Mission Produce, Inc.

Good afternoon and welcome to the Mission Produce Fiscal Fourth Quarter 2022 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. 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 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 and 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 table 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. With that, I'd now like to turn the call over to Steve Barnard, CEO.

Thank you for joining us for our fourth quarter and full year fiscal 2022 earnings call. We achieved an important corporate milestone in fiscal 2022, generating $1 billion of revenue for the first time in our company's nearly 40-year history. We grew our full-year revenue by 17%, driven by an extremely robust pricing environment, where our average selling price was up 28%, which was supported by low industry volume out of key sourcing regions such as Mexico. While a strong pricing was in place for nearly the entire fiscal year, trends reversed sharply during the fiscal fourth quarter with the onset of the new Mexican season and drove prices down approximately 35% as compared to the fiscal third quarter. While this sequential softening was anticipated, the speed of the decrease was greater than expected and drove our average price down 10% for the quarter versus the prior year period. As we've noted previously, our business is driven by volume, and in an otherwise normal environment, lower prices tend to drive incremental consumption, particularly in the newer emerging markets. However, this environment is anything but normal. While our fourth quarter volume increased 6%, Our financial performance was impacted by a confluence of variables that undermined our ability to drive the per-unit margins that we have generated historically. Persistent cost inflation, combined with the impact of a La Nina weather pattern that drove a bigger crop with a greater mix of larger fruit that we'd planned for within our own production, resulted in a delay to our seasonal transition to the Mexican production. Further, we did not have the normal benefit of the California crop in the fourth quarter, which was pulled forward this season as growers took advantage of the high-pricing environment. This resulted in an unfavorable mix, lower relative pricing, and temporary margin compression. Taken together, this presented a significant headwind for our per-unit margins, which were well below our expectations, and drove a 35% decrease in our fourth quarter consolidated adjusted EBITDA. That said, the numbers don't necessarily demonstrate the significant inroads we've made with our Peruvian programs and the strategic advantages that it affords us. During the 2022 harvest season, we converted several retailers to the Peruvian product for the first time. While the market environment was disruptive to our ability to capture the margin we'd traditionally expect, it was an ideal set of circumstances to demonstrate the value of our global sourcing network. Retailers were keenly aware of how the short industry supply led to high pricing and sought out alternatives. Through our vertically integrated production, we were able to establish programs with our retail customers where we can commit to substantial volumes of product at attractive price points. These programs are a huge win for Mission in a broader sense. We are deepening our relationship with major retail accounts through sound strategy and execution, demonstrating new pathways to drive profitable sales across their enterprises. We also reinforced the quality and consistency of our production with their consumers, which builds trust and opens future opportunities. And finally, we improved awareness and established a trusted alternative during Mexico's off-season. Mission's ability to deliver consistent, high-quality fruit during the Mexican off-season is a clear advantage of our vertical integration and is an example of how year-round sourcing capabilities are helping expand the avocado market. Supporting our global footprint remains critical for our growth strategy. We are leveraging our vertically integrated global supply chain and distribution capabilities to continue developing international markets. We are bringing our network of complementary assets that cover North America and Latin America to bear and are building on our presence in Europe as well, with addition of our hub in England. We have our team in place, and they are on track to open this new facility later in our fiscal second quarter, right in time to service the Peruvian harvest season. The facility's strategic location provides a mission with a unique access to the growing market in the United Kingdom for avocados, while simplifying import logistics and expediting transit times. We've been working with retailers in the UK to grow the category direct access to high-quality ripe product through our source and distribution capabilities. Our vertical integration from our scaled production and South America positions as well to provide the European market with a year-round supply of high-quality avocados, and we aim to propel the avocado category forward in Europe just as we have in the U.S. market. In Asia, we are leveraging our more than 35-year presence in Japan and existing Chinese distribution facilities to serve as a platform to build our Asian distribution network. Both of these regions present immense long-term growth opportunities for us with consumption rates that are a fraction of what the U.S. has grown into today. Ultimately, our ability to execute this consistently comes back to our year-round sourcing capabilities, which are extremely unique and a substantial competitive advantage for mission. Our goal is to grow our access globally with consistent year-round supply. This is the key to supporting long-term consumption growth and is the catalyst to drive new market development. Mission has played a critical role in the industry's growth. It has required 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 provide greater control over the quality and supply that our customers have come to expect. With respect to fiscal 2023, we see a more normal marketplace emerging, highlighted by better and more consistent supply conditions which provides a constructive foundation for the industry to drive consumption and expand growth in new geographies. We are prepared to meet demand during the upcoming peak Super Bowl season and expect to produce improved operating performance for the full year in 2023. With that, I'll pass the call over to our CFO, Brian Giles, for his financial commentary.

