Village Farms International, Inc.

Good morning, ladies and gentlemen. Welcome to Village Farms International's third quarter 2022 financial results conference call. This morning, Village Farms issued a news release reporting its financial results for the third quarter ended September 30th, 2022. 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 on how to access replays 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 securities files with the SEC and Canadian Regulatories, including its form 10-K MD&A for the year ended December 31st, 2021 and form 10-Q MD&A for the quarter ended September 30th, 2022, which are available on EDGAR. 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 of Village Farms International. Please go ahead, sir.

Thanks, Michelle. Good morning and thank you for joining us for today's call. With me today is Village Farms Chief Financial Officer Steve Ruffini, Village Farms Head of Canadian Cannabis Mandish Dosanjh, and Village Farms Executive Vice President of Corporate Affairs Anne Gillen Lefevre. As usual, we'll go through the same format that we have previously. Steve and I will review the operating highlights and financial results for the quarter, and then we will be available for questions. So with that, the headlines for our third quarter results are very strong growth in Canadian cannabis retail branded sales, faster than the underlying industry growth, which resulted in market share gains. A smaller loss in our fresh produce business, although micro macro challenges remain and continued solid performance in our U.S. cannabis business despite restrained consumer spending. So expanding on the Canadian cannabis business, as I discussed in our last call in the second half of last year, with the benefit of several years of retail experience behind us and our team's unique ability to discern consumer trends and market segmentation, we refined our strategies. We also made the decision to invest strategically with the goal to drive both sales and market share growth in 2022. The third quarter was clear evidence of the success of this strategy, both in terms of sales growth and market share gains. Of particular note, retail branded sales, that is branded sales to provincial distributors, grew 46% year over year and 26% sequentially. for the first time in october village farms became the top selling cannabis producer in canada across all product categories not just dried flower in fact october marked our fourth consecutive month of market share expansion i want to take a moment here to comment on our market share sources the best sources of data in the canadian market continue to evolve and as a management team we have evolved the sources We are now using HiFi for all provinces except Quebec for which we use WeCrawler. This is the data we use to run our business and therefore we believe the right data to share. Importantly, there continues to be multiple contributors to our sales growth and market share gains. The PureSun Farms brand expanded. It's already number one market share in the dry flour category. as Paint Kush and JetFuel Gelato continue their strong performance. And we were further complimented by the launch of innovative new strains, researched and perfected by our commitment to continuous innovation. Pure Sun Farms has been the best-selling dried flower brand for six consecutive quarters now. Rose Life Science in Quebec continued to steadily expand its market share with a number of product launches in the quarter. which specifically target Quebec consumers. In October, Rose became the number two licensed producer in Quebec, and we are very proud of this achievement, less than one year since our majority acquisition. And we ramped up the rollout of our new value-oriented brand, the original Fraser Valley Wheat Company, into two provinces, British Columbia and Alberta, where the value segment is prominent. In British Columbia, We have had a full quarter's worth of sales data and we're already the top selling LP. The launch of Fraser Valley contributed to an increase in our market share from 6.5% in Q2 to 8.5% in Q3. That number increased further to 9.4% for the month of October. And I will note that we achieved this despite regular sellouts in a province where we already topped are the top-selling LP. In Alberta, the second province we launched in later in the quarter, Fraser Valley, has returned us to market share growth. This success is the result of our precisely defined brand strategy, a value-oriented brand with individual and unique strains that, like all of our products, is now 100% hang-dried. We feel confident in our ability to maintain growth with our continued innovation and growth of the Fraser Valley brand. In mid-October, we launched the first Fraser Valley SKUs in Ontario, and we are seeing similar positive results. Although still early days, we're quite impressed that the team delivered a strong start to the Fraser Valley launch, while at the same time continuing to support the rollout of Promenade and other brands, and while continuing to grow in market share of our first brand, Pure Sun Farms. This is a hallmark of great execution. We have also continued to execute on the cost side of the