Mission Produce, Inc. (NASDAQ:AVO) Q1 2025 Earnings Call Transcript

Mission Produce, Inc. (NASDAQ:AVO) Q1 2025 Earnings Call Transcript March 10, 2025

Mission Produce, Inc. beats earnings expectations. Reported EPS is $0.1, expectations were $0.01.

Operator: Good afternoon, and welcome to the Mission Produce Fiscal First Quarter 2025 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 over to Jeff Sonnek, Investor Relations at ICR. Thank you, Jeff. You may begin.

Jeff Sonnek: Thank you and good afternoon. Today’s presentation will be hosted by Steve Barnard, Chief Executive Officer; and Bryan Giles, Chief Financial Officer. The company’s President and Chief Operating Officer, John Pawlowski is also on today’s call for participation during the Q&A session. 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. And with that, I’d now like to turn the call over to Steve Barnard, CEO. Steve, please go ahead.

Stephen Barnard: Thank you for joining us today. We’re pleased to deliver a strong start to fiscal 2025, achieving record first quarter revenue of $334.2 million, a 29% increase compared to the same period last year. This performance demonstrates our ability to successfully navigate a dynamic operating environment, where we experienced industry supply challenges in Mexico during a period of strong consumption. With the Mexican avocado season ramping up, our marketing and distribution segment is back in focus during the fiscal first quarter. We realized segment growth of 32% versus the prior year, reflecting a 5% increase in avocado volumes sold and a 25% increase in per unit avocado selling prices relative to the prior year period.

The combination of volume, growth during a period of heightened pricing clearly indicates the resiliency of consumer demand for the category, despite the broader impacts from the inflation that consumers continue to absorb. Our Blueberry segment also contributed nicely to our strong line performance with a 12% increase in revenue to $36.4 million. Blueberries are an exciting area for us and one that we continue to invest in. In fact, over 100 hectares of new plannings came online early last year, growing the total footprint of over 550 hectares, which positions us well in a category that continues to see growing consumer demand similar to avocados and mangoes. We see tremendous long-term growth in Blueberries as consumer preferences shift towards healthy, convenient snacking options and we’re strategically positioning ourselves to capitalize on this trend by expanding our acreage and investing in premium varietals that deliver superior flavor profiles and extended shelf life.

While our Mango program is still in its early stages, we’re seeing encouraging progress as we expand our footprint and grow our share in this high growth category that is significantly underrepresented in the North American market. We are in an ideal position to continue driving this category given our ability to enhance existing customer relationships as well as leverage our packing and distribution infrastructure. Similar to our approach with avocados, we see significant opportunity to further develop underserved mango markets by bringing greater consistency and quality to consumers, which we believe will drive increased consumption as well as perceived consumer value over time. While we generated top line growth, we experienced some normalization of our per unit avocado margins during the first quarter, which was anticipated.

The compression this quarter was specifically driven by unstable industry supply in Mexico, which began to materialize during the holidays and necessitated increased procurement through co-packers and spot market purchases to ensure we maintain appropriate service levels to meet our fruit size and volume commitments to customers. Per unit margin was also impacted by our strategy to grow our share in mangos as well as our Canadian facilities closures in the quarter as we optimized our distribution footprint in North America. These closures are part of an ongoing effort to enhance operational efficiency and should ultimately strengthen our long-term cost structure. I am pleased and proud of our team’s ability to manage the complexity of the supply challenges in Mexico and all of our other diverse countries of origin.

The team’s focus and commitment to driving results and delivering for our customers is unmatched in the industry. The dynamics we faced this quarter underscore precisely what we’ve spent the last 45 plus years building a durable and strategically diversified business model. The diversification encompasses two primary fronts. Number one, expanding our global sourcing footprint to include key growing geographies such as Peru, Colombia, Guatemala and among others to ensure reliable, year round supply. And number two, shifting into complementary food categories like Blueberries and Mangoes. When we face challenges in one sourcing region, our network provides us with the flexibility to pivot to alternative sources, while our category expansion allows us to leverage existing infrastructure and capabilities to drive efficiencies and create additional growth vectors.

