Village Farms International, Inc.

This morning, Village Farms issued a news release reporting its financial results for the first quarter ended March 31, 2023. That news release, along with the company's financial statements, are available on the company's website at villagefarms.com under the investor's heading. Please note that today's call is being rebroadcast 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 this statement, 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 foreign securities filings with the SEC and Canadian regulators, including its Form 10-K MDNA for the year ended December 31, 2022. and 10-Q for the quarter ended March 31, 2023, which will be available on EDGAR. These forward-looking statements are made as of today's date and exact 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 DiGilio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DiGilio.

Thank you, Bella. Good morning, everyone, and thank you for joining us for today's call. 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 Lefevre, and Patty Smith, Vice President and Corporate Controller. As per our usual format, Steve and I will review the operating highlights and financial results for the quarter, and then open up the call for questions. So let's begin. The first quarter was a solid start to 2023 with three particularly noteworthy highlights. First, our fresh produce business is tracking towards our goal of achieving sustainable positive adjusted EBITDA for this year. Fresh delivered its third consecutive quarter of significant sequential improvement, approaching break-even adjusted EBITDA with a Q1 EBITDA loss of just under $1 million. That's a $5.2 million turnaround from Q1 last year. and a $2 million improvement from Q4. While there's still much work to be done, I'm encouraged by the meaningful and steady progress over the past several quarters. Second, despite what remains a very difficult environment in which to operate, our Canadian cannabis business continues to be one of the best and most consistent performers in the country. Retail branded sales once again significantly outpaced market growth, And we expanded market share while continuing to generate positive adjusted EBITDA, which we did again this quarter. And third, we have added markets to our Canadian export channel, which is generating strong momentum in this part of our international cannabis strategy, where margins are much higher and taxation is rational. Let me address each of these, starting with Canadian cannabis first. Village Farms Canadian cannabis business keeps putting up big points on the scoreboard, which in a normal operating environment would be recognized. There are three key areas in which the team continues to deliver. One, our number one position in dried flower category nationally, which we have held consistently for five quarters now, and which remains the largest product category and the basis for all product formats. Our strategic acquisition of Rose Life Science, which has been accretive to their growth in the important Quebec market, and thus a contributor to our overall growth. And three, our execution, commercialization, and investment in innovation, which propelled us into the number two market share position overall last year, and which we maintained during Q1 of this year. Notably, we are one of just three of the top 10 producers that meaningfully grew market share over the past year, and we outpaced the second biggest gainer by more than two to one. Our low-cost production capabilities and continued incremental gains in our efficiency enabled us to generate year-over-year growth in adjusted EBITDA, our 18th consecutive quarter in positive territory. The team is focused on execution against those variables in our control. Yet, despite the proven and sustainable strategic advantages built into our Canadian cannabis model, we are operating in a structure that keeps much beyond our control. It feels like we are playing the game with one hand and both feet tied behind our back. The iconic federal legalization of cannabis in Canada is approaching the six-year mark. It was a bold, courageous, and progressive move designed to bring about the availability of a safe, regulated product, create a new, healthy, competitive industry, and convert an enlisted market into beneficial tax revenue. As we speak with many other governments exploring legalization, we are asked about the Canadian model. There are many positives. The availability of a safe, regulated product, innovation and emerging research to benefit the consumer, and a partnership between operators and regulators where the rules are largely transparent or at least a means to discuss. Yet as we and other LPs have noted respectfully in our conversations with the regulators, the Canadian excise tax is strangling the economics of producers and as a result not generating the sustainable tax dollars the government expected. To put this in context, Q1 alone we incurred 18.6 million Canadian dollars in excise tax, more than our entire payroll expense on branded sales of 47 million or 40% of our provincial sales in a quarter. This does not include payroll tax or property tax or licensing tax or income tax. If we were an alcohol tobacco company, that nearly 19 million in excise tax would be in a neighborhood of just under $5 million. Let me say that again. If we were an alcohol tobacco company, we'd have paid roughly $14 million less in tax this quarter alone. It's ludicrous. It's not surprising that then, as others have noted, the majority of LPs are not paying these taxes. We suspect the economics do not allow it. It has been well documented by industry experts that the government is solely the most profitable entity in the Canadian cannabis supply chain, and we believe the illicit trade is likely the most profitable. This is perverse. The