Canadian business. Gross margin remains within our stated target range, and SG&A was down meaningful compared to the second quarter of this year, both in absolute dollars and as a proportion of net sales. As the bulk of our investment spend in multiple major brand launches this year, which is now driving market share gains, as well as our major innovation that I will discuss later, is behind us. All of this contributed to our 16th consecutive quarter of positive adjusted EBITDA for our Canadian cannabis business. That's every quarter since Q4 of 2018, with adjusted EBITDA, which is 100% generated by cannabis sales only, increasing with each in the last two quarters. We have successfully enhanced profitability while gaining market shares. This is yet another hallmark of great execution. To summarize, our Canadian cannabis business is growing sales, increasing market share, and adding new customers, all while we are lowering our costs, benefiting from the increased efficiencies of scaling up our cultivation operations and gaining even more experience every day. This will further enhance profitability to invest for future growth. Now turning to our U.S. cannabis business, Balance Health Botanicals continues to perform well, and more importantly, remain profitable despite restrained consumer spending. Last quarter, I discussed the broad slowdown in consumer purchasing that was being exaggerated by the lack of clarity of the CBD category's ability to access traditional retail selling channels. We have been proactive here, pursuing new sales opportunities and implementing a number of initiatives aimed at customer attraction and retention, as we are seeing some positive results. During the quarter, we grew our subscription program by more than 5% to over 19,000 active subscribers. Balance Health also recently launched its second product in its Synergy Plus line, Deep Sleep Synergy Plus, which is positioned to help customers fall asleep and stay asleep. using plant-based ingredients. Our continued success in Canada makes me even more excited about and confident in our other international opportunities. We continue to make steady progress on our international strategy during the third quarter as we pursued emerging legal cannabis markets in which we are confident that we can win. As discussed in our last call, through our Netherlands subsidiary, Lely Holland, we have one of just 10 licenses to cultivate and distribute cannabis in the Dutch supply chain program, which is expected to be the first major legal recreational market for cannabis in Europe. We look forward to directly participating in what is expected to be the first major European market to permit large-scale cannabis cultivation and distribution for recreational purposes. In other international markets, we are very pleased with the pace of sales in the Australian medical market and export from our Canadian cannabis business. Sales to Altium International, our investing partner, have accelerated meaningful this year, in addition to starting shipments to a new customer during the quarter. In fact, Q3 sales to Australia have more than tripled over the past two quarters. And we continue to prepare for our first exports to both Israel and Germany via Canadian cannabis business. Admittedly, preparation has taken longer than expected as we navigate the evolving testing protocols and delays for each country to approve these protocols. But we are ready to go otherwise, and our market intelligence continues to support that our product, as it is in Canada, will be consumer preferred. It's a bit of a horse race as to which market we'll ship to first. So now turning to our fresh produce business. We continue to be impacted by a number of significant pressures, most notably input cost inflation, which with that is now more or less a demand-supply balance, has limited our ability to pass pricing to our customers. Specifically in Q3, we continue to be impacted by the Brown-Wagos virus, which is affecting growers in the U.S. globally, although it is confined solely to our Canadian operations. We did see some of the inflationary pressures abate in Q3, And this is apparent in the improved financial results compared to the first and the second quarter of this year that Steve will discuss in a moment. Although we expect these pressures to persist into next year, we do think the worst is behind us, which means we expect year-over-year comps to improve in 2023. Last quarter, I discussed the start of an intensive operation review of the fresh produce business. The exercise is progressing well, and I'm encouraged by the process to date. We are currently involved in a deep review of the two separate independent consulting reports and that the consulting work is already starting to help us assess customer profitability and other aspects of our operation. With last night's election results, we expect to have greater clarity on the future of cannabis regulation on both the federal and Texas fronts, as well as any of the potential for regulatory processes during the so-called lame duck session. And I look forward to reporting on those outcomes of our review at the appropriate time. I'll now turn over the call to Steve Ruffini. Steve.

