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

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 2022 third quarter earnings call. We produced strong revenue growth of 27% to $313.2 million, and we generated $31.6 million in adjusted EBITDA for the third quarter, which was supported by sustained strength in pricing amid a lower industry supply backdrop. Additionally, our per unit margins performed well in the third quarter, which have remained at the high end of normal historical ranges and demonstrates the flexibility of our diversified global sourcing platform, even in periods where we experienced volatility from the large Mexican source market and capacity absorption headwinds that we are incurring from our new Laredo facility. On the Laredo point, we continue to feel great about the flexibility that this 261,000 square foot mega facility will provide us in the future to drive volume efficiency throughout North American markets. We've made substantial investments in our network over the past several years, including Laredo, and we feel great about the capacity we have in place to support our anticipated growth over the next several years. While we've been absorbing those incremental overhead costs over the past year, they are largely fixed and have stabilized, which provides us with an opportunity to leverage those investments, as utilization rates improve and we move more volume through the facility. To that end, earlier this week, we announced a long-term third-party logistics partnership with NatureSweet, which is one of the largest growers and marketers of tomatoes, bell peppers and cucumbers in North America. Given the size and scale of our business, Mission is uniquely positioned to offer 3PL services that streamline operations and create logistical efficiencies for complementary products. This 3PL deal will leverage our state-of-the-art Laredo forward distribution center in Texas, to handle approximately 70% of their Mexican volume that's destined for the…

Thank you, Steve, and good afternoon to everyone on the call. I'll start with a brief review of our fiscal third quarter performance ended July 31st, 2022, and touch on some of the drivers within our 3 reportable segments. Then I'll provide a snapshot of our financial position and conclude with some thoughts on some of the current industry conditions that we are seeing. Total revenue for the third quarter of fiscal 2022 increased 27% to $313.2 million. Growth was driven by a 42% increase in average per unit avocado sales prices due to lower industry supply out of Mexico following a smaller Mexican harvest as well as inflationary pressures. As a result of the smaller industry harvest, avocado volumes sold decreased 11%. Domestic volumes declined 6%, which was a lower rate relative to export markets during this period, demonstrating the resiliency of demand for avocados amid higher price points in the U.S. market. Third quarter gross profit increased $1.7 million or 4% compared to the same period last year to $42.6 million, and gross profit percentage decreased 300 basis points to 13.6% of revenue. The increase in gross profit was primarily driven by higher per unit margins during the quarter. Strength in margin was partially offset by the impact of lower avocado volumes sold and its related impact on fixed cost absorption in our Marketing and Distribution segment. Gross profit in the International Farming segment was essentially flat with the prior year, and I'll discuss these dynamics later in my remarks. The lower gross profit percentage was driven by higher per unit sales prices, as per unit margin represents a lower proportion of the sales value. Margin is primarily managed on a per unit basis in our Marketing and Distribution segment, which can lead to significant movement in gross…

[Operator Instructions] Our first question comes from Ben Bienvenu with Stephens.

Bryan, I was hoping to put a finer point on your commentary around volumes in the fourth quarter. You said higher sequentially. Should our inference be that, that's lower year-over-year or higher year-over-year, but higher sequentially, just to put a finer range on things, if that's possible?

At this point, we don't have a specific number that we've communicated. What I would say is that we generated about -- we had about 6 million leg equivalents, and I apologize for speaking in legs as opposed to pounds, but roughly 6 million leg equivalents that we sold during Q3. We did roughly 6.3 million legs last year during Q4. So there wasn't a big gap from that perspective. We do expect to be higher in Q4 than in Q3, probably numbers that aren't too far off from what we saw in Q4 last year, probably a comparable year-over-year numbers.

And then thinking about the International Farming business, the volumes are quite strong. When we think about pricing, I know you guys price a portion of that earlier in the year. How should we think about the exposure of that business in the fourth quarter, the volume there, to market pricing versus prices you might have locked in earlier in the year?

Well, I'll take the first shot and then -- we clocked up as many retailers as we could on a fixed volume, fixed price for the entire season, which includes the fourth quarter. So, there's a little bit of pressure on the market today or this week with a little more Mexican fruit coming in. But so far, everyone's sticking to their guns and doing what they said they do. We do remind them that they were getting a heck of a deal about 90 days ago, and it's worked out well for them. They've had great movement. And I think it's steady as she goes, as far as we can tell from this side of it, at least for the Peruvian fruit.

Yes. I would kind of agree with that, Ben. Certainly, with these program sales that we put in place with our customers, we weren't necessarily selling Peruvian fruit in Q3 at what you'd consider like a spot market rate, because we knew we were negotiating with these customers to sell over the entire season, and we wanted to make sure we had a home for all the fruit. So, whereas you may have seen pricing in our Peruvian product, it was maybe a little bit lower than, let's say, Mexico, California was selling spot marketing in Q3. I think that you would -- that gap is going to be much smaller in Q4 because, even if that market price declines, our prices should hold up relatively stable. To your point, it's not all sold through on long-term contracts, and the portions of that fruit that are sold in the spot market will likely be lower in Q4 than they were in Q3. Most certainly, I think we are expecting kind of lower average sell-through prices in Q4 than what we saw in Q3.

