Good afternoon and welcome to the Mission Produce Fiscal Second Quarter 2022 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 call – 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 the 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.

Thank you for joining us for our fiscal 2022 second quarter earnings call. I'm pleased with our fiscal second quarter performance, which demonstrated our ability to get the business back on track quickly following the temporary operational challenges associated with our ERP implementation. Total revenue for the second quarter of fiscal 2022 increased 18% to $278.1 million, and we generated $9.2 million in adjusted EBITDA. Revenue growth was driven by a continued strong pricing environment that is being supported by resilient demand, amid lower industry supply. More importantly, however, it was our ability to drive a recovery of in per box margins, which have returned to the high end of normal historical ranges. From a supply perspective, the ongoing inconsistency of Mexican supply continued during the fiscal second quarter. The industry continued to experience challenges with abnormal grading and sizing of harvested fruit. For context, approximately 76% of the U.S. distributed volume was Mexican sourced fruit in the second quarter. We utilize alternate sources to fill demand, which were primarily focused on California, which produced a larger crop this year as well as production from Colombia and Chile. While Mission's global footprint provides sourcing advantages relative to the industry as a whole, there are not enough ample sources of fruit available at this time of year to meaningfully offset the impact of the Mexican supply shortages. This is an example of why Mission has been proactive in investing in vertically integrated global supply sources to fill these supply gaps and reduce industry volatility. The backdrop of constrained supply coupled with consistent demand continued to create sustained upward pressure on pricing through the first half of this fiscal year, where prices were approximately 50% higher versus the prior year. Despite these higher prices, demand in the core U.S. markets have proven…

Thank you, Steve. And good afternoon to everyone on the call. I'll start with a brief review of our fiscal second quarter performance ended April 30, 2022, and touch on some of the drivers within our two operating segments. Then I'll provide a snapshot of our financial position and conclude with some thoughts on some of the current industry conditions that we are seeing. Total revenue for the second quarter of fiscal 2022 increased 18% to $278.1 million as compared to $234.7 million for the same period last year. Growth was driven by a 44% increase in average per unit avocado sales prices due to lower industry supply out of Mexico, following a smaller Mexican harvest, as well as inflationary pressures. Partially offsetting price gains was a 19% decrease in avocado volume sold, which again was primarily driven by the smaller industry harvest. Second quarter gross profit decreased $7.3 million or 27% compared to the same period last year to $19.8 million. And gross profit percentage decreased 440 basis points to 7.1% of revenue. The decreases were primarily driven by the impact of lower avocado volume sold in our Marketing and Distribution segment and its related impact on fixed cost absorption. In addition, we experienced gross profit decreases in the International Farming segment due to the timing of cost incurred and impact of pricing at early-stage mango farms. The lower gross profit percentage was driven by higher per-unit sales prices. Margin is primarily managed on a per-unit basis in our Marketing & Distribution segment, which can lead to significant movement in gross profit percentage when sales prices fluctuate. SG&A expense for the second quarter increased $2.4 million to $18.7 million due primarily to non-capitalizable costs associated with the implementation of our new ERP system in our Marketing and Distribution segment.…

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

Hi guys, Jim Salera stepped in for Ben today. If we could ask a couple questions on the supply environment, so as the new supply comes online from Peru and California, can you maybe talk about the match up with pricing? Is that going to be enough to alleviate prices in the third quarter or is that something that doesn’t really get to fully satisfy the demand until more into the fourth quarter?

I would say at the earliest it’ll be the end of the third quarter, primarily in the fourth quarter. Mexico really won’t get started from what we can tell until probably the second or third week of July. And by the time it gets in the system, you’re looking at realistically, probably the August 1 or so. Peru could affect that to some degree, but the demand is pretty good. So I would think it’ll have to take Mexico to change the thing dramatically.

Okay. Yes, on the supply – sorry, go ahead.

