Mission Produce, Inc.

Good afternoon and welcome to the Missing Produce Fiscal Second Quarter 2021 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Jeff Sonick, Investor Relations at ICR. Sir, please go ahead.

Thank you and good afternoon. Today's presentation will be hosted by Steve Barnard, Executive Officer, and Brian Giles, Chief Financial Officer. Mike Brown, Chief Operating Officer, is also participating on the call and will be available for Q&A. The comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs, as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll 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 comparable GAAP measures. I'd now like to turn the call over to Steve Barnard, CEO.

Thank you for joining us for our fiscal 2021 second quarter earnings call. We delivered another strong quarter, generating $16.3 million of adjusted EBITDA, which represents growth of 13% compared to the same period last year. Our blue-chip customer base and the flexibility that our network provides allowed us to distribute 22% greater volume than the prior year. With our vertical integration and key intelligence, we are in an excellent position to continue to grow our leadership position. The strength of our infrastructure has provided us with an incredible advantage as we've managed through this pandemic environment. Our operational network and global reach proved to be especially valuable as the industry has met with the demand shocks from the pandemic over the last year, as well as managing a large Mexican crop this season. Mission's ability to stay nimble and manage disruptions with minimal effects proved to be highly beneficial and allow us to demonstrate the value we provide to our customers worldwide. The consistency that we bring is critical in fostering customer relationships, creating growth in new and existing business, while expanding our business. The hallmark of mission since we started the company 38 years ago is our long commitments to innovation and investing in infrastructure, and I'm excited to share that our Laredo, Texas Forward Distribution Center is on track to be open and fully operational in September. We completed construction of the 262,000 square foot facility at the end of April, and we've been working through our operational qualification process and finishing up the internal systems that will make this a game changer for our North American customers. Beyond North America, our ambitions are global. We are leveraging our global supply chain and distribution capabilities to continue developing international markets such as Europe and Asia. Both of these regions represent immense long-term growth opportunities for us with consumption rates that are a fraction of what the U.S. has grown into today. In fact, in the fiscal second quarter, Mission delivered first-ever shipment of California avocados to China. This is a significant milestone for us and the industry. Our year-round sourcing capabilities are extremely unique and remain a substantial competitive advantage for Mission. Avocados have become a household staple, and we've commissioned some consumer survey work that demonstrates the power of these trends. Coming out of the pandemic this summer, consumers are seeking normalcy, which included social gatherings and events, which is great for all businesses, including ours. While our food service channel was perhaps more resilient than others due to the positioning and quality of our customer base, we are eager to see this channel reemerge. Based on the consumer research, 81% of respondents report they plan to return to gathering with family and friends, 68% plan to eat out, and 56% are even planning to travel again. Consumer activities certainly impact consumption habits, And our intelligence tells us that this summer, 58% of Americans plan to buy and eat more avocados. Avocado consumption generally peaks during the summer, with over half the US households purchasing fruit between June and August. Right now, consumers are buying more avocados for the health benefits and for summer dishes. As the global avocado leader, we're here to contribute to all post-pandemic avocado activities. Mission has played a critical role in creating greater access to avocados at your neighborhood retailer and favorite restaurant through our consistent year-round supply and value-added services. This requires foresight and a constant focus on continuously assessing opportunities to optimize our sourcing capabilities with third-party growers, as well as investing in our own farms to ensure that we can control the quality and supply that our customers have come to expect. So, as we look ahead to our fiscal second half of the year, our industry transitions into the southern hemisphere, where our own Peruvian farms become a large component of the volume that is sold. The growing season was very productive, and we are expecting solid yields from our crop, and with prices firming up, we're in a great position to deliver a strong second-half operating performance, led by our international farming segment, which Brian will speak to in greater detail. For the third quarter-to-date period, retail pricing is steady, along with consumption patterns versus the prior year, which is common going into the summer months. Finally, I wanted to comment on another major corporate milestone, which we are extremely proud of, our inaugural ESG report titled Finest for the Future that was published in April. Throughout our 38-year history, Mission has remained rooted in honesty, respect, and loyalty to its land, resources, and people. As the global leader in avocados, we have committed to sustainability initiatives that embody our core values, which I've shared previously. We use the acronym FIRST, F-I-R-S-T, fun, innovative, reliable, successful, and trustworthy. The report illustrates our dedication to the finest practices for our people, product, and planet. We embody sustainable practices from field to fork, and our advanced farming practices allow us to keep our water usage per avocado well below industry average. Our people are passionate and have an innovative spirit, constantly driving our operations to reduce our environmental footprint and contribute positively to our global community. With a focus on investing in people, reducing water and waste, and minimizing carbon emissions, some selected highlights of the report include the following accomplishments and goals. Mission's global workforce comprises nearly 50% women, almost 20% of whom were promoted in 2020. We announced the implementation of an initiative to utilize a reduced plastic bag in at least 50% of the bags packed and shipped globally by the fiscal year 2025, equating to almost 500,000 half-liter plastic bottles. Our precision and biodiverse farming methods use less irrigation water per avocado compared to the average grower with approximately 40% less water in Peru and California. Solar panels at our Oxnard, California packing facility power almost three quarters of the facility during peak season, with more facilities transitioning to supply renewable energy each year, specifically in Peru and California. And by the end of 2021, Mission aims to apply shelf life extension technology to 22.5 million pounds of avocados to combat food waste and reduce shrink of avocados, the equivalent of powering almost 563 homes, according to the U.S. Environmental Protection Agency, greenhouse gas calculator. With that, I'll pass the call over to our CFO, Brian Giles, for commentary around our recent financial results.

