Good afternoon, and welcome to the Mission Produce Fiscal Fourth 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 that 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 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, please go ahead.

Thank you for joining us today. Fiscal year 2023 was a dynamic year for Mission. Although we drove a 12% increase in total avocado volume sold, 654 million pounds for the year, net sales decreased 9% to $954 million due to a 24% decrease in average per unit avocado sale prices. However, I'd remind you that in the prior year, we experienced a volume decline of 11% which supported an extremely robust pricing environment with prices higher by 28%. I believe this context is an important reminder that in a normal environment, our business is largely driven by our volume, and our primary goal is to drive long-term volume growth through supporting our markets with consistent supply and then translating that improved excess to per capita consumption growth. This is a playbook that has served us well and has Mission instrumental in driving growth throughout the North American market, and we intend to do the same thing globally in markets such as Europe and Asia over the long term. To support these opportunities and emerging demand in our growth markets, we are methodically building our capabilities in those regions in a measured fashion. For instance, in the United Kingdom, the construction of our new forward distribution center is progressing according to plan, with our Phase 2 buildout to expand capacity, including additional ripening room, storage, and sorting, as well as building handling capacity for our popular mango category. While volume growth is our primary mandate, our industry can be unpredictable, influenced by uncontrollable variables such as weather patterns and the individual marketing decisions from fragmented growers around the world that impacts the supply-demand equilibrium. In 2023, price decreases and higher avocado volume sold were driven by higher industry supply out of Mexico in the current year. This contrasts with the…

Thank you, Steve, and good afternoon to everyone on the call. I'll start with a review of our fiscal fourth quarter financial performance, touching on some of the key drivers within our three reportable segments. Then I'll provide an update on 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 2023 was $257.9 million, an 8% increase compared to the same period last year, driven by higher per unit avocado sales prices, partially offset by a decrease in avocado volume sold. Both the higher pricing and lower volume correlate with lower industry supply out of Peru during the quarter. Revenue growth was further supported by strong performance in our Blueberries segment, which increased by 88%. In the current fiscal quarter. Gross profit increased by $0.9 million to $27.8 million in the fourth quarter. Our Marketing and Distribution segment experienced gross profit growth of 49%, mainly driven by strong per unit margins on Mexican and Californian avocado sales. Gross profit also benefited from higher volumes and elevated pricing within our Blueberries segment. On the contrary, our International Farming segment experienced a significant decline in gross profit due to lower volume and lower pricing on avocados sold from our Company-owned farms. The lower volume and pricing conditions were driven by the same El Nino-related weather events that we spoke about during our fiscal third quarter call, which resulted in quality issues and a compressed Peruvian harvest season. SG&A expense increased $1.1 million, or 6%, compared of the same period last year, primarily due to executive severance charges, increases in stock-based compensation and additional labor costs to support our growing UK operation. Excluding these items, we made progress on our goal to reduce controllable expenses during the…

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

Hi. Good evening, everyone.

Good evening, Ben.

I wanted to start if we could -- hi. I wanted to start if we could on the cost side of the equation. I know over the last year or so in particular, it's been a priority to drive cost out of the business and residually higher costs from the inflation that we've seen over the last several years. Where are you in that path to driving cost out of the business and how much opportunity is left as we think about 2024?

Well, I'll just start out by saying we've picked the low-hanging fruit so far, Ben, a lot of labor, mostly down in the Peru area. Freight costs have continued to drop. So, we're looking at pretty good benefit there going forward. I mean, not as drastic as it dropped last year, but it's still coming off a little bit. So, those are the two big ones that I can tell you right off the top. And, yeah.

I would say, Ben, we're very focused on a couple of things. I mean, certainly asset utilization is important to us. So, we look at our marketing business, we saw strong volume growth this year and that certainly had a favorable impact on utilization of our packing and distribution facilities globally. I think we're regularly questioning or the costs that we have within our operations and looking for opportunities to improve. To Steve's point, I think the biggest opportunity in the near term is in our farming operation down in Peru. I think we're working closely with the team down there to identify all of the costs that really are controllable and to some extent go back to kind of a zero-based budgeting model of what we truly need to operate the farms. We certainly went through a period of time, where focusing on yield improvement and doing kind of a number of things that are focused around that and investing in the farms to drive volume growth, was a high priority. I think philosophically, with the lower sales pricing that we've seen over the last few years driven by higher volume out of Peru, I think it's causing us to change our focus a little bit and certainly focus more on cost reduction initiatives than maybe we have. To Steve's point, we saw benefits this last year of lower ocean freight than we had the year before. But those benefits were really offset by the fact that we saw higher farming costs -- higher farming and packaging costs. Some of that driven by the fact that our yields were lower as a result of El Nino. So, yeah, we're seeing opportunities. We're looking within the farms themselves. We don't have a specific number at this point, but we are certainly looking for meaningful reductions. I would note that most of those costs are things that would end up on our balance sheet until we get to Q3 and Q4 of next year. So, it really won't show up in results until we start selling product from our own farms during the 2024 harvest season.

