Good afternoon, everyone, and welcome to the Mission Produce Fiscal Second Quarter 2024 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 over to Jeff Sonnek, Investor Relations at ICR. Please go ahead, sir.

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 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 today. We are pleased to deliver a second consecutive quarter of record results fueled by continued strong momentum in our Marketing and Distribution segment. Total revenue for the second quarter of fiscal 2024 increased 35% to $298 million. Growth was driven by robust consumer demand for avocados, which translated into an 8% increase in avocado volumes sold in our Marketing and Distribution segment, which is an encouraging sign giving our per unit sales prices were up 22% versus the prior year. Further, the volume growth demonstrates our ability to drive per capita consumption through providing consistent access to our customers through our global sourcing network. The stable industry environment in the first half of our year not only aids in volume growth, but it also allows our business to operate with greater efficiency and this showed up again in the second quarter with another strong adjusted EBITDA performance. Adjusted EBITDA increased 166% to $20.2 million in the second quarter and our cash flow from operations improved by $39 million year-to-date in fiscal 2024. Our performance was driven by a combination of factors that generated higher per unit avocado margins, including stable industry supply and a heavier emphasis on fruits sourced directly from growers in Mexico, an earlier start in California harvest season, and tailwinds from the price increases we implemented for value-added services in the fall of 2023. We also progressed with our efforts to reduce corporate expenses. The combination of higher volumes, stronger per unit margin, and cost control contributed meaningfully to our profitability and cash generation. Looking to the second half of the year, while El Nino weather conditions had appeared to have eased, we're still seeing its effect on the development of the Peruvian avocado crop for this year, resulting in notable…

Thank you, Steve, and good afternoon to everyone on the call. I'll start with a review of our fiscal second 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 second quarter of fiscal 2024 increased 35% to $297.6 million, driven by a 22% increase in avocado sales prices and an 8% increase in avocado volumes sold in our Marketing and Distribution segment. Results were also supported by our Blueberry segment where revenue growth was spurred by higher volumes attributed to an extended harvest season compared to the same period last year. Gross profit increased by $12.9 million to $31 million in the second quarter and gross profit margin increased 220 basis points to 10.4% of revenue. These increases were primarily driven by stronger per unit margins and higher volumes of avocados sold in our Marketing and Distribution segment and further supported by increased volumes sold in our Blueberry segment. SG&A expense decreased $0.6 million or 3% compared to the same period last year, primarily due to a reduction in our general corporate expenses. We continue to focus on reducing controllable expenses and we have achieved approximately $2 million of cost savings in these areas during the first half of fiscal 2024. Net income for the second quarter of fiscal 2024 was $7 million, or $0.10 per diluted share, compared to a net loss of $4.6 million, or $0.07 per diluted share for the same period last year. Adjusted net income for the same period was $9.8 million, or $0.14 per diluted share, compared to an adjusted net loss of $0.5 million or $0.01 per diluted share last…

Thank you, sir. [Operator Instructions] And our first question comes from the line of Gerry Sweeney with ROTH Capital Partners. Please proceed.

Hey, Steve, Bryan. Thanks for taking my call.

Hey, Gerry

Hey. Good talking to you, Gerry.

In your prepared remarks, you discussed robust demand and prices. And this, I think this has been a little bit different from a couple of years, the past couple of years. I'm just curious, if this is driven by just more consistent supply out of Mexico and what that supply is doing to the market, especially with the prices that moving up with improved volumes of demand.

Well, it appears, Gerry, that the consumption continues to go up and prices, the higher prices haven't really affected it. When you look back up a couple of steps and you look at the overall volume sold compared to a year ago or two years ago, it's at actually higher prices per pound. So I think we're somewhat in a revolution here where this consumption continues to grow with times of more volume and long-term, as Bryan said on the -- I mean, in Peru, it's lower, but in Mexico, it's -- in California, we've had some weeks here compared to years past that were higher volumes at higher prices. So it's a pretty good situation all the way around, at least for now.