This multidimensional approach is designed to provide greater financial consistency throughout seasonal transitions, while ensuring reliable year round supply for our customers. A prime example of this is improving our financial performance that can be seen in this quarter’s International Farming segment results. While not typically a material contributor in Q1, adjusted EBITDA for the segment improved $2.3 million year-over-year to positive $1.8 million. Though relatively small in the context of our overall results, the segment’s contribution demonstrates the positive influence of our diversification strategy on our fixed cost absorption within the farming operations. More specifically, we are seeing greater utilization of our Peru packing facility for Blueberries volume during what is traditionally a slower period ahead of the avocado harvest in the second half of the year.

This improved utilization of assets represents exactly the type of operational efficiency we aim to achieve across our entire organization. In closing, our first quarter results demonstrate the strategic value of our business model. Through our continued focus on operational excellence, prudent capital allocation and strategic growth initiatives, we’re well positioned to navigate shifting market dynamics, while delivering long-term value to our shareholders. Our vertically integrated operations and expanding global footprint give us unique advantages in securing consistent supply for our customers while our diversification across complementary fruit categories provides multiple evidence for sustainable growth. Although there is great uncertainty surrounding the tariff negotiations with our North American neighbors, these dynamics only serve to reinforce the value of our global strategy, which provides us with tools to mitigate potential impacts.

We remain excited about the opportunities ahead and we continue to strengthen our global leadership position. With that, I’ll pass the call over to our CFO, Bryan Giles, for his financial commentary.

Bryan Giles: Thank you, Steve, and good afternoon to everyone on the call. I’ll start with a review of our fiscal first 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 market conditions that we are seeing. Total revenue for the first quarter of fiscal 2025 increased 29% to $334.2 million, largely driven by growth in our Marketing & Distribution segment, where average per unit avocado selling prices increased 25% on a 5% increase in avocado volumes sold. Gross profit increased by $2.8 million to $31.5 million in the first quarter, driven by our International Farming segment, which benefited from increased packing and cooling service activity that correlated with higher blueberry production volumes.

These favorable results were partially offset by lower gross profit in our Marketing & Distribution segment, caused by lower per unit margins on fruit sold and costs associated with our Canadian facility closures during the quarter. Gross profit margin decreased 170 basis points to 9.4% of revenue. As a reminder, gross profit percentage fluctuates based upon per unit sales price levels in relation to per unit cost as profitability is primarily managed on a per unit basis. SG&A expense increased $1.5 million or 7% compared to the same period last year, primarily due to higher employee related costs, including statutory profit sharing and stock based compensation expense. Adjusted net income for the quarter was $7.1 million or $0.10 per diluted share compared to an adjusted net income of $6.7 million or $0.09 per diluted share last year.

Year-over-year growth was driven by improved non-operating results, including reduced interest expense attributed to a combination of lower interest rates and lower borrowings and increased equity income related to improved performance in our avocado distribution joint venture in China. Adjusted EBITDA was $17.7 million compared to $19.2 million last year, due primarily to lower per unit gross margins on fruit sold in our Marketing & Distribution and Blueberry segments. Turning now to the segments. Our Marketing & Distribution segment net sales increased 32% to $295.8 million for the quarter. Primarily due to the avocado pricing and volume dynamics I described previously. Segment adjusted EBITDA was $9.7 million compared to $11 million in the same period last year, as a result of lower gross profit driven primarily by lower per unit gross margins on fruits sold.

Per unit margins on avocado sold were negatively impacted by challenges in obtaining Mexican supply required to meet customer commitments during the quarter. In the first quarter, our International Farming segment results are typically focused on the provision of packing and processing services for our blueberry segment and for third party blueberry producers, though this will evolve over time as our operations develop in other areas such as Guatemala. With this seasonality in mind, total segment sales in our International Farming segment increased $3.4 million or 59% to $9.2 million compared to $5.8 million for the same period last year. Segment adjusted EBITDA increased $2.3 million to $1.8 million compared to negative $0.5 million for the same period last year.