Thank you, Steve, and good afternoon to everyone on the call. I'll start with a brief review of our fiscal second quarter performance ended April 30th, 2021, and touch on some of the drivers within our two operating segments. Then I'll provide a snapshot of our strong financial position and conclude with some thoughts around our outlook. As Steve mentioned, we had a great fiscal second quarter 2021, which met our plan and reflects the strong global infrastructure we have in place to service our blue chip customer base. Total revenue was $234.7 million compared to $221.6 million for the same period last year, representing a 6% increase. The increase in revenue was driven by a 22% increase in avocado volume sold, partially offset by a 14% decrease in average per unit sales prices, which reflected a broader trend over the past couple quarters that is being driven by strong industry supply from Mexico. I'll touch on the price volume dynamics in a moment, but would like to reiterate that our business is managed to volume targets as we leverage our global presence to drive share of fresh avocados to our retail and food service customers. While prices fluctuate given the influences of global supply and demand, pricing is not something Mission can control or forecast with any degree of certainty. That said, Our leadership position as a global value-added marketer and distributor of fresh avocados tends to insulate our gross profits, as these sought-after value-added services, such as ripening, bagging, and distribution, are largely unaffected by price changes. As such, our second quarter 2021 gross profit increased 26% compared to the same period last year, driving a gross profit margin improvement of 180 basis points to 11.5% of revenue. The increase in gross profit was closely correlated to increases in avocado volume sold during the quarter, as margins per unit were relatively stable. The improvement in gross profit percentage was driven by lower per unit sales prices during the period. In lower priced environments such as this, where price is inversely related to higher market volume, we are usually able to expand our gross profit percentage, as our margin is being measured against a lower revenue base. SG&A for the second quarter increased $5.2 million to $16.3 million due to higher professional fees, higher employee-related costs, and higher liability insurance premiums now required as a public company. We also experienced an increase in rent expense in conjunction with our move to our new corporate headquarters in February 2021. Further, the year-over-year change was also compounded by the recording of a legal settlement contingency of $0.8 million in this year's second quarter. Net income for the second quarter of 2021 was $7.4 million, or 10 cents per diluted share. This compares with a net loss of $14.8 million, or 23 cents per diluted share, for the same period last year. Notably, we experienced a significant non-operational variance that affected net income in the second quarter of the prior year, which was associated with a $21.2 million increase non-cash impairment charge on our unconsolidated investment in Moruga, our blueberry farming operation in Peru. Adjusted net income was $8.7 million, or 12 cents per diluted share, for the second quarter of 2021, compared to adjusted net income of $6.2 million, or 10 cents per diluted share, for the same period last year. Adjusted EBITDA increased $1.9 million, or 13%, to $16.3 million for the second quarter of fiscal 2021, compared to $14.4 million for the same period last year. In terms of our segment drivers, our marketing and distribution segment net sales increased 6% to $232.4 million for the quarter. The drivers for the marketing and distribution segment are similar to those that I've described for the consolidated results. with volume growth being partially offset by lower average pricing. This is due to the fact that virtually all of our third party revenue is generated within this segment. Segment adjusted EBIT had decreased 8% to $16.2 million due to the higher corporate expenses associated with being a public company, which weren't completely offset by the higher volumes and stable per unit gross margins. Our international farming segment primarily represents our own farms that we manage in Peru. Naturally, the dynamics of this business are quite different from those in our marketing and distribution segment. While we are more exposed to price in this segment compared to our marketing and distribution segment, this is a highly strategic initiative for mission. Our growing base of global customers requires year-round supply, and today's