Good afternoon and welcome to the Mission Produce Fiscal First 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.

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 2023 first quarter earnings call. We produced total revenue of $213.5 million and adjusted EBITDA of $2.3 million in the first quarter. This performance largely reflects the reversal of the strong pricing and low industry volumes that summarized most of 2022. As the new Mexican season kicked in during first quarter of 2023, we were in a great position to drive volumes, and I'm pleased to report that our growth of 14% exceeded that of the industry, which is a testament to our distribution capabilities and infrastructure that supports our global customer base. However, with these higher industry volumes, the pricing environment reversed, decreasing 27% ultimately outpacing the volume growth we had realized, although the velocity of the price deceleration created unfavorable circumstances to drive per unit margin, the market has since found some pricing stability, which is more conducive to generating improved profitability and looking ahead to the balance of the year we believe conditions exist that make for a more constructive pricing outlook as our fruit season comes online. While the price volatility during the first quarter was unfavorable, we are optimistic that this new equilibrium of lower fruit pricing will ultimately drive greater consumption in the coming year compared to the depressed consumption rates we saw last year. Furthermore, this shift to a more rational environment facilitates our ability to penetrate new growth markets such as Europe and Asia, and drive per capita consumption in these emerging markets with improved access to year round high quality fruit that we are uniquely able to deliver via our owned and third party sourcing capabilities and global footprint. But having access to diversified sourcing is only half the equation. You also need the distribution infrastructure, which is precisely where Mission shines. We…

Thank you Steve, and good afternoon to everyone on the call. I'll start with a brief review of our fiscal first 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 first quarter of fiscal 2023 were essentially flat with the prior year at $213.5 million. However, note that the first quarter was advantaged by approximately $30 million due to the Blueberry consolidation that took place beginning in the fiscal third quarter of last year, but isn't yet reflected in the comparable prior year first quarter period. Thus, when looking at the drivers of our lower avocado revenue within the marketing and distribution segment, it was largely a function of a 27% decrease in average per unit avocado sales prices, being partially offset by an increase in avocado volumes sold to 14%, both of which were driven by higher industry supply out of Mexico during the quarter. Gross profit increased by $8.5 million to $9 million in the first quarter, and gross profit percentage increased 400 basis points to 4.2% of revenue. As a reminder, prior year gross profit and margin percentage were negatively affected by operational challenges created by the implementation of a new ERP system within our marketing and distribution segment that led to inventory management issues and unusually large fruit disposals. Normalizing for that impact in prior year gross profit within the marketing and distribution segment was relatively flat year-over-year. In the current year period, higher volumes had a favorable impact on fixed cost absorption in areas such as distribution, while the lower pricing environment limited our ability to generate per box margins on the buy…

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Gerry Sweeney from Roth Capital. Please go ahead.

Good afternoon, Steve and Bryan. Thanks for taking my call.

Hey, Gerry.

Hey Jerry.

Hey. So lots of detail there on your prepared remarks, but I'm just trying to maybe think a little bit out louder to make sure I'm thinking about this the right way. Last year wave of different issues, anything from fruit sizes, production cost, logistics, even pricing, all which in some ways drove or impact the consumption. Sort of as we're looking at this year, it sounds as though you may be seeing, and I'm going to stress to the beginning of maybe a regression to the mean in terms of some normalcy around size. We're even seeing some cost stabilization, if not mitigation, especially on logistics. If this continues along with volumes, if this continues, we should see EBITDA begin to improve throughout the years. Am I sort of looking at this all correctly?

Well, volume in Mexico is up. Inflation appears to be easing on all fronts. We're based off of volume. We're built for volume. And last year we were light on volume, the exception of Peru and, yes, I would agree it's feeling a lot better going into where we are. I mean, there's still challenges everywhere, but some of the major things that we're seeing, they're retreating as far as the inflationary issues.

