Earnings Call Transcript - AVO Q3 2023

Operator, Operator

Good afternoon, and welcome to the Mission Produce Fiscal Third 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 Sonnek, Investor Relations at ICR. Please go ahead.

Jeff Sonnek, Investor Relations

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, 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?

Stephen J. Barnard, CEO

Thank you for joining us for our fiscal 2023 third quarter earnings call. Our top line performance of $261.4 million was generally consistent with expectations and reflects a continuation of the conditions that returned to the industry earlier this fiscal year, where higher industry volumes were offset by lower average selling prices following last year's elevated market conditions. However, adjusted EBITDA of $21.2 million came in below expectations, while we drove a significant increase in sales volumes during the quarter and achieved continued sequential improvement in per unit margins relative to the fiscal second quarter, despite the lower pricing environment. Our sites were set higher based on initial estimates that suggested a strong and substantial Peruvian harvest. Furthermore, with the rapid completion of the Mexican harvest, prices began to accelerate. At the time, we still believed that we would be experiencing a strong Peruvian harvest, so we took advantage to lock in pricing with our customers ahead of the seasonal increase in volume and also made a decision to distribute some early volume to secondary markets to optimize our position in key export markets. However, the industry experienced an abrupt change in growing conditions midway through the quarter, with the onset of excessive heat that negatively impacted anticipated volumes and fruit size across the Peruvian growing region. The lower volumes from our own production combined with a suboptimal mix of fruit sizes to service key export markets and the fixed cost nature of our farming operations pressured segment margins and were the primary source of our lower than expected adjusted EBITDA performance during the fiscal third quarter. Industry pricing has since responded to these events and moved higher, which we expect to help lessen the impact of our fiscal fourth quarter margins. As a large global player in the agricultural business, we are all too familiar with the impacts that weather can have, both good and bad, and mitigating this risk through sound strategy is a core fundamental philosophy of Mission. This is visible in our global diversified sourcing capabilities and our efficient distribution network that can manage significant volume in an efficient and thoughtful fashion, maximizing our per unit margins under any set of circumstances. For instance, we were able to generate 23% growth in volume during the quarter, which reflects our ability to support our marketing and distribution segment for an extended period, following the completion of the Mexican harvest. Moreover, we were able to deliver volume growth across each of our key export markets. Other industry players with more limited supply options faced greater challenges during the third quarter due to the rapid completion of the Mexican harvest season this July. This demonstrates the value of our vertically integrated and diversified global sourcing and distribution network, which allows Mission to remain in position to service new and existing customers regardless of the circumstances. We bring to bear our 14 forward distribution centers in North America, the UK, the EU, and China, and in managing our year-round sourcing from eight primary growing regions for the benefit of our customers who are seeking ripening and other value-added services. While the current market environment doesn't afford us the same opportunity to drive the level of per unit margins that we had hoped for during the fiscal second half of the year, we were encouraged by the rational pricing environment through the first half of the fiscal third quarter, which is a key element that allows us to open new growth markets to help drive demand and support long-term consumption growth. Our new forward distribution center in the UK opened in April and continues to perform well. We are already seeing the benefits of this strategic location with its direct access to major international ports and transportation networks. In summary, we remain focused on maximizing the opportunities we have despite the curveball we encountered with the Peruvian crop development. Although volumes and size are lower than we initially expected, we remain in a great position to utilize this route to service our global customer base during the Mexican counter season. With that, I'll pass the call over to our CFO, Bryan Giles, for his financial commentary.