illicit market has ample room to underprice the legal, safe market, a major reason why the illicit market remains strong and underground for the industry. It's questionable, then, if the legal industry will be able to convert the remaining 40% or so of all Canadian cannabis sales that is still a listed product on the current excise tax regime. This is clearly inconsistent with the industry's desired contribution in that it challenges local enforcement efforts. It challenges profitability. Just look at the lack of corporate income tax contributions, the thousands of job losses, and impacts on ancillary businesses and local communities. Challenges future investment. Innovation cannot be funded out of continued capital injection. I feel this is another area the illicit trade can surpass the industry. More well, the tax structure, flat per gram tax, takes the absurdity to another level in the contents of the rapid expansion of the value segment of the market, including our own Fraser Valley wheat field. All of this is one reason we are attracted to the opportunities in international markets, the second highlight for our Q1. Leveraging or experiencing Canada for international opportunities with their attractive profit profile is a core part of our cannabis strategy and we are seeing very good momentum. Year-over-year export sales were up more than tenfold and now contribute nearly 7% to our Canadian cannabis segment sales. Most of the export growth to date, including this quarter, has come from our first export market in Australia. Earlier this year, we added a second export market with the launch of PureSun Farms brands in Israel. And last week, we announced our launch in the German medicinal market, after successfully completing all testing protocols, a testament to our team and local partner, Ayuvo Therapeutics. While the lead-up to both market launches had its delays, I'm pleased that we have received follow-on orders for both countries, and we are thrilled to build our business with local partners. And then my third takeaway for Q1, a significant turnaround in our fresh produce business. Fresh is an important strategic business for Village Farms. We are committed to de-risking it and returning it to profitability as part of our long-term growth strategy. Q1 was another very encouraging step in that direction. The macro environment has improved. Oversupply is getting under control, and we have made adjustments for inflation. We continue to work on our improvements across all aspects of our operations, from greenhouse to customers receiving docks, including best-in-class operating protocols to manage plant viruses. As you know, that's been difficult the last few years. Our fresh results for the first quarter continue to support our confidence in sustainable improvement, improved financial performance for our produce business this year, and reinforce our belief in the value of this business. Fresh and cannabis are synergistic. Each benefits from the other's expertise, assets, and deep-rooted experience. We have capitalized on these synergies in Canada and have long eyed the United States. As such, we have formally applied for a medicinal license in Texas where the legal use of medicinal cannabis may be greatly expanded to include chronic pain. While the number of potential licenses and timing of when the state will make a decision are unknown, we are encouraged by the potential to contribute our cannabis expertise, our decades of investment in the state of Texas, and our deep agricultural roots to any future plans by Texas to award additional licenses. Should we receive a license, we will work with the stock exchanges towards an acceptable ownership structure that would enable us to participate in the market. With respect to our current CBD business in the United States, Balance Health Botanicals continue to hold its own in another very difficult market in which to operate. We continue to benefit from the success of Synergy Plus and its line of products last year. So far this year, this business is operating more or less on plan and with the continued focus on costs supporting near break even adjusted EBITDA. Regulation of the CBD business would be a meaningful game changer for this business and we eagerly await the outcome of the Farm Bill 2023. This year, the potential review of the category. In the meantime, the team is operating under the highest production standards both from our current customers as well as the opportunity to expand when food, drug, mass retails are ready and open. So with that, I'll turn the call over to Steve for a more detailed review of financials. Steve. Thanks, Mike.

Consolidated sales for all of Village Farms for the first quarter were $64.7 million, a decrease of 8% from Q1 of last year. with a decrease due to lower sales from fresh produce and U.S. cannabis, which were partially offset by Canadian cannabis sales. On a constant currency basis, sales declined 5%, with a stronger year-over-year U.S. dollar, reducing our reported number by 2.6%. On a constant currency basis, our cannabis business sales were 48% of our consolidated U.S. dollar sales. Consolidated net loss for the quarter was $6.6 million or $0.06 per share compared to a net loss of $6.5 million or $0.07 per share for the same period last year. The slight increase in net loss was mainly due to our improved operating loss of improvement of $2.2 million being offset by a higher year-on-year income tax expense of $2.3 million. as we are booking evaluation allowance for our US tax losses, which we started in Q4 of 2022. Operating loss before tax for Q1 improved 27% from Q1 last year. Improvement was mainly the result of the improved operating performance from VF Fresh. Consolidated adjusted EBITDA for Q1 was $519,000. A significant year-over-year improvement from negative $6.1 million for Q1 last