Good afternoon and welcome to the Mission Produce Fiscal First Quarter 2023 Conference Call. Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Jeff Sonnek, Investor Relations at ICR. Please go ahead.

Thank you, and good afternoon. Today's presentation will be hosted by Steve Barnard, Chief Executive Officer; and Bryan 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 the 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 fiscal 2023 first quarter earnings call. We produced total revenue of $213.5 million and adjusted EBITDA of $2.3 million in the first quarter. This performance largely reflects the reversal of the strong pricing and low industry volumes that summarized most of 2022. As the new Mexican season kicked in during the first quarter of 2023, we were in a great position to drive volumes, and I'm pleased to report that our growth of 14% exceeded that of the industry, which is a testament to our distribution capabilities and infrastructure that supports our global customer base. However, with these higher industry volumes, the pricing environment reversed, decreasing 27%, ultimately outpacing the volume growth we had realized. Although the velocity of the price deceleration created unfavorable circumstances for driving per unit margin, the market has since found some pricing stability, which is conducive to generating improved profitability. Looking ahead to the balance of the year, we believe conditions exist that make for a more constructive pricing outlook as our fruit season comes online. While the price volatility during the first quarter was unfavorable, we are optimistic that this new equilibrium of lower fruit pricing will ultimately drive greater consumption in the coming year compared to the depressed consumption rates we saw last year. Furthermore, this shift to a more rational environment facilitates our ability to penetrate new growth markets such as Europe and Asia, and drive per capita consumption in these emerging markets with improved access to year-round high-quality fruit that we are uniquely able to deliver via our owned and third-party sourcing capabilities and global footprint. But having access to diversified sourcing is only half the equation; you also need the distribution infrastructure, which is precisely where Mission shines. We remain well positioned to manage higher volumes of product this year to our unmatched global network of distribution, ripening, and other value-added assets. Looking ahead, our focus remains on the advancement of our global presence through investments in new global facilities, such as our forward distribution center in the United Kingdom, and the diversification of our business by leveraging our core competencies in new and creative ways, such as blueberries. We expect that the improved stability in the avocado market, coupled with easing of cost inflation, will allow us to generate sequential improvements in our per unit margins, albeit below what has been our historical targeted range. With this backdrop, we expect to deliver a better year of operating performance in fiscal 2023. Our forward distribution center in the United Kingdom is expected to become operational in April. It is strategically located with direct access to major international ports and transportation networks and will strengthen Mission's expanding international footprint while optimizing product distribution to our growing European customer base with direct access to our global source network. This project represents a strategic investment in physical assets and people that will help us scale up quickly in this market in the coming years. We are very excited to get this facility open and elevate our ability to service this region properly with our efficient and cost-effective model. With respect to our blueberry business, although our first-quarter performance was impacted by an unfavorable pricing environment, we continue to be optimistic about the long-term opportunity given our access to new premium varietals, which are in the early stages of disrupting the status quo. These new varietals are not only expected to sell at a premium but also provide us with the added benefit of extending the marketing window with an elongated harvest. While the initial goal of our entry into the market was to optimize labor management for our seasonal avocado business, our experience in operationalizing scaled production and unique high-value crops puts us in a position to make a broader impact on the industry. This is a long-term play for us, but one that we think will prove to be quite valuable over time. With that, I'll pass the call over to our CFO Bryan Giles for his financial commentary.