Bryan Giles, CFO

Thank you, Steve, and good afternoon to everyone on the call. I'll start with a brief review of our fiscal third 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 third quarter of fiscal 2023 was $261.4 million, a 17% decrease compared to the same period last year, driven by a 33% decrease in average per unit avocado sales prices, partially offset by a 23% increase in avocado volumes sold. Both the lower pricing and higher volume were driven by higher industry supply out of Mexico during the quarter, which contrasts with the same period last year when there was limited supply that drove pricing to near record levels. Gross profit decreased by $14.2 million to $28.4 million in the third quarter. The decrease was concentrated in our International Farming segment, driven by lower pricing on avocados sold from our own production. Within the Marketing and Distribution segment, while per unit margins were below the elevated levels from the prior year, we’re pleased to see meaningful sequential improvement versus fiscal second quarter. The improvement in per unit margins was driven by a higher mix of California-sourced fruit relative to last year and the impact of higher avocado volume sold. We are pleased to deliver volume growth across all our end markets, driven by the strength of our Peruvian programs in our international export markets and further supported by a larger Mexican harvest, which helped contribute to a 15% increase in North American volume. The later growth helped us leverage our facility in Laredo, Texas, and achieve improvement in fixed cost absorption. SG&A expense decreased $3.2 million or 16% compared to the same period last year, primarily due to lower employee-related incentive compensation accruals, lower ERP process reengineering costs, and lower professional fees due to the maturation of our public company processes. Adjusted net income was $10.3 million or $0.15 per diluted share compared to $18.9 million or $0.27 per diluted share for the same period last year. Adjusted EBITDA was $21.2 million, compared to $31.6 million for the same period last year, a decrease in both of these figures was due to lower per unit margins within the International Farming segment as a result of lower market pricing. Turning to our segments. Our Marketing and Distribution segment net sales decreased 17% to $256.6 million for the quarter due to the avocado pricing and volume dynamics previously described. Segment adjusted EBITDA increased $0.6 million or 4% to $16.1 million, primarily due to lower SG&A. The impact of lower per unit gross margin was largely offset by higher avocado volumes sold. 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 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 were $38.2 million and decreased by 41% compared to the same period last year, due primarily to lower pricing on avocados sold from company-owned farms, as compared to the elevated levels in the year-ago period, which were brought about by constrained industry supply. Segment adjusted EBITDA decreased $11.4 million to $4.9 million, driven primarily by lower gross margin resulting from the lower pricing environment, as compared to last year's elevated pricing which resulted from limited Mexican supply. 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, our Blueberry segment results were negligible, yet higher in the third quarter due to an early start of the blueberry harvest relative to last year. Net sales were $1.4 million and segment adjusted EBITDA was $0.2 million, which compared to $0.3 million and negative $0.2 million in the same period last year, respectively. Shifting to our financial position, cash and cash equivalents were $23 million as of July 31, 2023, compared to $52.8 million as of October 31, 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 sourced 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. Thus, when looking at operating cash flow on a three-month period for fiscal third quarter, we generated approximately $19 million in cash. However, on a year-to-date basis, given the seasonal nature of our working capital, net cash used in operating activities was $7.3 million compared to $3 million for the same period last year. The $4.3 million change was driven by a combination of lower net income due to a decrease in our International Farming segment performance relative to prior year, and slightly unfavorable movement in working capital. Overall working capital movements were comparable to the prior year, with offsetting changes in inventory and grower payable balances being driven by the lower pricing environment in the current year. Capital expenditures were $47 million for the nine months ended July 31, 2023, compared to $42 million last year. Current year expenditures were concentrated in pre-production avocado orchard maintenance in Guatemala and Peru and construction costs on our new distribution facility in the UK. Capital expenditures also included $11.1 million related to the development of our Blueberry operation, compared to $3.7 million in the prior year. Excluding the influence of our Blueberry operation, core CapEx associated with our avocado business decreased 6% or $2.4 million versus the prior year-to-date period. We expect this trend to hold for the balance of fiscal 2023. With respect to our capital allocation framework, I'd point out that our Board approved a stock repurchase program last week, which is our first as a public company. The primary intent is to mitigate the dilutive impact of our stock incentive plans and, as appropriate, provide a tool for the Company to support the stock in the open market. This authorization permits the Company to repurchase up to $20 million of our common stock over the next 36 months. There have been no shares repurchased since the approval, and the entire authorization remains outstanding as of today. 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 flat to slightly higher on a sequential basis and higher on a year-over-year basis by approximately 10% compared to the $1.28 per pound average experienced in the fourth quarter of fiscal 2022. The industry expects volumes to be flat to slightly lower in the fiscal 2023 fourth quarter, versus the prior year period due to reduced supply from Peru brought about by the impact of weather on growing conditions. In terms of our owned farm production in Peru, we now anticipate exportable volumes to be in the range of 105 million pounds to 115 million pounds for the 2023 harvest season, which is a decrease from our initial expectations, reflecting the decline in growing conditions throughout the region. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question is from Ben Bienvenu with Stephens. Please proceed with your question.

Ben Bienvenu, Analyst

Hi, thanks. Good afternoon, everybody.

Stephen J. Barnard, CEO

Hi, Ben.

Bryan Giles, CFO

Hi, Ben.

