Village Farms International, Inc.

Good morning, ladies and gentlemen. Welcome to Village Farms International's fourth quarter and year-end 2022 financial results conference call. This morning, Village Farms issued a news release reporting its financial results for the fourth quarter ended December 31st, 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 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 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 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 MDNA for the year ended December 31, 2022, which will be available on EDGAR. These forward-looking statements are made out 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 DeGilio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGilio.

Thank you, Chris. Good morning, and thank you for joining us today. With me are Village Farms Chief Financial Officer Steve Ruffini, Village Farms Head of Canadian Cannabis, Mandesh Dosanjh, and Village Farms Executive Vice President of Corporate Affairs, Anne Gillen Lefebvre. As per our usual format, Steve and I will review the operating highlights and financial results for the quarter, and then we will be available for questions. Let me first begin with the key takeaways for our fourth quarter. First, Our Canadian cannabis business now ranks number two nationally in market share after steady growth throughout the year. In fact, our retail branded sales grew 25% year over year, while the market grew just over 13%. That's nearly twice of that market. We launched multiple brands, notably the original Fraser Valley Weed Company, SOAR, and Promenade, and we generated our 17th consecutive quarter of positive adjusted EBITDA. Importantly, we grew while integrating Rose Life Sciences into our platform. Many times in the past, we were asked about getting access to the Quebec market. We did. When we acquired Rose in very late 2021, it ranked 12th in terms of Quebec market share. It now ranks second. This is a great achievement in just one year. And just after quarter end, we further expanded our export markets with our first shipment to Israel and expect additional shipments to other countries in short order. Second, in our U.S. cannabis business, Synergy Plus is on track to be a $4 million a year brand in retail in less than one year since launch, another outstanding achievement. And once again, in Q4, the team's performance has made Balance Health one of the very few positive EBITDA CBD companies that we know of. Third, fresh produce is turning around. 2022 was one of the most difficult years of my long career in the produce business. In fact, the brown rugose virus has cost us $13 million over 21 and 22 crop cycle in Texas alone. And that's only in production costs and yield. It does not include the impact on customer relationships and it does not include the impact of the virus in calendar year 2022 in our Canadian facility, which we had not previously experienced. A significant turnaround for fresh produce is on the horizon for 2023, which we will demonstrate in the first quarter of 2023, much of this being driven encouraging success with the Brown-Ragoose Protocols. Q4 demonstrated the strength of our strategy, including surgical investments, operational improvements, including AI technology and innovations we made, which resulted in the year ending on a much stronger footing than it started in fresh. With respect to Canadian cannabis, we have read all the same news articles and hear the same pundits that say Canadian cannabis is out of favor with investors. Actually, that all cannabis in North America is out of favor with investors. Despite this, with all of our current challenges, we have worked hard, demonstrated operational excellence, and have proven our business and built an enviable position. And what other consumer products industry does this kind of growth exist for an industry leader? I don't know of one. And who can claim our depth of experience to capture future growth in the industry? It will get better, and when it does, we will have a clear leadership position. Let me spend a few minutes clarifying our strategy. When and since we expanded to cannabis, we expected the sequence to be, one, launching markets where our cultivation expertise would be the basis for a competitive and profitable business model. We chose Canada. Two, maintain optionality to enter the US market which has the number one single country market for cannabis, is a huge opportunity. We assign the value to the very real optionality of our Texas-based assets as worth much more, assuming produce broke even. Then starting from scratch in the U.S., we're legally permissible, as we have done in Canada. Which brings me to the last event in the sequence, number three, when the U.S. market legally permits us in our case to enter it, which is permissible by NASDAQ and with a strong preference to convert some of our Texas-based assets as we have done and proven in Canada. So how is this working out? On number one, as you can see from our results in 2022, despite very difficult market and regulatory conditions in Canada, which have hampered all players' profitability, We have built a very competitive and profitable business model. I'd give us a solid A grade for our efforts, especially when the vast majority of what we have built, we have built organically, not through M&A. Number two has proven more difficult in 2022. In simple terms, the option to enter the U.S. market ended up costing more than expected due to factors I have discussed for the last three quarters. 