentum here in the year you cited the strength in volumes and the industry having returns.
Your 19% volume growth in the quarter, a very strong slightly below the industry growth that we saw can you talk about the puts and takes our Intel.
Shoring up that differential and then as you look forward you talked about the industry expectation for growth can you talk a little bit about your relative performance to that industry growth.
That's just U S.
Yeah, you know.
I think that we looked at the supply that.
It came on to the second quarter again, very Mexico centric as compared to the prior year. We do know that it's competitive I'm trying to obtain access to that fruit in Mexico.
Particularly when its the only country of origin. The that has fruit available. We feel you know, particularly with our U S. Like our retail market base, which is our core customer base.
We've been building share over the last year and certainly higher than we were a year ago. At this point in time, and that's really where we focus our primary attention too.
I think we believe that all in all we have grown in tandem with the industry. You know certainly you know as.
As we transition to the second half of the year, we're gonna have sources from Peru from California, and some of our export markets will then grow more significantly as we have access to those countries of origin, but I think in general we're pretty pleased with the growth rates that we've seen and I think within our core customer.
Base, we feel like that we've either held or we've built share are relative to where we've been historically.
Especially right now, especially with some of the let's see.
Okay.
Especially with some of the export markets Europe in particular in China numbers are way up compared to a year ago.
Got it okay.
And then if I could just talk a little bit about the margins and you.
You talked about some lingering elevated costs across your supply chain in the last year and at the same time, you've had lower industry volumes that have pressured your fixed cost absorption in the business can you talk a little bit about the progress that you're seeing there and fixed cost absorption improvements as volume improves and then what.
Success are you having in that'd be passing along some of those more permanent costs into higher pricing to customers.
Well it Oh, one of the good things on the costs that are going down, especially are they ocean freight theyre down.
The levels of a couple of years ago, which is.
Substantially.
Improved.
I think when you you have a crop like this where we have a big Mexican crop a big Peruvian crop California's pretty stable.
You are you see consumption growth with lower prices like this.
You'll really noticed that the year after when you have a.
Slightly less the size of the crop and the prices historically and I'm not saying, they're going to happen. This next year, but you'll usually see a step up as you go along in value. So.
You know it was like climbing allege you get to the legend.
Regroup and then climb again in <unk>.
That's what historically has happened and I don't think it'll change going on down the road here in the next year or so.
Yeah and in.
Typically your question about capacity absorption I mean, we saw during the second quarter about a 20, 20% increase in our North American volumes, which really that's what consumes capacity within our primary North American distribution network. So yeah, we're seeing substantial improvements and how those costs are being absorbed through the network.
If you look at costs in absolute terms.
Certainly labor costs, it's settled in at a higher level than where they were a few years ago. We think that it's stabilized now, but it's certainly at a higher point.
To Steve's point transportation costs, whether it be ocean, our over the road freight that's come back and off a little bit from its peaks in 2020 two.
And back to a more normalized level I'd say ocean freight is still sitting at a level, that's a little higher than where we were in 2021, but much closer to that level than where we were last year and then we're even starting to see some reduction in some of our packaging costs as well I think you can see signs that suppliers vendors.
Have more they have more capacity available theres more competition out there and I think we're starting to small degrees C. Some of the benefits of that in our results.
Okay very good and then one more if I could just thinking about your own production and he talked about the your expected range for own farm production.
Nice growth year over year can you talk about kind of the drivers there that youre seeing out of Peru, and then you also alluded to new sources of production.
Out of mission on farms down the road can you talk about kind of the development pipeline, there and what we might expect.
Sure, let's say Peru.
First point last year, we had a big crop and we also had a size problem on the fluid it was too big.
We had 70% I think last year that was 36 isn't larger which is a large fruit, which is harder to sell in a mid sized group because they sell and buy the eaten up by the tonne.
I was there last week and.
The size curve is much improved its only about 20% of large group versus seven years, which is a substantial improvement.
And the other thing that's very notable is that the crop is about five to six weeks later and maturity than it was last year as it is here because of the cold weather cool weather El Nino lot of rain here and there.
So it's a little bit it's not.
Apples to apples here compared to a year ago.
It's slightly tilted on the calendar, which.
Can be hard to track if you don't know all of the variables.
But crops up.
Demand is good.
Especially overseas.
As an example is looking at triple their volume from last year as a country.
They've got a.
