Mission Produce, Inc. (AVO) Q4 2023 Earnings Call Transcript

Good afternoon, and welcome to the Mission Produce Fiscal Fourth 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 that 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. Sir, 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 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, please go ahead.

Thank you for joining us today. Fiscal year 2023 was a dynamic year for Mission. Although we drove a 12% increase in total avocado volume sold, 654 million pounds for the year, net sales decreased 9% to $954 million due to a 24% decrease in average per unit avocado sale prices. However, I'd remind you that in the prior year, we experienced a volume decline of 11% which supported an extremely robust pricing environment with prices higher by 28%. I believe this context is an important reminder that in a normal environment, our business is largely driven by our volume, and our primary goal is to drive long-term volume growth through supporting our markets with consistent supply and then translating that improved excess to per capita consumption growth. This is a playbook that has served us well and has Mission instrumental in driving growth throughout the North American market, and we intend to do the same thing globally in markets such as Europe and Asia over the long term. To support these opportunities and emerging demand in our growth markets, we are methodically building our capabilities in those regions in a measured fashion. For instance, in the United Kingdom, the construction of our new forward distribution center is progressing according to plan, with our Phase 2 buildout to expand capacity, including additional ripening room, storage, and sorting, as well as building handling capacity for our popular mango category. While volume growth is our primary mandate, our industry can be unpredictable, influenced by uncontrollable variables such as weather patterns and the individual marketing decisions from fragmented growers around the world that impact the supply-demand equilibrium. In 2023, price decreases and higher avocado volume sold were driven by higher industry supply out of Mexico in the current year. This contrasts with the limited supply out of Mexico in the previous year, which sent prices soaring. In order to help mitigate this dynamic, over the years, we've made strategic decisions to vertically integrate our business with our own avocado production in Peru, and we have subsequently developed acreage in other strategic source regions like Guatemala and Colombia to balance out our year-round supply. We've also diversified by identifying other products such as mangoes and blueberries that allow us to leverage our existing assets and resources to ensure that we are maximizing productivity during seasonal variances. The value of this diversification was on display in 2023. Despite realizing lower revenue in our Marketing and Distribution segment, our per unit margin improved in part due to higher volumes, which in turn led to a substantial increase in adjusted EBITDA for the full year 2023 for this segment. Furthermore, our emerging Blueberries segment also contributed materially, with segment revenue growing exponentially and adjusted EBITDA increasing by $4.4 million from approximately breakeven in fiscal 2022. These gains helped insulate us from the headwinds we faced in our International Farming segment when our Peruvian season came online during the second half of the fiscal year. We were met with El Nino-induced weather-related challenges in Peru this year that included above-average temperatures and flooding. These challenges resulted in quality issues and lower-than-expected volumes, both of which impacted our International Farming segment performance. Because we set our market allocation and customer pricing and volume commitments prior to knowing the full impact of these weather-related events, we were limited in our ability to generate the seasonal increase in adjusted EBITDA we would typically expect in the second half of the year, which in turn impacted our overall consolidated cash generation. Looking ahead to 2024, we expect to realize improved pricing in our International Farming segment, given adjustments we've made to our marketing strategy following this past year's experience. In addition, weather conditions have improved as El Nino conditions have moved offshore in Peru. Continuation of this weather pattern should lead to more predictable production yields for the coming year. We believe these factors will create a more constructive backdrop for our International Farming segment performance next year. In the meantime, we remain focused on advancing cost control measures and reallocating resources to maximize efficiency. We are largely through our peak investment cycle to support the avocado business, and in the near term, our capital spending will be much more modest. We believe that with anticipated improvements in operating cash flow and declining CapEx needs in 2024, we are in a great position to enhance our capital structure in the year ahead. We continue to focus our organization's efforts on supporting long-term consumption growth trends globally and providing the market with consistent year-round supply of avocados on a global scale, a capability that is unique to Mission Produce. We are also excited about accelerating and advancing our burgeoning mango program and seeing the continued success of our Blueberries segment. 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 review of our fiscal fourth quarter financial performance, touching on some of the key drivers within our three reportable segments. Then I'll provide an update on 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 2023 was $257.9 million, an 8% increase compared to the same period last year, driven by higher per unit avocado sales prices, partially offset by a decrease in avocado volume sold. Both the higher pricing and lower volume correlate with lower industry supply out of Peru during the quarter. Revenue growth was further supported by strong performance in our Blueberries segment, which increased by 88%. In the current fiscal quarter, gross profit increased by $0.9 million to $27.8 million. Our Marketing and Distribution segment experienced gross profit growth of 49%, mainly driven by strong per unit margins on Mexican and Californian avocado sales. Gross profit also benefited from higher volumes and elevated pricing within our Blueberries segment. On the contrary, our International Farming segment experienced a significant decline in gross profit due to lower volume and lower pricing of avocados sold from our company-owned farms. The lower volume and pricing conditions were driven by the same El Nino-related weather events that we spoke about during our fiscal third quarter call, which resulted in quality issues and a compressed Peruvian harvest season. SG&A expense increased $1.1 million, or 6%, compared to the same period last year, primarily due to executive severance charges, increases in stock-based compensation, and additional labor costs to support our growing UK operation. Excluding these items, we made progress on our goal to reduce controllable expenses during the fourth quarter and are working hard to attain additional cost savings in select areas in the year ahead. Net income for the fourth quarter of fiscal 2023 was $4 million or $0.06 per