Ben Bienvenu, Analyst

So, I want to ask, recognizing that the International Farming operations harbored the concentration of the margin pressure in the quarter. Can you talk about what you're seeing outside of that segment? Obviously, nice sequential improvement in margins, and you're managing SG&A fairly nicely. Can you talk about what trends you expect to persist into the fourth quarter? And then to the degree that, and you alluded to this that you could see some improvement in the International Farming segment in the fourth quarter. What are the things that could amplify that improvement or diminish it?

Bryan Giles, CFO

Hi Ben. In our Marketing and Distribution segment for the third quarter, we were pleased with the volume growth, nearly reaching 7.4 million lug equivalents sold. This growth was primarily driven by increased availability of Mexican fruit entering the U.S. market, contributing to a 15% rise in volume in North America. We were also able to leverage the Peruvian fruit we brought to the U.S. last year to support our export markets in Asia and Europe, which experienced faster growth. Our vertical integration strategy proved effective, as we had the necessary fruit available for marketing. In the third quarter, we maintained a good balance in sourcing from Mexico, California, and Peru as we approached the fourth quarter. California's crop is nearing its end, while the new Mexican crop will be available in the latter half of the quarter, and the Peruvian season is wrapping up. Overall, we anticipate that volume may be lower than last year, as industry supply from Mexico appears to be lighter for the upcoming season. This could lead to slightly higher pricing in the fourth quarter, although the end of California’s crop typically presents challenges regarding our per box margins. Historically, around a third of our volume is marketed in the third quarter, with a larger percentage in the fourth. While the variance might not be as significant this year, we do expect more volume in the fourth quarter compared to the third, which should be beneficial. Additionally, a market environment with higher pricing will support this. It's worth noting that a substantial portion of our U.S. volume is handled through programs, which differs from our approach in Europe and Asia.

Stephen J. Barnard, CEO

And China.

Bryan Giles, CFO

And China, yes. So, there could be some benefit there.

Stephen J. Barnard, CEO

When you look at some of the positives that came out of this, the shipments to China tripled in one year. They've obviously got a lot of people over there and we are building two more ripe centers. So, we're pretty well-positioned to help that growth market. The kids are drinking avocado smoothies like crazy. It's kind of a runaway train in a positive way. In the EU and the UK, we're also positioned well for the future and we're just waiting for favorable conditions.

Ben Bienvenu, Analyst

Yes. Okay. Fair enough. Understood. On SG&A expense, down quite a bit sequentially and versus what the run rate we've seen in the first half of the year, down quite a bit year-over-year. Is this a reasonable baseline expectation in terms of absolute dollars for SG&A? And maybe if you could talk about some of the things that you all are doing there to manage SG&A a bit more tightly than what we've seen over the last couple of years?

Bryan Giles, CFO

I wouldn't say this is a sustainable level. The decreases this year are partly due to incentive-based compensation. We haven't met our internal performance expectations during the first nine months of the year, which led to adjustments made by our management team to our accruals, and we hope this won't be the case going forward. Additionally, in some of our international operations, specifically in Peru and Mexico, there is government-mandated profit sharing tied to the profitability of those operations. With the significant drop in earnings in the Farming segment, we experienced much lower profit sharing accruals in that segment as well. Therefore, that aspect of SG&A is more closely linked to the performance of this year. However, some other costs, such as those related to ERP after last year's challenges post go-live, are not expected to recur. There may also be opportunities to reduce some consulting-related professional fees as we progress.

Ben Bienvenu, Analyst

Okay. Very good. Thanks so much for taking my questions.

Bryan Giles, CFO

Okay. No problem.

Operator, Operator

Thank you. Our next question is from Tom Palmer with JPMorgan. Please proceed with your question.

Tom Palmer, Analyst

Hi, good afternoon. Thanks for the questions.

Stephen J. Barnard, CEO

Hi, Tom.

Tom Palmer, Analyst

Wanted to maybe just start off on the Peru side and get an idea of what we're looking at just from a volume split. I think a quarter ago, the discussion was a relatively even balance in terms of sell-through between 3Q and 4Q. Is that still the case or is it a bit more skewed toward the fourth quarter perhaps?

Bryan Giles, CFO

Typically, as I mentioned, we're about 35% in the first half and about 65% in the second, in terms of the profit impact of the sell-through of that fruit to customers, not so much harvest, but sell-through. This year, it'll probably be not quite as back-loaded as what we typically see. I would say we might be based on our full-year projections of where volume is going to land, compared to what we ran during the third quarter, it would probably put us at a split of around 45% in Q3 and 55% in the third quarter, with the potential for some amount to slip over to Q1 fiscal 2024 as well. But that would be a relatively small amount if it did.