The improved performance resulted from higher blueberry packing and cooling service revenues, which was supported by growth of our own Blueberries business. As Steve discussed in his remarks, we are pleased to see the results of improved operating leverage in what has traditionally been a smaller quarter for the segment. Net sales in the Blueberry segment increased 12% to $36.4 million compared to $32.5 million in the prior year period, driven by a 70% increase in blueberry volumes sold that was partially offset by a 33% decrease in average per unit selling prices. Higher blueberry volumes were driven by increased total acreage and yields from our own farms, while price decreases were driven by a normalization of the supply and demand environment this year, as compared to last year’s high pricing that was driven by lower supply following unfavorable regional weather conditions.

Adjusted EBITDA was $6.2 million compared to $8.7 million in the prior year period, primarily due to lower selling prices impacting per unit gross margins. Shifting to our financial position. Cash and cash equivalents were $40.1 million as of January 31st, 2025. Cash used in operating activities was $1.2 million for the first quarter ended January 31st, 2025, compared to cash provided by operating activities of $9.5 million for the same period last year. During the current year period, our working capital position was hindered by the impact of higher per unit price points. Higher prices had an unfavorable effect on both accounts receivable and inventory balances, compounding 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.

Increased productive acreage in our International Farming and Blueberry segments this year has led to further increases in growing crops inventory. Capital expenditures were $14.8 million for the three months ended January 31st, 2025, compared to $9.9 million last year and were attributed to avocado and blueberry farming related investments in Latin America and the construction of our Guatemala packhouse. Our projected CapEx budget for fiscal 2025 remains unchanged at $50 million to $55 million. As a reminder, this figure is approximately $10 million higher than we would have expected due to spend in our International Farming and Blueberry segments that rolled over from fiscal 2024, as a result of the timing of vendor payments and blueberry plant development.

Our overall trajectory of moderating capital spending remains intact as we complete these remaining projects through fiscal 2026, which we believe positions the business to continue generating meaningful free cash flow with debt paydown as our near term priority to further strengthen our balance sheet. In regards to our near-term outlook on the fundamental drivers of our operations, we are providing some context around our expectations for industry conditions. That said, these projections do not consider any potential influence from the ongoing tariff discussion. So please consider this as a base case scenario to help inform your modeling assumptions. Beginning with avocados, industry volumes in the fiscal 2025 second quarter are expected to be consistent with the prior year period.

Mexico volumes should taper off during the quarter as the industry harvest comes in lighter than initial expectations. However, California improving harvest should get off to a faster start than prior year based upon improved weather conditions, which should mitigate the impact on overall available volumes. At projected volume levels, pricing is expected to be higher on a year-over-year basis by approximately 5%, compared to the $1.59 per pound average experienced in the second quarter of fiscal 2024, indicative of continued strength in demand. Turning to Blueberries. The harvest timing of our Peruvian blueberry season this year is similar to the prior year with approximately 20% of the harvest to be sold through in the fiscal second quarter, which should translate to an increase in volumes sold of approximately 35% to 40%, when applied to a larger total harvest from our farms for the 2024, 2025 season.

Average sales prices are expected to decline sequentially, but be consistent with prices experienced in the second quarter of fiscal 2024. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A.

Q&A Session

Operator: Great, thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question here is from Ben Klieve from Lake Street Capital Markets. Please go ahead.

Ben Klieve: All right. Thanks for taking my questions. First, in the quarter itself, I’m wondering if you can help us a bit and elaborate on this dynamic where you had sourced from co-packers? Can you quantify kind of the degree to which you had to do this in the current quarter relative to normalized levels? And then have conditions approved quarter-to-date such that, that you’re able to secure inventory more directly or has the condition kind of sustained so far over the last six weeks?

Stephen Barnard: They’ve sustained over the last several weeks. The crop overall is down slightly in Mexico. And as Bryan said in his statements, the demand is up and volume is up a little bit also compared to the year ago. But we’re going to have to live through this for probably another month or so until we get other sources of supply like California and Peru on deck, which is right around the corner.

