Village Farms International, Inc.

Good morning, ladies and gentlemen. Welcome to the Village Farms International Second Quarter 2023 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the second quarter ended June 30th, 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 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 are 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 ending December 31st, 2022, and 10Q for the quarter ended June 30th, 2023, which will be available on EDGAR. These forward-looking statements are made as of today's date and accept as required by applicable security law. We undertake no obligation to publicly update or revise any such statements. I would now like to turn the call over to Michael DiGiulio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. Giglio.

Thank you, Lisa. Good morning, 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 Anne Gillen Lefevre, Village Farms Executive Vice President of Corporate Affairs, and Patty Smith, Vice President of Corporate Controllers. As per our usual format, Steve and I will review the operating highlights and financial results of the quarter and then open the call for questions. Turning now to Q2's highlights. We're very pleased with Q2's significantly improved financial results, which builds on our very solid start to 2023 last quarter. There are three noteworthy highlights. First, we delivered continued strong and consistent growth in our Canadian cannabis retail sales fully aligned with our strategic goal to be a leader for the long term in the largest federally legal cannabis market in the world. Second, we have stabilized our U.S. cannabis business and, in fact, returned it to sequential top-line growth while generating profitability and positive cash flow. And our fresh produce business saw another quarter of significant year-over-year improvement. Importantly, with our fresh produce strength of our strategic decision to build upon our unmatched expertise in controlled environmental agriculture to deliver leading revenue growth, profitability, and ultimately cash flow in each of our businesses. To do this, we lean heavily on the breadth and depth of our multi-talented team's capabilities, and we leverage our wealth of experience to succeed even in difficult market and regulatory conditions and unfavorable economic cycles not to mention the artificial pricing environment in the Canadian cannabis industry due to the lack of enforcement of the illicit market. Addressing each of these businesses in detail, I'll begin with the continued improvement in fresh produce. Against a still challenging macro environment, most notably high interest rate and high inflation, we continue to see the benefit of the actions we have taken under our ongoing plan to return the business to sustainable long-term profitability, including our significant progress in managing the Brown-Rigoso virus, while increasing our planting of virus-resistant strains. Fresh produce delivered its fourth consecutive quarter of sequential improvement and generated positive adjusted EBITDA of more than $1 million. This is an improvement of nearly $12 million from Q2 last year, which brings the improvement in adjusted EBITDA for the first half of 2023 close to $17 million and moved our year-to-date EBITDA into positive territory, a committed effort by our entire Fresh team. Execution on the multi-part operational plan for Fresh continues. We're committed to long-term continuous improvement to partner with our customers and win with consumers. We are strengthening our operations with investments in infrastructure and technology, including artificial intelligence for crop management, the initial results of which are very encouraging. We are planning more virus-resistant strains, which will continue over the next few years. We have also been able to turn our attention back to important growth initiatives like product innovation, where we have had great success in the past with development of exclusive varieties that command higher margins. As an example, one of our newest products, Sensational Sarah, is a novel tomato variety that has a perfect natural balance of sugar and acid and has been a hit with both retailers and consumers. It also marks the debut of our new sustainable packaging solution for produce, biodegradable and recyclable, that also addresses safety and shelf life. With the first half of 2023 in the books, Fresh Produce continues to track towards our goal of achieving positive adjusted EBITDA for the full year. Turning now to our Canadian cannabis business, which continued to deliver at standout performance. Retail branded sales for Q2 grew 24% year over year and 8% sequentially, both well ahead of underlying market growth. We delivered our 19th consecutive quarter of positive adjusted EBITDA and importantly, We were profitable on a net income basis. We have proven again that Village Farms Canadian cannabis business has the best organic growth story in the Canadian cannabis industry. Our growth has been achieved at a fraction of the capital costs of most other large LPs. And we have done so faster, absent a first mover advantage. The majority of that growth has been generated internally and not purchased. One and only acquisition in Canada, Rose Life Sciences in Quebec has posted a 300% sales growth since acquisition, more than tripling market share as it contributes meaningfully to the growth of the cannabis industry in the very important partner province of Quebec. Rose has proven without any doubt in my mind to be the best acquisition ever done in the Canadian cannabis industry to date. bringing with it invaluable insight and