Mission Produce (AVO) Q3 2023: Avocado Volume Up 23% as Peruvian Crop Volatility Pressures Margins

September 11, 2023 | By EarningsIQ Research

Mission Produce’s third quarter showed robust avocado volume growth offset by margin compression caused by unexpected Peruvian weather volatility and industry price resets. The company’s global sourcing model enabled volume gains across all end markets, but margin pressure in international farming revealed the operational risks of crop variability. Management is banking on rational pricing and diversified sourcing to stabilize results in the fourth quarter, but weather and supply chain remain key variables for investors to monitor.

Summary

• Volume Gains Offset by Margin Pressure: Avocado sales volumes surged, but international farming margins fell sharply due to Peruvian crop disruption.
• Global Sourcing Model Demonstrates Resilience: Diversified supply enabled Mission to outpace rivals in key markets despite regional volatility.
• Forward Focus on Pricing and Supply Chain: Management expects improved pricing and operational leverage, but weather and crop mix risks persist.

Business Overview

Mission Produce is a vertically integrated global supplier of avocados and select produce, operating across three main segments: marketing and distribution, international farming, and blueberries. The company generates revenue by sourcing, packing, ripening, and distributing avocados and blueberries to retail, foodservice, and international export customers. Its business model relies on diversified sourcing from eight major growing regions, supported by a network of 14 distribution centers in North America, Europe, and Asia, and value-added services such as ripening and logistics.

Performance Analysis

Mission Produce’s Q3 2023 revenue fell year-over-year, driven by a 33% decline in per unit avocado prices, but this was partially offset by a 23% increase in avocado volumes sold. The surge in volume was powered by a larger Mexican harvest and strong Peruvian program execution, enabling the company to deliver growth across all end markets. However, the pricing environment normalized from last year’s record highs, compressing gross profit and adjusted EBITDA, particularly in the international farming segment, where lower prices and a suboptimal fruit size mix pressured margins.

SG&A expense fell 16% year-over-year, reflecting lower incentive compensation and maturing public company processes. The marketing and distribution segment saw a modest EBITDA gain despite revenue declines, thanks to higher volumes and improved fixed cost absorption. In contrast, international farming revenue and EBITDA dropped sharply as weather-driven crop shortfalls in Peru led to lower yields and unfavorable size distribution, limiting the company’s ability to capitalize on higher-margin export opportunities.

• Volume Expansion Across All Markets: North American volume grew 15%, with even faster growth in Asia and Europe, demonstrating the company’s ability to flex supply between regions.
• Margin Compression in Farming Segment: International farming EBITDA fell $11.4 million, highlighting the fixed cost risk of agricultural operations when crop yields disappoint.
• SG&A Leverage: Cost discipline and reduced incentive accruals contributed to lower overhead, though some reductions are temporary and tied to current year performance.

Working capital and cash flow dynamics reflected the seasonal nature of the business, with cash generation in Q3 but negative year-to-date operating cash flow due to crop cycle timing. Capital expenditures increased, mainly to support new orchard development and distribution infrastructure, including the UK facility and expanded blueberry operations.

Executive Commentary

Strategic Positioning

1. Global Sourcing and Vertical Integration

Mission’s ability to source from eight primary regions and operate 14 global distribution centers underpins its competitive edge in supply chain resilience. This structure allowed the company to redirect Peruvian fruit to export markets and maintain volume growth even as the Mexican harvest ended abruptly. Vertical integration, the strategy of owning and controlling multiple stages of the supply chain, enables margin optimization and customer service continuity, especially when regional disruptions occur.

2. Exposure to Crop Volatility and Weather Risk

The quarter exposed the operational and financial vulnerability of international farming to unpredictable weather patterns. Excessive heat in Peru reduced both yield and fruit size, resulting in a suboptimal export mix and lower per unit margins. While Mission’s diversified sourcing buffered some impact, the fixed cost structure of farming operations amplified the margin hit, showing the limits of risk mitigation in agriculture.

3. Expansion in Value-Added Services and New Markets

Mission continues to invest in value-added capabilities, such as ripening centers and distribution infrastructure, to differentiate its offering and capture growth in emerging markets. The UK distribution center and new facilities in China are already contributing, with China shipments tripling year-over-year. This supports the company’s long-term strategy to drive avocado consumption growth and reduce reliance on any single region or customer set.