2022 hurt the option value. So I'd give us a D for this part of the strategy last year. On number three, our original expectations were that restrictions would be addressed by Washington and the legislative actions in 2022, at least after the midterms at the latest, which we extended later on to the lame duck session ending in January of this year. You've probably guessed that I would assign an F to the efforts in Washington, but I'd also give us a C as it's our job to manage in a regulated market as well. We would never run a business the way Washington runs itself. We recognize the need to improve our average. To do so, we are attacking all assumptions about entering the U.S. market, starting with the need to improve and de-risk our fresh business results. We have undertaken the following. We will be reducing the footprint of our Texas assets to improve profitability and focus our cultivation assets and team in one region in Texas to better service our profitable customers. We have identified and started implementing multiple operational improvements, which will enhance yields and lower costs. And we're reviewing every customer relationship to focus on those accounts which are most profitable for us so that we can over-deliver the key customers. Regarding factors out of our control, climate, virus, inflation, I'm sure you can appreciate that operators only discuss these when they are putting pressure on the business model. But they are very real across all agricultural businesses. Over our 30-year history and experience dealing with these factors is one reason we have built the top cannabis cultivation operation in the world. As of the first two months of 2023, inflation and the brown goose virus, which puts tremendous pressure in our profitability in 2022, are abating. I'm not ready to call victory yet, but I will call on those in our fresh business who have attacked the virus, input costs, and pricing opportunities. They have made me cautiously optimistic. So to summarize, we have launched a plan to de-risk the fresh operations by attacking the asset base, cost, and customer profitability. Our goal is to keep attacking these fronts until we can safely deliver a positive EBITDA contribution absent any major climate or economic event. We owe this to our stakeholders, and we understand that as a business, fresh must contribute to the growth of village farms. I will turn it over to Steve for more detailed review of the financials. Steve.

Thanks, Mike. Before I get into results, just a quick reminder on the impact of the acquisition of 70% of Rose Life Science on November 15, 2021. And therefore, the fourth quarter and annual 2020 2021 results only reflect six weeks of contribution in last year's comparisons. Turning to the results, consolidated sales for all the village farms for the fourth quarter were 69.5 million, which was a decrease of 5% from Q4 last year, due primarily to a weaker Canadian dollar in 2022 versus 2021. On a constant currency basis, our year-on-year sales were close to flat, year-on-year down 1%. Higher sales from the Canadian cannabis business were offset by lower sales from fresh produce. On a constant currency basis, our cannabis sales were essentially 50% of our consolidated U.S. dollar results. Consolidated net loss for the quarter was $49.3 million or $0.41 per share compared with a net income of $2 million or $0.02 per share for the same period last year. Our Q4 2022 net loss included the following significant non operational charges to income due to balance sheet adjustments, specifically an additional 13.5 million. Impairment to goodwill in the quarter related to the value on our balance sheet of the acquisition price of balanced health botanicals. This in addition to the June 30th, 2022 impairment charge of 29.8 million. as a direct result of the significant decline in the valuations in other CBD-focused peer publicly traded companies. The total impairment of $43.3 million for the year is a significant driver of our reported statutory full-year loss of $101.1 million. We also, in the fourth quarter, wrote down in the Canadian cannabis business took an $11 million US or $15 million Canadian charge for aged, lower-potency flower inventory. Additionally, we took a valuation allowance adjustment to our US deferred tax asset, creating significant change in our 2022 tax provision, resulting in a $19.2 million charge to earnings in the quarter. These balance sheet