Village Farms International, Inc.

Good morning, ladies and gentlemen. Welcome to Village Farms International's second quarter 2022 financial results conference call. This morning, Village Farms issued a news release reporting its financial results for the second quarter ended June 30th, 2022. That news release, along with the company's 10Q filing, are available on the company's website at villagefarms.com under the investor's heading, as well as Edgards. 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 replay are available in today's news release. Before we begin, let me remind you that forward-looking statements may be made today, during, or after the formal 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 underlining assumptions, risks, and uncertainties is contained in the company's various security filings with the SEC and Canadian Regulatory. including its Form 10-K MDNA for the year ended December 31, 2021, and its Form 10-K MDNA for the quarter ended June 30, 2022. 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 DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead.

Thanks, Debbie. Good morning. With me for today's second quarter call is Village Farms Chief Financial Officer Steve Ruffini, Village Farms Head of Canadian Cannabis, Mandish Dosanji, and Village Farms Executive Vice President of Corporate Affairs, Anne Gillen Lefevre. Steve and I will provide our customary remarks on operating highlights and financial results and then we will be available for questions. So let me start by sharing my views on the quarter. First, year-over-year revenue growth of 18% was quite strong with contributions from each business line. As with Q1, we saw strong relative execution and performance from our cannabis businesses, which continued to be offset by the macro challenges facing Village Farms Fresh, our produce business. As I did last quarter, I will start with our Village Farms Fresh produce business. On our Q1 call, we listed a number of significant pressure points for the produce business, notably significant input costs and inflation, lack of ability to pass pricing on to the customer, and an oversupply of product. And all this was in addition to the ongoing challenges of the brown rugose tomato virus that's impacting tomato growers, nearly all of them globally. We also noted that as long as these conditions continued, we would see their impact on our produce results, and it was likely to get worse before it got better. So as expected, that was the case in Q2, as we, along with our peers, most of whom are private companies, some of whom are also public, continue to see costs balloon. To provide some perspective, freight alone increased 2.2 million higher in Q2, and we saw significant increases in fertilizer and other inputs, as well as packaging and labor. Fresh produce is a difficult business. It's our heritage and a business we take great pride in. We also believe it is a tremendous foundation for our expansion into U.S. cannabis, and we have already proven that same synergy and strategy in Canada. We believe with full comprehensive legislation of cannabis, When that happens, there will be a significant change in how cultivation is done. Large-scale, low-cost will matter. With that in mind, during the quarter, we initiated an intensive operational review of the fresh produce business in light of these additional industry-wide headwinds, which have made a business with thin margins even more challenging. To review, which will include 30 party experts, will scrutinize our processes to ensure that we are optimizing profitability. We have been here before a number of times, especially during the last 15 years that we have lowered our costs to manage through secular price compression caused by importation. It all comes down to resourcefulness and determination. We separate what is in our control and not in our control so that we can prioritize our attack and we take definitive action. Right now it's all hands on deck for this perfect storm and fresh produce. However, as I have spoken too often, a critical part of PROTO strategy's optionality for our expansion into U.S. cannabis. We are not losing sight of what these assets will be worth in a different macro environment, or more importantly, in a different regulatory environment for cannabis. We believe they would be multiples of their current value. We had been optimistic that following the last election, some sort of meaningful progress in U.S. cannabis regulation would have occurred by now. This is obviously a source of significant frustration for us, and we know for our shareholders as well. So now turning to our Canadian cannabis business. We have all read and heard about how difficult and challenged the Canadian cannabis industry is. Oversupply, price compression, a retreating but still lingering illicit supply. This is not shocking to us. You have heard me say many times that we have built our Canadian cannabis business for just this environment. And last year, we saw the capital market start to dry up for the sector. We prepared ourselves for just what we have seen, irrational behavior by many in the marketplace in an attempt to solve operational or market share issues. The back half of 2021, as a team, we hunkered down and refined our long-term strategy for success in 2022. So how did our Canadian cannabis business perform in the first half of 2022? Net sales grew a very healthy 25% year over year and 38% sequentially, a new record with healthy growth in both our branded and non-branded segments. The segment printed its 15th straight quarter of positive adjusted EBITDA, which remains a standout achievement among publicly traded licensed producers in Canada. Our namesake Pure Sun Farms brand held its position as the number one cannabis flower brand in Q2, now five quarters in a row, supported by the launch of 12 new SKUs, including one new strain. We did not sacrifice profitability to buy market share. Many new brands and new products continue to enter the market. To grow our share, we must be even more innovative and strong in our commercial efforts, and I'll talk about what we are doing in both those areas in a moment. In Quebec, Rose expanded its market share with its portfolio, moving into the number three licensed producer spot with an 8.5% share of the market. As importantly, during the quarter, we were laser focused in executing on multiple growth initiatives that will drive what we have said and continue to believe will generate even more traction in the back half of 2022. These are the launch of PureSun Farms' second brand, the original Fraser Valley Wheat Company, accelerating our innovation strategy to launch more new products more often with a particular focus on new strains, supporting our brands and products with the right commercial effort, and building a solid footprint in international markets modeled on the success of Canadian cannabis business. Let me start with Fraser Valley Wheat Company. We entered the Canadian cannabis market with a single brand, Pure Sun Farms, whose everyday premium positioning targeted the largest segment of the consumers, what we refer to as our core segment. We watched as consumer