Village Farms International, Inc.

Good morning, ladies and gentlemen. Welcome to Village Farms International 4th Quarter End Year End 2021 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the 4th quarter end year ended December 31, 2021. That news release, along with the company's financial statements, are available on the company's website at villagefarms.com under the Investors heading. Please note that today's call is being broadcast live over the internet and will be archived for replay both by telephone and via the internet beginning approximately one hour following completion of the call. Details of how to access the replays are available in today's news release. Before we begin, let me remind you that forward-looking statements may be made today. During and after the former part of this conference call, certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks, and uncertainties is contained in the company's various securities filings with the SEC and Canadian regulators, including its Form 10-K MD&A for the year ended December 31, 2021, which is available on EDGAR. These forward-looking statements are made as of today's date and, except as required by applicable securities law, we undertake no obligation to publicly update or revise any such statements. I would now like to turn the call over to Michael DiGiglio, Chief Executive Officer at Village Farms International. Please go ahead, Mr. DiGiglio.

Thank you, Annex, and good morning, everyone. With me for today's fourth quarter and year-end call is Village Farms Chief Financial Officer Steve Ruffini. and joining us is President and CEO of PureSun Farms, Mandish Dosanjh, who, with the addition of Rose Life Sciences, now oversees what we refer to as our Canadian cannabis operations. So I'm going to open up with a few points. At the end of the third quarter conference call, I discussed how the future of village farms was rapidly coming into focus as a result of our consistent execution on our strategy. The fourth quarter and really the entire 2021 year were further evidence of that. Q4, like Q3, was another quarter of strong financial performance. And from my viewpoint, the headline of the quarter was, again, profitability and growth. Positive consolidated earnings per share of $0.03. Positive consolidated adjusted EBITDA of $5.3 million for the quarter, with each business contributing positive adjusted EBITDA. Importantly, one can see the consistency emerging from the business, consistency that underscores a rock-solid foundation for our next phase of growth. So I'd like to take a few minutes to lay out what I see as the longer-term benefits of what we accomplished in 2021, together with some of the headwinds which we successfully navigated. Then Steve will review our financial results in more detail, and I'll have some closing remarks. So 2021 in review, let's talk about that. It was a very successful year for Village Farms in terms of delivering on our growth strategy. Consolidated 2021 sales grew 58% over 2020, reaching a record $268 million. And adjusted EBITDA grew 89% to $14 million. 2021 was not only a year of significant growth, but also one in which we executed across the entire businesses to build for continued growth in 2022 and beyond. Let me start with what went well. Pure Sun Farms contributed and continued to maintain its profitable market share leadership in a direct cannabis category in Canada, especially impressive as we saw many of our peers lose market share, some massively. or they drastically reduce prices to try to recapture market share or mitigate share loss. Clearly not a sustainable practice if they ever hope to become profitable. Some have even mothballed Canadian REC to focus on other strategies. We launched 23 additional SKUs in four categories just in Q4 alone, taking us to more than 50 new SKUs in the back half of the year alone. building on our momentum throughout the year. Notably, we introduced several high THC strains, followed on the success of pink kush, which still remains the top-selling strain in the country. And we significantly ramped our pre-roll business, which continues to be the second most popular category of consumers after flour. With outstanding market share gains, for example, in Ontario, we more than quadrupled our market share from January through December. And we saw a more than 200% year over year increase in sales of branded derivative products. Pure Sun Farms remains the top selling brand of dried flour in Ontario, British Columbia, and Alberta for the fourth quarter, as it did for the entire 2021 year, and as it has for as long as we've been tracking data in each of those provinces. More than two years now in Ontario, and well over a year in BC and Alberta. And in every province, we group share in almost every product category. We are especially proud that the team achieved what it did in 2021 while still absent from the Quebec market for most of the year. And if you allow me to stay with Quebec for just a moment, the third largest provincial market in Canada, we follow through on our commitment to enter that market with the acquisition of Quebec-based Rose Life Science midway through the fourth quarter. And we're pleased to welcome the Rose family to the Village Farms family. Rose provides a substantial presence in Quebec, not only as a supplier and cultivator, but also as the largest third-party distributor in the province with some of the largest brands in the country, which is unique to Quebec and unique within Quebec. It provides experienced Quebec-based industry leaders with deep CPG, cannabis, and local and regional expertise, with two of the co-founders, including its chief executive officer, remaining with the team. And it adds a Quebec-based 55,000-square-foot indoor cultivation and processing facility. In addition to Rosa's own brands, which are Tam Tam's, Day Lease, Pure Lane, and E-Lact, I am pleased that the team has already expanded our Quebec portfolio with the recent launch of the Promenade brand, which will feature Pure Sun Farms genetics. The early read is strong for consumer acceptance and market share here. Another area of strategic importance here in 2021 was the expansion of our BC cultivation facilities. After receiving Health Canada approved approval for our second 1.1 million square foot production facility called Delta II, which is adjacent to our 1.1 million square foot Delta III facility, we began planting in the first half of D2 in the fall. This brings, with the addition of rows, our total cultivation