Yeah, Gerry. I'll kind of add on to that. I mean, I think that there's some, certainly in the last few years when we've seen big increases in supply, it's had a negative impact on pricing and vice versa. I think there was some after-effect from COVID that likely played into it. I think we're seeing more normalized shopping patterns now than we saw previously. I think there's more interest in engagement in the category maybe than we've seen over the last few years. And I think consistent supply probably ties into that. We're seeing more aggressiveness with our customers, our retail customers in particular, at promoting the category. And I think those are big positives, I think a higher level of it than we've seen in a while. And as a result, we're seeing deeper household penetration and greater consumption among consumers, particularly here in the U.S. market. So I think we view it as a positive. I don't know how you couldn't view it as a positive when volumes are up and pricing is up, I think that our numbers may be a little more extreme than what retail is seen. I think prices are up at retail and consumption is up, but I do believe that some of that cost is likely being borne by our customers to some extent, again, because they're excited about the category and they're moving significant volume. So they're making the decision to promote it.

Okay. Taking volume over price to some degree. Is that fair?

Yeah.

I would say so, yeah.

Yeah. Also on the M&D side, you talked about gross margins being up and you gave, a couple of different reasons. Stable supply, early California season, and then I think some fee increases. Is there any way you can sort of either one bucket those out just to see what's driving each? And then the follow-up would be to that would be just on the fee side. Are you at a level where you feel as though fees are at appropriate level, or is there still some catch-up to do on that front due to inflation and some other cost headwinds from the past couple of years?

Okay, Gerry. I think I'll answer the last question first. I think we made the adjustments that we felt were necessary at the end of last year to bring our rates in line to the value that we provide to our customers. We'd gone an extended period of time without raising rates in any meaningful way for things like ripening and distribution services, for bagging product in -- our transportation as well. We did everything we could to try to hold back on increases question not certain whether some of the increases we were seeing were transitory in nature. As it became more apparent that these cost increases were sticky, we had to look at raising those fees, and that's what we did. I think we felt we raised them to a level that is appropriate for the service we are providing and in line with what others in the industry are doing. I don't necessarily see the need at this point to extend those increases further, though we will continue to evaluate as we move through the year. Gerry, I don't know, Steve had…

Just I was going to add to it. One thing that helps those costs is the volume of mangos going through the same facilities being put on the same truck. So we are getting a little bit more efficiency also to help cover those costs.

I think that's absolutely true. And getting back to your first question, it's tough to pinpoint exactly. It's such a dynamic environment that we work in. It's tough to pinpoint the exact drivers of the gross margin performance in the moment that we are actually achieving it. I mean, I will say that we consistently expected, and I think we referenced in the prior call that Mexico crop was not going to be any larger this year than it was last year. If anything, we expect it'd be slightly smaller. I think we continue to expect that crop, those constraints on the harvest to hit throughout the quarter and transitioning out of the quarter. I don't think we saw as much of a reduction in volume during the quarter as we'd been expecting as to where the industry as a whole is expecting and what we were communicating to our customer base. So I think that was likely keeping pricing a little bit elevated, not knowing exactly what the supply conditions are going to look like as we've been caught in challenging situations in the past. So that certainly plays a part of it. I think it's -- you can't underestimate the impact of starting the California season earlier this year. We have a lot of fixed costs in our Oxnard location that we carry on a year-round basis. We definitely ramp during the season, when this harvest season begins. But when we're starting to run product through, the contribution margin from that California fruit is certainly higher than what we see when we're buying fruit from third parties, co-packers in Mexico, or running through to our other locations. So I think they all -- they have a meaningful impact. I don't think we're really -- we can really explain how one, they both play off each other and it's very difficult to kind of pinpoint the margin of accretion to one versus the other. But the fact that we made reference to them, we believe that both had a meaningful impact.

Got you. That's fair and I get it. It's very, very extremely dynamic situation there. Final question, then I'll jump back in queue is you talked about the International Farming side, specifically the Peru crop being maybe down 50% year-over-year, but offsetting that is maybe some prices and then some efficiency that you put into it, into the operations there. But maybe you could potentially translate some of this to -- into terms of maybe adjusted EBITDA potential for the international segment?