year is mainly the result of the $5.2 million fresh produce EBITDA turnaround Mike discussed earlier, as well as higher EBITDA from our Canadian businesses and a 13% year-over-year decrease in corporate costs to $2.2 million, excluding stock compensations. Turning to our Canadian cannabis results, which I will discuss in Canadian dollars to provide a more accurate gauge of period-to-period performance without exchange fluctuations, net sales for Q1 grew 23% year-over-year to $34 million, with retail-branded sales growing 40%, once again outpacing overall Canadian market growth by a wide margin. Beginning this quarter, we are breaking out our international export sales In our Canadian cannabis business, as they are becoming a larger part of our sales mix, as Mike discussed, with more favorable margins, it's an increased focus for us. International sales were 1.7 million, which was a 750% increase over Q1 of last year. Non-branded or wholesale sales for Q1 were 2.3 million compared with 4.9 million in Q1 last year. as already low spot prices in an oversupplied market were further eroded by large inventory liquidations. As we have discussed many times, the wholesale market is opportunistic for us, and we have been selective around our participation in the current market environment, with the expectation of improved pricing when supply is more aligned with demand. Gross margin for Canadian cannabis in Q1 was 33%, essentially in line with our 34% in adjusted gross margin We reported in Q1 of 2022, which excluded the purchase price inventory adjustment in that period. The slight decrease in margin was primarily related to a sales mix with a higher portion of lower margin Fraser Valley sales as that brand continued to have success in the value segment of the market. And it was not launched until the back half of 2022, being for the most part offset by the higher margins on our higher international sales. Selling, general, and administrative expenses for Canadian cannabis for Q1 were $9.3 million, or 27% of net sales, unchanged from $9.3 million in Q1 last year, but down a percentage of sales from 34% in Q1 2022. On a sequential basis, SG&A costs were down on a dollar-on-dollar basis from $9.8 million in Q4, an unchanged percent of sales. I will note that Q1 is typically elevated on a percentage of sales basis due to seasonally lower sales. SG&A cost efficiency remains an organizational-wide focus. Our Canadian cannabis operations delivered their 18th consecutive quarter of positive adjusted EBITDA of $5.3 million, which was up 95% from $2.7 million for the Q1 of last year. We continue to generate solid positive EBITDA in a tough and uber-competitive pricing market. Moving now to our U.S. cannabis operations, for which I will revert back to U.S. dollars. U.S. cannabis sales for Q1 2023 generated entirely by our CBD business, Balanced Health, were $5 million, generating a gross margin of 65%. This compares with sales of $7 million and a gross margin of 67% for Q1 last year. The sales decrease is primarily due to the industry-wide challenges. which we have mitigated with new product introductions, including our Synergy Plus line of hemp-derived THC products. Adjust EBITDA for U.S. cannabis was just under break-even at negative 151,000 compared to a positive 580,000 in Adjust EBITDA in Q1 of last year. Based on the information we have, we continue to believe that we are outperforming the majority of CBD-focused peers. Turning now to fresh produce, Although our financial performance continued to be impacted by inflationary pressures, we achieved our third consecutive quarter of sequential improvement in this business, which resulted in a considerable year-over-year improvement. Produce sales were down 16% year-over-year, with an increase in sales from our own facilities being offset by lower produce sales from our other suppliers due to lower year-on-year volumes. as we transition our partner growers during 2023. Lower year-on-year volumes were offset by a 27% increase in price due to both generally higher market pricing in early 2023 versus early 2022, as well as our success in having a higher percentage of VF Fresh sales going direct to retail accounts, who generally pay a higher price than our wholesale accounts, which is one of the early wins in our operational plan. The higher sales price is the primary driver of our improved EBITDA. Adjust EBITDA loss for fresh produce took another step closer to break even with a loss of $995,000, which was a substantial improvement over the loss of $6.2 million in Q1 of last year, as well as the negative $3 million for Q4 of 2022. A continued stabilization of the macro environment and our work on improving yields and customer profitability continues to support our confidence in substantially improved financial performance for this business in 2023. Turning now to cash in the balance sheet, at the end of Q1, we had cash of $34.9 million and $80.3 million of working capital, which are substantial increases from the $21.7 million and $60.8 million, respectively, at the end of the fourth quarter of 2022. Total debt at the end of Q1 was $52 million, down slightly from $53.5 million at the end of the prior quarter, as our recurring loan amortization is close to $1.5 million per quarter. I'm also very pleased to report we extended the Pearson Farms revolving and non-revolving credit facility, which now expired in February 2026 from February 2024 under the same terms, conditions, and covenants. In the current environment of tighter credit, higher interest rates, lower risk tolerance, financial challenges of many of our Canadian cannabis peers, as well as the regulatory focus on the health of our financial institutions, the extension is a strong indicator by our lenders in our cannabis business operations. And now I'll turn the call back to Mike. Thank you, Steve.