footprint to nearly 2.3 million square feet when D2 is fully planted. So half of Delta II is now fully in production, and we are now selling product grown in Acta Soti. You know, we still get questions about why at a time when so many of our peers have shuttered capacity, we are expanding. But be assured that we have always taken a measured approach to match capacity with anticipated demand, and we continue to see great opportunities in the current $4-plus billion and growing Canadian recreational market and export markets to support this investment. matching capacity to demand as part of our long-term DNA of our agricultural roots. Another highlight for 2021 was the purchase of one of the top companies in cannabinoid products in the United States, Balance Health Botanicals. Based in Denver, Colorado, Balance Health brings an accomplished management team with deep expertise in CBD products, with both the founder and the chief executive officer remaining with the company. Proven success in the e-commerce channel with one of the best digital platforms in the industry. Another potential pathway to participate in the high THC market when the legal landscape permits. And it adds another profitable business to our cannabis portfolio, one of the few in the sector. Internationally, we saw meaningful steady progress against our strategic goal of participating in select markets as they legalize. We are building out our European business and added senior leadership to head up business development and operations there. We acquired an irrevocable option to purchase majority ownership in one of the 10 expected participants in the Netherlands for what is likely to be the first major European rec market. To our knowledge, we will be the only North American company with a majority ownership position in the Netherlands. It's a market structure in which we have already proven our success. and it represents a springboard to additional emerging European markets. And we have deep ties in the Netherlands, going back four decades, and great respect for the growing industry in the Netherlands, which makes our participation there quite unique. Additionally, in the international arena, Pure Sun Farms continues to advance towards EU GMP certification a bit slower than expected. And Altium International, of which we own 12%, added Taiwan to its commercial launches for CBD and launched in the Australian high THC medical market exclusively with PureSun Farms grown products. Finally, in our Village Farms fresh produce business, we saw a return of positive EBITDA in the back half of the year after the demand and supply imbalances that negatively impacted pricing earlier in the year. Yeah, when I look back on 2021, there were a number of things that we would have liked to have seen play out differently. Macro headwinds that held us back from doing even better than we did. First, Canadian cannabis. I will first acknowledge that the Canadian government and HealthCan in particular for their foresight in being the first major country to legalize recreational cannabis and support development of a market that now has a run rate of 4.6 billion. and which grew a phenomenal 50% in 2021. Let me repeat that. The Canadian market grew 50% year over year, with Pure Sun Farms growing its retail branded sales at nearly double that pace at 99% last year. That's really quite an accomplishment. There are very few sectors that have this kind of macro growth underpinning the growth of the top operators. That said, even at the projected size of this market of 7 or 8 billion and more, Canada has too many suppliers and too much supply. This has led to the irrational behavior which holds back the entire industry from developing into a more mature consumer and customer-centric one. There are other headwinds which we hope will be addressed as the industry starts to mature. An excise tax that sits on top of an already high corporate tax rate, strong restrictions on the marketing of brands and products, restrictions on the use of common agricultural tools, even certain biologicals are non-permissible, and still a very active black market which has none of the regulation, taxation, mandated government-run distribution channels, and no product safety standards to adhere to. This is why having the right model, the right cost structure, And when a focus on profitability is so important. And I think we have proven that. If we can be successful in a tough Canadian market, we believe we can be successful anywhere. And I've said in the past, where we compete, we are the competition. Also in Canada, despite progress on Pure Sun Farms EU GMP certification, it has taken much longer than expected due to COVID-related international travel disruptions. Initial plans were to sell into the European market by now, yet we are optimistic and are now working on a target of Q2 for receipt of our certification and are confident we can be exporting to Germany in the second half of this year. And we are also progressing on plans to export to Israel, which does not currently require GMP certification, expect sales to start there also in the second half of this year. Among headwinds in the United States, we have been very disappointed with the lack of regulatory progress. The lack of clarity from the FDA on the use of CBD is holding back valuable development of plant-based wellness products to benefit consumers in a regulated manner. And in the high THC category, the lack of political leadership to push forward federal legalization, despite bipartisan support, has left this great country with a patchwork of state regulations. should and hopefully soon will do better. Finally, as I noted earlier, our fresh produce business had a tough first year due to market dynamics, which did turn around significantly in the back half with the normalization of pricing for those two quarters. For the most part, the headwinds in 2021 were external in nature. It has been and will be our job to keep our focus on our long-term growth strategies. Some of these headwinds will persist into 2022, of course. For example, we believe the Canadian LP landscape will undergo further restructuring. And the new year has started with other macro challenges for all of us. Geopolitical unrest, inflation, supply chain holdups. It's a lot to manage through, but the team at Village Farms has persisted through disruption before. So now in that narrative, I'm going to turn it over to Steve to review our financials and our return with some final closing thoughts. Steve.