Thanks, Mike. Let me begin with a quick reminder on the timing of our balanced health through Rose Lifeline acquisitions last year and their impact on our third quarter of 2022 results. The contributions of each are consolidated in our financial results for the third quarter and the first nine months of 2022. However, as we acquired Balanced Health Botanicals on August 16th of last year, our 2021 comparative results reflect approximately half a quarter's contribution from that business. As our 7% ownership of rows was acquired in Q4 2021, there is no contribution for the comparative period in 2021. Turning to the results. Consolidated sales for all village farms that includes our Canadian US canvas operations and our village farms fresh produce operations for the third quarter was 71.1 million, a slight decrease of 2% from the third quarter of last year due to a weaker Canadian dollar in 2022 versus 2021. On a constant currency basis, our year on year sales were flat. Higher sales from the Canadian Canvas business as well as the incremental contribution from a full quarter as a result of balanced health were offset by lower sales from fresh produce. Consolidated net loss for the quarter was $8.7 million or $0.10 per share compared to net income of $700,000 or $0.01 per share for the same period last year. The net loss was driven predominantly in the fresh produce business that Mike discussed earlier. Consolidated adjusted EBITDA for the third quarter of 2022 was negative 2.2 million compared with positive adjusted EBITDA of 6.9 million in Q3 last year. The EBITDA loss in Q3 this year was driven almost entirely by fresh produce. Corporate costs were 2.8 million compared with 3.5 million for the third quarter of last year. The decrease due primarily to lower SG&A. Looking at our individual business segments, starting with cannabis, Net sales from our combined Canadian and U.S. cannabis operations grew 14% year-over-year to $35.6 million from $31.2 million, with the increase being driven by the growth in our Canadian cannabis business, primarily driven by the addition of Rose Brands in Quebec and the increase in Pearson Farms Brands with the contribution from a full quarter of Balanced Health. Total cannabis sales comprised 50% of Village Farms' total consolidated sales in this quarter, up from 43% in Q3 last year. Total cannabis adjusted EBITDA was $5.4 million compared with $9.4 million for the third quarter of last year, with the decrease due substantially due to the lower margin on our Canadian non-branded sales due to price compression in the wholesale market and incremental SG&A spend in 2022 versus 2021 due to investment in brand launches and innovation the addition of rows as well as higher percentage of SG&A spend in our U.S. cannabis business. Within cannabis, our Canadian operations delivered another solid quarter. I will 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 the local Canadian market growth rates. On that subject, I note that the reported results of our Canadian subsidiaries have been impacted by the strengthening U.S. dollar versus the Canadian dollar in 2022 as compared to 2021, which negatively impacts the results of the Canadian cannabis segment when translated to U.S. currency. On a constant currency basis, our Canadian cannabis Q3 sales in U.S. dollars would have been 3.4% higher. Our Canadian cannabis operations once again saw healthy year-over-year growth with net sales for Q3 of this year increasing 15% to the same period last year to 39.8 million Canadian, another new quarterly record. Canadian cannabis net sales were comprised of 82% retail branded sales, 16% non-branded sales, and 2% distribution fees and commissions. As previously noted, non-branded sales may vary widely from quarter to quarter. Both Q2 of this year and Q3 of last year were stronger quarters for non-branded sales. Q3 was a weaker quarter for non-branded sales in dollar terms, as non-branded sales are demonstrating more downward price sensitivity correlated to the general retail market's pricing trends for this segment's customers. And we sold less bulk high-quality flour in Q3 than in Q2, and more aged and out of spec flour, which has a much lower price. Our branded sales category also includes our export sales to Australia. Retail branded sales for Q3 increased 46% year-over-year and 26% sequentially, continuing our expected trend of quarter-on-quarter improvement through 2022, which we are forecasting to continue growing in Q4. Gross margin for Canadian cannabis for Q3 was again comfortably within our stated target of 30 to 40% at 32%, which was down slightly from 33% in Q2. Our gross margin continues to benefit from gains in cultivation efficiency and operational improvement, which is offset somewhat by pricing pressure in the non-branded market. Our Pearson Farms and Roads branded gross margins remain above the range in both in the quarter and year to date. With our increasing market share driven by new brands, strains, as well as our expansion in Quebec, is resulting in achieving branded