I was just going to say the one thing we didn’t have in Peru that we will have in Q3 is some meaningful Peruvian volume. So I think while volume will be up sequentially, it’ll still be down year-over-year. I’d expect a higher pricing environment than we saw a year ago at this time, but should start to trend lower from what we’ve seen over the last few months.

Perfect. I was just going to ask in terms of the reliability of the supply, specifically, the food and health itself in Peru, in California versus what you guys have been seeing in Mexico. Is there any concerning around that?

Well, Peru’s got a pretty good supply this year. What we’re bringing in here is mostly contracted, but there will be more supplies coming is the weeks go on. They’re pretty much getting going full blast down there now, but by the time it gets up here, it’ll be three or four weeks from now. But that’ll help. California’s really peaked where it is today on volume. It will start slowing down here probably towards the end of the month, not stopping, but slowing down and then Mexico from what we know they’re going to start with new crop and they say early July, but it appears like it could be delayed a little bit.

Okay. And then if I could sneak in one more question on the demand side, have you guys seen any consumer demand, I’ll say like a price umbrella where once the fruit prices hit a certain point, they either swap out of the category or the volume sees decrement not related to supply, but just related to consumer pricing power specifically maybe at some of the QSR restaurants at Chipotle.

Well, it’s out there. I think the number keeps – the tide keeps rising from what we’re saying. I mean, with these prices, the industry’s still moving 55 million pounds a week or so between all sources compared to this situation years ago, the stability is really impressive on what’s happening. I mean, 55 million pounds a week even five to seven years ago, we would not be seeing these prices. So I think the overall category is very strong. There’s a limit. We just don’t know where it is yet. It keeps moving.

Yes. I mean, I would say that, this is a pretty good example of the laws of supply and demand at work. I mean, as supply decreases, price increases correspondingly until those lines intersect. And I think that’s what we’ve seen happen. I think the demand curve is proven to be steeper particularly in the U.S. market than maybe people had thought. I mean, with pricing rising at a much faster rate or much faster rate than volume is declined. I think we view that as a positive, that demand is strong out there. We certainly don’t want it to remain in this environment for an extended period of time, because then I believe that there could be concerns over long-term. How it could impact consumption over the long haul. But I don’t believe over the short-term that’s going to have a meaningful impact. Again, the hope is get volume back on track relatively soon. See some alleviation on where the price is at today. And I think what we will be happy with the market that – the market at that point.

Okay, great. If I could sneak in one more question on the inflation front, just anything that you guys are seeing that might lead to, I’ll say it, if not return to normal, at least the sequential slowing in kind of the inflation rate? Or is it, this is a step up that’s pretty much locked in and this is the normal moving forward.

I think some of it’s going to come back. I mean, when we look at – one of the things that’s going to probably have a more meaningful impact the second half of the year is the inflation on our farming product. I think that things around ocean transport much higher than what it was last year at this time, some of the controlled atmosphere containers we’re seeing costs that are close to double what we experienced in last year’s market. I don’t think those are going to remain at that level. I think that the capacity constraints will get resolved over time. Hopefully fuel prices will settle in at a lower level and those will come back. I think some of the other things, when we look at our farming operations with fertilizers, other types of raw materials that go into the crop; we’ve seen inflationary pressures there as well. Those may stick a little bit longer. I think it’s more difficult. I think that may have a little more to do with some of the other things that are at play in the world right now. But I think we’re hopeful that at a minimum that they stabilize if not revert over time.

Perfect. Thanks for the color guys. I’ll pass it along.

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

Hi and thanks for the questions. Maybe first just check in on the Peru harvest. I guess, we’re getting to the point where you’re starting to get some visibility on supply. It sounds like you’re counting on that to make up some of the shortfall from other regions like Mexico. But maybe a little more specific, I mean, are you expecting the harvest to be larger than last year? Just anything on the size that we should expect from your company-owned farming operations.