Thank you, Steve, and good afternoon to everyone on the call. I'll start with a brief review of our fiscal first 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 first quarter of fiscal 2023 was essentially flat with the prior year at $213.5 million. However, note that the first quarter was advantaged by approximately $30 million due to the blueberry consolidation that took place beginning in the fiscal third quarter of last year, but isn't yet reflected in the comparable prior year first quarter period. Thus, when looking at the drivers of our lower avocado revenue within the marketing and distribution segment, it was largely a function of a 27% decrease in average per unit avocado sales prices, being partially offset by an increase in avocado volumes sold of 14%, both of which were driven by higher industry supply out of Mexico during the quarter. Gross profit increased by $8.5 million to $9 million in the first quarter, and gross profit percentage increased 400 basis points to 4.2% of revenue. As a reminder, prior year gross profit and margin percentage were negatively affected by operational challenges created by the implementation of a new ERP system within our marketing and distribution segment that led to inventory management issues and unusually large fruit disposals. Normalizing for that impact in prior year gross profit within the marketing and distribution segment was relatively flat year-over-year. In the current year, higher volumes had a favorable impact on fixed cost absorption in areas such as distribution, while the lower pricing environment limited our ability to generate per box margins on the buy-sell of avocados. While we experienced some sequential improvement versus fiscal fourth quarter, per box margins remained below our targeted range. In addition, our blueberry segment experienced a negative gross margin of approximately $3 million during the first quarter as a result of weak sales prices within the European and U.S. markets, driven by strong industry supply as well as the amortization of purchase accounting adjustments associated with the business combination of Maruga during fiscal 2022. SG&A expense for the first quarter of fiscal 2023 increased by $0.4 million, or 2% compared to the same period last year, primarily due to the consolidation of Maruga, which added approximately $1.6 million of expense. Normalizing for this accounting dynamic and excluding $0.9 million of nonrecurring ERP implementation costs in the prior year period, we are pleased to see stabilization in our core SG&A expenses, which is a positive signal amid this inflationary period. Adjusted net loss for the first quarter of fiscal 2023 was $5 million, or $0.07 per diluted share, compared to $12.2 million, or $0.17 per diluted share, for the same period last year. Adjusted EBITDA was $2.3 million for the first quarter of fiscal 2023, compared to a loss of $10.4 million for the same period last year, the improvement of which was primarily attributed to higher gross margin. Turning to our segments. Our marketing distribution segment net sales decreased 14% to $181.8 million for the quarter, and segment adjusted EBITDA increased $12.3 million, or 160%, to $4.6 million. Net sales declines were due to the avocado pricing and volume dynamics previously described, while the EBIT improvement was driven primarily by higher gross margin due to our ERP implementation challenges in the prior year quarter. 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, though smaller 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. With this in mind, total segment sales in the international farming segment increased 73% to $5.7 million for the quarter compared to the same period last year due primarily to higher packing and cooling service revenue for blueberries. Segment adjusted EBITDA improved $0.9 million to a loss of $1.8 million as a result of higher segment sales and lower SG&A expense. Our blueberry segment reflects the results of Maruga's farming activities, which includes cultivating early-stage blueberry plantings and harvesting mature bushes. This product is marketed globally by our partner in the Maruga joint venture. 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 to January. Furthermore, 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. For the first quarter, our blueberry segment net sales were $29.8 million, and segment adjusted EBITDA was a loss of $0.5 million. While the blueberries business experienced pricing compression in the European and U.S. markets during the quarter due to significant growth in industry volumes, we continue to be bullish on the long-term prospects for this business. We are working alongside our partner to introduce new premium varietals to the market that also have advantages with respect to our ability to stretch the harvest and extend the marketing window. This creates an ideal opportunity to deliver value to customers while driving improved margins over time. Shifting to our financial position, cash and cash equivalents were $39.2 million as of January 31, 2023, compared to $52.8 million as of October 31, 2022. Net cash used in operating activities was $1.3 million for the three months ended January 31, 2023, compared to $41.4 million for the same period last year. During the current year period, our working capital position benefited from the impact of lower per unit price points. Lower prices had a favorable effect on both accounts receivable and inventory balances and substantially offset the impact of typical working capital growth we see in the first quarter as a result of heavy sourcing of Mexican fruit with shorter payment terms and the build of growing crops inventory within our international farming segment for harvest and sale during the second half of our fiscal year. Capital expenditures were $17.6 million for the three months ended January 31, 2023, compared to $20.9 million last year. Current year expenditures include $4.4 million of spend related to irrigation installation and early-stage plant cultivation in our Maruga blueberry operation. This spend was not included in capital in the prior year when the operation was not consolidated. Capital expenditures in both years included avocado orchard development, pre-production, orchard maintenance, and land improvements in Peru and Guatemala. In addition, capital expenditures in the first quarter of fiscal 2023 included construction costs on our new UK distribution facility that is scheduled to open in spring 2023. For the full year 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 Maruga blueberries project in the almost region of Peru. In terms of our near-term outlook, we are providing some context around our expectations for industry conditions to help inform your modeling assumptions. The industry is expecting volumes to be higher in the fiscal 2023 second quarter versus the prior year period, primarily due to continued expectations for a larger Mexican harvest. We expect the overall Mexican crop to be approximately 20% higher than the prior harvest season. With year-over-year volume increases from Mexico ticking up during the quarter, we expect the quarterly uptick to be partially offset by lower California volumes due to a later start to the harvest season. We believe pricing will be higher on a sequential basis but lower on a year-over-year basis by 30% to 35% compared to the $2.04 per pound average experienced in the second quarter of fiscal 2022. This movement is primarily due to the volume dynamics noted above, and while the inflationary impact on our cost structure has shown signs of stabilization, we are still contending with higher expense run rates that are compromising our ability to drive higher per unit margins and adjusted EBITDA. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from Gerry Sweeney from Roth Capital. Please go ahead.