diluted share, compared to a net loss of $42 million or $0.59 per diluted share for the same period last year, which included a non-cash charge of $49.5 million related to goodwill impairment within the International Farming segment. Non-operating items also contributed to the year-over-year change in net income and included higher interest expense in the current quarter associated with rising interest rates. Adjusted net income for the fourth quarter of fiscal 2023 was $7.5 million or $0.11 per diluted share, compared to $9.2 million or $0.13 per diluted share for the same period last year. Adjusted EBITDA was essentially flat at $17.3 million as compared to $17.2 million for the same period last year. A stronger performance from our Marketing and Distribution and Blueberries segments were largely offset by weaker performance from our International Farming segment that I'll address in more detail in a moment. Turning now to our segments. Our Marketing and Distribution segment net sales increased 7% to $236.2 million for the quarter due to the avocado pricing and volume dynamics previously described, that are typical of what we have experienced over the last few years. Segment Adjusted EBITDA increased $6.8 million, or 170%, to $10.8 million due to the impact of higher per unit gross margins. The current quarter margins benefited from a California harvest season that extended into August in the current year and a relatively stable Mexican harvest environment. Our International Farming segment owns and operates orchards from which the vast majority of fruit produced is sold through our Marketing and Distribution segment. It also generates smaller amounts of revenue from packing and processing fruit for both our Blueberries segment and for third-party producers of avocados and blueberries. Production from this segment is currently derived from Peru, with smaller operations emerging 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 starts in April and runs into September of each year. Total segment sales in the International Farming segment were $40.3 million and increased by 1% compared to the same period last year. I would like to point out that our reported segment sales were distorted by a change in the phasing of segment revenue recognition versus the prior year to align with the timing of avocado sales to customers. This shift in methodology aligns with the timing of profit recognition, whereas it was previously aligned to the harvest timing in Peru. As such, the reported segment growth is contrary to the fundamental drivers that resulted in an apples-to-apples decline in segment sales of approximately 40%, that was due to a combination of lower avocado volumes sold from company-owned farms and lower realized pricing. Segment-adjusted EBITDA decreased $11.1 million to $1.1 million, driven primarily by lower gross profit resulting from the volume and price drivers of lower revenue. Activity in our Blueberries segment tends to be 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. Net sales increased 88% to $19.5 million and segment-adjusted EBITDA increased $4.4 million to $5.4 million in comparison to the same period last year. The increases were driven by higher pricing resulting from lower industry supply from Peru combined with a 29% increase in volume from our own farms. The volume increase from our own farms was due to an earlier start to the blueberry harvest season relative to last year brought about by the commencement of new production in premium varieties. Shifting to our financial position, cash and cash equivalents were $42.9 million as of October 31st, 2023, compared to $52.8 million at October 31st, 2022. Net cash provided by operating activities was $29.2 million for the fiscal year ended October 31st, 2023, compared to $35.2 million for the same period last year. The $6 million change was primarily driven by weaker operating performance within the International Farming segment and working capital growth. Within working capital, trade accounts receivable were negatively impacted by higher avocado sales prices as well as higher blueberry volumes and pricing. In our International Farming segment, working capital was relatively flat as the favorable impact of lower on-hand inventory of company-owned fruit and reductions in other assets from acceleration of VAT refunds attributed to the earlier completion of the avocado season compared to the prior year, were offset by decreases in accounts payable and accrued expenses. Capital expenditures were $49.8 million for the fiscal year ended October 31st, 2023, compared to $61.2 million last year. Furthermore, capital expenditures in our fiscal fourth quarter totaled less than $3 million. Current year capital expenditures included $12.9 million related to the development of our Blueberries operation compared to $6.9 million in the prior year. Excluding the influence of the Blueberries joint venture, CapEx decreased 32%, or $17.4 million versus the prior year to $36.9 million. The step down that we are seeing in capital spending is aligned with prior communications that we are nearing the end of our recent heavy investment cycle in avocados. For perspective, our CapEx averaged approximately $65 million annually from fiscal 2020 through 2022. This year, CapEx, excluding Blueberries, is approaching investment levels of fiscal 2018 and 2019 that averaged below $30 million annually. This is a level we feel comfortable with over the near term for these parts of the business, and it's consistent with our projected CapEx budget for fiscal 2024, in the range of $30 to $35 million, of which approximately $5 million is earmarked for our Blueberries business. While we have various projects in progress for farming expansion and facility improvements that we will continue to support, we feel good about our core Avocado footprint and the assets supporting that business. We expect to continue investing behind the growing Blueberries business, but at a measured pace to ensure that our blueberry joint venture can fund its own growth in the future. Net, we believe that the business is in a position to generate positive free cash flow in fiscal 2024 and beyond. Although we instituted a modest share repurchase program last quarter, of which we utilized approximately $600,000 in the fourth quarter, our core capital allocation priority is maintaining a healthy capital structure that minimizes leverage. Thus, debt paydown is our near-term priority, and given our forecast for improved operating cash flow in 2024, we expect to be in a position to strengthen our balance sheet this year. In terms of our near-term outlook on the fundamental drivers of our operations, we are providing some context around our expectations for industry conditions to help inform your modeling assumptions. Industry volumes are expected to be slightly lower in fiscal 2024 first quarter versus the prior year period due to expectations for a lighter Mexican harvest, resulting at least in part from smaller fruit sizing. Pricing is expected to be slightly lower on a sequential basis but higher on a year-over-year basis by approximately 15% compared to the $1.14 per pound average experienced in the first quarter of fiscal 2023, assuming that volume aligns with our expectations. 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. Our first question comes from Ben Bienvenu with Stephens, Inc. Please proceed with your question.