key growing regions can't keep up with international demand. As a result, we made a commitment close to a decade ago to establish a presence where we control our own supply that we are able to sell to customers through our marketing and distribution segment operations. As we look forward, in the short run, growth within our international farming segment will be dictated by yield improvement within our maturing orchards. We expect longer-term growth to be supported by additional producing acreage that will come online and subsequently mature. Similar to fiscal first quarter, We realized nominal affiliated sales in the second quarter since the avocado harvest season for Peruvian farms typically runs from April through August of each year. Adjusted EBITDA for international farming is generally concentrated in the third and fourth quarters of our fiscal year in alignment with the harvest season for avocados in Peru. For the second quarter, international farming segment sales increased 79% to $4.3 million, and net sales after intercompany eliminations increased 10% to $2.3 million for the quarter. While nominal in absolute terms, the increase in segment sales was due to earlier timing of the avocado harvest season relative to last year. Net sales increased primarily due to higher packing and cold storage service revenue compared to the same period last year. Segment adjusted EBITDA improved by $3.3 million to $0.1 million primarily due to the revenue drivers noted above, which enables us to better leverage fixed-cost overhead in Peru during the avocado harvest off-season. Shifting to our financial position, cash and cash equivalents were $54.2 million as of April 30, 2021, compared to $124 million as of October 31, 2020. Mission's financial model has historically generated strong operating cash flow, which has provided us great flexibility to support our long-term growth objectives with the required infrastructure and sourcing capabilities. Despite significant investments in the business over the past decade, as we built out our global footprint, our net leverage ratio is very healthy. Our operating cash flows are seasonal in nature and can be temporarily influenced by working capital shifts. resulting from payment timing for Mexican source volume, which has shorter terms than other source markets. Additionally, we are building our growing crops inventory in the first half of the fiscal year to be sold in the second half of the year. These variables can cause quarterly shifts in operating cash flows, but it is not indicative of positive operating cash flow performance that we expect to realize for the full year. Net cash used in operating activities was $20.2 million for the first half of fiscal 2021, compared to $4.7 million in the same period last year. The $15.5 million increase was primarily driven by an unfavorable change in networking capital, which is not inconsistent with... The $15.5 million increase was primarily driven by an unfavorable change in networking capital, which is not inconsistent with our seasonal expectations. Capital expenditures were $46.8 million for the first half of fiscal 2021, compared to $19.7 million for the same period last year. Capital expenditures for fiscal 2021 have been concentrated in land improvements and orchard development in our Peru and Guatemala farming operations, and on completing construction of our new distribution facility in Laredo, Texas. In terms of our outlook, as we transition to our own production in Peru in the fiscal second half of the year, we are providing full fiscal year modeling assumptions for sales, volume, and adjusted EBITDA as follows, given our greater visibility to both volume and cost. Full year fiscal 2021 net sales are expected in the range of $900 million to $920 million, which assume total annual volume in the range of 670 to 680 million pounds, which includes expected avocado production from our owned farms in the range of 95 to 105 million pounds. Full year fiscal 2021 adjusted EBITDA is expected in the range of 100 million to 105 million dollars, but may be influenced by future pricing dynamics, which have a disproportionate impact on our own production. On a third quarter to date basis through the month of May, we are currently seeing volumes increase approximately 10% versus the same period in the prior year. From a pricing perspective, again through the month of May, we are realizing average avocado prices that are flat with prior year, whereas measured on a sequential basis are approximately 10% higher than the average we experienced in second quarter 2021. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A.

