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Mission Produce, Inc. (AVO)

Q4 2022 Earnings Call· Thu, Dec 22, 2022

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Transcript

Operator

Operator

Good afternoon and welcome to the Mission Produce Fiscal Fourth Quarter 2022 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

Analyst

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.

Steve Barnard

Analyst

Thank you for joining us for our fourth quarter and full year fiscal 2022 earnings call. We achieved an important corporate milestone in fiscal 2022, generating $1 billion of revenue for the first time in our company's nearly 40-year history. We grew our full year revenue by 17%, driven by an extremely robust pricing environment, where our average selling price was up 28%, which was supported by low industry volume out of key sourcing regions such as Mexico. While the strong pricing was in place for nearly the entire fiscal year, trends reversed sharply during the fiscal fourth quarter with the onset of the new Mexican season and drove prices down approximately 35% as compared to the fiscal third quarter. While this sequential softening was anticipated, the speed of the decrease was greater than expected and drove our average price down 10% for the quarter versus the prior year period. As we've noted previously, our business is driven by volume and in an otherwise normal environment, lower prices tend to drive incremental consumption, particularly in the newer emerging markets. However, this environment is anything but normal. While our fourth quarter volume increased 6%, our financial performance was impacted by a confluence of variables that undermined our ability to drive the per unit margins that we have generated historically. Persistent cost inflation, combined with the impact of a La Niña weather pattern that drove a bigger crop with a greater mix of larger fruit that we planned for within our own production, resulted in a delay to our seasonal transition to the Mexican production. Further, we did not have the normal benefit of the California crop in the fourth quarter, which was pulled forward this season as growers took advantage of the high pricing environment. This resulted in an unfavorable mix,…

Bryan Giles

Analyst

Thank you, Steve, and good afternoon to everyone on the call. I'll start with a brief review of our fiscal fourth 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 fourth quarter of fiscal 2022 were essentially flat to the prior year at $238 million. However, note that current revenue was advantaged by approximately $10.5 million due to the blueberry consolidation that took place this year, but isn't reflected in the prior year period. When looking at the drivers of our avocado business for the quarter, revenue was driven by a 10% decrease in average per unit avocado sales prices, due to a combination of higher industry supply and were exacerbated by an unfavorable mix of larger fruit from the company's own production in Peru. Avocado volumes sold increased 6%, primarily due to the company's larger Peruvian harvest as well as greater Mexican volume, partially offset by lower volumes from California. Fourth quarter gross profit decreased $6.9 million or 20% compared to the same period last year to $26.9 million and gross profit percentage decreased 296 basis points to 11.3% of revenue. The decrease in gross profit was primarily driven by lower per unit margins in both the international farming and marketing and distribution segments. International farming segment margin was impacted primarily by significant cost inflation, including logistics, farming and packing expenses. These increased expenses accounted for nearly $0.15 per pound, or approximately $3.50 per box. I would note, however, that we are seeing some signs of easing pressure on refrigerated ocean freight, which tend to lag that of dry containers. We aren't contracted yet and we are…

Operator

Operator

[Operator instructions] Thank you. Our first question is from Ben Bienvenu with Stephens. Please proceed with your question.

Ben Bienvenu

Analyst

Hey, thanks for answering my questions. So I want to ask you noted that there's still some lingering pressures from costs into the fiscal first quarter. What is your line of sight to that margin pressure alleviating and you getting back to your targeted margin per box range? Or maybe ask a different way, what do you need to see from an external environment to get back to that normal range of margin?

Bryan Giles

Analyst

Stability comes to mind. Ben, I think one of the things we're seeing, when we talked about inflation in the fourth quarter, the most significant impact was really on the farming side of the business, probably more so than our marketing piece, but there's no doubt that there are cost pressures that we're seeing there in terms of some of the overheads that we're working with. I think in terms of the buy-sell on the fruit, which is probably going to -- which is typically the primary driver as to what our ultimate per box margins are on that marketing side of the business, I think right now what we would like to see to Steve's point is a stable environment, stable pricing. I think we're starting to settle into that, but we're at very low price points right now. I think we would like to see some uptick in pricing, particularly as we move towards the Super Bowl. And again, as we've mentioned in the past, our volume does tend to be backloaded in the first quarter during that ramp up. So I do think that it's tough for us to make too many judgments on what we've seen so far in the early part of the quarter. I think we're still hopeful that as we kind of move through it that -- that the margin environment does begin to improve.

Ben Bienvenu

Analyst

Okay. I want to ask about the impairment charge. Can you talk in a little bit more detail about what drove that impairment and kind of what the moving pieces are there?