Hi. Good evening, everyone.

Good evening, Ben.

I wanted to begin by discussing the cost aspect. Over the past year, it has been a priority to reduce costs in the business, especially in light of the ongoing higher costs due to inflation we've experienced. Can you share where you are in the process of cutting costs and what opportunities remain as we look towards 2024?

Well, I'll just start out by saying we've picked the low-hanging fruit so far, Ben, a lot of labor, mostly down in the Peru area. Freight costs have continued to drop. So, we're looking at pretty good benefits there going forward. I mean, not as drastic as it dropped last year, but it's still coming off a little bit. So, those are the two big ones that I can tell you right off the top. And, yeah.

I would say, Ben, we're very focused on a couple of things. I mean, certainly asset utilization is important to us. So, we look at our marketing business, we saw strong volume growth this year and that certainly had a favorable impact on utilization of our packing and distribution facilities globally. I think we're regularly questioning the costs that we have within our operations and looking for opportunities to improve. To Steve's point, I think the biggest opportunity in the near term is in our farming operation down in Peru. I think we're working closely with the team down there to identify all of the costs that really are controllable and to some extent go back to kind of a zero-based budgeting model of what we truly need to operate the farms. We certainly went through a period of time, where focusing on yield improvement and doing a number of things that are focused around that and investing in the farms to drive volume growth, was a high priority. I think philosophically, with the lower sales pricing that we've seen over the last few years driven by higher volume out of Peru, I think it's causing us to change our focus a little bit and certainly focus more on cost reduction initiatives than maybe we have. To Steve's point, we saw benefits this last year of lower ocean freight than we had the year before. But those benefits were really offset by the fact that we saw higher farming costs, higher farming and packaging costs. Some of that driven by the fact that our yields were lower as a result of El Nino. So, yeah, we're seeing opportunities. We're looking within the farms themselves. We don't have a specific number at this point, but we are certainly looking for meaningful reductions. I would note that most of those costs are things that would end up on our balance sheet until we get to Q3 and Q4 of next year. So, it really won't show up in results until we start selling product from our own farms during the 2024 harvest season.

Okay. Understood. Thanks for that. You noted that you've passed the peak of the CapEx spending cycle. You've made significant investments in incremental capacity. With the capacity that you've brought online, can you help us think about the runway that you have ahead of you relative to the growth that you expect to deliver?