Yes, Gerry, I think we're seeing some positive signs as we've moving in through the early part of Q2 volumes. I do feel they gain some traction, seems to be more pull through at retail than we saw for much of the first quarter. So we're seeing volumes at high levels and pricing is increasing in conjunction with that. So I think we feel good about where the industry is going through the second quarter. I think we're excited about seeing some of the other countries of origin, like California and Peru, start to come on and that will happen as we move close to the end of the second quarter, give us more options for sourcing fruit for our customer base. Certainly some of the inflationary pressures are starting to subside. I think when we look at kind of our farming operations, which are going to kick in later in the year, I think we've got a lot of favorable things we're seeing right now. We're seeing production yields up for our farms. We're seeing an improved size curve over what we saw last year for commercial sizes. And most importantly, we're seeing some of the freight rates that hurt us so significantly last year, subside and revert back closer to levels that we saw in 2021. So I think certainly a big variable is still what the market prices will be at during those summer months. But we definitely feel better. There's a lot of positives that we see out there kind of heading towards the summer.

Got it. This question, I got to throw it out there. I'm not sure if it's really answerable, but obviously food inflation is a hot topic. We're seeing it across the board and seeing some even in my own personal consumption, maybe trading down different when you go to a supermarket. Is there a price level that you've seen or that drives consumption a little bit higher, a little bit lower, above or below a certain level? We haven't seen an inflation a market like this with inflation for years. I'm just curious if there's any data, any thoughts around that?

Yes, I mean, if it gets under a dollar, it usually attracts a lot more people, at least on an average size. One of the issues we had in the first quarter was there was a disconnect between the market in Mexico and what the retail price was. So there was a big gap in there that slowed demand down. That has since changed ever since Super Bowl has been pretty normal, I would say, or competitive. And we're seeing substantially improved volumes throughput as an industry. Mexico is picking record numbers, and it seems to be stable price wise.

Got it. I was going to say Mexico is stable in general, not just price but --

[indiscernible] I am going to comment on that.

That's what I figured. I appreciate, I'll see you early next week.

Okay. Thanks, Jerry.

Thank you. [Operator Instructions] Our next question comes from the line of Tom Palmer from JPMorgan. Please go ahead.

Hey, guys. Thanks for the question.

Hi, Tom.

Hi, Tom.

Maybe we can just kick off on maybe the supply outlook as we move past the Mexico harvest. I mean you noted California harvest coming in maybe a little bit later, but do you have any early indication in terms of how the quality, how the size of that might be coming through and then anything on Peru for the same?

Sure. As you may know, we've been getting a lot of rain here in California. So that will help that crop size up. They like rain. They haven't seen it in a while. We're starting to pick a little bit here now. it's kind of size picking in some areas. A lot of pruning going on and that type of thing. I really don't see much volume really, until April coming out of California. We have already started our Peru harvest, although slowly this past week. Most of that's going overseas, but our crops up about 10% and the sizing, as Bryan mentioned in his remarks, is a much more normal situation. So it's quite positive in those regards.

Okay, thanks for that detail. And then maybe just check in on the blueberry side. If I looked at some of the disclosures right, I think this was a business that kind of fair value assumed something in the $6 million range for annual EBITDA. And it looks like for this year, this growing season at least, it was a little under a million. I guess first is, am I looking at that right? And then how abnormal was this year? I mean, is the 6 million a number that you've been seeing in recent years? And then this year just kind of suddenly fell off and was unusual in nature? Or was maybe some of the other years leading up to this one a bit challenged too?

Hi, Tom. We certainly had some challenging years in the past. I think this one was more extreme than what we've seen. I don't think you're looking at it wrong. I think we've had years where we've generated EBITDA in the $5 million to $6 million range for that operation. I think certainly as the business has grown, the acreage is planted, the yields have improved. We've seen volume increases over time. But the one thing that we have seen is, as the industry crop as a [whole increased] that pricing has come down over time. I think one of the big challenges that we have right now is that some of the initial plans at things we did of older varieties aren't considered kind of a premium varietals, and they're limited in terms of which markets they can make their way into, and they generally generate a lower average sales price. And when you're looking at a market, Peru's become the largest exporter of blueberries in the world over the last couple of years. You're seeing the pressure on pricing as a result of that. The ways that we're trying to control that going forward, I think we alluded to in the call. A lot of the we've replaced some of the plants we have today with newer varieties, larger blueberries with a better taste profile that should be able to get them into premium markets like China, which will generate a stronger return. On top of that, some of the new varieties through pruning, we have more options in terms of altering the harvesting window. Right now, we're hearing north of 80% of the fruit, blueberries in Peru are harvested between October and December. And what we really want to see over time is that season getting stretched out. So I think we're still pretty happy. I think we're happy with the outlook. We weren't happy with the results from this last year, but I think we're still bullish on where this is going to go, that the genetics that we're planting with are going to truly have a distinctive advantage over kind of the traditional varieties that most of the people of the growers in Peru are planting or have planted. So I think that our biggest driver there is to, again get our fruit into those premium customers so we can generate those higher returns and continue to grow yield so we can lower our average cost and kind of stretch out that harvest window as much as we can.