Yeah. I'll kind of talk specific to the numbers and then maybe Steve can jump in and give a little bit more perspective, kind of on what we've been experiencing down in Peru over this last season and what we expect to see happen going forward from a weather standpoint. Where we're at today it was we've -- we kind of came in when our last harvest season ended, I don't think any of us were pleased with the results we achieved last year and our big focus coming out of the season was how can we reduce costs within our farming operation to improve its profitability. So that process began towards the back end of last summer and is continued on through this year. So those cost savings initiatives that we are benefiting from now are a result of those actions that we took. I think when we look at volume, certainly we're expecting numbers to be significantly lower than what we were planning for, significantly lower than what we've seen the last few years. As a result of those supply constraints, we do expect pricing to be up. And what we're seeing on our farms is not unique. I mean, we're looking at industry estimates out of Peru, where we're talking with other suppliers down that market. And we believe that the reduction that we are seeing in our own farms is relatively in line with what we're hearing across the board. So we're going to have limited supply, but the industry as a whole is going to have limited supply as well as we move through the second half of our fiscal year. I think when we look at it, we certainly had expectations for this year that we could generate EBITDA that's significantly higher than what we did last year. I think as a result of the lack of volume, we're more likely to see results in the farming segment that are more in line with what we saw last year and not achieve the recovery that we were expecting this year. So again, if I look year-over-year, there may not be dramatic movement, but it's certainly going to fall well short of the expectations that we have for that segment. We believe at this point that it's isolated to this year with the weather events that we've discussed. We certainly see some positive signs with weather that I think Steve will discuss after I'm done. But certainly, we wanted to be transparent about what we think is going to happen for the year that we're in right now. We're going to work to get through it, and then I think we remain excited about the possibilities that exist going forward.

Yeah. Just to expand on that, Gerry. This El Nino comes by about every ten years, and Peru is probably the closer you are to the equator, the more of it you get. I mean, California had its fair share, too, but one of the things we did notice early and what we did, we went out and locked up a lot of our -- a lot of those Peruvian packers have great orchards in a packing house, but they don't really have a marketing or distribution arm. So we went out and locked up a lot of loads to help fill the gap that we could see coming on our own production, which has helped out. And it's on a consignment basis, so everybody wins when the market goes up. And it's not covering everything we would have had on our own, but it's filling the gap pretty well and providing a pretty good income for us, too. So it appears El Nino is moving offshore. So hopefully the trees recover in time and put on a good set here later in the year. I'll be down there in a couple of weeks, have a better idea of it.

Okay. I appreciate it. Thanks, guys. I'll jump back in the queue. Thanks.

Take care, Gerry.

Thanks, Gerry.

And the next question comes from the line of Ben Klieve with Lake Street Capital Markets. Please proceed.

All right. Thanks for taking my questions and congratulations on a nice quarter here. First question on the Blueberry initiative, you talked about kind of accelerating the investments into the expansion. And I'm wondering if you can first of all confirm that the targets that you had set for that initiative, which I think was 2,600 acres by the end of 2028. Is that still kind of the end goal that you have for that segment, but maybe now that's just accelerated by a couple of years? And then second, the CapEx going into that initiative on a total basis, is that unchanged? And you're just accelerating it, or have you increased the total level of CapEx you're expecting to put in?

