Good afternoon, and welcome to the Mission Produce Fiscal Third Quarter 2021 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. Sir, please go ahead.

Thank you. 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 the 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. I would now like to turn the call over to Steve Barnard, CEO.

Thank you for joining us for our fiscal 2021 third quarter earnings call. We are pleased with our fiscal third quarter performance amid intense industry volatility that was brought about by Mexico’s delayed timing on the transitional harvest of the new crop. Our team did an excellent job navigating this complex period and produced per-unit margins within the range of our expectations, though toward the lower end as a result of the Mexican pricing volatility. Mission’s global sourcing and distribution network, along with our owned production in Peru proved to be a significant advantage to us during the quarter, with nearly 45% of our third quarter U.S. distributed volume being sourced outside of Mexico, which we believe is significantly greater than that of the industry. Our vertical integration was the key in our ability to significantly mitigate the influences of Mexico’s unpredictability, while also positioning us to drive an 18% increase in our distributed volume to our export markets versus the prior year. Our ability to stay nimble and manage disruptions such as the unpredictable Mexican harvest cadence in the third quarter, really demonstrates the value of our cohesive, vertically integrated sourcing and distribution network. Moreover, the disruption allowed us the opportunity to demonstrate the value we provide to our customers worldwide with the consistency and quality of our Peruvian program. The consistency that we bring is critical in furthering our customer relationships, and we are taking full advantage of the situation to remind potential customers of the value that we can bring to their operations to a vertically integrated avocado program. We continue to look ahead toward the future, both domestically and abroad, to ensure that we are prepared to meet the growing global demand that’s been driven by powerful consumption trends. And as we’ve shared, our latest facility…

Thank you, Steve, and good afternoon to everyone on the call. I’ll start with a brief review of our fiscal third quarter 2021 performance ended July 31, 2021, and touch on some of the drivers within our two operating segments. Then, I’ll provide a snapshot of our strong financial position and conclude with some thoughts around our outlook for the balance of the fiscal year. Total third quarter revenue increased 4% to $246.8 million from $236.4 million in the prior year period. The increase in revenue was driven by a 2% increase in volume and a 2% increase in price. I’ll touch on the price volume dynamics in a moment, but I would like to reiterate that our business is managed to volume targets, as we leverage our global presence to drive share of fresh avocados to our retail and food service customers. While prices fluctuate given the influences of global supply and demand, pricing is not something Mission can control or forecast with any degree of certainty. In the third quarter, the industry experienced excessive volatility in spot pricing as a result of a sporadic harvest cadence in Mexico, with the regular starts and stops, which exacerbated the usual market dynamics that dictate pricing. As we’ve noted previously, our leadership position as a global value-added marketer and distributor of fresh avocados tends to insulate our gross profits, as these sought-after value-added services such as ripening, bagging and distribution are largely unaffected by price changes. However, excessive pricing volatility can be problematic as we balance the inventory we are buying in the spot market against global customer commitments. As a result, we realized some temporary compression in our per-unit margins, but I’d note that we were still able to achieve levels that were near the bottom end of our targeted…

Thank you. [Operator Instructions] Our first question is from Bryan Spillane of Bank of America. Please proceed with your question.

Hi. Thank you, operator. And good afternoon, guys. So, just a couple of questions, I guess, related to first, on the Mexican crop and supply. I guess, by the comments, it sort of sounded like it’s still a pressure early in the quarter, but I guess, by saying earlier in the quarter, do you expect that that should begin to alleviate as you exit the fourth quarter. So, just trying to get an understanding of timing wise, is the worst of this past due, or would you expect the supply constraints to continue all the way through and as you’re exiting 4Q?

Well, I think, Bryan, if we look at history, it goes in cycles, and they tend to alternate every other year. So, looking back and estimating the future, I would say you’re right. It’s due to change just because we’re coming into a new flower and they tend to alternate. And, if it stays the way it is today, it’s going to be a tough road, but it never does.

Yes. Bryan, I’ll elaborate on that a little bit. Yes, we’re still sowing through kind of the off-bloom crop at this point. We believe that we’ll start harvesting the regular bloom within the next week or two. So, we’re kind of right at that transition point. Typically, there tends to be a lot of volume that comes into the market at that point in time, and we’re expecting that that will be the case again this year. And that at that point, the supply dynamics will ease up a bit. So, certainly, we got off -- I think some of the challenges we saw at the end of Q2 -- or I’m sorry, Q3, continued through August, but we do expect improvement as we move through the latter half of the quarter.

Okay. That’s helpful. And then, the second is just in terms of cost pressures. So, beyond supply, just thinking about things like freight costs, availability of like shipping containers, port congestion, just the moving of stuff for lack of a better way to put it, which has really been a challenge for a lot of companies or most companies. Can you just give us a little bit more color on just the dynamic there? And again, same idea, is it kind of fully baked into the base? Is it getting worse? Just trying to getting an understanding of that as well.

