Good afternoon, and welcome to the Mission Produce Fiscal Third Quarter 2023 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. 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 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?

Thank you for joining us for our fiscal 2023 third quarter earnings call. Our top line performance of $261.4 million was generally consistent with expectations, and reflects a continuation of the conditions that returned to the industry earlier this fiscal year, where higher industry volumes were offset by lower average selling prices following last year's elevated market conditions. However, adjusted EBITDA of $21.2 million came in below expectations, while we drove a significant increase in sales volumes during the quarter, and achieved continued sequential improvement in per unit margins relative to the fiscal second quarter, despite the lower pricing environment, our sites were set higher based on initial estimates that suggested a strong and substantial Peruvian harvest. Furthermore, with the rapid completion of the Mexican harvest, prices began to accelerate. At the time, we still believe that we would be experiencing a strong Peruvian harvest, so we took advantage to lock in pricing with our customers ahead of the seasonal increase in volume and also made a decision to distribute some early volume to secondary markets to optimize our position in key export markets. However, the industry experienced an abrupt change in growing conditions midway through the quarter, with the onset of excessive heat that negatively impacted anticipated volumes and fruit size across the Peruvian growing region. The lower volumes from our own production combined with a suboptimal mix of fruit sizes to service key export markets and the fixed cost nature of our farming operations pressured segment margins and were the primary source of our lower than expected adjusted EBITDA performance during the fiscal third quarter. Industry pricing has since responded to these events and moved higher which we expect to help lessen the impact of our fiscal fourth quarter margins. As a large global player in the agricultural…

Thank you, Steve, and good afternoon to everyone on the call. I'll start with a brief review of our fiscal third 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 third quarter of fiscal 2023 was $261.4 million, a 17% decrease compared to the same period last year, driven by a 33% decrease in average per unit avocado sales prices, partially offset by a 23% increase in avocado volumes sold. Both the lower pricing and higher volume were driven by higher industry supply out of Mexico during the quarter, which contrast with the same period last year when there was limited supply that drove pricing to near record levels. Gross profit decreased by $14.2 million to $28.4 million in the third quarter. The decrease was concentrated in our International Farming segment, driven by lower pricing on avocados sold from our own production. Within the Marketing and Distribution segment, while per unit margins were below the elevated levels from the prior year, we’re pleased to see meaningful sequential improvement versus fiscal second quarter. The improvement in per unit margins was driven by higher mix of California sourced fruit relative to last year, and the impact of higher avocado volume sold. We are pleased to deliver volume growth across all our end markets, driven by the strength of our Peruvian programs in our international export markets and further supported by a larger Mexican harvest, which helped contribute to a 15% increase in North American volume. The later growth helped us leverage our facility in Laredo, Texas and achieve improvement in fixed cost absorption. SG&A expense decreased $3.2 million or 16%…

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, thanks. Good afternoon, everybody.

Hi, Ben.

Hi, Ben.

So, I want to ask, recognizing that, the International Farming operations harbored the concentration of the margin pressure in the quarter. Can you talk about what you're seeing outside of that segment? Obviously, nice sequential improvement in margins, you're managing SG&A fairly nicely. Can you talk about what trends you expect to persist into the fourth quarter? And then to the degree that, and you alluded to this that you could see some improvement in the International Farming segment in the fourth quarter. What are the things that could amplify that improvement or diminish it?

Hi, Ben. When I look at, kind of, look at our Marketing and Distribution segment, I think the things that we're happy with during the third quarter, certainly the volume growth that we saw year-over-year close to $7.4 million lug equivalents sold through. So, very much on the high-end. We saw a lot of growth. Because of the lower price points, I think the way we looked at it with more Mexican fruit available, that Mexican fruit came into the U.S. market, and that's really what helped drive our volume growth in North America about 15%. And when that -- with that happening, a lot of the Peruvian fruit that we brought to the U.S. last year, we were able to utilize to support our export markets in Asia and Europe primarily, which grew at much faster rates than that. So, I think we were pleased to the extent that our vertical integration strategy worked. We had the fruit available that we needed for the marketing segment. I think as we look through the third quarter, certainly we were -- we had a nice balance between sourcing from Mexico, California and Peru as we transition to the fourth quarter, we're probably looking at California crop is coming to an end. You're looking at the new crop out of Mexico coming online during the second half of the quarter, and you're looking at the Peruvian season kind of coming to a close as we move through the quarter. So all-in-all, I mean, we think that volume will be a little bit lower than what it was last year, from what we're hearing at this point, Mexico industry supply for the coming season, maybe a little bit lighter than what it was last year. So, we're preparing for that. And we think…

And China.

And China, yes. So, there could be some benefit there.

When you look at some of the positives that came out of this, the shipments to China tripled in one year, they've obviously got a lot of people over there and we now have -- while we're building two more ripe centers. So, we're pretty well-positioned to help that growth market over there. The kids are drinking avocado smoothies like crazy. So, it's kind of a runaway train in a positive way. And then the EU and the UK, again, we're in position there and we're built for the future and we're just waiting on mother nature to leave us alone.

Yes. Okay. Fair enough. Understood. On SG&A expense, down quite a bit sequentially and versus what the run rate we've seen in the first half of the year, down quite a bit year-over-year. Is this a reasonable baseline expectation in terms of absolute dollars for SG&A? And maybe if you could talk about some of the things that you all are doing there to manage SG&A in a bit more tightly than what we've seen over the last couple of years?