Well, as you know, we've expanded into the UK pretty aggressively, along with the EU, for helping pull product through the system. We've got a very state-of-the-art facility in London, right outside of London, that's picking up business rapidly. I think when we look over into Asia, we're continuing to invest, but not nearly to the degree we do in Europe, but just pulling that product through and leveraging our assets as we go forward. This Mango category that we're into now is picking up some great steam too, and leveraging our assets, such as truck fill rates and facility utilization. So, it's a little bit here and a little bit there. I can't really say it's any one area, but it's all areas where we're focused.

To expand on what Steve mentioned, the volumes we processed in our North American operations during fiscal 2023 were higher than in 2022, but similar to those in 2021. The avocado market experienced a phase of double-digit growth, and while we remain optimistic about our category, we anticipate growth rates exceeding those in other produce areas. However, the volume growth we've observed in recent years has slightly decreased compared to the previous decade. We currently have the capacity to manage more volume, especially in North America. Our Laredo facility, which handles products crossing from Mexico, is set up to accommodate significantly more volume than we are currently processing, although it is not fully built out yet, allowing for potential incremental investment to expand capacity further. Overall, we feel confident in our position. We have increased the amount of fruit stored at the border rather than at our distribution centers to enhance flexibility, consistent with strategies discussed prior to the Laredo opening. We believe we are well-positioned in North America. Steve pointed to growth capital expenditures in the UK, where we recognize a strong opportunity. In Europe, our strategy is to rely on third-party distributors for now, but in the future, we may consider investing in our own facilities. We have a capable partner to help us deliver the necessary value-added services in that market. Regarding our farms, we have completed planting all the trees in Peru that we planned for the foreseeable future, and our packing capacity for avocados is sufficient. We're also planning to build a packing house in Guatemala for the fruit harvested from our own farms, which is a significant capital expenditure still pending. There might be a small increase in acreage planted in Guatemala over the next two years, but it will be a major reduction from our previous levels. Currently, those are our main farming considerations. Lastly, concerning blueberries, we are focused on ensuring that our joint venture can fund its investments through operating cash flow, which we have agreed upon with our partner for future capital expenditures. Although we initially faced challenges this year, we notice a significantly improved environment for blueberries, potentially allowing us to reinvest in development efforts depending on generated cash flows. Nonetheless, we have outlined an overall investment plan for blueberries, with decisions about the timeline remaining to be determined.

And one thing about those Blueberries, is we run those through our avocado packing facility there in Peru during the off-season. So, it helps utilize that giant facility also and lower our overall cost year-round.

Okay. That's great. Thanks for all the detail, and thank you for taking the questions.

Sure. Thanks, Ben.

Thanks, Ben.

Thank you. Our next question comes from the line of Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

Hey. Good afternoon, Steve and Bryan. Thanks for taking my call and happy to be here.

Good morning.

Thank you.

Ben discussed the cost controls on the International side. However, I think you mentioned improvements in the marketing strategy. I'm assuming that's relevant to Europe and the UK. Could you provide a bit more detail on what changes you are making in that area, if I heard that correctly?

Yes, we are looking into several aspects, Gerry. Market allocation is certainly a factor. We primarily send fruit to three markets: North America, mainly the US; Europe; and Asia. South America, specifically Chile, serves as an overflow market, and we try to limit the amount of fruit sent there, although it is an option. If fruit isn't exported, it remains in the country for processing, but in-country fruit yields the lowest returns, followed by Chile. We manage overall returns from the three main export markets. In the US, the amount of fruit we can import and the pricing depend not only on the volume of Peruvian fruit sent by the industry but also on the situation in Mexico. We will be closely monitoring the Mexico crop this season to identify opportunities for greater import of Peruvian fruit into the US market next year, which we believe is quite likely. Regarding Europe, which is our second-largest market, we aim to significantly increase the volume of fruit processed through our UK operations in its second year. We generated strong returns through this location by adopting a direct-to-retail strategy. In Mainland Europe, we still rely heavily on wholesale markets because we haven't had the repackaging capabilities to sell directly to retail, but we plan to explore this in the coming year as we now have the capability, although it will be a transition period. Additionally, we are considering reducing the volume sent to Mainland Europe next year due to weaker returns experienced this year. Lastly, concerning Asian markets, with China being the primary focus, we will need to assess the situation as the season approaches to determine potential returns and decide how much fruit to allocate there based on our market strategy. Historically, Mission has marketed all its fruit independently and has not partnered with others for marketing, but that is something we will reconsider moving forward.