Okay. Understood. Thanks for that. You noted that you've passed the peak of the CapEx spending cycle. You've made significant investments in incremental capacity. With the capacity that you've brought online, can you help us think about the runway that you have ahead of you relative to the growth that you expect to deliver?

Well, as you know, we've expanded into the UK pretty aggressively, along with the EU, for helping pull product through the system. We've got a very state of the art facility in London, right outside of London, that's picking up business rapidly. I think when we look over into Asia, we're continuing to invest, but not nearly to the degree we do in Europe, but just pulling that product through and leveraging our assets as we go forward. This Mango category that we're into now is picking up some great steam too, and leveraging our assets, such as truck fill rates and facility utilization. So, it's a little bit here and a little bit there. I can't really say it's any one area, but it's all areas where we're focused.

Yes. I would say, to build on top of what Steve says, that the volumes that we moved through our North American operations in our fiscal 2023, while they were higher than what we did in 2022, they were not meaningfully different than what we did in 2021. We're not seeing -- the avocado space certainly went through a period of time where double-digit growth rates were the norm. While we're still very bullish on our category, and we believe that we'll see growth rates that are higher than what we're seeing in other areas of the produce category, I think it's safe to say that the volume growth we've seen over the last few years have come off a bit from what they were over the prior decade. So, we built up, we've got capacity today to be able to handle more volume, particularly in North America. I think our Laredo facility which is handling product that's crossing from Mexico, is geared up to handle more significant volumes than we're currently moving. We haven't completely built it out yet, so there is some incremental spend we could do within the facility to expand capacity further. But I think overall, we feel pretty good about where we stand. And again, having that capacity there, I will say we do hold more fruit kind of at the border, as opposed to, in our end DCs, to give us more flexibility, and I think that's consistent with some of what we talked about years ago before Laredo opened. So, we are holding more fruit there, and it's alleviating pressure on some of our other DCs as well. So, I think in North America we feel that we're in a good spot. Steve alluded to the growth CapEx in the UK, where there…

And one thing about those Blueberries, is we run those through our -- actually, our avocado packing facility there in Peru during the off-season. So, it helps utilize that giant facility also and lower our overall cost year-round.

Okay. That's great. Thanks for all the detail, and thank you for taking the questions.

Sure. Thanks, Ben.

Thanks, Ben.

Thank you. Our next question comes from the line of Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

Hey. Good afternoon, Steve and Bryan. Thanks for taking my call and happy [Multiple Speakers]

Good morning.

Thank you.

Ben talked about the cost controls on the International side. But one thing you -- I think you highlighted was improvements in the marketing strategy. And I'm assuming that's through Europe and the UK. I was wondering if you could give a little bit more detail of what you're sort of changing on that front, if I heard that correct?

Yes. I think that we're looking at a few things, Gerry. Certainly, market allocation comes into play. When we -- there's four primary markets, or three primary markets we send fruit to, North America, which is predominantly the US. We've got Europe, and we've got Asia. We -- South America, Chile, is an overflow market. We really try to minimize the amount of fruit that goes there, but it's available if need be. And then worst case scenario, there's fruit that doesn't get exported, it stays in country and goes to processing. Pecking order in terms of returns, in-country fruit is the lowest return. Chile would be the second lowest. And then kind of -- we kind of manage the overall returns in those other three primary export markets. I think that certainly within the US, the amount of fruit that we can bring here and the pricing is determined by, not only by how much Peruvian fruit the industry as a whole sends, but by what's going on in Mexico. So, certainly we're going to be evaluating the Mexico crop as we move through the season to see if there are more opportunities to bring -- opportunities to bring more Peruvian fruit to the US market in the coming year. And we think that there's a high probability that that will be the case. I think when we look to Europe, which is probably the market that takes second-most volume, certainly the UK operation being in its second year next year, we're looking to significantly expand the amount of fruit that we run through it. And we actually generated very solid returns through that location, kind of employing our direct-to-retail strategy. So, we'll be able to do more of that. I think in Mainland Europe, we still sell a…

When you say market it yourself, are you talking -- that comment, was that specifically about Asia, or is that all three regions?

No, we're talking 100% of the fruit that we harvest if it's exported, Mission is the marketer of it. We're evaluating whether some percentage of the fruit that we grow in Peru, we may send to other parties to let them market the fruit under their label. In certain markets, we think that that can help boost the returns for the farms without really compromising our competitive position.

Understood. And then the comment you made about Europe maybe pulling some fruit back there. I'm assuming that fruit would come to the US?

It would come to the US -- it could go to the UK, it could come to the US. Those would be the most likely markets that it would end up in.