preferences evolved and the market began to segment, such that today in certain markets, such as Alberta and British Columbia, the value segment accounts for well over a third of the market. The Fraser Valley brand is targeted directly at this significant market opportunity. It is differentiated from the Pure Sun Farms brand in that it targets a frequent and price-conscious consumer with dependable and potent large format flour with selected popular strains starting with consumer favorites Donny Burger and Mac. While the team naturally expects some cannibalization of our Pure Sun Farms brand, we also anticipate profitable market share gains as Fraser Valley targets a real need articulated by both the provincial boards, retailers, and consumers. The Fraser Valley brand will follow a gradual rollout. We have prioritized British Columbia, where the value segment has been growing significantly, followed by Alberta, which is highly competitive in the value segment. Although it is still early days, we are very encouraged by the consumer response to date. Our first shipment to British Columbia sold out in just three days and immediately became the number two flower brand right behind Pure Sun Farms, which continues to hold the top spot in that province as it continues to do so in Ontario and Alberta. Early data from Alberta is also very strong. In terms of innovation, to date we have launched more than 100 SKUs across the Canadian cannabis business. This includes new strains such as bubble mints, berry cream puff, and most recently, sugar cookies. Innovation followed by investment is critical, especially when the growth of this segment attracting so many brand launches. Jet fuel gelato is a great example. Jet fuel is now the fastest growing strain in Ontario through the quarter end of June 2022. In July, jet fuel moved into the number two position in top strains in Ontario, with our pink cush remaining to the number one overall spot, where it has consistently been since the launch one year ago. This is quite impressive, and kudos to the PureSun Farms team. Innovation has been an integral part of Rose's market share. During Q2, they launched nine new SKUs into the Quebec market and their first SKU in other provinces. A meaningful contributor to the strong performance of the Rose portfolio was their Promenade brand, which benefits from the collaboration with Pure Sun Farms, including use of Pure Sun Farms biomass. Another successful innovation at Rose is their Delise brand, which brings together the products of Quebec-based craft producers under Rose's brand strength and distribution capabilities. Based on success in Quebec, Rose is now expanding that model to other provinces under the Homage brand. This is a great first example of the synergistic opportunities between Rose and Pure Sun Farms with our Canadian cannabis operators. I look forward to discussing many more in the future. We are innovating in other ways as well. During the quarter, we were proud to partner with NOIA to launch cookies, sun-grown flour in Ontario. Cookies being one of the most well-known and successful cannabis brands globally. It is a testament to our cultivation capabilities that we were chosen for cookies to enter the Canadian market with high quality, large format, sun-grown strains at a differentiated price. On a final note on innovation, we are also investing in our core capabilities to ensure that we are relevant in the moment of consumer purchase. In that regard, I'm pleased to report 100% of Pure SunFarm's product is now hang dried. Following significant investment, we now have the capacity to hang dry all of our Delta 3 and Delta 2 production. And as expected, we are already hearing very positive customer feedback as a result. Just as the case for the Canadian market, there is a lot of noise around international markets. What will they look like? What will the regulations be? Where are the real opportunities? And who will be the winners and losers? And once again, we are ignoring the noise and focusing on our strategy, which can be very simply stated as follows. We will participate in those markets where we believe the regulatory construct and consumer demand gives us the right to win and be profitable. Our first foray was into Australia, where we have now completed our sixth shipment for the medical market there since beginning shipments 10 months ago. Growth in the Australian market is accelerating, and we are capturing that growth. Following receipt of our EU GMP certification earlier this year, the team is also engaged with partners in both Israel and Germany, where we believe we have a winning strategy for these promising markets. the same strategy that has underpinned our success in Canada, high-quality products at an attractive price. I'm encouraged by our progress, especially after the two-year protraction of the certification process due to pandemic travel restrictions. Even with the significant time it takes to ensure compliance with every country's unique regulations, including new requirements as the market opens, we are targeting to begin shipments to these markets in the coming months. And then finally, on the international front today, I'm very pleased to announce that Lely Holland has just granted the 10th and final license to cultivate and distribute cannabis in the Dutch supply chain experiment, which is expected to be the first major legal recreational market for cannabis in Europe. Last year, we purchased an option on majority ownership of Lely, and subsequent to Lely's receipt of their license, we exercised that option such that we now own 85% of Lely. As Village Farms Europe Cannabis, we can now look forward to executing on our plan, under which, if the program proceeds on schedule, we will see us generating revenues later next year. In our U.S. cannabis business, Balance Health Botanicals continues to perform well and remain profitable amidst what is an increasingly challenging market. However, our balanced health botanical businesses experience a slowdown in consumer purchasing, consistent with data that is emerging from other consumer-facing businesses, which is being exaggerated by the lack of clarity on the CBD category's ability to access traditional retail selling channels. Average order sizes are decreasing, and we are detecting a lengthening of order times from our recent, or rather, repeat customers. The BHB team has continued to develop products with unique benefits for consumers like Synergy Plus. Last month, they released a study that reported a significant reduction of mild or temporary anxiety when using CBD distilleries, daytime Synergy, CBG, and CBD tincture. I might suggest that we could all use some of that product these days. None of these interim challenges changes our mind around the strategic importance of our acquisition of BHB. It remains a well-established, profitable business with top brand awareness and an established e-commerce platform and retail channels that provide an additional pathway to participate in the high THC cannabis market in the U.S. when we are able, which we believe will be very different from today. With that, I'll turn the call over for Steve. Steve?