Well, let’s just take one at a time. The freight deal is still an issue. Like you read all these journals and a lot of these containers are stuck in China or somewhere in Asia, trying to get out of there. Fortunately, starting Mexico, we have a lot less freight compared to, say, out of Peru, which is pretty much mostly freight or ocean freight. So, that will ease up the pressure on us a little bit. I don’t think it’s going to change the shipping side of it, but that will help here, because most of it’ll be by truck into the U.S. or Canada through our Laredo facility, which should help, too. So, that side of it. But yes, you’re going to see inflation on everything from materials to labor. I mean, this labor thing, not necessarily in Mexico, but here, and I just read today in Chile, they’ve got the same problem due to the fact they’re getting paid to stay home and no one wants to work. So, we’ve got to get over that and get back to work as a country, not just us.

Yes. I’ll elaborate even a little further on those overhead costs. I think certainly, the largest component of our cost of goods sold, Bryan, is the purchase of third-party fruit. I think we kind of understand the dynamics that are at play there, aren’t really inflationary in nature. They’re more of a supply-demand issue. The second largest item is our transportation cost. And I think to Steve’s point, we came through the preseason with a heavy slant towards ocean cargo. I think, we negotiated terms early on. And with our scale that we have, they were actually fairly favorable this year. So, I don’t -- we didn’t really experience big increases in ocean cargo cost year-over-year. And just with our volume itself ramping up as well, it gave us more leverage with the carriers. I think, on the land transport, which, to Steve’s point, is significant when we transition to the Mexico season. We’re operating at a level this year that is quite a bit higher than a year ago at this time, but it seems to be pretty stable right now. We have not seen big increases over the last two to three months. So, certainly, I can’t predict what’s going to happen next, but it feels as if that market has stabilized a bit. If you go behind that, labor would be the next one. And certainly, with the majority of our labor located in Mexico and in Peru, we don’t have the same dynamics at play, maybe to the same extent that somebody who’s operating in the U.S. does. But that being said, there has been changes in the laws down in Peru that have increased wages that we’ve dealt with over the course of this year, and we’ve kind of managed that. That’s kind of part of some of the higher costs that we’ve experienced in our farming operations. But, I don’t think we -- we haven’t really had an issue yet where it’s impacted our ability to deliver product to our customers.

Our next question is from Tom Palmer of JP Morgan. Please state your question.

Hey. Good afternoon. Thanks for the questions. I wanted to ask just first on the realized pricing side. It seems like you exited last quarter and the update you gave for May was that pricing had really strengthened. It seems like for the quarter, a little bit more stagnant relative to last quarter, despite calling out some supply constraints that I thought would have showed better flow-through plus the cost environment that you’re facing. So, just kind of wondering what limited that pricing, and as we look at the fourth quarter, how you’re thinking about that?

Well, again, it goes up back to the supply. I think, we have to keep in mind, too, at the same time, consumption continues to grow in this category globally, not just here in the U.S., but everywhere, high single digits to low double digits, I know both here and in the European Union. So, on top of that, these avocados are alternate bearing. In Mexico, there’s three to four different flowers you deal with. And they tend to sometimes overlap when you have an abundance and then sometimes they’re delayed like the situation we’re in right now. So, I guess, the -- what I like to tell people around here, when you have this thing figured out, then you’re in real trouble, because you don’t. So, you plan the game with your head up, be vertically integrated like we are around the world where we have other options other than just one source such as Mexico or California. And it tends to mitigate the situation. We’re not quite where we want to be yet on the supply side of it, timing-wise, but we’ve got, as we know, operations in Guatemala, Colombia, South Africa is coming. So, we’re working hard to mitigate that issue and take the risk out of it.

Hey Tom, I’ll kind of give a few more details on the numbers as well. When we ran in Q2, our average per pound price for the quarter was $1.42. I think that was a period where we were building up to where we kind of peaked in pricing at the end of the quarter, which led to that $1.42 average, coming off -- having an average of $1.04 during the first quarter of the year. What we saw leading into Q3 is for the first month, we maintained pricing during the month of May at fairly close to those levels. And then, we saw it come off a bit during June and July to where we ran at an average of $1.43 again for the quarter as a whole. I think that the size curve that came out of Mexico does come into play here. When we’re getting a lot of smaller fruit out of the field, it does tend to sell for a lower per pound price than larger fruit does. And we did see kind of -- that kind of shift in the mix towards smaller fruit during the quarter. So, that does kind of put a cap on where pricing can go. As we look to Q4, I think the way we’ve modeled internally, I think we’re seeing pricing for the quarter as a whole remaining relatively stable with where we ran in Q3, probably somewhere around $1.40 to $1.42 a pound. I would say that we came in to August with pricing a little bit higher than what we were running in, as we came out of July. It feels like we’re going to peak in September. And then, the expectation is that when the new crop comes on board and has a meaningful impact in October that prices will start to come back off again.

Great. Thank you for all that detail. And to follow up, I guess, on the Peru harvest. Just any split on how we should think about volumes in the third quarter relative to the fourth quarter?