Good afternoon, Steve and Bryan. Thanks for taking my call. Lots of detail there on your prepared remarks, but I'm just trying to maybe think a little bit out loud to make sure I'm thinking about this the right way. Last year, a wave of different issues, anything from fruit sizes, production costs, logistics, even pricing, all of which in some ways drove or impacted consumption. As we're looking at this year, it sounds as though you may be seeing, and I'm going to stress the beginning of maybe a regression to the mean in terms of some normalcy around size. We're even seeing some cost stabilization, if not mitigation, especially on logistics. If this continues along with volumes, we should see EBITDA begin to improve throughout the year. Am I sort of looking at this correctly?

Well, volume in Mexico is up. Inflation appears to be easing on all fronts. We're built for volume, and last year we were light on volume, the exception of Peru. Yes, I would agree it's feeling a lot better going into where we are. I mean, there are still challenges everywhere, but some of the major issues we are seeing are retreating as far as inflationary concerns.

Yes, Gerry, I think we're seeing some positive signs as we're moving into the early part of Q2. Volumes seem to gain some traction; it seems to be more pull-through at retail than we saw for much of the first quarter. So we're seeing volumes at high levels, and pricing is increasing in conjunction with that. I think we feel good about where the industry is heading through the second quarter. We're excited about seeing some of the other origins, like California and Peru, start to come online, which will happen as we move closer to the end of the second quarter, giving us more options for sourcing fruit for our customer base. Certainly, some of the inflationary pressures are starting to subside. We are seeing production yields go up for our farms. We're observing improved size curves compared to last year for commercial sizes. Most importantly, we're observing freight rates that negatively impacted us last year gradually subsiding and reverting closer to levels we experienced in 2021. A significant variable will be market prices during those summer months, but we certainly feel more positive. There are a lot of positives we see heading toward summer.

Got it. This question, I got to throw it out there. I'm not sure if it's really answerable, but obviously food inflation is a hot topic. We're seeing it across the board and even in my own personal consumption, maybe trading down differently when you go to a supermarket. Is there a price level that you've seen or that drives consumption a little bit higher, a little bit lower, above or below a certain level? We haven't seen an inflation market like this for years. I'm just curious if there's any data, any thoughts around that.

Yes, I mean, if it gets under a dollar, it usually attracts a lot more people, at least on an average size. One of the issues we had in the first quarter was there was a disconnect between the market in Mexico and what the retail price was. So there was a significant gap that slowed demand down. That has since changed, and ever since the Super Bowl, it has been pretty normal or competitive. We are seeing substantially improved volume throughput as an industry. Mexico is picking record numbers, and it seems to be stable price-wise.

I was going to say Mexico is generally stable, not just in terms of price but also overall.

I am not going to comment on that.

That's what I figured. I appreciate it. I'll see you early next week.

Thank you. Our next question comes from Tom Palmer from JPMorgan. Please go ahead.

Hey, guys. Thanks for the question.

Hi, Tom.

Hi, Tom.

Maybe we can just kick off on the supply outlook as we move past the Mexico harvest. I mean you noted California harvest coming in maybe a little bit later, but do you have any early indications in terms of how the quality, and how the size of that might be coming through, and then anything on Peru for the same?

Sure. As you may know, we've been getting a lot of rain here in California. So that will help that crop size up. They like rain. They haven't seen it in a while. We're starting to pick a little in some areas. A lot of pruning is going on and that type of thing. I really don't see much volume until April coming out of California. We have already started our Peru harvest, although slowly this past week. Most of that is going overseas, but our crops are up about 10%, and the sizing, as Bryan mentioned in his remarks, is a much more normal situation. So it's quite positive in those regards.

Okay, thanks for that detail. And then maybe just check in on the blueberry side. If I looked at some of the disclosures right, I think this was a business that kind of fair valued assumed something in the $6 million range for annual EBITDA. And it looks like for this year, for this growing season at least, it was a little under a million. I guess first is, am I looking at that right? And then how abnormal was this year? I mean, is the $6 million a number that you've been seeing in recent years? And then this year just kind of fell off and was unusual in nature? Or was maybe some of the other years leading up to this one a bit challenged too?