Thanks, Mike. First, a reminder on the timing of our balanced health and road life science acquisitions last year and their impact on our second quarter 2022 results. As we acquired balanced health botanicals in Q3 2021 and 70% of life sciences for 2021, results of each are consolidated in our financial results for the second and first half of 2020. However, neither contributed to the comparative periods of 2021. Turning to the results, consolidated sales of all the village farms that includes our Canadian and U.S. cannabis operations and our VF fresh produce operations for the second quarter increased 18% year over year to 82.9 million from 70.4 million second quarter of 2021. The increase was driven by higher sales from both the Canadian cannabis business and fresh produce, as well as the incremental contributions from the acquisition of Balanced Health under our U.S. cannabis operations. This quarter is a mixed quarter, which includes a large one-off goodwill write-down. Consolidated net loss for the quarter was $36.6 million, or negative $0.41 per share, compared with a net loss of $4.5 million, or a negative $0.06 per share for the same period last year. This quarter's net loss includes a gross impairment of $29.8 million, or $22.8 million after tax, relating to the acquisition of Balanced Health Botanicals, in our U.S. cannabis segment and a write-down of our investment in Viet Hemp, which was our remaining 2019 hemp inventory. The net write-downs resulted in a negative impact on earnings per share of approximately 27 cents per share. The remainder was driven almost entirely by the impact of cost inflation and ongoing virus pressure on our fresh produce business. Consolidated adjusted EBITDA for the second quarter of 2020 2022 was negative 10.3 million compared to a positive adjusted EBITDA of 1.5 million for the same period last year. The EBITDA loss in Q2 this year was driven also entirely by our fresh produce division. Corporate costs were 2.1 million compared to 1.7 million with the increase due primarily to incremental costs related to various business expansion initiatives, including those associated with the Netherlands cannabis opportunity that Mike just described. Looking at our individual business segments, starting with cannabis, net sales from our combined Canadian and U.S. cannabis operations grew 44% year-over-year to $35.6 million from $24.8 million, with the increase roughly split between the growth in our Canadian cannabis business and the contribution of Balanced Health under our U.S. cannabis business segment. Q2 cannabis sales comprised 43% of Village Farms consolidated sales, up from 21% from the same period last year. Total cannabis adjusted EBITDA was 2.1 million compared with 7.4 million for the second quarter of last year, with the decrease being substantially the incremental SG&A spend for some farms for the investment in various commercial support activities, like the new Fraser Valley brand, and some which are still to come, such as international exports, as well as the addition of rose operations in 2022, which we didn't have in 2021. Mike noted earlier we are beginning to see the return on these investments in the form of higher sales and market share gains. Within cannabis, our Canadian operations delivered another solid quarter. As usual, I review our Canadian cannabis results in Canadian dollars, which provides a more accurate gauge of our period-to-period performance in the face of exchange rate fluctuations, as well as providing the ability to more accurately compare to Canadian market growth rates. Our Canadian cannabis operations once again generated strong year-over-year growth with net sales for Q2 of this year increasing 25% year-over-year and 38% sequentially to $38 million, which is a new quarterly record. Canadian cannabis net sales were composed of 48% retail branded sales, 29% non-branded sales, and 3% distribution fees and commissions. We have previously called out the back half weighted seasonality of sales in our Canadian cannabis business and we are again in confirming this expectation this fiscal year. It may be even more pronounced this year as planned growth initiatives anticipated to drive additional sales including the Fraser Valley brand launch and the start of shipments to additional international markets. Our gross margin for the Canadian cannabis business for Q2 remains solidly within our stated target range of 30 to 40 percent at 33 percent down to tick from 34 percent in Q1. We're continued to benefit overall from continued gains in cultivation efficiency and production improvements as well as the expansion of our footprint with the addition of the first half of the Delta II facility last year. Pearson Farms operations continue to run at their full capacity during Q2 and continue to do so today at 1.6 million square feet of production space. We continue to be focused on actively managing inventory levels as the biggest challenge continually balancing demand and supply fluctuations, developments which can create lumpiness in our non-branded revenues. As of June 30th, our day sales outstanding was at its lowest level in 2022. Selling general and administrative expenses for the Canadian cannabis