Mission Produce Inc

Current report

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Current report

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited financial statements and related notes included elsewhere in this quarterly report. This discussion and analysis contains forward-looking statements based upon our current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. Please refer to the section of this report under the heading “Forward Looking Statements.”

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Overview

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We are a world leader in sourcing, producing and distributing Hass avocados, serving retail, wholesale and foodservice customers. We source, produce, pack and distribute avocados and a small amount of other fruits to our customers and provide value-added services including ripening, bagging, custom packaging and logistical management. In addition, we provide our customers with merchandising and promotional support, insights on market trends and training designed to increase their retail avocado sales.

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We have three operating segments which are also reportable segments:

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•Marketing and Distribution. Our Marketing and Distribution reportable segment sources fruit from growers and then distributes the fruit through our global distribution network.

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•International Farming. International Farming owns and operates orchards from which the vast majority of fruit produced is sold to our Marketing and Distribution segment. The segment’s farming activities range from cultivating early-stage plantings to harvesting from mature trees. It also earns service revenues for packing and processing fruit for both our Blueberries segment, as well as for third-party producers of other crops. Operations are principally located in Peru, with smaller operations emerging in other areas of Latin America.

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•Blueberries. The Blueberries segment represents the results of Moruga. Moruga’s farming activities include cultivating early-stage blueberry plantings and harvesting mature bushes. Substantially all blueberries produced are sold to a single distributor under an exclusive marketing agreement.

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Results of Operations

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The operating results of our businesses are significantly impacted by the price and volume of fruit we farm, source and distribute. In addition, our results have been, and will continue to be, affected by quarterly and annual fluctuations due to a number of factors, including but not limited to: pests and disease; weather patterns; changes in demand by consumers; food safety advisories; the timing of the receipt, reduction or cancellation of significant customer orders; the gain or loss of significant customers; the availability, quality and price of raw materials; the utilization of capacity at our various locations; and general economic conditions.

Current report

Our financial reporting currency is the U.S. dollar. The functional currency of our most significant subsidiaries is the U.S. dollar and the majority of our sales are denominated in U.S. dollars. A significant portion of our purchases of avocados are denominated in the Mexican Peso and a significant portion of our growing and harvesting costs are denominated in Peruvian Soles. Fluctuations in the exchange rates between the U.S. dollar and these local currencies usually do not have a significant impact on our gross margin because the impact affects our pricing by comparable amounts. Our margin exposure to exchange rate fluctuations is short-term in nature, as our sales price commitments are generally limited to less than one month and orders can primarily be serviced with procured inventory. Over longer periods of time, we believe that the impact exchange rate fluctuations will have on our cost of goods sold will largely be passed on to our customers in the form of higher or lower prices.

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Net sales

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Our net sales are generated predominantly from the shipment of fresh avocados to retail, wholesale and foodservice customers worldwide. Our net sales are affected by numerous factors, including the balance between the supply of and demand for our produce and competition from other fresh produce companies. Our net sales are also dependent on our ability to supply a consistent volume and quality of fresh produce to the markets we serve.

Current report

Net sales increased $76.5 million or 35% in the three months ended April 30, 2024 compared to the same period last year, primarily driven by our Marketing and Distribution segment, where average per-unit avocado sales prices increased 22% and avocado volume sold increased 8%. Blueberry revenue also increased $8.3 million or 488% compared to the same period last year, driven by the timing of the harvest season compared to the same period last year.

Current report

Net sales increased $121.7 million or 28% in the six months ended April 30, 2024 compared to the same period last year, driven by a 23% increase in average per-unit avocado sales prices and a 4% increase in avocado volume sold. Blueberry revenue increased $11.0 million or 35%, primarily due to a 63% increase in average per-unit sales price, partially offset by a 17% decrease in volume sold. Pricing in the first quarter of 2024 was favorably impacted by industry supply constraints during the Peru harvest season.

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Gross profit

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Cost of sales is composed primarily of avocado procurement costs from independent growers and packers, logistics costs, packaging costs, labor, costs associated with cultivation (the cost of growing crops), harvesting and depreciation. Avocado procurement costs from third-party suppliers can vary significantly between and within fiscal years and correlate closely with market prices for avocados. While we have long-standing relationships with our growers and packers, we predominantly purchase fruit on a daily basis at market rates. As such, the cost to procure products from independent growers can have a significant impact on our costs.

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Logistics costs include land and sea transportation and expenses related to port facilities and distribution centers. Land transportation costs consist primarily of third-party trucking services to support North American distribution, while sea transportation cost consists primarily of third-party shipping of refrigerated containers from supply markets in South and Central America to demand markets in North America, Europe and Asia. Fuel prices as well as variations in containerboard prices, which affect the cost of boxes and other packaging materials, impact our product cost and our profit margins. Variations in production yields and other input costs also affect our cost of sales.