Bryan Giles

Analyst

Sure thing, Ben. I think that the things that happened in particular as we moved into kind of through the third quarter and into the fourth quarter, the market conditions that we're dealing with much higher cost of borrowing, much higher weighted average cost of capital associated with the rising interest rates. And again, when looking at goodwill, we have to look at discounted cash flows, not just absolute. We combine that with kind of what we saw in the sales market as we transition to the fourth quarter. I think we were experiencing cost inflation throughout Q3 and Q4, but in Q3, our average selling prices of fruit were significantly higher. And I think probably we and -- we had a much more comfortable at that point that the higher sales prices were absorbing that cost growth. I think the decline that we saw in Q4 caused us to kind of be -- maybe scrutinize things a little more closely. And I think we wanted to be maybe a little more conservative in how we modeled going forward. So that certainly impacted the cash flows or our cash flow modeling. I will say the one other thing that's out there that actually happened in 2021 was the rising tax rates in Peru. Now that was something that didn't necessarily drive an impairment in the prior year, but it certainly consumed a significant amount of the headroom that we had when we looked at the valuation of that business. So. I think those were kind of the primary drivers. I will say kind of on the back end that a lot of this goodwill came on the books in 2018 when we bought out our partner's interest and we didn't have an active liquid stock of Mission at that point in time and that was really the currency that that was used for making the acquisition. So, in hindsight, there was probably some debate over the value that was assigned to Mission shares versus the farming operation right from the get-go that we probably carried forward.

Ben Bienvenu

Analyst

Okay, just one more for me. I know you're not guiding specifically to EBITDA for 2023, but you did talk about I think you mentioned do you expect improved year-over-year performance and earnings. Just so you can give us rough goal post, are we thinking getting back to 2021 levels, getting back to 2020 levels, I know 2019 was exceptionally elevated, but just to help us set very rough parameters on kind of the slope of recovery in the business that you're currently expecting.

Bryan Giles

Analyst

At this point, Ben, I don't think we're really prepared to provide anything too specific for the year as a whole. When we look kind of at a high level, I think that volume -- we do expect volumes as we said at the industry level to be much stronger out of Mexico this year and Mexico is still the primary country of origin for the fruit for that we work in both in the U.S. and abroad. So we do expect there to be kind of favorable tailwinds from the volume growth. I think we certainly, in the first quarter last year, had some one-time cost related to ERP that we think we put behind us when we moved into Q2. We don't expect that or would not expect that to recur this year. On the flip side, I think as we moved through the middle of this last year, we also saw very strong margins, particularly out of California with the very high price points. And I'm not sure if we have a more moderate pricing environment coming forward into this next year if that may have some offsetting impact. So it's tough for us at this point to really define exact parameters. I think that with volume growing, it will improve our capacity utilization, but we still will have capacity to grow far beyond, I believe where we're going to get to this year. So I think that'll continue to be a little bit of a drag and may cause some pressure that would prevent us from getting back to maybe where we were in prior periods. But I think the most important thing for us is to see stability, so we can start to kind of model on the marketing side of the business what things might look like kind of as we move towards the back end of this first quarter. I think on the farming side, it's really kind of early for us. I think we're -- we don't have a complete estimate yet of what our farming production for the upcoming season is going to be. I think we'll know more as we kind of get to the end of the first quarter and then certainly kind of looking at the dynamics at play with the other countries of origin to get a better sense as to what we think average selling prices might look like next summer.

Ben Bienvenu

Analyst

Okay, fair enough. Thanks.

Operator

Operator

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

Tom Palmer

Analyst

Hey, thanks for the question. I wanted to maybe first just follow-up on the Peru impairment. Bryan, you highlighted kind of the factors that contributed to it being the higher cost of capital, the tax rate change, the lower earnings in the inflationary environment, the second half of this year. To what extent I didn't hear mention, I guess, and I'm wondering to what extent this is a factor. Did you lower your earnings expectations above and beyond that tax rate change for future years? Was that a big factor or was it more of those other items and therefore kind of the underlying profitability this business is still largely maintained.

Steve Barnard

Analyst

I don't have all the calculations in front of me, Tom. I do know that the higher tax rates had a significant impact. I know that the higher weighted average cost of capital, which was 2.5 percentage points higher than what we were using back when we originally put the goodwill on the books had a meaningful impact kind of applying that over a very long period of time. I do think that, when we're looking there, there's certainly a recency bias and kind of looking at what happened this year where overall for the season, our average pricing on Pure is very comparable to what it was last year on a sell through, but we looked at a much higher cost structure and I think what we're debating internally is certainly is how that cost structure is going to come back down. I think there's some things where we're already starting to see that, but we don't know at what pace that reduction is going to happen, for example, with something like ocean freight. I think with other items in our cost structure, things like fertilizer, we've also seen significant ramp ups and I think the key on some of those areas is to continue to drive up the yields per hector to try to absorb those costs as we continue to kind of wait for more favorable market conditions to I think as we move into future years. but I think it was difficult for us to predict exactly when those things were going to happen and I think we felt a little uncomfortable taking very aggressive positions on that within our modeling.