Thank you. 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. 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. Our first question comes from Brian Spillane with Bank of America. Please proceed with your question.

Hi. Thank you, operator, and good afternoon, everyone. Hey, Brian. A couple of questions on my end. I guess the first one, just in terms of the outlook on pricing in the back half of the year, I think it's forecast to be a bit higher in the second half than the first half. Is the assumption that it's it's kind of reflects where pricing is currently. So you're not expecting pricing to move. We're not assuming that that prices move up more from where they are, or are you expecting kind of relative to the comment you just said, it kind of where, where pricing has been in may and June, are you expecting it to move higher from here?

Hey Brian, this is Brian. Uh, the, the assumptions that we made in our model, As we look into Q3 and Q4, is that pricing will continue at a similar run rate to what we saw in Q2? Okay.

All right. So there's not an expectation that it would move higher from here, basically?

Nothing's been – we have not built into our models that there will be significant changes in prices from where we were during the last quarter.

Okay. Okay. And then the second question is just around – you know, the margin per box, like just, just if you could give us some color on, on how you're thinking about, uh, the margin per box outlook and relative to just as anything changed in terms of, um, inflation, right. You know, whether it's, it's freight or, or any of the other, you know, sort of pieces that have been affecting a lot of other companies, um, Is there anything we should be thinking about there as we're thinking about margin per box through the back half of the year relative to just how inflation has moved, whether it's labor inflation or freight or other?

Sure, I'll talk about that a little bit. I mean, certainly the dynamics of our two segments are a little bit different. In marketing and distribution, where it's more of a buy-sell on the volume, we're certainly aware of the cost inputs that feed into it. Fruit is obviously the largest part of our cost of goods sold. And there's a lot of factors that influence the pricing of fruit that are independent of inflation per se. But if you look beyond that, we start to get into our transportation, our packaging costs, our labor costs. And yeah, we've seen some pressure to the upside on those. I think thus far, we've done a pretty effective job of being able to pass those costs along to our customer base. We're not seeing an erosion of our margin per box at this point. And we're not expecting to see an erosion of that going forward. And Mike may have some additional comments on that as well as he's more on the front line with dealing with some of these things. I will say on the farming segment though, we are projecting significant volume increases from our own production this year. That is having a favorable impact on margins as it becomes a larger part of our overall business and the overall amount of fruit that we market. So I'd say that that's a positive. I will say that we are seeing some inflationary costs increase, though, down in our farming operations as well. As we look in Peru, we've seen labor cost increases. We've also, though, you know, seen some cost increases associated with farming practices that are helping us to drive these yield improvements.

So just to add to that a little bit, Brian, we have very good visibility on our production and what our needs are in terms of packaging materials, and there's all kinds of inflationary things right now. Pallets, for instance, are becoming more of a challenge out there, and boxes and And so we're always looking out three, four months in having our supplies set and pricing set. So as Brian Giles indicates, we're able to pass that on through the selling price. But we are watching it every day. We're watching our freight costs every day. We've locked in some good rates on our ocean carriers. to move our crop from Peru up to the United States over to Europe and Asia. So we're feeling very comfortable with where we are on a great part of our transportation set right now.

And then thanks for that. And then just last one, maybe for Steve, just, you know, we've been watching the headlines and the Peruvian elections and not asking for you to handicap which way it goes, just is there anything that we should be either thinking about or anything that we should be watching for, how it might affect either the harvest this year or your operations in Peru?

Well, we've been pretty prepared for some shutdown, so to speak, but we haven't seen anything yet. We've shipped ahead, at least on the short term. We got way ahead of it last week just in preparation, but It's been very quiet. We're back to work there. We took the weekend off, so to speak, to wait it out, but we've been through this before. They had a president a couple terms ago that was just as radical, I'll say, on the left, and it takes two-thirds of Congress to get anything done down there, so nothing's really imminent on happening where it's going to turn negative on us, so I think it's just more of the same chaos, and we keep doing our job and keep our head down and stay focused on what we do.

All right. Thanks, Steve. Thanks, everybody. I'll pass it on.

Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Tom Palmer with JP Morgan. Please proceed with your question.

Hi, guys. Thanks for the question. Just to kick off, I want to clarify on the pricing outlook. So I think you're assuming pricing runs at a similar run rate for the remainder of the year as we saw in the second quarter. But if I heard you right, May pricing was up 10% relative to the second quarter. So it would seem that the pricing embedded in your outlook is that pricing deteriorates from here. So is this just conservatism? Is there some other reason you think May's pricing might not hold? I know it can be difficult to forecast pricing. I just figured you guys have much better visibility than we do.

I mean, I would say May, it's one month out of six months that are remaining in our year. You know the volatility that we've seen in pricing in the first quarter of this year. From January, when we were seeing pricing that was around $1 a box, we saw it increase to north of $1.60, or not a box, $1 a pound to north of $1.60 a pound. in the month of April. So there's certainly movements that take place. I think that overall, you know, we're using our best judgment to estimate where we think the averages are going to pan out, but it's not going to be a steady state through the whole, you know, through the whole timeframe. You're going to have ups and downs within it.