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In general, changes in our volume of products sold can have a disproportionate effect on our gross profit. Within any particular year, a significant portion of our cost of products are fixed. Accordingly, higher volumes produced on company-owned farms directly reduce the average cost per pound of fruit grown on company owned orchards, while lower volumes directly increase the average cost per pound of fruit grown on company owned orchards. Likewise, higher volumes processed through packing and distribution facilities directly reduce the average overhead cost per unit of fruit handled, while lower volumes directly increase the average overhead cost per unit of fruit handled.

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Gross profit percentage will fluctuate based upon per-unit sales price levels in relation to per-unit costs. Margin is primarily managed on a per-unit basis in our Marketing and Distribution segment, which can lead to movement in gross profit percentage when sales prices fluctuate.

Current report

Gross profit increased $12.9 million or 71% in the three months ended April 30, 2024 compared to the same period last year to $31.0 million and gross profit percentage increased 220 basis points to 10.4% of revenue, compared to the same period last year. The increases were attributed to our Marketing and Distribution segment, driven by strong per-unit margins on avocados sold and higher volume.

Current report

Gross profit increased $32.6 million or 120% in the six months ended April 30, 2024 compared to the same period last year to $59.7 million and gross profit percentage increased 450 basis points to 10.7% of revenue, compared to the same period last year. The increases were attributed to our Marketing and Distribution segment, where we achieved strong per-unit margins on avocados sold and higher volume, and our Blueberries segment, where we benefited significantly from higher per-unit sales pricing.

Current report

Warmer temperatures correlated with El Niño have persisted through the development of our 2024 Peruvian avocado crop. We expect these warmer temperatures to negatively affect our harvest yields for the second half of fiscal year 2024, reducing exportable volume from our owned farms to be more than 50% lower than recent seasons. The decrease in volume will negatively impact absorption of fixed costs at our Peruvian farms. Though we expect these lower volumes to generally support higher pricing, we do not expect higher pricing levels to offset the negative impact of volume decreases on gross profit for the International Farming segment for the fiscal year.

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SG&A

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Selling, general and administrative (“SG&A”) expenses primarily include the costs associated with selling, professional fees, general corporate overhead and other related administrative functions.

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SG&A expenses decreased $0.6 million or 3% in the three months ended April 30, 2024 compared to the same period last year, primarily due to a reduction in general corporate expenses.

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SG&A expenses increased $1.0 million or 3% in the six months ended April 30, 2024 compared to the same period last year, primarily due to higher employee related costs, including performance-based incentive compensation and stock-based compensation expense. These costs were partially offset by a reduction of approximately $2.0 million in general corporate expenses.

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Interest expense

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Interest expense consists primarily of interest on borrowings under working capital facilities that we maintain and interest on other long-term debt used to make capital and equity investments. We also incur interest expense on finance leases, computed using each lease’s explicit or implicit borrowing rate.

Current report

Interest expense increased $0.7 million or 26% and $1.6 million or 31% in the three and six months ended April 30, 2024, respectively, compared to the same periods last year, driven primarily by rising interest rates. Interest expense incurred from a significant financing lease in our Blueberries segment was $0.5 million and $0.4 million for the three months ended April 30, 2024 and 2023, respectively, and $1.0 million and $0.7 million in the six months ended April 30, 2024 and 2023, respectively.

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Equity method income

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Our material equity method investees include Henry Avocado (“HAC”), Mr. Avocado and Copaltas.

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Equity method income was flat in the three months ended April 30, 2024 compared to the same period last year, as income from HAC was largely offset by losses at Mr. Avocado resulting from low margins on fruit sold.

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Equity method income decreased $0.5 million or 36% in the six months ended April 30, 2024 compared to the same period last year, as losses at Mr. Avocado were only partially offset by income growth from HAC.

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Other income (expense), net

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Other income (expense), net consists of interest income, currency exchange gains or losses, interest rate derivative gains or losses and other miscellaneous income and expense items.

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Other income increased $0.4 million or 67% in three months ended April 30, 2024 compared to the same period last year, primarily due to foreign currency transaction losses in the previous year from the weakening of the U.S. dollar relative to the Mexican peso.

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Other income (expense), net was zero in the six months ended April 30, 2024 compared to expense of $0.2 million in the same period last year, primarily due to higher interest income.

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Income taxes

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The provision for income taxes consists of the consolidation of tax provisions, computed on a separate entity basis, in each country in which we have operations. We recognize the effects of tax legislation in the period in which the law is enacted. Our deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years we estimate the related temporary differences to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.

Previous report

Stock repurchase program

Previous report

On September 6, 2023, the Board of Directors approved a stock repurchase program, which permits the Company to repurchase up to $20 million of shares of the Company’s common stock within 36 months from adoption. Share repurchases may be made from time to time in open market or privately negotiated transactions and/or pursuant to Rule 10b5-1 trading plans in such quantities and at such prices as may be authorized by certain designated officers of the Company and are subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy and other relevant factors.

Previous report

No repurchases were made by us or our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) of the Exchange Act) of registered equity securities during the first quarter of 2024. As of January 31, 2024, the approximate dollar value of shares that may yet be purchased as part of our stock repurchase program was $19.4 million.