Great. Thanks for all the details.

Sure thing.

Thank you. Our next question comes from the line of Bryan Spillane from Bank of America. Please go ahead.

Thanks operator, good morning or good afternoon, guys. So I just had one question. I guess you talked a little we're talking about in marketing and distribution and we talked a bit about maybe the profit per box or profit per carton beginning to sort of maybe normalize, I guess is what I heard. But I guess we talked a bit about this. I think on the last earnings call there's just other inflation, labor, transportation costs, right. So as we're all trying to sort of fixate on kind of a mean reversion, if you will, on profitability in both the farming segment and in marketing and distribution, are you at a point yet where your pricing discussions have also incorporated starting to cover some of the non fruit costs? Or will that take more time and will that affect sort of getting back to a more normalized profit per box?

Well, we're in the process actually just this week of looking at freight rates. We're kind of dragging our feet as it continued to fall, say specifically out of Peru to either Asia, U.S. or Europe. And it seems like the longer we wait, the better they get. So we're getting close to where we could meet our expectations on cost of something comparable to two years ago on freight rates out of the Peru. So we're seeing some improvement in that on truck rates too on improvement and that on truck rates too, on internal truck rates across the country. It's not probably coming down as fast as the ocean freight is, but they are concerned continuing to creep down a little bit every week in certain specific lanes for sure.

And I will say, Bryan we have made some alterations to our pricing structure since the beginning of our fiscal year. I think we're used to freight prices moving around quite a bit in our customers, we adjust pricing regularly for that. But for some of the other value added services we provide, like ripening and distribution that are intended to cover some of our over head infrastructure related to those operations. We have gone back and kind of made some pricing adjustments there, acknowledging that we've seen inflationary cost pressures in those operations and the volume growth over the last few years hasn't been there to absorb it. So we're pushing, I think it's something that we've been doing over the last few months. I think we're making progress in getting customers to accept it. I still don't think we're kind of outside of the range of what our competitors are doing, but we're kind of pushing ourselves, I think, kind of up to the higher end. And we expect, over time, that we'll likely see everyone kind of need to do that.

Okay, and then, actually, just one additional question that there is, now I guess, the prediction that we may end up with an [almeno] at some point this year. So, Steve, can you just remind us again how that might affect Peru, how that might affect California and Mexico? Just flipping from [lanino] which where we've been for the last couple of years, to [almeno] is there anything that we should be thinking about there?

Yes, I mean it’s – we’ve had almost twice the normal rainfall here in California already this year. And starting tonight, we're getting another couple of inches, much needed, by the way. And it actually helps the trees as long as it stops at some point, but they're very healthy. The fruit is sizing up quicker because the water. I call it sweet water. It's rainwater. It doesn't have all some of the salts and whatnot in it, but so far it's been a positive here. It is raining in Peru. We actually have our Peru team here this week, but it's not a flooding situation, it's just raining. So it held up harvest a couple of afternoon. It's mostly in the afternoon. So as long as it stays where it is there, it doesn't wash the bridges out and whatnot we're good. And I don't think there's any prediction of that from what I know today.

Okay, thank you.

Thanks, Bryan.

Thank you. Ladies and gentlemen, at this time, I am showing no further questions. I just like to end the question-and-answer session and turn the conference call back over to Steve Barnard, CEO for any closing remarks.

Thank you very much for your interest in Mission Produce and we look forward to speaking you again soon.

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