adjustments totaled 43.7 million of our reported 49.3 million loss. Consolidated adjusted EBITDA for Q4 2022 was near breakeven at negative 756,000 compared to positive adjusted EBITDA of 5.1 million in Q4 of 2021. The EBITDA loss in Q4 this year was driven by fresh produce, although we saw a considerable improvement compared to Q3. Corporate costs were relatively flat, Year-on-year. As I shift to Canadian cannabis results, I refer to results in Canadian dollars to provide more accurate gauge of our period-to-period performance amidst exchange rate fluctuations. Our Canadian cannabis operations delivered year-on-year growth in Q4 of 13% to $38.2 million. Retail branded sales for Q4 continued a meaningfully outpaced the market growth at 25%. percent year-over-year. Wholesale sales for Q4, however, were down 35 percent year-over-year due to continued significant price erosion in the market as distressed producers liquidate inventories. This revenue channel can vary widely from quarter to quarter. This was especially the case in Q4. The wholesale pricing environment contributed to our decision to write down $15 million of aged lower-potency flour inventory as its expected realizable value was reassessed relative to current wholesale market pricing. As it is sold, it will pressure our gross margin target range of 30% to 40%. Excluding this write-down, which is recorded in our cost of goods sold for Q4 for statutory purposes, Without this charge, our gross margin for Canadian cannabis in Q4 was 40%, at the top end of our stated target range of 30% to 40%, up from both Q2 and Q3 as we continue to execute on providing high-quality, everyday-priced products. General and administrative expenses for our Canadian cannabis operations for the fourth quarter were $9.8 million, or 26% of net sales, compared to $9.2 million, or 27% of net sales in Q4 in 2021, and was a sequential improvement following our investments in the end of 2021 and the first half of 2022. We remain on track to bring SG&A as a proportion of sales back into the lower 20% range in 2023. Q4 2022 SG&A includes severance costs of our publicly announced headcount reduction in early Q4. Our Canadian cannabis operations delivered their 17th consecutive quarter of positive adjusted EBITDA at $6.3 million, up from $6.1 million in Q4 2021. I will now move to our U.S. cannabis operations and revert my review back to U.S. dollars. U.S. cannabis sales for the fourth quarter, which continued to be generated entirely by Balanced Health, were 5.3 million, which generated a gross margin of 67% that compares with sales of 7.5 million and a gross margin of 71% in Q4 last year, with the sales decrease primarily driven by the industry-wide challenges, although indications are that we are outperforming the majority of our peers. Our back half 2022 results were driven in part by the success of our Synergy Plus line of hemp derived THC products. Adjusted EBITDA for US cannabis was $300,000 compared with adjusted EBITDA of $1.7 million in Q4 of 2021. Now turning to fresh produce. Although our financial performance continued to be impacted by inflationary pressures, especially for freight and other production inputs, And the volume loss due to the Brown Ragoose virus, we delivered a significantly improved quarter, driven predominantly by improvements in our Texas operations, which are continuing into early Q1 2023 and are coupled with stronger year-on-year pricing. Adjusted EBITDA was negative 3 million compared with a positive 700,000 in Q4 of 2021, and notably a considerable sequential improvement from the negative 4.9 million in Q3. And as expected, it really was a first half, second half story with adjust the EBITDA for the back half of the year, improving to a negative 7.9 million from a negative 16.5 million for the first six months of 2022. Turning now to cash flows in the balance sheet at December 31, 2022, we had 16.7 million in cash and approximately 44.1 million in working capital. During the quarter, we had a net cash outflow of $1.5 million net of all operational capital expenditures and financing in the quarter. Subsequent to quarter end, Village Farms Management, our board, and our advisors made what we believe to be a prudent decision to raise $25 million through a registered direct offering of just under 18.4 million common shares at US price of $1.35, together with warrants to purchase up to the same number of shares which at their exercise price of $1.65 would generate $30 million in additional proceeds. We made the decision to raise capital last month based upon two factors. First, our best informed assessment of all the 2023 factors outside of our control. The second, a failed federal cannabis legislative agenda that might have delivered more efficient capital market fundraising. We felt we had the responsibility to our shareholders, indeed all stakeholders, store up our balance sheet so that we could focus without distraction on executing our operational plan. And now I'll turn it back to Mike.