I think, what we can say is, we’re still holding to the number that we’re projecting for the year as a whole. We are expecting a heavier portion of the fruit in the fourth quarter this year, on a percentage basis, heavier than what we’ve seen in prior periods. So, yes, I think that somewhere in the neighborhood of 60% plus of the fruit will be sold through during Q4 this year.

[Operator Instructions] Our next question is from Ben Bienvenu of Stephens. Please state your question.

Hey. Thanks. Good afternoon. I want to follow up on the comments that you provided on the Laredo facility. I think you said it was about a 50 basis-point headwind to margins in the quarter. Can you talk about the duration of that headwind, the ramp to maturity? And should we be thinking of that as a net positive to margins in the next fiscal year, or is it going to take longer than that? Just give us some sense, if you can, of the ramp of that facility.

Well, I’ll have Bryan give you the numbers, but again, it’s all volume-based. We aren’t anywhere close to the volume that we will see in, say, January going through Laredo, and it will continue to start going up, probably in the next couple of weeks and peak in January and then pretty much maintain until it starts slowing down in late spring. So, that whole thing is based off of volume. And with these prices, you can tell the volume isn’t there today, but it’s out there. It’s just delayed in harvester. It’s a different flower this year, so to speak.

Yes. Ben, I think, as we went through Q3, we know that Q3 tends to be our low point for importing fruit from Mexico. But, even when Mexico is at its low point, it still makes up more than 50% of the product that we sell into the U.S. And for most other marketers, it’s more than that. So, we knew that volumes running through Laredo would be lower in Q3, but we also knew that that would give us a chance to kind of work out any operational kinks that were required when things weren’t quite as stressful. I think, as we build -- move into times of the year where volume is higher, those facilities, it absolutely will have less of an impact on margin. That being said, we’re running at volumes that were relatively flat in the North American market, as we’ve introduced a substantial amount of new capacity in Laredo, during the third quarter. I think what’s going to need to happen over time is that we continue to see this year-over-year growth to absorb that capacity that we’ve introduced. It’s tough for me to know exactly when it will be profitable on a standalone basis, only looking at kind of operational dynamics. But, I think what we can say in the short term is that we’re not running significantly more volume through today than we were before Laredo opened. We’ve kind of redistributed where our fruits coming out today, and there’s likely some ability to optimize margin as a result of that. But, I think, to truly get the throughput we need from that facility, we’re going to need to continue to see growth over time. And again, it’s just an example of the investments that Mission is willing to make, because to position ourselves well for the future. This wasn’t going to maximize short-term profits by bringing a facility of this size up and running, but we certainly feel very strongly that it’s going to keep us in the driver seat for the long haul.

Yes. Okay, makes perfect sense. And then, if I could ask a question on SG&A expense. I know in the short term, the gross margins can be variable, based on price swings in the market. The SG&A was up a lot year-over-year. I know there’s some just strange comparisons because of the IPO. But, could you help us think about what sort of a baseline SG&A is and what a reasonable rate of growth is going forward, just so that we can try to calibrate our margins relative to reality?

Yes. So, if we look at Q3 standalone, we saw a $3.7 million increase in SG&A, of which more than 50% of that we believe is attributed to public company costs. While it’s tough to estimate how much of that, it’s difficult for me to say that all of it is going to continue at that $1.8 million level over time. I think, we do know that there are certain items like putting a SOX and internal audit program in place is going to be more expensive in year one than it’s going to be in year two and year three. We know the D&O insurance, while we’re inside the 1933 Act is going to be more in year one, two and three than it’s going to be in year four. So, we know that there are certain things out there that are going to come off over time. We just don’t know the exact amount or the exact timing that they will. But if I had to estimate, of that $1.8 million, I would say at least probably $1 million of it is ongoing public company costs that are not going to go away in the future. That’s probably a new baseline that we’re measuring against. And of the other $800,000, I would say that it would probably come off over a multiyear period, difficult to estimate how much per year. I’d say, if you look separate from the public company costs at our SG&A, there are components to SG&A like selling that our investments into the business in the long haul. And those things are -- they’re going to grow at a rate that’s likely a little higher than inflation over time, because we are continuing to invest in our strategy, whether it be something like mangoes, as we moved into and staffing that up over the course of this year, or as we continue to move forward with our plans. We’ve said that we have plans to grow internationally, whether that be in Europe and Asia, and we’re going to add resources over time in those areas to support it. So, I don’t think we’re going to be your typical stagnant SG&A where it’s just a fixed cost. It’s growing at an inflationary rate. I think that there is going to be growth -- growth in that, that’s geared around investment in the business for the long haul.

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 conference call back over to management for any closing remarks.

Well, we see a great opportunity ahead, as we always do. The consumption of avocados continues to grow globally. We continue to invest in our business and the industry’s business, not only on the sourcing side of it, but diversify there, so we don’t get into supply issues. But, the overall consumption around the world, there’s a huge opportunity ahead, and we plan on being a major player pretty much everywhere. So, stay tuned.

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