Bryan Giles: Hey, Ben. And I would also comment that, we kind of — as we transitioned into December, kind of early parts of the Mexico harvest season, I think everyone was expecting a bump in the overall industry crop this year. So I think, we were planning for volume increases as we move through the holidays and into January. I think what we’ve come to realize subsequent to that is that the overall industry harvest out of Mexico is unlikely to be as large as we’d initially expected. I think some of the behavior in terms of some of the commitments we’ve made to customers was driven around the need to move more volume. And then once we’ve made those commitments, we needed to go out and fulfill them. I think as we’ve moved forward beyond that, I think we have a better expectation now of what the overall Mexico harvest is going to look like.

And I think that is likely to enable us to avoid buying as much fruit kind of in the spot market and through co-packers as we did during that window. So I will say it’s not uncommon for us to use co-packers to fill specific needs on specific sizes of fruits or certain grades. So we do buy from them on a regular basis. I think the percentage of fruit though that we acquired via those means was much higher during the first quarter than what we would typically like to see.

Stephen Barnard: The other thing that affects it is the size of the fruit that was affected by El Nino or some weather phenomena a year ago. So the size, the average size is much smaller compared to history, which affects the overall tonnage.

Ben Klieve: Okay. Very good. I appreciate that from both of you. Regarding the working capital build, Bryan, you talked about the reasons for this in the first quarter. And I’m wondering the degree to which you have visibility of this unwinding in the second quarter or beyond and taking cash off the balance sheet given the buildup in the first quarter?

Bryan Giles: Yeah. Ben, this is normal, somewhat normal seasonality for our business. We generally have strains on working capital during the first half of our fiscal year and they generally unwind themselves during the second half of our fiscal year. I think maybe we didn’t see it quite as much last year, as we typically do where we actually had positive operating cash during the first quarter, but this is a very normal occurrence for us to see. I think it’s accentuated this year by the higher priced environment that we’re in. We do tend to have to pay our suppliers a little bit faster than we’re able to turn inventory in AR. So it certainly does have a bit of a negative impact. But as we move to the second half of the year, we would expect at a minimum as we move into harvesting our own fruit, selling fruit from our own farms down in Peru, that inventory balance is going to come down.

If price points stay at the levels that they’re at, it will likely continue to put some pressure on working capital from the standpoint of the prices that we pay for the fruit in Mexico. But I think just as we transition away from the Mexico harvest and into other countries of origin, that will have a favorable impact.

Ben Klieve: Okay, very good. And one more for me and then I’ll get back in queue around tariffs. I mean, obviously nobody knows. I’m not asking you guys to make any predictions here. What I’m curious about is the degree to which you’ve observed kind of supplier behavior changing at all, as this has become a variable, particularly kind of in the weeks leading up to the February 1st deadline, when the initial 25% tariffs were theoretically going to be implemented. Did you see any kind of changing behavior in late January before that date or in late February here before the early March threat re-emerged?

John Pawlowski: No. Ben, this is John. Really, there was a little bit more shakeup and movement at the March announcement than the February announcement. February, no one was sure if anything would go through or not. And so it was really business as usual. The March conversation became a little bit more choppy in regards to suppliers having more conversations with us and then vice versa, us having more conversation with our customers on what the impact would be. We had the whole industry experienced three days of the tariff being in place. And there were some, I would say, challenges or bumps at the Board in regards to things crossing and things not crossing, et cetera. But overall, we felt pretty good about supply being consistent and us being able to deliver against the requirements that we had with our customers. So we didn’t see any challenge in regards to either: A, getting fruit. B, moving fruit across or C, delivering that fruit to our customers.

Ben Klieve: Got it. Very good. Well, best of luck to everybody navigating this environment. Thanks for taking my questions, and I’ll get back in queue.

Stephen Barnard: Thank you, Ben.

Operator: [Operator Instructions] And if there are no further comments, I’d like to turn the floor back to management for any closing comments.

Stephen Barnard: Thank you for your interest in Mission Produce, and we look forward to speaking with you again next quarter.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you again for your participation.