operations in Q2 were 10.9 million or 29% of net sales, compared with 5.4 million or 18% of net sales for the same period last year. The increase in absolute dollars was the result of the addition of the Rose operations in 2022, which accounted for roughly one-third of the year-on-year increase, as well as investments. referred to earlier that Pearson Farms is making to drive market share and accelerate sales growth domestically, as well as preparation for the start of exports later this year. In fact, compared to Q1 of this year, although up in terms of absolute dollars, SG&A was down several points as percentage of revenue as sales increased at a faster pace than the expense line. We expect several of the incremental initiative spends in the earlier part of this year to result in higher sales and margins, resulting in a reduced SG&A percentage to revenues into the lower 20% for the balance of 2022. Our Canadian cannabis operations delivered their 15th consecutive quarter of positive adjusted EBITDA at 3.1 million, which although down from 9.1 million in Q2 of last year, is driven by the incremental year-on-year SG&A spent. I will now turn to our U.S. cannabis operations, and in doing so, we'll revert to U.S. dollars. U.S. cannabis sales for Q2 were generated entirely by balanced health botanicals, which were 5.8 million, generated a gross margin of 66%. Adjusted EBITDA was just shy of break-even, which was impacted by the write-down of remaining VF hemp inventory of roughly 300,000. As Mike noted, balanced health continues to perform well amidst an environment that has become increasingly challenged in recent months. Importantly, it remained profitable for the quarter. However, with the continued impact of lack of regulatory clarity slowing consumer spending on perceived discretionary items, we have tempered near-term growth outlooks. In assessing both valuations and these consumption pressures, we feel it is prudent to write down the value of Balanced Health's goodwill and intangibles by $29.8 million this quarter. There is no impairment of our Canadian cannabis values, and we do not expect any write-down of this largely organically built and growing and profitable business segments. Turning now to fresh produce, Q2 saw an exasperation of the inflationary pressures we saw across our cost structure in Q1. Although we achieved another quarter of year-on-year sales increase on higher volumes due to continued supply-demand imbalances, we still have been unable to pass on these costs to our customers. For example, year-on-year freight spend was $2.2 Million dollars higher in Q2 versus Q2 of 2021, almost solely due to the increased cost of diesel and trucking rates as the number of the trucks shipped to our retail customers was up 4% year on year. While painful for us, it is less than the year on year freight difference in Q1 2022 versus Q1 2021 of 2.8 million on a higher number of shipments in Q2. The incremental freight pressure has decreased a bit more in Q3, but it's primarily a macroeconomic cost out of our control. Additionally, we continue to manage through the global tomato virus, brown rugose, which continues to cause incremental costs and significantly negatively impact our yields, resulting in higher costs of production than anticipated as well as compared to from a historical perspective. This resulted in a negative gross margin for fresh produce of 8.9 million which drove negative adjusted EBITDA of $10.4 million compared to negative adjusted EBITDA of $4 million in Q2 last year. Turning now to cash flows and the balance sheet at June 30th, we had approximately $33 million in cash and equivalents compared to $41 million at March 31st of this year. And we had approximately $78 million in working capital excluding cash compared with $101 million in March 31st. During the quarter, we had operating cash outflows of $13 million net of working capital adjustments. As a reminder, the vast majority of our year-to-date cap expense has been for the Delta II facility and the addition of more dry rooms in order to hang dry our entire Pearson Farms capacity, which Mike mentioned, which is a key operational and quality initiative that we expect to see substantive enhancements to our results. Importantly, we will continue to plan to produce to expected demand and will only expand production when we see incremental demand increases for our brands, both within Canada and in the export market. Given the uncertainty of inflationary pressures and their potential continued impact on fresh produce, as well as the multiple cannabis growth initiatives before us that will require additional investment, this morning we will announce that we filed a prospectus supplement for an at-the-market offering of up to $50 million. Given the current state of the broader capital markets, and with respect to the cannabis sector more specifically, we believe the ATM mechanism in this environment is an efficient and flexible means by which to access additional capital when needed, should we choose to do so. We also believe that it is a transparent fundraising tool for our stakeholders, a characteristic which is important to us. And now I will turn the call back to Mike. Thanks, Steve.