Tom Palmer, Analyst

Oh, great. Okay. Thank you. And then just on you gave some indication of what you expect industry volumes to be from a distribution standpoint. And then you've also got Peru coming in lighter than you expected, sounds like California, which was solid is winding down. So, would you expect to grow in-line with the industry as we look at fourth quarter? I know longer-term it's at least in-line, but just for the fourth quarter, is the expectation in-line or is that going to be a little tougher given Peru?

Bryan Giles, CFO

I believe that when we analyze our fourth quarter performance and review the actual growth in both North America and internationally, I anticipate that even with a smaller crop in Peru, it will still account for a significant portion of the overall consumption in Q4. Given our position in Peru, I consider it advantageous for our market share. Additionally, as Mexico transitions from the off bloom to the new crop, we expect to see more of this in the latter part of the quarter. I don't think the situation in Mexico dramatically affects our market share either way. However, I recognize that the production in Peru is lower than last year’s fourth quarter and also below our initial expectations. Nonetheless, it still represents a considerable amount of fruit, providing us with an advantage over our competitors.

Tom Palmer, Analyst

Understood. Thank you.

Operator, Operator

Thank you. Our next question is from Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

Gerry Sweeney, Analyst

Good afternoon, Bryan and Steve. Thanks for taking my call.

Bryan Giles, CFO

Hi, Gerry.

Stephen J. Barnard, CEO

Hi, Gerry.

Gerry Sweeney, Analyst

I apologize, I'm on my mobile, but I wanted to inquire further about Peru. I understand that volumes decreased, but you mentioned making some decisions during the quarter regarding fruit allocation. I'm curious if, looking back, there’s anything you would have changed this quarter. More importantly, does the outcome of this harvest influence your processes or decision-making in the future for Peru, and could that be advantageous?

Stephen J. Barnard, CEO

Well, we had two extremes. We had cold weather early and very hot weather. We had cold weather in the summer and hot weather in the winter, and it really affected the overall production for the season, as did everybody else. But early on, it affected the set to start with the fruit, the fruit flowering because it was cold. And then when they did set, which was a little late, due to the cold weather and rain, it looked good at the beginning, but it got extremely hot. I can't give you the exact temperatures, but for Peru and the mid of winter, it was probably close to 90 degrees or higher. And it's what it does, it stunts tree or stuns the growth of the fruit on the tree because it's kind of in survival mode at that point with the hot temperature and it's trying to suck up the water as fast as possible to stay hydrated, etc. So, we had two extremes that just affected the overall production for the season.

Bryan Giles, CFO

Yes, I mean

Gerry Sweeney, Analyst

Got it. Yes.

Bryan Giles, CFO

I'd like to say Gerry, if we knew, we were going to have a higher pricing environment, say later in the year, we would have liked to have extended our harvest. But on the flip side, because of the weather conditions where we had issues with fruit dropping off the trees, I'm not sure if that's the decision we would have made. I think there's data here, there's data points that we're going to track going forward, but I'm not sure if we have a clear cut that we would definitely do something differently in the future, but we have a lot of data at hand that we're going to need to utilize as we move forward.

Gerry Sweeney, Analyst

Got it. Okay. That's helpful. I just wasn't sure what the situation was, and that's helpful in terms of understanding what.

Stephen J. Barnard, CEO

Yes. We were trying to hold the fruit later because there's usually a pretty good market, wait everybody out, but this, the fruit started dropping at a pretty rapid pace. So, we didn't want to wake up and not have anything on the tree.

Gerry Sweeney, Analyst

That because it was dropping both the heat and the tree was trapped overall, correct?

Stephen J. Barnard, CEO

Exactly. It sheds everything. It's like getting your kids out of the house, get out of here.

Gerry Sweeney, Analyst

I understand now. I wasn't certain if you had made a strategic decision to harvest a bit earlier and rearrange some things, but I realize now it was a choice between picking or dropping.

Stephen J. Barnard, CEO

Yes.

Operator, Operator

Ladies and gentlemen, at this time, I'm showing no further questions. I'd like to end the question-and-answer session and turn the call back over to management for a closing remark.

Stephen J. Barnard, CEO

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

Operator, Operator

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