And then one more, if I could. Just thinking about this 3PL relationship that you have through your Laredo facility, how much of the kind of slack capacity in that facility does that arrangement shop up? And are there other opportunities that you all have to maximize that capacity utilization of that asset as we think about kind of other periods of the year?

Well, we're kind of taking them one step at a time. This is a pretty substantial volume we're talking about on these tomatoes and cucumbers and whatnot. On a year-round basis, it's pretty consistent throughout the entire year. So what we hope to do is not only leverage our facility, but our personnel. And one of the things right around the corner is the logistics side of it because we compare customers -- the customer list, a lot of them are the same. So, I think we'll be able to synergize on freight down the road also. So, we're going to start with basically the transfers and then build from there.

Yes, Ben. I think this is absolutely going to help in the near term. I think that this business is going to need to ramp up a little bit over time. It's not going to start at full capacity from day 1. I think there's real strong opportunities here over the course of the next year to build this up. But on day 1, it is going to consume some of that slack capacity that we have in that facility today. If I had to guess, maybe it's 20% to 25% of the capacity, particularly in like cross-stocking and the docking area. I think that -- again, I'd remind everybody that the long-term purpose of this facility is to support the growing Mexico supply of avocados that we see happening over the long haul. This year, we were down. I think we know it's well documented across the industry, but we don't -- when we look at that, it doesn't take away from the fact that we expect Mexico to still be a strong contributor to the overall supply of avocados that are consumed here in the U.S., and this facility keeps us well positioned for that.

And that opening of Jalisco will help too because that product will go through there also.

[Operator Instructions] Our next question is from Tom Palmer with JPMorgan.

I wanted to ask -- I know it's a little early to think about next fiscal year, but we are approaching it. How do you think about volume growth when you're lapping a challenging supply year? How do you plan for your business? Do you think about just returning to your target high single-digit total sales growth, which is really volume-driven? So you're kind of approaching high single-digit volume growth a year, and that's what you planned for? Or when you're lapping such a challenging year such as this, do -- you kind of inherently assume you get a little bit extra because of the catch-up?

Well, on the volume side of it, the Mexican crop is expected to be up. I can't give you an exact percentage because I don't know, but it's going to be higher than it has been this past year. And then when you look at say the Peruvian crop, a lot of those trees are younger trees. They haven't bloomed yet or some of the earlier remains are just starting blooming. So it's hard to tell what the crop will be, but the trees will be bigger. So generally, you would think the crop will be larger there also. So too early to tell, but that's looking at history, and looking at how the Mexican crop looks and what we know about Peru, it should be a higher number.

Yes, I would agree with that, Tom. I would say that Mexico is going to be the big driver here. I mean, historically, it's provided 65% to 70% of the fruit that we've sold. So when Mexico moves, Mission moves, the whole industry moves. We are -- the data we're seeing so far would indicate that the crop is going to be much larger next year than it was this year. I don't know, to Steve's point, an exact percentage on that, but our volume growth is going to be driven by the fact that there's going to be a greater supply of fruit out there. What that means on top line revenue, a lot of it will depend on how the additional volume what that does to average selling prices. We know this year, a year where supply was constrained, prices reached record levels, and we're seeing revenues that are higher than we've ever seen historically. So certainly, the higher volumes are going to have an impact in the other direction, the extent to which we don't yet know.

And then, I wanted to ask on the blueberry side. I noticed in the Q, looks like a pretty substantial build-out over the next few years in terms of acreage, more than doubling it. How do you think about returns for blueberries compared to similar investments you're making in your farming operations? And then is the grow-out period quicker and so you get perhaps a faster return on those investments?

Sure. I'll start with the second part of your question. Absolutely, the return is faster on blueberries than it is on avocados. Generally, a lot of these plants are grown in pots ahead of time, so -- and then put in the ground. So you can develop them in the nursery. And from the time you get them in the ground, you can start having a crop with a decent-size crop within 1 to 2 years of planting. Like avocados, it may take 4 to 5 years. So it definitely comes to market quicker. Certainly, we evaluate the ROI on these types of projects. And we look at it as having a return that's comparable to what we'd be looking at and investing in avocado farming. Certainly, with blueberries, we would likely expect a slightly higher return from the standpoint that we're not marketing the fruit like we do with avocados. So on that side, we're making money not only on the farming of the fruit, but on the sell-through as well. With the blueberries, our partner in the JV is actually marketing the fruit. So it really is just looking at a farming asset, but there are a lot of other costs down in Peru that are leveraged through our blueberry operation because of being in a different time of the year, whether it be labor, whether it be facilities. So there are advantages that we benefit from by having this production in place. And I think we're excited about what we think it will deliver to the bottom line going forward.

And then just any idea of -- I see the total capital cost is about $50 million. Is that mainly going to be based on partner contributions? Or, I don't think there's a kind of cash out from the business.