Ben, probably the -- I wouldn't say that this is necessarily a sustainable level. Part of the reason for the decreases this year, related to incentive-based compensation. Certainly, we haven't delivered on the performance we expected to, internally, through the first nine months of this year. So, there's been adjustments made kind of as a management team to our accruals, which we would hope as we go forward isn't the case. But also in some of our foreign operations, both in Peru and in Mexico, there's government mandated profit sharing that geared around profitability of those specific operations. And with the big drop off in earnings down in the Farming segment, it resulted in significantly lower profit sharing accruals in our Peru or in our Farming segment as well. So, that component of SG&A, I think is more isolated to the performance of the current year. I think some of the other things, ERP coming off, after last year where we had big challenges after go live, that's sustainable. We don't see that repeating itself. And then some of the other consulting-related professional fees, there might be more opportunity for those to come down as -- in all honesty as we move forward.

Okay. Very good. Thanks so much for taking my questions.

Okay. No problem.

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

Hi, good afternoon. Thanks for the questions.

Hi, Tom.

Wanted to maybe just start off on the Peru side, and get an idea of what we're looking at just from a volume split. I think a quarter ago, the discussion was a relatively even balance in terms of sell-through between 3Q and 4Q. Is that still the case or is it a bit more skewed toward the fourth quarter perhaps?

Typically, as I mentioned, we're about 35% in the first half and about 65% in the second, in terms of the profit impact of the sell-through of that fruit to customers, not so much harvest, but sell-through. This year, it'll probably be not quite as back loaded as what we typically see. I would say we might be based on our full-year projections of where volume is going to land, compared to what we ran during the third quarter, it would probably put us at a split of around 45% in Q3 and 55% in the third quarter, with the potential for some amount to slip over into to Q1 fiscal 2024 as well. But that would be a relatively small amount if it did.

Oh, great. Okay. Thank you. And then just on you gave some indication of what you expect industry volumes to be from a distribution standpoint. And then you've also got Peru coming in lighter than you expected, sounds like California, which was solid as winding down. So, would you expect to grow in-line with the industry as we look at fourth quarter? I know longer term it's at least in-line, but just for the fourth quarter, is the expectation in-line or is that going to be a little tougher given Peru?

I mean, I think if we look at our fourth quarter and if we -- after the fact when we look at what the actual growth is, both in North America and abroad, I would think with Peru still being even with the smaller crop Peru, we'll still make up a pretty significant portion of the overall consumption in Q4. And with our position in Peru, I would think that it's advantageous for us from a share perspective. Certainly with Mexico transitioning from their off bloom to the new crop and we'll see more of that in the later part of the quarter. I don't -- when we're in Mexico, I don't necessarily think that that has a dramatic influence on our share one way or the other. But I think it could be, again, Peru is lower than what we saw last year, in the fourth quarter and it's lower than what we had initially expected. But it's still a meaningful amount of fruit, and it definitely gives us an advantage over our peers by having it.

Understood. Thank you.

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

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

Hi, Gerry.

Hi, Gerry.

I apologize, I'm on my mobile, but just wanted to dig in a little bit more on Peru, and I understand volumes were down, but you also discussed that, I think you made some movements or decision making. You had some decisions during the quarter where you allocated fruit. And I'm just curious, and obviously you can't play Monday morning quarterback, but I'm just curious if you were to change anything in the quarter, but more importantly, does -- what happened with this harvest maybe changed from a process or decision making processes in the future with Peru and would that be potentially beneficial?

Well, we had two extremes. We had cold weather early and very hot weather. We had cold weather in the summer and hot weather in the winter, and it really -- and plus a lot of rain due to that El Niño situation that went from California all the way down to Peru and further. But early on, it affected the set to start with the fruit, the fruit flowering because it was cold. And then when they did set, which was a little late, due to the cold weather and rain. It looked good at the beginning, but it got extremely hot. I can't give you the exact temperatures, but for Peru and the mid of winter, it was probably close to 90 degrees or higher. And it's -- what it does, it stunts tree or stuns the growth of the fruit on the tree, because it's kind of in survival mode at that point with the hot summer and or hot temperature and it's trying to suck up the water as fast as possible to stay hydrated, etcetera. So, we had two extremes that just effected the overall production for the season, as did everybody else.

Yes, I mean --

Got it. Yes.

I'd like to say Gerry, if we knew, we were going to have a higher pricing environment, say later in the year, we would have liked to have extended our harvest. But on the flip side, because of the weather conditions where we had issues with fruit drop off the trees, I'm not sure if that's the decision, we would have made. I think there's data here, there's data points that we're going to track going forward, but I'm not sure if we have a clear cut that we would definitely do something differently in the future, but we have a lot of data at hand that we're going to need to utilize as we move forward.

Got it. Okay. That's helpful. I just wasn't sure if there was -- exactly what the situation was and, that's helpful in terms of understand what --

Yes. We were

I appreciate. Yes.

We were trying to hold the fruit later because there's usually a pretty good market, wait everybody out, but this, the fruit started dropping at a pretty rapid pace. So, we didn't want to wake up and not have anything on the tree.

That because -- and it was dropping both the heat and the tree was trapped overall, correct?

Exactly. It sheds everything. It's like getting your kids out of the house, get out of here.

I got you. All right. I can relate to that. Got it. Okay. No, that's super helpful. I wasn't sure if you made -- listening to the commentary, I caught some of it. I wasn't sure if you made a like a strategic decision to maybe harvest a little earlier and move some stuff around, but I understand now it was it was either pick or drop.

Yes.

Got it. Okay. Thanks, guys.

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 call back over to management and a closing remark.

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

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