Could you have done, or are you able to do like an analysis? You pulled some fruit from Europe and brought it to the US, would have been more profitable this year?

The EU, yes. The UK, probably not.

The belief is that we could have peeled off some fruit and brought it here. Again, it's a fluid market and things change regularly. We went into last season thinking we were going to have a massive crop, Gerry. So, we accelerated harvest and we were looking at every possible market to move through -- fruit through. It wasn't until we got to late June, or I think it was late June, early July, that we started to see some of the impacts of the El Nino down at Peru, the warmer temperatures, causing fruit to not size up, and we're actually seeing drop on the tree. So, we ended up accelerating harvest as the industry as a whole did, and there ended up kind of being a shortage of fruit, Peruvian fruit during the fourth quarter. I think we could have managed things differently. We could have managed the harvest schedule over the season, and then we could have certainly managed the market allocation slightly differently had we known better. I think as we look to the coming year, we're seeing more favorable weather conditions today. But certainly, that's something we're going to monitor closely to understand what the yields are going to potentially look like. I think that's a big variable. But I think we feel, we're confident that we can generate better overall sales returns next year than we did this year. This was certainly the lowest year on sales returns off Peruvian product that we've seen to date. And we think we can get it back close to what we were generating in fiscal 2021 and 2022, if not in excess of those figures.

Got it. And I get it. It's a dynamic market too, I mean.

Yes.

Yes. I [Multiple Speakers]

We -- it's easy that we do a lot of second-guessing. There is things that could have been done differently. I think that we -- when the seasons are over, we kind of look through everything and try to figure out what lessons we could learn from it and how we can behave differently going forward.

Got it. One last question. Obviously, Blueberries stand out in the quarter. Just curious, maybe what's driving that growth? I think you talked about premium. You mentioned premium product or premium fruit. Just curious, what's driving that? And outside of additional CapEx, what's the opportunity there? Maybe even 1Q and in maybe the following year since we're coming to the end of the [Multiple Speakers]

Yes. One of the things that's happened over the last probably three years, there's some new varieties coming out that have much larger size to the berry itself. The flavors are addictive, and the yields are substantially larger. So, what we've done, we've -- all these new plantings are these new special varieties, and we're actually taking out some of the older blocks and also replacing them with these new varieties. But they sell for substantially more money per kilo, and the yields are much higher. So, that's really the bottom line on why this thing has taken off. It's -- they're just a much better product, and you get a lot more money for them. We will continue to phase out the old varieties over the next probably two to three years, and we'll continue to plan a few more. We do have limits to where we're going with this, of course, but it will be there in probably two to three years. Yes.

Yes. Gerry, we have somewhere probably slightly over 500 hectares of blueberries planted today. Certainly, we've got some future plantings up in the northern region of Peru that we've communicated previously that we'll build out to probably get another 500 hectares before all said and done. I think the market that we're looking at today, there is a couple of things going on. Number one, we're benefiting from a much stronger pricing market today than we were a year ago. And a lot of that is due to the fact that the overall industry crop out of Peru is significantly lower this year than it was last year. I mean what we're hearing is it's 30%, 35% lower as an industry. We're not seeing that same 30% to 35% reduction out of our crop because our plants are still younger, and we're putting in some of these new varieties that are driving better yields. So, I think we're benefiting a bit because we're seeing -- we saw higher volumes during our fourth quarter than we did a year ago, not only because of these other varieties, but because these other varieties not only do they generate higher yields, but they're more pliable in terms of the timing of the harvest. So, we've been able to accelerate some and take advantage of these windows to kind of smooth the harvest window out a little bit more than what we've seen in prior years, though we certainly benefited from those volumes coming off earlier and the higher price environment that we saw during the fourth quarter. As we look forward, typically Q1 would be our largest quarter in terms of harvest of blueberries, and we still believe that will be the case. There'll be an uptick from where we were in Q4 in terms of volume. On the flip side, we anticipate that pricing will likely soften a little bit from where it was in Q4 as volumes for the industry do ramp up somewhat, and that's something we'll continue to monitor. We still think it'll be very attractive relative to where we were a year ago at this time, but nonetheless, probably a little -- track a little lower than what we saw in the fourth quarter. So, higher volumes, lower pricing, is kind of what we expect. And again, the goal for us is to try to stretch that harvest season out so we're not flooding the market with blueberries at any given time. So, we may even see opportunities to stretch some of this into the second quarter, and that would improve returns further.

The other thing, Gerry, most of Peru, I would say 65% or 70% still have those old varieties, and the El Nino effect has affected those older varieties much more than these new stronger versions. So, that's helped us also, which makes the price go up.

I appreciate it guys. Thank you.

Hey, no problem.

Okay. Thank you.

Thank you. And ladies and gentlemen, at this time, I'm showing no further questions. Now, I'd like to turn the -- to end the question-and-answer session and turn the conference call back over to management for any closing remarks.

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

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