Tom Palmer

Analyst

Okay, thanks for that. Understood. You had some info in the 10-K on the planned blueberry build out just the overall cost. How does the cost to plant blueberries compared to the cost to build out acres for avocados? Is it comparable?

Bryan Giles

Analyst

I don't know the exact numbers, but it's a lot more expensive on the development side of it because you've got proprietary plants that another nursery grows compared to the avocado trees, which we grow ourselves and use the seed stock and the top stock from our own ranches, but these are all proprietary varieties which cost a lot of money up front, but your production from what we've seen so far on these new varieties are over double of what the old varieties were and you can get a much higher sales price for them, especially in places like Asia. So, I don't have the exact numbers on them. It's relevant though.

Steve Barnard

Analyst

Yeah, Right, 50,000 an acre, maybe or hector.

Tom Palmer

Analyst

Okay.

Bryan Giles

Analyst

We're using the same people. It's kind of the same logic that we did earlier, except it's on a different ranch up north, which the timing comes off differently. So we're kind of spreading it out a little bit.

Tom Palmer

Analyst

Understood. Thanks. And then I just wanted to follow up on our comment you made about margin pressure due to a lack of California avocados. Could you maybe just elaborate on what you meant by that?

Steve Barnard

Analyst

Sure, we generally make -- from a contribution margin perspective, the country of origin where in our marketing business where we tend to make the highest margin is with California when we're sourcing fruit here and running through our Oxnard packing house. In a typical year for California, we're harvesting well into September, maybe even into October and selling California through -- fruit through the entire quarter. So we're getting a benefit in that fourth quarter of having that California fruit as part of our sales mix. I think what we saw this year is because of the high prices, most California growers completed their harvest much earlier than normal. We finished packing here at our facility the first week of August. So we had very little volume -- selling volume that flowed through in our fourth quarter and I would say that that was when we're talking about a favorable impact. it was more of a mixed based comment that I'm not having that California sales in there that's a higher margin to kind of bump things up relative to last year.

Tom Palmer

Analyst

okay, thank you.

Operator

Operator

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

Bryan Spillane

Analyst

Thanks operator. Good evening, guys. So I guess just a more higher level question with regards to costs and maybe this is more relevant for the international farming segment than marketing and distribution, but, I guess my question is just to the extent that there are higher non-fruit related costs, like overheads, labor. freight shipping like to the extent that this -- these elevated costs are more structural, if you get to that point, if that's the conclusion you’ve drawn, does that change the way you need to approach pricing with retailers to get back to sort of a stability but also getting back to a profit for box. I guess what's underneath my question is just for most of the companies we follow who are especially experiencing this with their upstream suppliers, what's happening is that their upstream suppliers are coming back to the vendors and saying, our labor costs are permanently higher. We think transportation is going to be permanently higher and so whatever a pass through was right, there's an overhead component that's being adjusted upwards and I guess, it's just I guess my concern or my question is just it's a lot of these costs are going to be more permanent, do we need to have a maybe a different sort of reset in terms of how you think about pricing with retailers because it's more than just the volatility of the fruit. I hope that's clear.

Bryan Giles

Analyst

No, you're absolutely right. We have to continue to pass it along or we're not going to be here very long. So, a lot of these contracts were set up early last year on freight. Fertilizer kept going up as the year went along. Labor kept going up as the year went along. As Bryan mentioned, the tax change in Peru, so it just kind of all boiled up. It just weren't an adjustment period now and we'll continue to adjust to get it right, but it's kind of creeped up on us.