Thanks, Mike. Before I begin, just a reminder, read the timing impact of our acquisitions over the past two years. Our Q4 2021 results reflect the full consolidation of Pearson Farms, of which we increased our ownership to 100% in November 2020. For Q4 2020, Pearson Farms was consolidated for approximately half of that quarter. Q4 2021 reflects the full quarter consolidation of balanced health botanicals, which we acquired 100% in the third quarter of 2021. And in Q4 2021 reflects the full consolidation of approximately one half a quarter's contribution from Rose Life Science, which we acquired 70% in mid-November. Turning to results. Consolidated sales Canadian and U.S. cannabis and village farms fresh produce for the fourth quarter increased 55% year-over-year to $72.8 million from $47.4 million in Q4 2020. The approximate $25 million increase was primarily the result of the consolidation of Pearson Farms in this year's results for a full quarter versus the partial quarter last year, which, of course, this year, of course, includes, as Mike mentioned, the year-on-year growth of Pure Sun Farms, as well as the addition of sales from Rose and the first full quarter contribution from Balance Health Botanicals, as well as the increased sales in Q4 village farms fresh produce this year versus last year. We generated consolidated net income for the quarter of $2.1 million, or $0.03 per share, compared with a net income of $7 million, or $0.12 per share in Q4 of 2020, when we benefited from a one-time $23.6 million non-cash accounting gain from the full acquisition of Pearson Farms in that quarter. Consolidated adjusted EBITDA for Q4 swung to a positive $5.3 million from a negative $500,000 in the same period last year. Looking at our individual business segments starting with cannabis, our combined Canadian and U.S. cannabis operations saw a sales increase of 169% year-over-year with growth driven by the factors just mentioned. Our Q4 cannabis sales were 47% of our consolidated sales compared to 27% for the same period of 2020. In all probability, cannabis will be in excess of 50% of our consolidated sales in 2022. Cannabis adjusted EBITDA increased 183% to 6.8 million from 2.4 million. Canadian cannabis operations delivered another strong quarter, driven predominantly by continued strong performance of Pearson Farms and benefiting from a partial quarter contribution from Rose. As I noted on our last call, Any period-to-period comparisons of our Canadian cannabis results in our reporting currency of U.S. dollars should take into account the fluctuations in the Canadian U.S. dollar exchange rate. All such information is provided in our MG&A. For ease of comparison on this call, I will review our Canadian cannabis results in Canadian dollars, which provides a more accurate gauge of period-to-period performance. Our Canadian cannabis business once again generated strong year-over-year growth. Net sales for Q4 increased 114% year-over-year to 34.5 million, which were up 53% year-over-year and down 2% sequentially. Q4 net sales included 1.4 million of net sales from Rose, representing its contribution from our acquisition on November 15th to the end of the quarter. Pearson Farms retail branded sales for Q4 were 75% of its net sales of 32.4 million, which was up 56% from 15.6 million in Q4 2020, and up 7% from 22.8 million in Q3 of 2021. With three full years of sales data, we are now beginning to see seasonality emerge in the Canadian retail branded sales. As was the case in 2020, we saw a somewhat modest growth in orders from the provincial distributors from Q3 to Q4. It appears that provincial buyers' purchasing patterns are to stock up for the holiday season in Q3 and early Q4 and then scale back on orders in the later part of Q4 and early Q1 as they manage their own on-hand inventories for their fiscal year-ends of March 31st. I will also note that for each of the last two years, approximately 40% of our annual sales were in the first half of the year and 60% in the back half of the year. We expect this trend to repeat in 2022 and be even more skewed toward the back half as we expect a number of growth initiatives such as product launches, export sales, and expanded provincial distribution to ramp up throughout the year. Retail branded sales comprised 85% of our was comprised of 85% dried flower and pre-rolled products with derivative products comprising the balance of 15%. Non-branded or wholesale sales for Q4 were 8.5 million compared with 7 million for Q4 in 2020 and 11.7 million for Q3 2021. As I noted on our last call, Q3 was particularly strong quarter for non-branded sales and we continue to expect that this revenue stream will vary from quarter to quarter. I will again take this opportunity to reiterate that we assess wholesale sales based upon product availability and always in the context of making economic and strategic sense for our retail branded business. Gross margin for the Canadian cannabis business