Thank you, Stephen. Good afternoon to everyone on the call. I'll start with a brief review of our fiscal fourth 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. Total revenue for the fourth quarter of fiscal 2022 were essentially flat to the prior year at $238 million. However, note that current revenue was advantaged by approximately $10.5 million due to the blueberry consolidation that took place this year. but isn't reflected in the prior year period. When looking at the drivers of our avocado business for the quarter, revenue was driven by a 10% decrease in average per unit avocado sales prices due to a combination of higher industry supply and were exacerbated by an unfavorable mix of larger fruit from the company's own production in Peru. Avocado volume sold increased 6%, primarily due to the company's larger Peruvian harvest, as well as greater Mexican volume, partially offset by lower volumes from California. Fourth quarter gross profit decreased $6.9 million, or 20%, compared to the same period last year, to $26.9 million, and gross profit percentage decreased 296 basis points to 11.3% of revenue. The decrease in gross profit was primarily driven by lower per unit margins in both the international farming and marketing and distribution segments. International farming segment margin was impacted primarily by significant cost inflation, including logistics, farming, and packing expenses. These increased expenses accounted for nearly 15 cents per pound, or approximately $3.50 per box. I would note, however, that we are seeing some signs of easing pressure on refrigerated ocean freight, which tend to lag out of dry containers. We aren't contracted yet, and we are watching this closely, but do expect some year-on-year savings in the coming year, which is encouraging. Marketing distribution segment margin was pressured by the sharp deceleration of industry prices during the quarter and was lower than our targeted range. Further, we also experienced an impact on our per unit margin due to our lack of California fruit during the quarter. SG&A for the fourth quarter increased $4 million to $19.5 million due primarily to higher employee-related costs driven by higher stock-based compensation expense and labor inflation, as well as non-capitalizable ERP implementation costs and non-recurring process reengineering costs related to the ERP system in our marketing and distribution segments. The consolidation of Moruga increased SG&A by $1.2 million, which included amortization of an intangible asset recognized at acquisition. Net loss for the fourth quarter of fiscal 2022 was $42 million, or 59 cents per diluted share, compared to net income of $16.9 million, or 24 cents per diluted share, for the same period last year, and includes a non-cash charge of $49.5 million related to goodwill impairment within the international farming segment, which I will comment on in my discussion of the segment performance. Similarly, adjusted net income for the fourth quarter of fiscal 2022 was $9.2 million, or 13 cents per diluted share, compared to $17 million, or 24 cents per diluted share, for the same period last year. And adjusted EBITDA was $17.2 million for the fourth quarter of fiscal 2022, compared to $26.4 million for the same period last year, due primarily to lower per unit gross margins and higher SG&A costs noted above, partially offset by the impact of higher avocado volume sold. Turning to our segments, our marketing distribution segment net sales decreased 4% to $221.2 million for the quarter, and segment adjusted EBITDA was $4 million. The drivers for the marketing distribution segment are similar to those that I described for the consolidated results in relation to pricing, volume, per unit margins, and SG&A. Our international farming segment primarily represents our own farms that we manage in Peru. Substantially, all sales of fruit from the international farming segment are to the marketing and distribution segment, with the remainder revenue largely derived from services provided to third parties and the blueberry segment. Affiliated sales are concentrated in the second half of the fiscal year in alignment with the Peruvian avocado harvest season, which typically runs from April through August of each year. As a result, you see the international farming segment emerge in third and fourth quarters and contribute to adjusted EBITDA in a significant fashion. So, with this in mind, total segment sales in the international farming segment increased $9.4 million, or 31% for the quarter compared to the same period last year, due primarily to higher affiliated sales due to an increase in avocado volume harvested and sold. Segment-affiliated sales reflects the consideration returned to the international farming segment net of logistics costs, the most significant of which is ocean freight. When considering higher logistics costs along with rampant inflationary pressure across our growing operations, our margins suffered as a result. Segment-adjusted EBIT was $12.2 million, a 32% decrease from prior year, primarily due to lower per-box margins, driven by significant inflation, including logistics, farming, and packing costs. While sales pricing was comparable to prior year, an unfavorable mix of larger fruit inhibited our ability to drive pricing higher. During the fourth quarter of fiscal 2022, we recorded a $49.5 million non-cash impairment loss to reduce the carrying amount of goodwill associated with our Peruvian reporting unit within the international farming segment. Combination of variables, including inflationary impacts on our cost structure, increasing interest rates, and higher inactive corporate tax rates in Peru unfavorably impacted the discounted cash flow forecast for our Peruvian farming operation. As Steve said in his remarks, despite this turbulence we have recently experienced, we firmly believe that the investments we are making in our Peruvian farming operations are integral to supporting our customers and our long-term strategy. Our blueberry segment reflects the results of Moribius farming activities, which includes cultivating early-stage blueberry plantings and harvesting mature bushes. This product is marketed globally by our partner in the Mareeva Joint Venture. For the fourth quarter, our blueberry segment net sales were $10.5 million and segment adjusted EBITDA was $1 million. As a reminder, 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. Although relatively small in size, 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. Shifting to our financial position, cash and cash equivalents were $52.8 million as of October 31st, 2022, compared to $84.5 million at our prior year end. Net cash provided by operating activities was $35.2 million for fiscal year 2022, compared to cash provided of $47 million in the same period last year. Despite our weaker income performance, we were able to limit the effect of our operating cash flows to less than $12 million due to reductions in working capital, which were favorably impacted by lower per unit fruit pricing toward the end of our fiscal year. Capital expenditures were $61.2 million for the fiscal year ended October 31, 2022, compared to $73.4 million last year. Current year expenditures were concentrated on the purchase of farmland in Peru, as well as land improvements and orchard development in Peru and Guatemala. Capital expenditures within our marketing distribution segment were much lower following the completion of our Laredo facility in the prior year. Looking ahead to fiscal 2023, we expect CapEx related to our core avocado business to be lower than fiscal 2022. with reduced investments in our farming operations in Peru being partially offset by spend associated with the construction of our new UK distribution center. That being said, we will incur additional costs as we ramp up development of the Moruga Blueberries project in the Olmos 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 as the business shifts back to the marketing and distribution segment. The industry is expecting first quarter volumes to be higher than prior year, primarily due to expectations for a larger Mexican harvest. We expect the overall Mexican crop will be approximately 20% higher than the prior year harvest season, but early season volumes are currently lagging that figure due primarily to low pricing in the market. We expect prices to be lower on a sequential basis, but consistent with pricing experienced in the latter part of the prior quarter. On a year-over-year basis, we expect to see pricing down approximately 20% to 25%, as compared to the $1.56 per pound average we experienced in the prior year first quarter. As for our cost structure, we continue to battle the same inflationary pressures that have been well documented. These include freight, labor, and packaging costs, among others. which create headwinds to our ability to drive pre-unit margins and adjust to evenness. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A.