Smoothies at the young kids are eaten.
They can.
Now, we're coming out with a noodle soup slash avocado dice promotion this summer with several retailers on across <unk>.
Cross promotion, so we're playing offense over there and we're seeing good results so far.
Yeah, I think to kind of follow up on Steve's point, the farms down in Peru.
Think that those numbers equate to somewhere close to a 10% increase in production year over year and if you take into account for the smaller size curve in terms of piece count on the trees are actually much higher than the.
The increase even more significant year over year.
Some of this is continued maturity of existing farms.
While many of our farms are.
I mean, our oldest farms are up to about a little over 10 years now those ones are immature, but we still have a number of other farms that are more in the five to six year range, where we're still seeing an uptick in yields per hectare each year that number has started to level off.
I don't expect to see continued significant growth, but we did still see some benefit some pick up this year and we had a little bit of new acreage again that was still coming into production.
So that being said I think you know, we're we're pretty happy with where are the yields are at where the sizes are at I think we had a bad better production off of our northern farms up in the almost region. This year as well so all in all Peru priest tracking well.
I think if you talk about some of our other farms Guatemala.
We have our farming assets down there we are expecting while none of those farms are actually going to move into a productive state and start generating profits in fiscal 'twenty. Four we will start to see some fruit come off those trees that we will be marketing I don't have there are meaningful amounts yet by any means.
But this is just the beginning of kind of that transition into having year round supply of our own production I believe that this initial Guatemalan production will come off in Q1 of fiscal 'twenty four again small quantities this year and will and will supplement it with third party sourcing that we're gonna be doing out of Guatemala.
As well and a lot of that fruit will go into our European and Asian markets Colombia.
Similar situation there we have the joint venture down in Colombia about 900 hectares of trees that have that have been planted will start to see a small amount of productivity this year with that ramping up.
It's a little bit more in 2025, and probably 2026 before they reach full production I think just the growing environment and the conditions are a little bit different in Colombia, then in Guatemala, and therefore like the cycle from tree planning to reach maturity is likely to take a little bit longer there than what we're seeing in Guatemala.
All very helpful color. Thanks, so much best of luck.
Okay. Thanks, Ben Thanks, Ben.
Our next question comes from the line of Tom Palmer with Jpmorgan. Please proceed with your question.
Hey, good afternoon.
Good.
Hi, Tom.
Yeah.
Maybe just follow up and I really appreciate all the detail on the farming side.
How does that net out I guess as we think about the year I know there are a lot of moving parts, but we see avocado prices are down meaningfully, but it sounds like quality is a lot better.
Cost environments, better harvest volumes are up by 10% and you kind of the midpoint of your outlook.
No.
I guess, how should we be thinking about maybe that EBITDA outlook for this year in this segment relative to what we've seen in recent years I mean is it reasonable for instance.
About some degree of year over year step up even with the lower pricing.
Hey, Tom.
I would say that it's still premature for us to kind of lock in on a number at this point I think to you you mentioned a lot of things that are are accurate I think we have a pretty good sense on where our production is going to land.
We know input costs are lower than what they were last year. So we have a pretty good feel for what our cost per.
Cost per unit is going to be at this point in time.
I think the wildcard is where pricing ultimately settles as we move through the season.
We know we have a lower pricing environment. This year than we did a year ago at least in the early part of the season.
So I mean, when we looked at Q3 last year, we had very strong like contribution on per box margins because the price points, we're still extremely high.
Prices are much lower this year.
And that's going to create a more challenging environment from that perspective.
Being said, we have a better size curve.
We have more commercial grade fruit this year that kind of fall within the sweet spot for retail promotion.
Then we did last year. So there's a number of positives, but there is the kind of that pricing in that market pricing condition. That's the big question Mark at this point, we don't have a lot of our we have seasonal volume commitments that we've.
That we've been working to with a number of our retail and foodservice customers, but we don't have a significant amount of pricing locked at this point in time. So it's just has it I'm I'm hesitant to give any specific guidance as to where where we may land there, but I do believe that we feel that overall the pricing environment. This year will be.
Lower on average than what it was last year, it's just a matter of will those other favorable impacts offset it or not.
I think youre thinking about it the right way Tom I, just don't have enough info to give you at this point to tell you, whether it's going to be worse or if it's going to be better when we net everything out.
But the freight savings from last year is significant.
Say there.
Yeah.