I mean, we came from a very low point for the first six months of this year. So it's a little misleading. Yes, the prices are higher, but they were too low to start with. And keep in mind, a lot of our Peruvian business is contracted, so it's not really affected by it.

I think there's another big point to reference is that versus a year ago, Peru is actually a little bit further ahead in terms of the percentage of the crop harvested. The northern regions harvested quite a bit earlier. As you know, California crop is down. So I think congestion in the market is – is probably not so likely, but there are indications that we're going to have pretty stable pricing comparable to Q2.

Okay, thank you. And then just a modeling question. You gave really helpful detail on the total volume expectation out of Peru, but it I guess just any color on how you look at the volume shaking out between the third quarter and the fourth quarter, because it really can swing EBITDA quite a bit from quarter to quarter.

And I think, you know, Tom, part of the reason why we gave full year expectations as opposed to quarter by quarter is because it is very difficult to pin down the timing of the harvest. You know, knowing that the margin that we make on our farmed product, it can have a significant impact based upon, the timing of when that comes off. We've seen in the past, we've seen the harvest sell through in the third quarter range anywhere from 40% on the low end to slightly over 50% on the high end. And it's just difficult for us to try to pinpoint where that's going to fall. But those are the types of ranges we've seen historically.

Okay. Thanks, guys. I'll enter the queue. Thank you.

Our next question comes from Jerry Sweeney with Roth Capital. Please proceed with your question.

Good afternoon. Thanks for taking my call, guys. I hate to ask another question on pricing, but I'm going to do it. And it's not so much where pricing is going. This is more, I guess... partly out of curiosity, but maybe can you describe some of the impacts that could drive pricing in the second half versus the first half? Obviously, you talked about a large Mexican crop. I know, through some channel checks, I believe some of that pricing was influenced by maybe timing of harvest or speeding up of harvest, et cetera. But just curious how certain items could impact the second half and what we should look out for, et cetera, if that makes sense there.

I'll start. I think the biggest unknown is what's left in Mexico. They've got a fair amount of what we call the old crop. The question is, how long will it last, and when will the new crop, Floralocas, start? It's hard to get good information out of there, but right now they've got plenty of fruit, but it is very high in oil, and They're running out of time, really, on getting it harvested. And the question is, is the next version or the next set going to be ready to go in time? So there could be a gap in there for a while.

Hey, Jerry. Yep. The summer crop is going to be, at least industry estimates indicate, is going to be a little bit smaller than last year, what they call the local crop and the Mendez crop. I think that's going to be influenced a little bit by late rains. And what we're hearing out of the region now is that it's raining quite nicely in the evening. So who knows? Weather can always impact the effect on the fall. But at this point in time, there's nothing indicating that there's extraordinary volume ahead once Mexico finishes their old crop. And on the old crop, believe it or not, the national prices in Mexico is keeping some number one and a lot of number two fruit in Mexico right now for processing in the national market. So it's a constant balance that we look at. But usually it's weather and volume that can affect The weekly volumes can affect pricing, and we don't see right now anything extraordinary happening on that front.

Got it. Okay. That's super helpful. And then just to switch gears a little bit, a lot of this conversation has been about some of the shorter term, but obviously Europe, Asia, big opportunities there longer term. You know, what could be the timing? Is there anything that could speed up some growth in those areas, or is this just more – You know, partly a process of, you know, expanding production in Peru and I think Guatemala and then just shifting some of that into those markets over time.

Well, there's opportunity in both Asia and Europe, and it's just making sure the timing's right and the move is right. But when you look at the per capita consumption, there's a long runway in both areas.

Huge, yeah, yeah. Okay.

Yeah, I think certainly, you know, whether it's through our own investments or through working with third parties, developing that source globally to supply these markets is an area that we focused a lot of time and attention on. And we continue to do so, and it is growing at a comfortable rate each year. And then, you know, that's what we use to support our customers as we move into these export markets. So I think definitely, as Steve has said, a lot of consumption rates Still much lower in these countries than what we're seeing in the U.S., so we see real opportunity for growth over time. And we see those markets probably growing at a faster rate than the U.S. market in the near term.

Starting from a lower point.

Yeah.

Yeah. Got it. Okay. I appreciate it. Thank you.

Thanks for being, Jerry.

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 Mr. Barnard for any closing remarks.

Well, I'd like to thank everyone for your interest in Mission Produce, and we look forward to speaking to you again soon.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your lines.