Thank you. 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. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to Pick up your hand step before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question is from Ben Bienvenu with Stevens. Please proceed with your question. Hey, thanks for answering my question.

So I want to ask... You noted that there's still some lingering pressures from costs into the fiscal first quarter. What is your line of sight to that margin pressure alleviating and you getting back to your targeted margin per box range? Or maybe asked a different way, what do you need to see from an external environment to get back to that normal range of margin?

Stability comes to mind.

Yeah. You know, Ben, I think one of the things we're seeing, I mean, when we talked about inflation in the fourth quarter, the most significant impact was really in the farming side of the business, probably more so than our marketing piece. But there's no doubt that there are cost pressures that we're seeing there in terms of some of the overheads that we're working with. I think in terms of the buy-sell on the fruit, which is typically the primary driver as to what our ultimate per box margins are on that marketing side of the business, I think right now what we would like to see, to Steve's point, is a stable environment, stable pricing. I think we're starting to settle into that, but we're at very low price points right now. I think we would like to see some uptick in pricing. particularly as we move towards the Super Bowl. And, again, as we've mentioned in the past, our volume does tend to be backloaded in the first quarter during that ramp-up. So I do think that it's tough for us to make too many judgments on what we've seen so far in the early part of the quarter. I think we're still hopeful that as we kind of move through it that the margin environment does begin to improve.

Okay. I want to ask about the impairment charge. Can you talk in a little bit more detail about what drove that impairment and kind of what the moving pieces are there?