sales demand volumes that are essentially fully utilizing our expanded supply capacity in the D2 facility. We will monitor our expected demand and other market dynamics within Canada and in the export market before we add incremental capacity by expanding into the remaining 600,000 square feet in D2, for which much of the hard costs have been incurred. Our inventory levels have built up over the course of 2022, but as a result of our ever increasing market share, we are now in the process of using its inventory for our winter demand and look to bring our inventory working capital down in Q4 and into Q1 of 2023, which is likely to impact the availability of biomass for our Canadian wholesale customers in 2023. Selling general and administrative expenses for Canadian cannabis operations for third quarter were 10.5 million or 26% of net sales compared with 6.9 million or 20% of net sales in the same period last year. The increase in absolute dollars was a result of the addition of the rose operations in this year's quarter, which accounted for approximately 6% of the year over year increase, as well as growth related expenditures at Pearson Farms. Notably, SG&A for Q3 this year was down meaningfully from Q2 of this year in absolute dollars, and for the second quarter decreased its percentage of net sales to 26%, down from 30% in Q2 and 32% in Q1. We remain on track to bring SG&A as a proportion of sales back into the lower 20% range for the fourth quarter and into 2023. Our Canadian cannabis operations delivered their 16th consecutive quarter positive adjusted EBITDA of $6.7 million, compared with $11.1 million for Q3 of last year, with adjusted EBITDA having increased sequentially in each of the last two quarters. We'll now turn to our U.S. cannabis operations, and in doing so, we'll revert to U.S. dollars. U.S. cannabis sales for the third quarter were generated entirely by Balanced Health Botanicals, for $5.1 million, which generated a gross margin of 68%. Adjusted EBITDA was essentially flat at $10,000, but did include one-off cash expenditures that will enhance future period EBITDA. This compares with the half-quarters contribution in Q3 last year of $3.99, with a gross margin also of 68%, and adjusted EBITDA of $700,000. Turning now to fresh produce, Q3's financial performance was impacted by not only the inflationary pressure and input costs, especially freight, but also by the production challenges due to the brown rice virus that has impacted tomato growers globally, which creates incremental costs, but more importantly has a significant impact on the production volumes. And as you may recall in prior presentations, like most agriculturally-based businesses, a substantial portion of our costs are fixed. So if volumes are down, there's less revenue to cover those costs. Sales worth $35.5 million compared to $41 million for Q3 last year, with the decrease due primarily due to lower tomato volumes and selling prices at both our own greenhouses as well as those for our growing partners. Volumes were impacted both by the brown rugose virus at our Delta 1 greenhouse as well as the delay in a 2022-23 crop cycle in Texas due to an operational change in our U.S. H-2A worker program. On the cost side, freight spending Q3 was approximately $1.2 million higher compared to the same period last year, due almost entirely to the increased cost of diesel and trucking rates on lower year-on-year volumes for the reasons stated, effectively increasing our freight per pound cost by 30% over Q3 in 2021. The Brown River Ghost virus had a significant impact on yields and thus revenues. This resulted in a negative gross margin for fresh produce of 3.3 million compared with positive gross margin of 2.1 million in Q3 last year. What was a meaningful improvement from the negative 8.9 million in Q2 of this year? The negative gross margin drove negative adjusted EBITDA for fresh produce $4.6 million compared with positive $1.3 million in Q3 last year. The negative $4.6 million in Q3 this year was also a significant improvement over the negative $10.4 million in Q2 of this year. Turning now to cash flows and the balance sheet, at September 30th, we had approximately $23 million in cash. We had approximately $45.2 million in working capital excluding cash. During the quarter, we had operating cash outflows of $6.8 million net of working capital adjustments. In August, we announced an at-the-market offering of up to $50 million, which we believe, given the continued state of the broader capital markets, and more specifically with respect to the cannabis sector, is an efficient and flexible means by which to assess additional capital should we choose to do so, especially in light of our fresh produce challenges and growth opportunities in cannabis. During the third quarter, we generated proceeds of $800,000 from the issuance of 292,000 shares and an average price of $2.84. In October, we generated gross proceeds of $3.9 million from the issuance of 1,852,000 shares and an average price of $2.11. Now, I turn the call back to Mike.