Q3 2023 Mission Produce Inc. Earnings Call

Yeah, Ben, probably 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's 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.

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 source 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.

Speaker 1: 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.

Thus, when looking at operating cash flow on a three month period for fiscal third quarter, we generated approximately $19 million in cash.

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, you know, ERP coming off, you know, after last year where we had big challenges after go live, that's sustainable. We don't see that, you know, repeating itself. And then some of the other consulting related professional fees, you know, there might be more opportunity for those to come down in all honesty as we move forward.

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. For more information, visit www.fema.gov

Speaker 1: Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Jeff Sonick, Investor Relations at ICR. Please go ahead. I'd like to turn it over to Jeff Sonick, Investor Relations at ICR.

Speaker 1: Thank you and good afternoon. Today's presentation will be hosted by Steve Barnard, Chief Executive Officer, and Brian Giles, Chief Financial Officer.

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.

Speaker 2: 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.

Overall working capital movements were comparable to the prior year with offsetting changes in inventory and grower payable balances being driven by the lower price and environment in the current year.

Okay, very good. Thanks so much for taking my questions. Okay, no problem.

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

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

Capital expenditures were $47 million for the nine months ended July 31, 2023, compared to $42 million last year.

Speaker 2: These statements are based on management's current expectations and beliefs, as well as a number of assumptions concerning future events.

Hey, good afternoon. Thanks for the question. We'll be right back.

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? You know typically as I mentioned we're about 35% in the first half and about 65% in the second in terms of

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.

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.

Capital expenditures also included $11.1 million related to the development of our blueberries operation, compared to $3.7 million in the prior year.

Speaker 2: 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.

Excluding the influence of our blueberries 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 profit impact, the sell-through of that fruit to customers, not so much harvest, but sell-through. This year, it'll probably be not quite as backloaded 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 Q1 fiscal 24 as well.

Speaker 1: With that, I'd now like to turn the call over to Steve Bartard, CEO . Steve? Thank you for joining us for our fiscal 2023 third quarter earnings call.

The primary intent 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.

Speaker 1: 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.

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 repurchased since the approval, and the entire authorization remains outstanding as of today.

Speaker 1: 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.

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

But that would be a relatively small amount if it did. Oh great, okay, thank you. And then...

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.

Just on you gave some indication of what you expect industry volumes to be from a distribution standpoint.

Speaker 1: Furthermore, with the rapid completion of the Mexican harvest, prices began to accelerate. At the time, we still believed 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.

And then you've also got, you know, Peru coming in lighter than you expected. Sounds like California, which was solid, is winding down. So would you expect to grow in line with the industry as we look at the 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?

In terms of our own farm production in Peru, we now anticipate exportable volumes to be in the range of 105 million to 115 million pounds for the 2023 harvest season.

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.

You know 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 You know both in North America and abroad I would think with Peru still being Even with the smaller crop Peru will 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

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.

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.

We will now 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. 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 key. If you would like to ask a question, please press star 2 on your telephone keypad.

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.

One moment please while we poll for questions. Thank you. Our first question is from Ben Bienvenu with Stevens. Please proceed with your question. Please proceed with your question.

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 is a core fundamental philosophy of mission.

Hey, thanks. Good afternoon, everybody.

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.

Hi, Ben. Hi, Ben.

So I want to ask recognizing that, you know, the...

international farming operations harbored the 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 lived 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? Hey Ben, when I look at our marketing 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.

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 face 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 U.K., the E.U., 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 U.K. 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 , 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 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.

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 US market, and that's really what helped drive our volume growth in North America, about 15%. And with that happening, a lot of the Peruvian fruit that we brought to the US last year, we were able to utilize to support our export markets, Asia and Europe primarily, which grew at much faster rates than that. So I think we were pleased to the extent that.

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, you know, 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 may be 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 that has the highest contribution margin. I think we've referred to that in the past. It probably Steel T

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 were pleased to see meaningful sequential improvement versus fiscal second quarter.

The improvement in per unit margins was driven by a 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 latter 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.

costs, 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.

The 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.