Sure thing, Ben. I think that the things that happened in particular as we moved into kind of through the third quarter and into the fourth quarter, you know, The market conditions that we're dealing with, much higher cost of borrowing, much higher weighted average cost of capital associated with the rising interest rates. And again, when looking at goodwill, we have to look at discounted cash flows, not just absolute. We combine that with kind of what we saw in the sales market as we transitioned to the fourth quarter. I think we were experiencing cost inflation throughout Q3 and Q4, but in Q3 our average selling prices of fruit were significantly higher. I think probably we had a much more comfortable at that point that the higher sales prices were absorbing that cost growth. I think the decline that we saw in Q4 caused us to kind of maybe scrutinize things a little more closely. And I think we wanted to be maybe a little more conservative in how we modeled going forward. So that certainly impacted the cash flows or our cash flow modeling. I will say the one other thing that's out there that actually happened in 2021 was the rising tax rates in Peru. Now, that was something that didn't necessarily drive an impairment in the prior year, but it certainly consumed a significant amount of the headroom that we had when we looked at the valuation of that business. So I think those were kind of the primary drivers. I will say kind of on the back end that a lot of this goodwill came on the books in 2018 when we bought out our partner's interest and we didn't have an active liquid stock of Mission at that point in time and that was really the currency that was used for making the acquisition. So in hindsight, there was probably some debate over the value that was assigned to Mission shares versus the farming operation right from the get-go that we probably carried forward.

Just one more for me. I know you're not guiding specifically to EBITDA for 2023, but you did talk about, I think you mentioned you expect improved year-over-year performance in earnings. Just so you can give us rough goalposts, are we thinking getting back to 2021 levels, getting back to 2020 levels? I know 2019 was exceptionally elevated, but just to help us set very rough parameters on kind of the slope of recovery in the business that you're currently expecting.

At this point, Ben, I don't think we're really prepared to provide anything too specific for the year as a whole. When we look at a high level, I think that we do expect volumes, as we said, at the industry level to be much stronger out of Mexico this year. And Mexico is still the primary country of origin that we work in, both in the U.S. and abroad. So we do expect there to be kind of favorable tailwinds from the volume growth. I think we certainly, in the first quarter of last year, had some one-time growth. cost related to erp that you know that you know we think we put behind us when we moved into q2 we don't expect that or would not expect that to recur this year um but on the flip side you know i think you know as we move through the middle of this last year we also saw very strong margins particularly out of california with the very high price points and and i'm not sure you know if we have a more moderate pricing environment coming forward into this next year if um that may have some offsetting impact. So it's tough for us at this point to really define exact parameters. I think that with volume growing, it will improve our capacity utilization, but we still will have capacity to grow far beyond, I believe, where we're going to get to this year. So I think that'll continue to be a little bit of a drag and may cause some pressure that would prevent us from getting back to maybe where we were in prior periods. But I think the most important thing for us is to see stability. So we can start to kind of model on the marketing side of the business what things might look like kind of as we move towards the back end of this first quarter. I think on the farming side, it's really kind of early for us. I think we're We don't have a complete estimate yet of what our farming production for the upcoming season is going to be. I think we'll know more as we kind of get to the end of the first quarter. And then certainly kind of looking at the dynamics at play with the other countries of origin to get a better sense as to what we think average selling prices might look like next summer.

Okay. Fair enough. Thanks.

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

Hey, thanks for the question. I wanted to maybe first just follow up on the Peru impairment. Brian, you highlighted kind of the factors that contributed to it being the higher cost of capital, the tax rate change, the lower earnings in the inflationary environment that the second half of this year to what extent I didn't hear mentioned, I guess. And I'm wondering to what extent this is a factor. Did you lower your earnings expectations above and beyond that tax rate change for future years? Was that a big factor or was it more of those other items and therefore kind of the underlying profitability of this business is still largely maintained?

I, you know, I, I don't have all the calculations in front of me, Tom. I do know that the higher tax rates had a significant impact. I know that the higher weighted average cost of capital, which was 2.5 percentage points higher than what we were using back when we originally put the goodwill on the books, had a meaningful impact, kind of applying that over a very long period of time. I do think that you know, when we're looking, there's certainly a recency bias and kind of looking at what happened this year where, you know, overall for the season, our average pricing on Peru is very comparable to what it was last year on a sell-through, but we looked at a much higher cost structure. And I think what we're debating internally certainly is how that cost structure is going to come back down. I think there's some things where we're already starting to see that, but we don't know at what pace that reduction is going to happen with, for example, with something like ocean freight. I think with other items in our cost structure, things like fertilizer, we've also seen significant ramp-ups. And I think the key on some of those areas is to continue to drive up yields per hectare to try to absorb those costs as we continue to kind of wait for more favorable market conditions to, I think, as we move into future years. But I think it was difficult for us to predict exactly when those things were going to happen. And I think we felt a little uncomfortable taking very aggressive positions on that within our modeling.