Our expectations, Ben at this point, the assumptions around total production are still the same. We have roughly 450 hectares planted down in the Chao region in Peru, which is where our original plantings were. And the plan is to develop around 600 hectares of land up in the Olmos region of the northern part of Peru. So, yeah, 1,050 hectares, around 2,600 acres in total. Nothing's changed at this point with that plan. In terms of the overall capital spend, we were planning to roll this out over a three-year timeframe, roughly. I mean, I will say our plan for this -- our original plan -- I think what we're planning to do now is more in line with what our original plan was when we approved the project a couple of years ago. When we went into budget for this year, we scaled back. We made some efforts to reduce the outflow because we were coming off of a relatively rough blueberry harvest season in 2022-'23. As we've gone through this year, with the success that we've had with the higher price points and the positive cash flow that's been generated, we've taken a closer look at how we phase the project and decided to just pull some of the development back in. So we're going to develop 100 hectares of land this year, start doing it towards the back half of the year. So some will -- cost will be incurred this year, some will roll into our next fiscal year, but that's costs that we would have been planning to do next year and we are just pulling it forward. The overall CapEx related to the project has not changed. And I think, as a matter of fact, I mean, we're looking for opportunities as we move through the development to actually reduce that cost of development. So, I think that's kind of where we stand today.

Got it. That's super helpful. Thanks, Bryan. And a question regarding the blueberry outlook. You noted that last year you had just a phenomenal performance out of that segment. I'm wondering if it's maybe it's too early to indicate one way or the other, but the weather conditions that are problematic for your other operations. Is there any indication that the blueberry outlook is going to be compromised at all because of weather, or is it too early to say, or is there no effect?

It doesn't appear that they affect the blueberries as much. And one of the things that's different, all these new plantings on these blueberries banner, these super new varieties, special genetics out of Driscoll that produce a berry that they get a big premium on, not only because of the flavor and the size, but the production is almost double compared to the run of the mill varieties. So, as Bryan said, we wanted to accelerate this as fast as possible. We have the land available. We have the team to do it, and we got the cash to do it because of the great year we had, and get through it and enjoy it earlier.

Yeah. I think to Steve's point, Ben, the crop, we have no indication that there's going to be challenges with the crop size this year. I think with -- one of the things, with the planting further to the north, we should start harvesting blueberries a little earlier this year than what we've traditionally seen. So, I don't know if it's going to have a dramatic impact in the third quarter, but we'll likely see a little more activity in Q3 with blueberries than what we've seen in prior years. Certainly, we benefited from an extremely high pricing environment this last year due to the supply constraints. I don't necessarily think that we're planning for that type of a pricing environment this coming year. We think it'll likely settle in at more rational levels, but again, it will be dependent upon the overall supply that's available. I think to Steve's point. One of the things that we believe will insulate our pricing, to some extent, are the new varieties that we are planning with opportunities to get them into premium markets, whether here in the US or in Asia. And as those become a larger percentage of the overall blueberries that we market, we see that being the primary driver for keeping our average sales prices higher than kind of the market as a whole out of Peru.

Got it. Got it. That's all good to hear. One more question for me and I'll get back in queue regarding the cost reductions in the international farming operation. $10 million of annualized savings. To what extent are those savings enabled by the lower volume that you're going to be getting out of Peru? I'm just curious if there's -- if that's -- that $10 million you think is kind of a sustainable number going forward, or if you get more normalized kind of volume next fiscal year, that you're going to see those costs pick up.

No. These initiatives are put in place, Ben, long before we knew what the crop size for this year was even going to look like. These are very much fixed costs related to the farming operations themselves. Some related to our packing operation. I think it's just operating leaner from a labor standpoint than what we have historically. I think there are some other things that we're doing beyond that. But labor is certainly the biggest driver. When we look the biggest variable costs we have in our farms is actually related to harvesting. And that is -- that's roughly 10% or so of the overall cost within our farming operation. So that 10% is going to see a benefit of a lower cost as a result of less volume. But the rest of the costs are more driven on a per hectare or per acre basis. And they're not directly correlated with the volume that's coming off the tree. So maybe they're not 100% fixed. Maybe there's a little bit of variability into it. But we would expect the vast majority of those cost savings to carry forward to future periods.

Got it. Okay. Very helpful. Well, congratulations again on a nice quarter here. Best of luck in the third quarter and I'll get back in queue.

Hey. Thank you very much, Ben.

Great. Thanks, Ben.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the call back to management for closing remarks.

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

This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.