Yes. I mean our expectation is that most of that's going to be funded through operating cash flows within the joint venture itself. I mean, with the 360-some-odd hectares that we already have planted today that are in a mature production, we're generating strong cash flow from that operation. And over the next couple of years, which we'll be doing these planning. That's where the majority of the funding is going to come from. The balance will come from partner contributions of which we'll be providing 60% of those. But we don't -- we view that number to be a small fraction of the $50 million.

Our final question will be from Gerry Sweeney with ROTH Capital.

Just start with the -- with Mexico and Laredo. And granted, there's probably a ton of variables in this question, but just trying to frame it out a little bit. But if you look at Laredo, the size of the facility, it's built for the future. How big does the Mexico harvest have to be to really start to sort of leverage that facility, and granted -- I know you have lease go for Michoacan and you're not taking -- there's going to be variables as to how much of that fruit you get. But I think there is some type of relationship there and I was just curious as to what it may be.

We did build it for the future. There's no question about that, because I'm glad we did it then looking at the cost of things to build today. But I think between some outside third-party logistics, such as we've just talked about, and then Jalisco opening up, that will help and improve volume coming across on the avocado space. I think it will also add efficiencies, as I said, where we can hopefully minimize a step or a stop or a leg on the transportation going forward by being able to ripen and bag or do whatever you're going to do right there in Laredo or straight into a customer rather than stop at another distribution center. So the volume, I think, will continue to increase year-to-year. Not quite sure what the crop in Mexico is yet or what to expect, but the demand continues to be good. So, I think as soon as Peru gets out of the way here in a few weeks, that volume should pick up substantially going through Laredo.

Yes, Jerry, I'd supplement that with -- certainly, there's peak times of the year when Mexico products coming across the border that probably runs from kind of January leading up to the Super Bowl through maybe late April, clearly that with Cinco de Mayo. So we've certainly designed capacity around of that facility to be able to handle volumes that kind of come off within that window. And we know that at other times of the year, we're going to be looking for 3PL opportunities like this NatureSweet one, to be able to kind of fill up capacity in that facility. I would say today, I don't have a precise number as to what that volume needs to get to during those times of the year to where we're running at peak capacity. But I can say that we have ample room for growth at this point. I will also say, though, that, that facility is set up in a way to backfill our capacity at our other distribution centers throughout North America. So utilizing, particularly with Mexican fruit, which is running year round, utilizing that fruit to hold fruit at the border as opposed to, in the old days, having to make decisions immediately when we only had a cross-stocking facility. It enables us to kind of delay making decisions on where that fruit goes and supplement capacity at those other locations. And I think you can kind of see some of that in how our CapEx and our marketing and distribution has come off as much as it has this year, kind of that lack of need to continue building out our North American infrastructure.

Got it. it gives you some more flexibility as to where to send the fruit and why and which -- got it. Speaking about the additional infrastructure, is there an opportunity on the -- with NatureSweet to use any of your other facilities? Or is this specifically for Laredo?

Well, it's primarily for Laredo. They have talked about utilizing some other ones in strategic locations, probably not all of them, but possibly the Pacific Northwest where they need to be there more just in time and inventory some product there. So I think there's some more opportunities down the road as we get in and learn about each other's business.

And then switching gears to the international side. It sounds as though the Peru harvest -- Just curious as to how much of that was acres coming on trees maturing versus maybe just a good or better crop year-over-year? And I guess what I'm really trying to get at is, obviously, you do have more acreage coming on, and I think you're expecting 110 million pounds to 120 million pounds out of Peru. What that could be as some of these acres mature over the next -- how many years?

Yes. I don't know the exact acreage that is not mature compared to mature.

Yes. Maybe I can…

Yes, Bryan will echo because he's depreciating it.

Yes. We had a little more acreage that came into production this year up at our Northern Peru farms. Most of it in the southern area in Chile was already in -- what we'd consider production. But we did have a small amount up north that came in this year. Most of the improvement in production though was driven by yields per hectare. I think that we saw numbers that looking at the overall production that we're estimating provided by the kind of the acreage is in production, we're probably going to see yields of around 18,000 kilos per hectare this year, so which -- that's continuing to climb from -- I think we've seen continued improvement in that each year. So I think we're pleased with the production that we've seen. And yes, I think we'll have a little -- as we look forward, we have some additional acreage in the southern part of Peru that we've planted over the last year or 2. That's probably a couple of years out from coming into production. I think we probably have about 600 hectares there. And then, similarly, we've got our planning in Guatemala that will be coming on. We'll get a very small amount of production probably this next year, and then in '24, it will become a little bigger and then continue to ramp up from there. So really kind of the long-term strategy of kind of filling in the calendar throughout the year, I think it takes time because for the trees to grow and to mature. But I think we're seeing that it's coming to -- it's going to be coming to fruition.

Thank you. There are no further questions at this time. I'd like to end the question-and-answer session and turn the conference call back over to management for any closing remarks.

Great. Thank you for your interest in Mission Produce, and we look forward to speaking with you again soon. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your attendance. You may now disconnect your lines.