Okay. Thanks for that. Understood. You had some info in the 10K on the planned blueberry build-out, just the overall cost. How does the cost to plant blueberries compare to the cost to build out acres for avocados? Is it comparable?

I don't know the exact numbers, but it's a lot more expensive on the development side of it because you've got proprietary plants that another nursery grows compared to the avocado trees, which we grow ourself and use the seed stock and the top stock from our own ranches. But these are all proprietary varieties, which cost a lot of money up front. But your production from what we've seen so far on these new varieties are over double of what the old varieties were. And you can get a much higher sales price for them, especially in places like Asia, so I don't have the exact numbers on them. It's relevant, though. Yeah, I mean, probably 50,000 an acre, maybe, or hectare. Okay. Yeah, we're using the same people. It's kind of the same logic that we did earlier, except it's on a different ranch up north, which the timing comes off differently, so we're kind of spreading it out a little bit.

Understood. Thanks. And then I just wanted to follow up on a comment you made about margin pressure due to a lack of California avocados. Could you maybe just elaborate on what you meant by that?

Sure. We generally make, from a contribution margin perspective, the country of origin in our marketing business where we tend to make the highest margin is with California. When we're sourcing fruit here, and running it through our Oxnard packing house. In a typical year for California, we're harvesting well into September, maybe even into October, and selling California fruit through the entire quarter. So we're getting a benefit in that fourth quarter of having that California fruit as part of our sales mix. I think what we saw this year is because of the high prices, Most California growers completed their harvest much earlier than normal. We finished packing here at our facility the first week of August. So we had very little volume, selling volume, that flowed through in our fourth quarter. And I would say that that was when we're talking about unfavorable impact. It was more of a mix-based comment that not having that California sales in there that's a higher margin to kind of bump things up relative to last year.

Okay. Thank you.

Okay. Thank you. Our next question is from Brian Spillane with Bank of America. Please proceed with your question. Thanks, Operator.

Good evening, guys. So I guess just a more higher-level question with regards to costs, and maybe this is more relevant for the international farming segment than marketing and distribution, but I guess my question is just, to the extent that there are higher non-fruit related costs, like overheads, labor, freight, shipping, to the extent that these elevated costs are more structural, if you get to that point, if that's the conclusion you draw, does that change the way you need to approach pricing with retailers to get back to sort of a, you know, a stability, but also, you know, getting back to a profit for box. And I guess what's underneath my question is just for most of the companies we follow who are especially experiencing this with their upstream suppliers, you know, what's happening is that their upstream suppliers are coming back to the vendors and saying, our labor costs are permanently higher. We think transportation is going to be, you know, permanently higher. And so whatever a pass-through was, right, there's an overhead component that's being adjusted upwards. And I guess, you know, it just – I guess my concern or my question is just if a lot of these costs are going to be more permanent, do we need to have maybe a different sort of reset in terms of how you think about pricing with retailers? Because it's more than just the volatility of the fruit. I hope that's clear.

No, you're – Absolutely right. We have to continue to pass it along or we're not going to be here very long. So a lot of these contracts were set up early last year on freight. Fertilizer kept going up as the year went along. Labor kept going up as the year went along. As Brian mentioned, the tax change in Peru. So it just kind of all boiled up. It just weren't an adjustment period. now, and we'll continue to adjust till we get it right. But it kind of creeped up on us.