Steve Barnard

Analyst

Yeah, I would say Bryan on the marketing and distribution side of the business, it's probably easier place to start. Absolutely, and I think we're already pushing we're building that into our costing models. We've been doing it and we're pushing for higher pricing with retail, I think in environments where those kinds of costs are increasing, the advantage on the marketing side of the business is we can either work with the customer for higher pricing or we can work back with the grower to drive our input costs down. So it does give us a little more flexibility there. We're aware of it, but I think certainly at times when these things are going up, margins do tend to get pinched a little bit, but we don't view that as a long term phenomenon and we view it more as a short term. I think when we look at the farming side of the business, we certainly we can see the cost growing. We don't have an ability to really lever like a fruit input cost like we do with the marketer. So the price with the customer is really the primary lever we have to drive margins for when we're dealing with costs that we don't have direct control over. I think that over the long term, I think the way you're saying explaining it is absolutely going to come true. There will be a balance of supply and demand and price points will settle in at a level that affords a reasonable profit to the growth, but in a short term market, like what we saw in the fourth quarter, that doesn't necessarily hold true. If the supply at that point, you've got fixed cost invested in the supply of the avocados is there and the market's going to determine what they're going to pay for those, but I do believe and I believe very strongly, we both believe that over a longer period of time that will settle in at a higher price point if those costs don't come back down.

Bryan Giles

Analyst

Yeah they're not all going to come back down.

Bryan Spillane

Analyst

Yeah, okay. So just maybe to tie that up right again from the seats we're sitting in because we can't see all these costs right. We can see the movement in avocado pricing and I think it gets back to maybe Ben's question earlier, is we're thinking about getting back to a kind of a more. whatever normalized profit per carton or profit per box. It's going to take some time because you're not really I guess it sounds to me like it's really determining how much of these other overhead costs are going to be more permanent and how much are not and so that dialogue you're going to have with your customers to sort of dial that in right or correctly, it's just going to take time. That's what -- that's what I'm hearing. I just want to make sure that I'm hearing that correctly.

Steve Barnard

Analyst

Yeah, I would say fuel might be the biggest variable. Labor will not come down, I guess.

Bryan Giles

Analyst

I think your spot on that, Bryan and, there's just -- the things that are driving our cost structure are not -- they're not directly correlated today with what's going to drive sales pricing of avocados in the short term. Again, over a longer period of time, they absolutely will, but I think it takes time to adjust that and I think I don't want to downplay the impact. I know Steve mentioned that the size curve, we ended up with -- we had much larger fruit that we were marketing this year that has -- it limits the outlets for it to some extent. There's retail once were primarily a certain size of avocado, if think of it like a bell curve and we would call like a size 48 or a half pound piece would be right in the middle. Ideally what we want is the tree to produce 40%, maybe more fruit that's in that size range and then fall off to each side of it and that's not what we saw this year on our harvesting and I think it got worse as the season moved on. certainly the fruit was sizing up, but as we harvested from some of our farms that were closer to the coast, which come later in the season, that's where we saw this larger size curve and it inhibited our ability to kind of move that fruit into some of the predetermined programs that we had set up earlier in the year. So I think we had a lot more fruit at the end later in the season that we had to move through kind of the broader market as opposed to our contractual pricing.

Steve Barnard

Analyst

Well, the thing that got magnified there too is with larger fruits ended up with more boxes and more loads and we didn't want -- we just kind of stretch the season out because we didn't want to put a bubble in there -- in the hose there and that kind of backfired on us with Mexico coming on hot with cheap fruit.

Bryan Giles

Analyst

And that was more -- the sizing thing is more weather related, right. That's what, the weather conditions were like optimal to grow giant fruit.

Steve Barnard

Analyst

Historically fruit can get pretty warm in their summertime, which is our wintertime and the trees go dormant and last year it was cool and they never went dormant. They grew the whole time and by the time we tried to slow the inputs down, i.e. fertilizer and water, it was too late too late.

Bryan Spillane

Analyst

Got it. Okay, one last question for me is just I think in the press release, you talk about volume in Mexico being lower or so. I guess supply, is that just simply our growers holding avocados because the prices are too low. Is that the simple explanation for that?

Steve Barnard

Analyst

Well, there's fighting for size. Their size curve presently is pretty small. So they're kind of dragging their feet a little bit, but at the same time the demand is -- this is the slowest time of year between around Thanksgiving to Christmas and usually by right after Christmas it picks up for New Year's and then super bowl is after that and it just keeps rolling after that. So this isn't really a surprise. It just -- we're ready to go.

Bryan Giles

Analyst

We're kind of jumping up.

Steve Barnard

Analyst

We expect a bigger crop for the season as a whole. It may not come off linear. It may not be linear in terms of up 20% all for every month during the season. I think it the growth rates lagging a little bit behind that right now, but with the crop is there.

Bryan Giles

Analyst

In Mexico, in their defense they're probably not in a hurry because the prices are relatively low and they're waiting for better.

Steve Barnard

Analyst

Yeah, that's a rational decision on their part.

Bryan Spillane

Analyst

Okay. All right. Thanks guys. Appreciate all the color.

Operator

Operator

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 call back over to management for any closing remarks.

Steve Barnard

Analyst

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

Operator

Operator

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