4. Capital Allocation and Share Repurchase

The board’s approval of a $20 million stock repurchase program signals a commitment to shareholder return and a tool to offset dilution from incentive plans. While no shares have been repurchased yet, this new authorization provides flexibility to support the stock in volatile markets.

Key Considerations

This quarter’s results highlight both the strengths and vulnerabilities of Mission’s global model as it navigates the realities of agricultural supply chains and shifting demand patterns.

Key Considerations:

• Weather-Driven Crop Risk: Peruvian heat waves and prior cold snaps led to lower yields and smaller fruit, directly impacting export margins and exposing the limits of crop forecasting.
• Volume as a Buffer: The ability to deliver 23% volume growth, even in a down pricing environment, demonstrates the value of Mission’s diversified sourcing and marketing reach.
• SG&A Reductions Not Fully Structural: Lower incentive compensation and profit sharing drove much of the SG&A improvement, but these are tied to the current year’s underperformance and may not persist as business rebounds.
• Capital Expenditure Focus: Ongoing investment in new orchards and distribution centers, especially in high-growth markets, positions Mission for future volume gains but adds near-term cash flow pressure.

Risks

Mission Produce remains acutely exposed to agricultural risk, particularly weather volatility in key sourcing regions like Peru and Mexico. Fixed cost leverage in farming operations can magnify margin swings in adverse crop years. Additionally, industry pricing remains sensitive to global supply shifts, and rational pricing behavior cannot be guaranteed. Execution risk also exists around the ramp-up of new facilities and the ability to maintain volume growth as crop cycles and regional supply fluctuate.

Forward Outlook

For Q4 2023, Mission guided to:

• Flat to slightly higher pricing sequentially, and about 10% higher year-over-year versus Q4 2022.
• Industry volumes expected to be flat to slightly lower due to reduced Peruvian supply.

For full-year 2023, management did not provide explicit guidance, but:

• Exportable Peruvian volumes now expected at 105-115 million pounds, down from initial forecasts.

Management emphasized that higher pricing and continued operational leverage from diversified sourcing should help offset some margin pressure, but acknowledged that crop variability and supply chain dynamics will remain key variables to watch.

• California crop is winding down, with Mexico’s new crop coming online later in Q4.
• Volume mix and margin structure will depend on regional supply and fruit size distribution.

Takeaways

Mission’s Q3 reinforced the importance of diversified sourcing and operational agility in the face of agricultural volatility, but also highlighted the persistent risks of margin compression when crop cycles turn adverse.

• Operational Flexibility Demonstrated: The company’s ability to shift fruit between markets and sustain volume growth is a key differentiator, but cannot fully offset crop-driven margin headwinds.
• Margin Risk Remains Elevated: International farming segment performance is highly sensitive to weather and crop mix, and fixed costs amplify downside in difficult harvest years.
• Investors Should Watch Q4 Pricing and Volume Mix: The trajectory of industry pricing, the size and quality of late-season crops, and execution on new facility ramp-ups will be critical for near-term performance.

Conclusion

Mission Produce’s Q3 2023 results provide a clear view into the dual realities of global agricultural supply chains: volume growth and market access can drive resilience, but margin volatility remains a structural risk. Investors should monitor the interplay of crop cycles, pricing discipline, and execution on growth initiatives as key determinants of future earnings stability.

Industry Read-Through

The quarter’s results underscore the cyclical and weather-driven risks inherent in global produce supply chains, with implications for peers in avocados, berries, and other specialty crops. Companies with diversified sourcing and integrated distribution networks are better positioned to manage regional crop shocks, but margin volatility is likely to persist for all players. The rational pricing environment seen in early Q3 may not be durable if global supply swings or competitive dynamics shift. Investors should expect continued volatility in margin structures across the produce sector, and pay close attention to capital allocation, supply chain investments, and operational flexibility as key differentiators in a challenging macro environment.

AVO Consumer Staples Produce Vertical Integration Avocados Weather Risk Supply Chain Global Sourcing