And like I said because of those savings, we we have margin for pricing to be lower.
And still generate better margins like we did last year because of all the other things we talked about.
Okay. Thanks for that.
And then just maybe on the on the harvest timing.
Because I know that that's kind of how you allocate costs in that segment.
How skewed is it going to be to the fourth quarter. Because you did make the note about the delayed harvest I mean is it going to be a more balanced harvest than we typically see because I think it's pretty normally that at least from a cost standpoint.
And therefore from a harvest volume standpoint, it's more skewed to that third quarter, even with the sell through typically occurs in for Q.
Yeah, So what we typically see.
In a typical year, Tom we see about two thirds of the harvest taking place in the third quarter, but about two thirds of the sell through of the fruit happening in the fourth quarter.
At this point because of I think we came into this year thinking that we wanted to kind of try to balance how to actually sell through a little more fruit earlier as opposed to having so much come off during the fourth quarter I think what's going to happen in reality this year because of the maturity of the fruit that it will probably be a.
A breakdown that look similar to what we've seen historically where the.
The sell through in the third quarter, if I go back at the last five years I think we've seen it as low as kind of you know 32, 33% we've seen it as high as like 44, 45% I think we'll probably be in that range, maybe towards the low end of it.
But I I don't think the mix on sell through at this point, it's going to be dramatically different than what it was last year in terms of percentage breakdown.
Okay.
That's for that but yeah to keep it to the point you made while we harvest a lot like our bottom line or EBITDA is really driven by the sell through and that's what we really focus more on than the harvest and yeah that sell through is there's probably like I said it was around 32% last year and up.
I think the feeling is that it wont be meaningfully off from that this year.
Great. Thanks, again look forward to seeing a couple of weeks.
Okay. Thanks, Tom.
And our final question comes from the mind of Christian.
Dara with bank of America.
Proceed with your question.
Hey, guys. This is Christian on for Brian . Thanks for taking our question we briefly touched.
Touched upon you guys briefly touched upon this in your prepared remarks and in one of your responses, but on consumption. So one potential positive as you know low pricing environment that should lead to higher Consumptions have you guys noticed our retailers doing anything differently setting up more displays marketing more behind the category.
Maybe consumers who are priced out of the category last year or are you seeing those return. If you are dead on that just any color you could provide would be helpful. Thank you.
Well I think we are seeing more displays.
I'm not going to comment on the price because it depends where you look but I.
I know there's been some.
I know early on in the year, they were making a great margins at retail but.
I can't.
I'll tell you that I've been in a store lately myself to look but the movement is pretty good prices are reasonable.
I think the throughput is an increase obviously over last year, just because we have more fruit but.
As I mentioned earlier, you get a secondary benefit of the following year, because you have more consumers.
Which drives more demand and more supply and drives the price up.
Proportionately so.
I think we're in pretty good shape balance wise I think as I mentioned earlier, we're seeing great growth in Europe and China.
Just don't have the big distribution center in the U K recently.
We've already exceeded our expectations, we have been open a month so lots of good things happening there the China numbers are substantially better than we forecasted because of trends of consumption.
People over there so.
There's good things happening in the industry.
Yeah Christian definitely [laughter].
About 90% of the product we sold in the second quarter came into North America.
That's a little bit lower than what it was last year at this point in time, I think where you know we we saw strong growth in domestic consumption.
Again, driven by that ample supply out of Mexico to Steve's point the area, where we saw another area. We saw a big increase year over year was in our Asian markets not back to where they were at 2021 levels, yet, but certainly last year. There was a lot of supply chain disruptions and we still dealing with COVID-19 issues and just the lack of supply that was available.
Oh I'm in the market last year, So I think where we're pleased we've already begun to see kind of that ramp back up in Q2, and the Asian markets.
And then as we transition into Q3 to Steves point with our U K facility open we've got one full month under our belt now and we're very pleased with the you know the the results we've seen thus far.
Perfect. Thank you very helpful.
Oh, you're welcome Christian.
And 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 conference call back over to management for any closing remarks.
Well. Thank you for joining us today, we're very excited about the growth opportunities in front of us as we work toward penetrating new markets in Europe , and Asia as we mentioned.
We look forward to seeing many of you at our Investor Day event on June 26th and seventh.
For those of you that have an interest in joining us please reach out to our Investor relations contact Jeff Sonic at ICR.
Have a great evening.
Participating.
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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