Mission Produce, Inc. (NASDAQ:AVO) Q2 2023 Earnings Call Transcript

Mission Produce, Inc. (NASDAQ:AVO) Q2 2023 Earnings Call Transcript June 8, 2023

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

Operator: Good afternoon and welcome to the Mission Produce Fiscal Second Quarter 2023 Conference Call. [Operator Instructions] 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. Sir, please go ahead.

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 comments during today’s call and the accompanying presentation contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, are considered forward-looking statements. These statements are based on management’s current expectations and beliefs as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements.

Some of these risks and uncertainties are identified and discussed in the company’s filings with the SEC. We’ll also refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release, which can be found on our Investor Relations website, investors.missionproduce.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. With that, I’d now like to turn the call over to Steve Barnard, CEO. Steve, go ahead.

Steve Barnard: Thank you for joining us for our fiscal 2023 second quarter’s earnings call. We delivered a solid second quarter with revenue of $221.1 million and adjusted EBITDA of $7.6 million, driven by a 19% increase in sales volumes. These metrics also demonstrate a sequential improvement in both volumes and per unit margins relative to fiscal first quarter. We realized increased market stability in the second quarter, which was a continuation of the conditions that returned to the industry in the first quarter earlier this fiscal year. We saw fairly consistent pricing through the Mexican season, and those conditions have continued into our current fiscal third quarter as well. Notably, this is a departure from the prior year where low industry volumes and inconsistent harvest timing led to significant price volatility.

This prompted a swift and disproportionate increase in pricing to record levels, which in turn led to per box margins that were toward the high end of our normal historic ranges. While this year’s stable market environment doesn’t afford us the same opportunity to drive per unit margins in the short term, the more rational pricing environment is advantageous for long-term consumption growth and allows Mission to leverage our global distribution footprint to penetrate new growth markets. As we celebrate our 40th anniversary this year, we continue to demonstrate our world-class vertically integrated model of sourcing, producing and distributing Hass avocados and other produce differentiates us from the competitors. Our focus remains on driving consumption growth globally by bringing consistent year-round diversified sourcing capabilities to new growth markets.

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On that note, we are excited about the opening of our forward distribution center in the UK in April. This facility is strategically located with direct access to major international ports and transportation networks and will strengthen Mission expanding international footprint and optimize product distribution to our growing European customer base with direct access to our global source network. We are very excited about this facility. And although it is still early, we are pleased with the progress we are making in the UK and are committed to further developing our efficient and cost-effective model in this important long-term growth region. Our ability to support these global growth markets is bolstered by the vertical integration of our own farming operations in Peru.

As we enter the Peruvian season and our owned production comes online in the second half of the fiscal year, Mission is very well positioned. Despite the lower pricing, the combination of easing inflationary pressures relative to prior year and higher distribution volumes born from our own production provides us the basis to continue improving our per unit margins on a sequential basis and support the seasonal step-up in adjusted EBITDA in the second half of the fiscal year. With that, I’ll pass the call over to our CFO, Bryan Giles, for his financial commentary.

Bryan Giles: Thank you, Steve, and good afternoon to everyone on the call. I’ll start with a brief review of our fiscal second quarter performance and touch on some of the drivers within our three reportable segments. Then I’ll provide a snapshot of our financial position and conclude with some thoughts on the current industry conditions that we are seeing. Total revenue for the second quarter of fiscal 2023 was $221.1 million, a 20% decrease compared to the same period last year, driven by lower per unit avocado sales pricing. Our average per unit sales pricing decreased 36% during the quarter. The impact of which was partially offset by a 19% increase in avocado volumes sold. Both the higher volume and lower pricing were driven by higher industry supply out of Mexico relative to the limited supply in the same period last year that drove pricing to near-record levels.

Gross profit decreased by $1.7 million to $18.1 million in the second quarter, while gross profit percentage increased 110 basis points to 8.2% of revenue. The decrease was driven by lower per unit margins on avocado sales, which was substantially offset by the higher volumes noted above. Per unit margins were negatively impacted by the mix of volume from source regions. Current year volumes were heavily concentrated in Mexico source fruit, whereas the prior year period was advantaged by the positive influence from an accelerated California harvest brought about by high market prices. While per box margins did not match the elevated levels from the prior year, we experienced meaningful sequential improvement versus fiscal first quarter and ended the quarter at a high point.

SG&A expense increased $0.6 million or 3% compared to the same period last year, primarily due to the consolidation of expenses from the Blueberry segment. Normalizing for this accounting dynamic, our core SG&A expenses were consistent with the prior year period, which is a positive signal amid this inflationary environment. Adjusted net income was $0.5 million or $0.01 per diluted share compared to $2.6 million or $0.04 per diluted share for the same period last year. Adjusted EBITDA was $7.6 million compared to $9.2 million for the same period last year. The decreases in both of these figures were primarily due to lower gross profit attributed to lower per unit margins. Turning to our segments. Our Marketing and Distribution segment net sales decreased 21% to $215.3 million for the quarter, and segment adjusted EBITDA decreased $3.1 million or 26% to $8.6 million.

Net sales and adjusted EBITDA declines were due to the avocado pricing and volume dynamics previously described. Our International Farming segment operates orchards from which substantially all free produced is sold to our Marketing and Distribution segment. Production from this segment is currently derived from Peru. The operations are under development in other areas of Latin America. Segment revenues and EBITDA are concentrated in the second half of our fiscal year in alignment with the Peruvian avocado harvest season, which typically runs from April through August of each year. The segment’s contributions in the first half of our fiscal year tend to be smaller on an absolute and relative basis. With this in mind, total segment sales in the International Farming segment were $6 million and decreased by 14% compared to the same period last year, due primarily to lower packet and cooling service revenue.