When you mention marketing it yourself, are you referring specifically to Asia, or does that include all three regions?

No, we're talking 100% of the fruit that we harvest if it's exported, Mission is the marketer of it. We're evaluating whether some percentage of the fruit that we grow in Peru, we may send to other parties to let them market the fruit under their label. In certain markets, we think that can help boost the returns for the farms without really compromising our competitive position.

Understood. And then the comment you made about Europe maybe pulling some fruit back there. I'm assuming that fruit would come to the US?

It could go to the UK or the US. Those are the most likely markets for it.

Could you have done, or are you able to do like an analysis? You pulled some fruit from Europe and brought it to the US, would have been more profitable this year?

The EU, yes. The UK, probably not.

The belief is that we could have peeled off some fruit and brought it here. Again, it's a fluid market and things change regularly. We went into last season thinking we were going to have a massive crop, Gerry. So, we accelerated harvest and we were looking at every possible market to move fruit through. It wasn't until we got to late June, or I think it was late June, early July, that we started to see some of the impacts of the El Nino down at Peru, the warmer temperatures causing fruit to not size up, and we're actually seeing drop on the tree. So, we ended up accelerating harvest as the industry as a whole did, and there ended up kind of being a shortage of Peruvian fruit during the fourth quarter. I think we could have managed things differently. We could have managed the harvest schedule over the season, and then we could have certainly managed the market allocation slightly differently had we known better. I think as we look to the coming year, we're seeing more favorable weather conditions today. But certainly, that's something we're going to monitor closely to understand what the yields are going to potentially look like. I think that's a big variable. But I think we feel confident that we can generate better overall sales returns next year than we did this year. This was certainly the lowest year on sales returns off Peruvian product that we've seen to date. And we think we can get it back close to what we were generating in fiscal 2021 and 2022, if not in excess of those figures.

Got it. And I get it. It's a dynamic market too, I mean.

Yes.

Yes.

We often find ourselves second-guessing. There are certainly things that could have been approached differently. When the seasons conclude, we review everything to identify lessons learned and explore how we can improve our actions moving forward.

Got it. One last question. Obviously, blueberries stand out this quarter. I'm curious about what's driving that growth. I think you mentioned a premium product or premium fruit. What exactly is fueling that? Additionally, outside of increased capital expenditures, what opportunities do you see there for Q1 and possibly the following year as we approach the end of 2022?

Yes. Over the past three years, we've seen the introduction of new berry varieties that are significantly larger in size. These flavors are very appealing, and the yields are much higher. We've planted these new special varieties and are replacing some of the older crops with them. They command a much higher price per kilo, and the yields are notably better. This is the main reason for the recent success. They are simply a superior product, yielding more revenue. We plan to phase out the old varieties over the next two to three years and will continue to plant more of the new types. However, there are limits to how far we can go with this, but we expect to see continued progress in the next couple of years.

Yes. Currently, we have over 500 hectares of blueberries planted. We also have plans for future plantings in the northern region of Peru that should bring us to an additional 500 hectares. The market dynamics are favorable for us right now, primarily due to stronger pricing compared to last year. The overall industry crop in Peru is significantly lower this year, reportedly 30% to 35% down from last year. However, our crop isn’t seeing the same level of reduction because our plants are younger, and we're introducing new varieties that yield better results. We experienced higher volumes in our fourth quarter compared to last year, which can be attributed to these new varieties that not only produce more but also offer flexibility in harvesting times. This has allowed us to create a smoother harvest schedule, taking advantage of early volumes and the higher prices observed in the fourth quarter. Looking ahead, we expect Q1 to be our largest quarter for blueberry harvests, with a volume increase from Q4. However, we also anticipate a slight decrease in pricing as industry volumes are expected to increase, which we will keep an eye on. While pricing may be somewhat lower than in Q4, it should remain attractive compared to a year ago. In summary, we expect higher volumes but lower prices. Our goal is to extend the harvest season to avoid flooding the market with blueberries at once, which may allow for some extension into the second quarter, ultimately improving returns.

The other thing, Gerry, most of Peru, I would say 65% or 70% still have those old varieties, and the El Nino effect has affected those older varieties much more than these new stronger versions. So, that's helped us also, which makes the price go up.

I appreciate it guys. Thank you.

Hey, no problem.

Okay. Thank you.

Thank you. At this time, I don't have any further questions. I would like to conclude the question-and-answer session and hand the conference call back to management for any closing comments.

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

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