for Q4 was a very healthy 42% excluding the impact of the purchase price accounting and 48% including the impact. In the interest of time, I will refer anyone who needs Full explanation of the PPA impact to read our MD&A. Gross margin again came in above our stated target range of 30 to 40%, as Q4 benefited from improved production efficiencies, which translated into lower cost of production and a higher proportion of higher potency flour and trim, which benefits our selling price. As noted last quarter, we expect our gross margin to trend back to our 30 to 40% target range in 2022 as our sales mix shifts to a higher proportion of lower margin derivative products and pre-rolls. We have lowered our sales price slightly on some of our more mature flower strains, but continue to hold our selling price on our newer flower strains. SG&A for the Canadian cannabis operations in Q4 were 9.2 million, representing a 57% year-on-year increase and a 37% sequential increase. As a proportionate sales, SG&A was 27% for Q4 compared to 26% in Q4 of last year and 19% for Q3 of 2021. Approximately 400,000 or 16% of the increase from Q3 was attributable to the acquisition of Rose partway through the quarter. Otherwise, the elevated SG&A to sales ratio reflects our continued investment in our Canadian cannabis operations as we add people in sales and marketing brand spend to support our branded revenue and operations. We also have seasonality in our brand marketing spend. In Q1 2022, we will not be spending the incremental holiday brand spend, so the market should expect a lower SG&A figure in Q1 2022 versus Q4 2021. And with the all-important 420 falling in Q2, we plan on an incremental brand spending Q2 as another example of seasonality of our cannabis business. As Mike mentioned, our Canadian cannabis operations delivered its 13th consecutive quarter positive adjusted EBITDA at $6.1 million, up 99% over Q4 of last year, and down 44% from Q3 with a sequential decline due mainly to lower non-branded sales and higher SG&A costs. I will now review our U.S. cannabis operations, and in doing so, we'll revert back to U.S. dollars. Our U.S. cannabis operations, which are comprised of balanced health botanicals and some SG&A via hemp, continue to perform in line with our expectations during its first quarter of contribution. Sales were $7.5 million compared with $3.8 million for the half-quarter contribution in Q3. First margin was relatively unchanged at 71%. and adjusted EBITDA was 1.9 million compared with 700,000 for Q3 of 2021. We recently launched a new synergy line, which has gone really well. And from the early brand recognition feedback, we expect future product launches under the synergy line. Due to the ongoing indecisiveness of the FDA, which Mike mentioned, we have no plans of growing hemp in calendar year 2022. Turning now to Village Farms fresh produce, Q4 saw continuation of the positive trend we repeated in Q3 with the normalization of market pricing. Fresh produce sales for Q4 increased 11% year-over-year to $38.4 million, primarily due to higher volumes. For the second consecutive quarter, we achieved positive adjusted EBITDA of $1.1 million. This division's EBITDA is primarily driven by market pricing. As Mike mentioned, there is increasing pressure on input costs. that need to be passed on to our customers in order to maintain a positive EBITDA trust division. These conversations are underway. Finally, some comments on our balance sheet and cash flow for the quarter. At December 31, we had approximately $58 million in cash and equivalents compared to $84 million at the end of Q3, and we had $52 million in working capital excluding cash compared to $40 million at the end of Q3. During the quarter, we used $16 million to fund the cash portion of our purchase price of the 7% interest in rose, and approximately $6 million in capital CapEx expenditures in our production facilities, primarily expansion of Delta II in Canada, and an incremental lighting project at one of our Texas facilities. And the balance of our cash is related to increases in our working capital, primarily in cannabis and tomato inventory. Operating cash flow From our business operations for the quarter, excluding working capital for Q4 was $5 million. Our capital position and ongoing operating cash flow have us in an excellent position to self-fund our ongoing operations and budgeted 2022 growth initiatives. As shareholders ourselves, we are prudent and strategic about capital raises, dilution, and investment, and the health of our balance sheet reflects this. Although we remain very optimistic about the growth of the cannabis industry, we recognize the value of prudent and patient investing during periods of capital market dislocations like we are in currently. We thank you for your patience as we work hard to continue to differentiate Village Farms as a profitable leader in the global cannabis industry. And now I'll turn the call back over to Mike.