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spk03: Good afternoon and welcome to the Mission Produce fiscal second 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. 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.
spk02: Sir, please go ahead. Thank you and good afternoon. Today's presentation will be hosted by Steve Barnard, Chief Executive Officer, and Brian Giles, Chief Financial Officer. The comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions 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 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. With that, I'd now like to turn the call over to Steve Barnard, CEO. Steve, go ahead.
spk07: 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 Mexican season, and those conditions have continued into our current fiscal third quarter as well. Notably, this is a departure from the prior year, where 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 to per box margins that were toward the high end of our normal historic ranges. While this year's 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 long-term consumption growth and allows 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 consistent, year-round diversified sourcing capabilities to new growth markets. On that note, we are excited about the opening of our Forward Distribution Center in the UK in April. This facility is strategically located, with direct access to major international ports and transportation networks, and will strengthen its mission expanding international footprint and optimize product distribution to our growing European customer base with direct access to our global source network. We are very excited about this facility, and although it is still early, we are pleased with the progress we are making in the UK and are committed to further developing our efficient and cost-effective model in this 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 enter the Peruvian season and 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 provides us 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.
spk01: 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 are 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 volume 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 8.2% 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. Current year volumes were heavily concentrated in Mexico source fruit, whereas the prior year period was advantaged by the positive influence from an accelerated California harvest brought about by high market prices. While 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 $0.6 million, or 3%, compared to the same period last year, primarily due to the consolidation of expenses from the blueberries segment. Normalizing for this accounting dynamic, our core SG&A expenses were consistent with the prior year period, which is a positive signal amid this inflationary environment. Adjusted net income was $0.5 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 fruit produced is sold to 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 in 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 packing and cooling service revenue. Segment 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 blueberry segment is 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. As a result, for the second quarter ended April, our blueberry segment results were negligible, with net sales of $1.7 million and segment adjusted EBITDA of $0.1 million. Shifting to our financial position, cash and cash equivalents were $20.9 million as of April 30th, 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 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. 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 cash used in operating activities was $26.1 million for the six months ended April 30th, 2023, compared to $37 million for the same period last year. The improvement was primarily driven by the effect of better operating performance, net of non-cash 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. Stable prices limited the movement in accounts receivable, inventory, and grower 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 30th, 2023, compared to $29.1 million last year. Current year expenditures include $9.1 million of spend associated with irrigation installation and early stage plant cultivation in our blueberry segment, which was not consolidated in the prior year. Capital expenditures in both years included avocado orchard development, pre-production orchard maintenance, and land improvements in Peru and Guatemala. In addition, fiscal 2023 capital expenditures included construction costs on our new UK 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 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. 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 $2.03 per pound average experienced in third quarter of fiscal 2022. The industry continues to expect volumes to be approximately 20% higher in 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, a strong Peruvian harvest outlook, and a larger off bloom 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 in 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.
spk03: 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. And one moment, please, while we pull four questions. Our first question comes from the line of Ben Bienvenu with Stevens Inc. Please proceed with your question.
spk05: Hey, guys. Thanks so much for taking my questions.
spk01: Hey, no problem, Ben. Good talking to you.
spk05: So I want to first start with the volume growth story. Obviously, building momentum here in the year, you cited the strength in volumes in the industry having returned. Your 19% volume growth in the quarter, very strong, slightly below the industry growth that we saw. Can you talk about the puts and takes and 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? Is that just you, Wes?
spk01: Yeah, Ben. You know, I think that, you know, we looked at the supply that – came on the second quarter. Again, very Mexico-centric as compared to the prior year. We do know that it's competitive trying to obtain access to that fruit in Mexico, particularly when it's the only country of origin that has fruit available. We feel, particularly with our U.S., like our retail market base, which is our core customer base, that we've been building share over the last year, certainly higher than we were a year ago at this point in time. And that's really where we focus our primary attention to. I think we believe that all in all, we've grown in tandem with the industry. Certainly, as we transition to the second half of the year, we're going to 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 relative to where we've been historically.
spk07: Especially with some of the export markets, Europe in particular, and China. Numbers are way up compared to a year ago.
spk05: Got it. Okay. And then if I could just talk a little bit about the margins. You talked about some lingering elevated costs across your supply chain over 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 in fixed cost absorption improvements as volume improves? And then what success are you having in maybe passing along some of those more permanent costs into higher pricing to customers?
spk07: Well, one of the good things on the costs that are going down, especially, are the ocean freight. They're down levels of a couple years ago, which is substantially improved. But I think when you have a crop like this, where we have a big Mexican crop, a big Peruvian crop, California is pretty stable. You see consumption growth with lower prices like this. You'll really notice it the year after when you have a slightly less size of a 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's like climbing a ledge. You get to the ledge and you regroup and then climb again, and that's what historically has happened, and I think it'll change going on down the road here in the next year or so.
spk01: Yeah, and specific to your question about capacity absorption, I mean, we saw during the second quarter about a 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 in how those costs are being absorbed through the network. If you look at costs in absolute terms, Certainly, labor costs have 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 or over-the-road freight, that's come back an awful little bit from its peaks in 2022 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, they have more capacity available. There's more competition out there. And I think we're starting to, to a small degree, see some of the benefits of that in our results.
spk05: Okay, very good. And then one more, if I could. Just thinking about your own production, you talked about your expected range for own farm production. Nice growth year over year. Can you talk about kind of the drivers there that you're seeing out of Peru? And then you also alluded to new sources of production out of mission-owned farms down the road. Can you talk about kind of the development pipeline there and what we might expect?