Segment adjusted EBITDA improved $1.4 million to negative $1.1 million, due primarily to the impact of lower losses generated at our early-stage mango farms during the quarter. Activity in our Blueberry segment is concentrated in the first and fourth quarters of our fiscal year in alignment with the Peruvian blueberry harvest season, which typically runs from July through January. As a result, for the second quarter ended April, our Blueberry segment results were negligible with net sales of $1.7 million and segment adjusted EBITDA of $0.1 million. Shifting to our financial position. Cash and cash equivalents were $20.9 million as of April 30, 2023, compared to $52.8 million at 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 source regions.

In addition, the company is building its growing crops inventory in its International Farming segment during the first half of the year for ultimate harvest and sale that will occur during the second half of the fiscal year. While these increases in working capital can cause operating cash flows to be unfavorable in individual quarters, it is not indicative of operating cash performance that management expects to realize for the full year. That said net cash used in operating activities was $26.1 million for the 6 months ended April 30, 2023, compared to $37 million for the same period last year. The improvement was primarily driven by the effect of better operating performance, net of non-cash items, combined with favorable net changes in working capital.

During the current year period, our working capital position benefited from the impact of relatively stable per unit price points on Mexican fruit. Stable prices limited the movement in accounts receivable, inventory and grower payable balances, whereas prior year working capital movement was negatively impacted by the rising price environment that we experienced during the first half of the year. Capital expenditures were $34.9 million for the 6 months ended April 30, 2023, compared to $29.1 million last year. Current year expenditures include $9.1 million of spend associated with irrigation installation and early-stage plant cultivation in our Blueberry segment, which was not consolidated in the prior year. Capital expenditures in both years included avocado orchard development, preproduction orchard maintenance and land improvements in Peru and Guatemala.

In addition, fiscal 2023 capital expenditures included construction costs on our new UK distribution facility that opened in April of this year. For the full year fiscal 2023, we continue to expect CapEx related to our core avocado business to be lower than fiscal 2022. That being said, we will incur additional costs as we ramp up development of the Moruga blueberries project in the Olmos region of Peru. In terms of our near-term outlook, we are providing some context around our expectations for industry conditions to help inform your modeling assumptions. Pricing is expected to be consistent on a sequential basis, but lower on a year-over-year basis by approximately 35% to 40% compared to the $2.03 per pound average experienced in third quarter of fiscal 2022.

The industry continues to expect volumes to be approximately 20% higher in the fiscal 2023 third quarter versus the prior year period, primarily due to the combination of California’s harvest shifting to the third quarter versus the second quarter last year, a strong Peruvian harvest outlook and a larger off blue Mexican harvest. In terms of our own farm production in Peru, we anticipate volumes to be in the range of 125 million to 135 million pounds for the 2023 harvest season. We expect sales of our own fruit to be more heavily weighted to the fiscal fourth quarter, which should have a corresponding effect on the cadence of our adjusted EBITDA generation. Note that while the inflationary impact on our cost structure has peaked, those costs remain at elevated levels and remain a headwind to driving higher per unit margins and adjusted EBITDA assuming pricing remains consistent with levels realized in the fiscal first half.

That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Benjamin Bienvenu with Stephens, Inc. Please proceed with your question.

Benjamin Bienvenu: Hi, guys. Thanks a lot for taking my questions.

Steve Barnard: Hi, no problem, Ben. Good talking to you.

Benjamin Bienvenu: So I want to first start with the volume growth story. Obviously, building momentum here in the year, you cited the strength in volumes in the industry having returned. Your 19% volume growth in the quarter very strong, slightly below the industry growth that we saw. Can you talk about the puts and takes on kind of shoring up that differential? And then as you look forward, you talked about the industry expectation for growth. Can you talk a little bit about your relative performance to that industry growth?

Bryan Giles: Yes, Ben. I think that we looked at the supply that came on to the second quarter. Again, very Mexico-centric as compared to the prior year, we do know that it’s competitive, trying to obtain access to that fruit in Mexico, particularly when it’s the only country of origin that has fruit available. We feel, particularly with our U.S., like our retail market base, which is our core customer base, that we’ve been building share over the last year, certainly higher than we were a year ago at this point in time. And that’s really where we focus our primary attention to. I think we believe that, all in all, we’ve grown in tandem with the industry. Certainly, as we transition to the second half of the year, we’re going to have sources from Peru, from California and some of our export markets will then grow more significantly as we have access to those countries of origin.

But I think in general, we’re pretty pleased with the growth rates that we’ve seen. And I think within our core customer base, we feel like that we’ve either held or we’ve built share relative to where we’ve been historically.

Steve Barnard: Especially with some of the export markets, Europe in particular, and China, the numbers are way up compared to a year ago.

Benjamin Bienvenu: Got it. Okay. And then if I could just talk a little bit about the margins, you talked about some lingering elevated costs across your supply chain over the last year. And at the same time, you’ve had lower industry volumes that have pressured your fixed cost absorption of the business. Can you talk a little bit about the progress that you’re seeing there and fixed cost absorption improvements as volume improves? And then what success are you having in maybe passing along some of those more permanent costs into higher pricing to customers?

Steve Barnard: Well, it – one of the good things on the costs that are going down, especially are the ocean freight, they are down levels of a couple of years ago, which is substantially improved. But I think when you have a crop like this, where we have a big Mexican crop, big Peruvian crop, California is pretty stable, you see consumption growth with lower prices like this. And you’ll really notice it the year after when you have a slightly less size of a crop and the prices historically, and I’m not saying they are going to happen this next year, but you’ll usually see a step up as you go along in value. So it’s like climbing a ledge, you get to the ledge and you regroup and then climb again, and that’s what historically has happened, and I don’t think it will change going on down the road here in the next year or so.