Yes. Our particular crop Tom is the largest we’ve ever had just because the trees are getting bigger and we continue to plant year after year in different locations targeting specific harvest periods. But yes, we’re going to have the most we’ve ever had by, I don’t know, 5% or 10% probably increase that is going to be spread around the world. But most of it will come to the U.S., which will help build the supply for the offsets from California and Mexico. So we’re in a great position and leading that space as far as being vertically integrated around the world.

Great to hear. And then switching gears a little bit. You’d mentioned per-box margins back to the high end of historic ranges. I just wanted to make sure I understood what this meant because you also noted some added costs, right? You’ve got the – I think shrinks probably still a little bit high, you’ve got freight, fixed-cost to leverages as Laredo ramps up. So when you talk about per-box margins is that an all in number when we look for instance at the Marketing and Distribution segment, or is that before considering some of these maybe costs that are spread across the volume base?

Thanks Tom. Good Tom. It’s an all in number that we’re referring to. So you could argue that with the fact that we are carrying higher costs in certain areas that the margin that we’re making on the fruit is even better than it’s been historically, because we’re coming up in with a blended rate that’s at the high end despite those pressures. I think that we’ve told people in the past a goal of somewhere between $3.50 to $4 a box margin. That’s where we try to operate. And yes, we came out of a quarter where we were operating kind of just above the high end of that. I think as we move forward, our goal is to kind of stay within that range. I don’t see anything in the near term that we’re looking at right now that would cause us to think that, that that’s not achievable.

Great. Thank you.

Thank you. Our next question is from Bryan Spillane with Bank of America. Please proceed with your question.

Hey thanks operator. Good afternoon guys. Maybe just a follow-up on Tom’s question and we’ve fielded this a few times, just getting back to a normalized unit profit or profit per box. Just – in terms of just the most important driver to that, is it really just going to come down to having supply and supply coming from the most optimal places? So, we’re kind of really going to be looking at what the harvest is like in Mexico, I guess, next year? Or are there other that we should be thinking about? But just simplistically, like what’s the biggest driver, I guess, to kind of get us back to those historic norms?

Well, supply, having enough supply to meet demand, demand continues to grow. As I mentioned a second ago, this Peruvian crop is growing every year. Our numbers are up about 20% and still planting in areas to kind of fill the gaps. Who knows where this demand is going. If you look at the prices today, in fact, that we’re moving £55 million a week, there’s a lot of room there. I mean if this thing comes down to a little lower level, I don’t know, it could be £65 million a week at a pretty steady pace going forward in the next year just looking at the history.

And in Mexico – sorry, go ahead.

Yes, I would add – I was just going to say I’d add on top of that, Brian, that having sources of fruit from multiple markets at any given time, a variety of options on countries of origin helps us lever one off the other. I think when we’re heavily dependent on one supply market and that market gets upside down on supply or it’s not there, it creates challenges for us. So, I think as we transition into times of the year when we have multiple countries of origin available, that flexibility certainly helps us with price and enable us to kind of balance out those different markets and lever them off one another.

And I guess just if we’re thinking about the shorter-term, maybe the next 12 months is Mexico from a supply perspective, is Mexico the most important kind of variable as we sort of look at trying to have more supply?

Well over the period of the next 12 months? Definitely. I mean they represent generally 72% to 73% of the U.S. consumption. The Peruvian product we’ll have here until September, late September, maybe October, there’ll be an overlap, of course. And then California, we’ll have some product here for the next by 60 days with volume or maybe a little longer. So we’ve got options in the short-term.

Okay. And then just one last – yeah. And then just one last question for me is just is we’re given how there’s just stretching the source product maybe from different places or make up some of the gaps that we’ve seen, has it affected the quality of the fruit that that is especially in, I guess supermarkets? Are you selling more or is the industry selling more, maybe lower quality fruit that it normally would just because at this point, it’s just a matter of having fruit at all versus being able to separate grade or quality?

I would say to a degree you’re right. I mean this Mexican crop has been drug out over the past couple months where some of the maturity is high. And I think the shelf life's a little lower than the other say Peru or California. So it just kind of depends what product you’re getting and what the source is. At this time of year I mean it changes as we move forward. They’re going to start with new crop here about a month or so. So it just – it’s a moving target on the source and the timing of the year.