spk07: Sure. Let's take Peru for a first look. Last year, we had a big crop, and we also had a size problem on the fruit. It was too big. We had 70%, I think, last year that was 36 is in larger, which is a large fruit, which is harder to sell than a mid-sized fruit because they sell them by the each, not by the ton. I was there last week, and the size curve is much improved. It's only about 20% of large fruit versus 70, which is a substantial improvement. And the other thing that's very notable is that the crop is about five to six weeks later in maturity than it was last year, as it is here, because of the cold weather. Cool weather, El Nino, a 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. China, as an example, is looking at triple their volume from last year as a country. They've got smoothies that the young kids are eating as fast as they can. And now we're coming out with a noodle soup slash avocado dice promotion this summer with several retailers on across cross promotion. So we're playing offense over there and we're seeing good results so far.
spk01: Yeah, I think to kind of follow up on Steve's point, the farms down in Peru, I 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, it's actually much higher than the increase is even more significant year over year. I think some of this is continued maturity of existing farms. You know, while many of our farms are, I mean, our oldest farms are up to about, you know, a little over 10 years now. Those ones have been mature, 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 benefits, some pickup this year. And we had a little bit of new acreage, again, that was still coming into production. So that being said, I think we're pretty happy with where the yields are at, where the sizes are at. I think we had a better production off of our northern farms up in the Olmos region this year as well. So all in all, Peru is 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 24, we will start to see some fruit come off those trees that we will be marketing. There aren't 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 24. Again, small quantities this year, and we'll supplement it with third-party sourcing that we're going to be doing out of Guatemala as well. And a lot of that fruit will go into European and or Asian markets. Similar situation there. We have the joint venture down in Columbia, about 900 hectares of trees that have been planted. We'll start to see a small amount of productivity this year with that ramping up 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 Columbia than in Guatemala. And therefore, like the cycle from tree planting to reaching maturity is likely to take a little bit longer there than what we're seeing in Guatemala.
spk05: Paul, very helpful caller. Thanks so much. Best of luck.
spk03: Okay. Thanks, Ben. Thanks, Ben. Our next question comes from the line of Tom Palmer with JP Morgan. Please proceed with your question.
spk02: Hey, good afternoon. Thanks for the question. Hi, Tom.
spk04: Maybe just follow up, and I really appreciate all the detail on the farming side. How does this net out, I guess, as we think about the year? And 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, the cost environment is better, harvest volumes are up, what, 10% at kind of the midpoint of your outlook. So 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, to think about some degree of year-over-year step-up, even with the lower pricing?
spk01: Hey, Tom, you know, I would say that it's still premature for us to kind of lock in on a number at this point. I think you mentioned a lot of things that are accurate here. 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 unit is going to be at this point in time. I think the wild card 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 contribution on per box margins because the price points were still extremely high. Prices are much lower this year. And that's going to create a more challenging environment from that perspective. But that 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 than we did last year. So there's a number of positives, but there is kind of that pricing, 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 been working through with a number of our retail and food service customers. But we don't have a significant amount of pricing locked at this point in time. So I'm hesitant to give any specific guidance as to 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 you're 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.
spk07: But the freight savings from last year is significant. Say that.
spk01: Yeah. And like I said, because of those savings, we have margin for pricing to be lower. and still generate better margins than we did last year because of all the other things we talked about.
spk04: Okay, thanks for that. And then just maybe 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. Is it going to be a more balanced harvest than we typically see? Because I think it's pretty normally, at least from a cost standpoint, and therefore from a harvest volume standpoint, it's more skewed to that third quarter, even if the sell-through typically occurs in 4Q. Yeah.
spk01: 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. Um, at this point, because of, I think we came into this year thinking that we wanted to kind of try to balance that a little, 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 breakdown that looks similar to what we've seen historically where, you know, the, the sell through in the third quarter, uh, If I go back at the last five years, I think we've seen it as low as kind of 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 don't think the mix on sell-through at this point is going to be dramatically different than what it was last year in terms of percentage breakdown. OK.
spk05: Understood. Thanks for that.
spk01: But, yeah, to the point you made, while we harvest a lot, like our bottom line, our 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 probably, like I said, it was around 32% last year. And I think the feeling is that it won't be meaningfully off from that this year.
spk04: Great. Thanks again. Look forward to seeing you in a couple weeks.
spk01: Okay. Thanks, Tom.
spk03: And our final question comes from the line of Christian Inquira with Bank of America. Please proceed with your question.
spk06: Hey, guys. This is Christian on for Brian. Thanks for taking our question. We've briefly 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 is low pricing environments that should lead to higher consumption. Have you guys noticed are retailers doing anything differently, setting up more displays, marketing more behind the category? Maybe consumers who were priced out of the category last year, are you seeing those return? If you have data on that, just any color you could provide would be helpful. Thank you.
spk07: 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 know there's been some, I know early on in the year they were making great margins at retail, but I can't 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 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. We just opened a big distribution center in the UK recently, and we've already exceeded our expectations. We've 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 with the young people over there. So there's good things happening in the industry.
spk01: Yeah, Christian, definitely, you know, about 90% of the product we sold in the second quarter came into North America. Um, That's a little bit lower than what it was last year at this point in time. I think we saw strong growth in domestic consumption, again, driven by that ample supply out of Mexico. To Steve's point, another area where 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're still dealing with COVID-19. and just the lack of supply that was available in the market last year. So I think we're pleased. We've already begun to see kind of that ramp back up in Q2 in the Asian markets. And then as we transition into Q3, to Steve's point with our UK facility open, we've got one full month under our belt now, and we're very pleased with the results we've seen thus far.
spk06: Perfect. Thank you. Very helpful.
spk01: You're welcome, Christian.
spk03: And ladies and gentlemen, at this time, I'm showing no further questions. I'd like to end the question as a session and turn the conference call back over to management for any closing remarks.
spk07: Thank you for joining us today. We are 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 7th. 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. Thank you for participating.
spk03: 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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