Yeah, I would say, Brian, on the marketing and distribution side of the business, it's probably an easier place to start. Absolutely. I mean, and I think we're already pushing, you know, we're building that into our costing models. We've been doing it, and we're pushing for higher pricing with retail. I think in environments where those kinds of costs are increasing, You know, the advantage on the marketing side of the business is we can either work with the customer for higher pricing or we can work back with the grower to drive our input cost down. So it does give us a little more flexibility there. We're aware of it. But I think certainly at times when these things are going up, margins do tend to get pinched a little bit. But we don't view that as a long-term phenomenon. We view it more as a short-term. I think when we look at the farming side of the business, you know, we certainly we can see the cost growing. We don't have an ability to really lever like a fruit input cost like we do with the marketer. So the price with the customer is really the primary lever we have to drive margins for when we're dealing with costs that we don't have direct control over. I think that over the long term, I think the way you're explaining it is absolutely going to come true. I mean, there will be a balance of supply and demand And price points will settle in at a level that affords a reasonable profit to the grower. But in a short-term market like what we saw in the fourth quarter, that doesn't necessarily hold true. If the supply at that point, you've got fixed cost invested and the supply of the avocados is there, and the market's going to determine what they're going to pay for those. But I do believe, and I believe very strongly that we both believe, that over a longer period of time, that will settle in at a higher price point if those costs don't come back down.

Yeah, they're not all going to come back down.

Yeah, okay. So just maybe to tie that up, right, again, from the seats we're sitting in, because, you know, we can't see all these costs, right? We can see the movement in avocado pricing, and I think it gets back to maybe Ben's question earlier, is we're thinking about getting back to a kind of a more, whatever, normalized profit per carton or profit per box, It's going to take some time because you're not really, you know, it's really, I guess, it sounds to me like it's really determining how much of these other overhead costs are going to be more permanent and how much are not. And so that dialogue you're going to have with your customers to sort of dial that in right or correctly, it's just going to take time. I mean, that's what I'm hearing. I just want to make sure that I'm hearing that correctly.

Yeah. I would say fuel might be the biggest variable. Labor will not come down.

Right.

I guess.

I think you're spot on on that, Brian. The things that are driving our cost structure up are not directly correlated today with what's going to drive sales pricing up of avocados in the short term. Again, over a longer period of time, they absolutely will, but it takes time to adjust that. I don't want to downplay the impact. I know Steve mentioned the size curve. And we ended up with – we had much larger fruit that we were marketing this year that has – it limits the outlets for it to some extent. Retail wants for primarily a certain size avocado. Think of it like a bell curve, and we would call like a size 48 or a half-pound piece would be right in the middle. Ideally, what we want is the tree to produce 40%, maybe more, a fruit that's in that size range and then fall off to each side of it. And that's not what we saw this year on our harvest. And I think it got worse as the season moved on. Certainly the fruit was sizing up. But as we harvested from some of our farms that were closer to the coast, which come later in the season, that's where we saw this larger size curve. And it inhibited our ability to kind of move that fruit into some of the predetermined programs that we had set up earlier in the year. So I think we had a lot more fruit at the end later in the season that we had to move through kind of the broader market as opposed to our contractual pricing.

The thing that got magnified there, too, is with larger fruit, you ended up with more boxes and more loads, and we just kind of stretched the season out because we didn't want to put a bubble in the hose there, and it kind of backfired on us with Mexico coming on hot with cheap fruit, so...

And that was more, the sizing thing is more weather related, right? That's La Nina, you know, the weather conditions were like optimal to grow giant fruit.

Yeah, I mean, historically, Peru can get pretty warm in their summertime, which is our wintertime, and the trees go dormant. And last year it was cool and they never went dormant. They grew the whole time. And by the time we tried to slow the inputs down, i.e. fertilizer and water, it was too late.

Too late. Got it. Got it. Okay, one last question for me is just, I think in the press release you talk about volume in Mexico, you know, being lower or, I guess, supply. Is that just simply, are growers holding avocados because the prices are too low? Is that a simple explanation for that?

Well, they're fighting for size. Their size curve presently is pretty small, so they're kind of dragging their feet a little bit, but at the same time, the demand is, this is the slowest time of year between the around Thanksgiving to Christmas, and usually right after Christmas it picks up for New Year's and then Super Bowls after that, and it just keeps rolling after that. So this isn't really a surprise. It's just we're ready to go. We're kind of jumping to that. Yeah.

I can hear that. The point I wanted to make there is we expect a bigger crop for the season as a whole. It may not come off linear. It may not be linear in terms of up. 20% all, you know, for every month or during the season. I think, you know, the growth rate's lagging a little bit behind that right now, but the crop is there.

In Mexico, I mean, in their defense, they're probably not in a hurry because the prices are relatively low and they're waiting for better size.

So that could... Yeah, that's a rational decision on their part. Okay. All right. Thanks, guys. Appreciate all the color. You're welcome, Brian.

Ladies and gentlemen, at this time, there are 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 your interest in Mission Produce, and we look forward to speaking to all of you again soon. Thank you.

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