All right. Thanks guys.

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

Hey, good afternoon, Steve and Bryan. Thanks for taking my call.

Hi, Gerry.

The question on just on the Peru fruits, looking at previous years, it sort of falls 40 – 40/60 Q3, Q4s, is that the way you see the volume kind of fall on – falling out again this year?

I think that it might be a little bit lower than that this year. I think that certainly for Q3 versus Q4, I – certainly, we would like to harvest as soon as possible, but some of that is dictated by the maturity of the fruit on the tree. The harvest started a few weeks later than I think we really would've liked to have begun the harvest this year. So I think that it won't be dramatically different from that 40/60 split. But if I had to estimate, I'd say, I'd take the under on that that we will likely have a little bit less of it sell through in Q3 this year. I will note that last year we had about 36% of our crop sell through in Q3. So I don't – I think that something like that is probably a reasonable target.

Got it. And then just, you mentioned maybe price rationalizing in the fourth quarter and this is probably not an easy question, but obviously, I mean, it's off bloom harvest out of Mexico, and then you have the Peru food coming in. What does rational pricing mean? I mean, with California's out, Mexico is off-bloom fruit, and then obviously Peru is coming through, but not nearly as big as Mexico. How much of a change in pricing could we see?

Well, I think we're – I haven't been downstairs this morning, but it's been in the $60 range for, for Mexican fruit and or California fruit per log [ph] at source, which is extremely high. Retail has been pretty high to match that. Peru is coming in at, those are mostly contracts so they're a little bit lower but they're stable throughout the season. And I think once we get substantial supply coming out of Mexico, that you'll see a reduction in the price, but I think it will be higher than it has been. In other words, it's going to back off a little bit but as we see this demand continuing to grow, the floor keeps rising. So in the past, if we were in the low-30s were an FOB price that was pretty average, I would say. It could be a little higher than that as an average.

And then on the inflation side, I mean, to some degree you're price taker, I guess, but is there any ability to pass on of the prices or do they – does some of this get baked into the final sales price? And then anything you can do to sort of mitigate it or manage it?

I think on the marketing and distribution side of our business, the advantage we have there is that we have two variables we can either recover inflation by pushing a lower cost back to our fruit supplier or we can drive it via a higher price with our customer. I think depending on the circumstance, we could utilize either one of those strategies or sometimes both. So I think with third party, that gives us more flexibility. With the farming side, we don't have that on the supply side. It really is just the price that we have to work with. And while inflation, it may impact the floor, at which avocado price can be – to floor price at which avocados will be sold, the true price that we end up settling in at is more driven off supply and demand than it is on the inflationary pressures. So I think that while – in a market like we're in right now, we've got inflationary pressures on the cost side. And while many of the parties that are marketing avocados are dealing with that. The pricing in some ways is independent to some extent of that, unless it were to get to a very low level where you're actually losing money, and we're not anywhere near those levels right now.

Got it. Okay. And then just ERP, just obviously a big issue before. Were there any sort of short-term costs or transitionary costs in this quarter from the ERP side that we're not going to see either maybe move into the third quarter or sort of exit in the third or fourth quarter, et cetera?

We're seeing some costs on the SG&A side related to our noncapitalizable ERP costs that are – that are still there related to consulting and support and they're trending down. But I don't believe or we don't believe that there was a meaningful impact within our gross margin as a result of operational issues or inefficiencies that were created by ERP during the quarter.

Got it, okay. That's it for me. I appreciate it. Thanks for taking the, my questions.

You’re welcome.

Good. Thanks, Gerard.

Ladies and gentlemen, at this time, there are no further questions. I'd like to end the question-and-answer session and turn the conference back to Mr. Barnard for any closing comments.

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

Thank you. This concludes today's conference call. You may now disconnect your lines.