Hi, Tom. We certainly had some challenging years in the past. I think this one was more extreme than what we've seen. I don't think you're looking at it wrong. I think we've had years where we've generated EBITDA in the $5 million to $6 million range for that operation. Certainly, as the business has grown, the acreage is planted, and the yields have improved, we've seen volume increases over time. However, one challenge we face is that some of the initial plans and older varieties aren't considered premium varietals and they are limited in terms of which markets they can penetrate, generating a lower average sales price. In the current market, Peru has become the largest exporter of blueberries in the world over the last couple of years, which has pressured pricing as a result. The ways that we're trying to control that going forward, I think we've alluded to in the call. We have replaced some of the plants that we have today with newer varieties, larger blueberries with a better taste profile that should penetrate premium markets like China, providing stronger returns. Additionally, some of the new varieties allow us to stretch the harvest and extend the marketing window. Right now, we are hearing that over 80% of the blueberries in Peru are harvested between October and December. Our goal is to stretch the season over time. I think we're still quite happy with the outlook. We weren't satisfied with the results from this last year, but we're still bullish about where this is heading. The genetics we are planting will truly have a distinctive advantage over the traditional varieties that most of the Peruvian growers have planted. Our biggest driver will be getting our fruit into premium markets so we can generate higher returns while improving yield, thus lowering our average costs and stretching out that harvest window as much as we can.

Great. Thanks for all the details.

Sure thing.

Thank you. Our next question comes from the line of Bryan Spillane from Bank of America. Please go ahead.

Thanks operator, good morning or good afternoon, guys. So I just had one question. I guess you talked a little bit about marketing and distribution and we talked a bit about maybe the profit per box or profit per carton beginning to sort of normalize, I guess is what I heard. But I guess we talked a bit about this. I think on the last earnings call there were just other inflationary factors, labor, transportation costs, right? So as we're all trying to fixate on kind of a mean reversion, if you will, on profitability in both the farming segment and in marketing and distribution, are you at a point yet where your pricing discussions have also incorporated starting to cover some of the non-fruit costs? Or will that take more time and will that affect sort of getting back to a more normalized profit per box?

Well, we're actually in the process just this week of looking at freight rates. We're kind of dragging our feet as they continue to fall, specifically out of Peru to either Asia, U.S. or Europe. The longer we wait, the better they get. We're getting close to where we could meet our expectations on costs comparable to two years ago on freight rates out of Peru. We're seeing some improvement in that on truck rates as well across the country. It's not coming down as quickly as ocean freight, but it is continuing to creep down a little bit every week in certain specific lanes.

And I will say, Bryan, we have made some alterations to our pricing structure since the beginning of our fiscal year. We adjust pricing regularly for our customers based on freight prices, but for some of the other value-added services we provide, like ripening and distribution intended to cover some of our overhead infrastructure, we have adjusted pricing acknowledging the inflationary cost pressures in those operations, while the volume growth over the last few years hasn't been there to absorb it. We are pushing for that, and I think it's something we've been doing over the last few months. We expect, over time, that we'll likely see everyone need to adjust similarly.

Okay, and then, actually, just one additional question that there is now, I guess, the prediction that we may end up with an El Niño at some point this year. So, Steve, can you just remind us again how that might affect Peru, how that might affect California and Mexico? Just flipping from La Niña, which is where we've been for the last couple of years, to El Niño; is there anything that we should be thinking about there?

Yes, I mean, we have had almost twice the normal rainfall here in California already this year. Starting tonight, we're getting another couple of inches, which is much needed. It actually helps the trees as long as it stops at some point, but they're very healthy. The fruit is sizing up faster because of the water. I call it sweet water; it's rainwater. It doesn't have all the salts and whatnot in it, so far it has been positive here. It is raining in Peru. We actually have our Peru team here this week, but it's not a flooding situation; it’s just raining. So it held up harvest for a couple of afternoons. It's mostly in the afternoon. As long as it stays where it is there and doesn't wash the bridges out, we’re good. I don’t think there’s any prediction of that, from what I know today.

Okay, thank you.

Thanks, Bryan.

Thank you. Ladies and gentlemen, at this time, I am showing no further questions. I would like to end the question-and-answer session and turn the conference call back over to Steve Barnard, CEO for any closing remarks.

Thank you very much for your interest in Mission Produce, and we look forward to speaking to you again soon.

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