capabilities around consumer trends, product innovation and distribution, as well as industry relevant management expertise. Our Canadian cannabis results are very much the product of our deliberate strategy to realign our business to continue to win in an environment that, as we accurately predicted, would not see any relief from the challenging conditions I described earlier. We are managing our business for the realities of the market that we have today, which is a long way from a normalized CPG playing field. The expected thinning of both competitors and excess capacity has been slow and protracted, and there has been no tax relief and very little enforcement of illicit trade, and I predict we will never see any real enforcement in Canada. To be clear, I'm not complaining. It is simply what it is, and we must manage accordingly. So on the production side, our mandate has been to manage output levels to match supply with expected demand. We have placed an elevated importance on the production protocols, building on our industry lead aimed at consistently generating efficiencies. Steve will speak more to this in a few moments. We are actively, prudently, and continuously managing our cost structure for our growth forecast. And we have successfully increased our market presence and coverage, transitioning from a branded house to a house of brands as consumer preferences evolve. Since the start of 2022, we have launched seven new brands to address consumer trends and preferences. building on our original Pearson Farms brand's domination in the core price segment of the flour category and added more than 300 new SKUs. Our SOAR brand launched less than a year ago, quickly became the top-selling premium brand in the flour category in Ontario, meaning we now have two number one flour brands in their respective price segments in Canada's largest provincial market. And Fraser Valley, which was launched just a year ago, is not only the third best-selling flour brand in the value category in Ontario, but also continues to be the fastest growing. Adding to this brand triple threat, last month we launched Super Toast, which is uniquely focused on convenience and ready-to-go products, and which is off to a great start. And further, in just a short period of time, Promenade has become the second largest selling brand in Quebec. At the top line of the Canadian share rankings, with a number of the large early leaders having given way to smaller up-and-comers, we stand out as a consistent performer, maintaining a top three position nationally in Q2. In Quebec, Rose became the top selling producer by market share in dollars in Q2 and was the fastest growing producer. We achieved this in what has been an increasingly competitive environment there. and notably with the addition of Hexo's distribution in Quebec, Rose now touches approximately one-third of every dollar of cannabis sales in that province. Soon we will start preparing a portion of our world-class indoor facility in Quebec for supply to our growing export business for 2024 and beyond. There is clearly a lot going on very well and a lot to be proud of on our Canadian cannabis business. but there is also a number of areas that we are working on to deliver future growth, and I'd like to share those as I always do. Our data shows that in some markets, more than 70% of SKUs and products on the shelf today were not in existence a year earlier. We have seen some dampening of our overall market shares. We under-indexed on newness in the core price segment. We have plans to return to be to being a meaningful contributor to the innovation and growth of the core segment, which is important for our retail partners. Q2 saw a marked increase in the number of our new product launches in the core price segment, with four new strains in flour and our all new high THC one gram vapes with high performance hardware. These are formulated to maximize potency and flavor with seven flavors rolled out initially. We've added even more new strains in July with a very active launch calendar throughout the remainder of this year that includes more new strains, more new vape flavors, and new infused pre-rolls across our brand portfolio. In Quebec, we launched 15 new SKUs under the first product call this year and targeting another healthy number of launches later this year. As we innovate, we are continually continuing to elevate quality, delivering bigger, better buds through harvesting and trimming, enhanced bud sorting and hand packing, achieving better moisture levels through our drying process, and offering humidity packs in store in Purcell and Farms flour. And we are delivering quality on a more consistent basis with enhanced Q&A controls. Again, this is part of our commitment to continuous improvement in every part of our organization, even those in which we are excelling. This is our DNA. We have also dealt with some internal supply issues for our market-leading flour strain, pink kush, as it exhibited longevity with consumers that is uncharacteristic of most products in the Canadian market. The good news here is that our pink kush has proven that Canadian consumers will stick with great products, and we have the ability to offer those great products. We have addressed those supply issues and expect pink kush sales to respond accordingly. Importantly, we do not believe that price increases we took on certain high-velocity SKUs had any meaningful impact on share in Q2. We've worked closely with provincial partners on the implementation and are encouraged by markup changes that the OCS is planning for the second half of 2023. It would make sense for other LPs to take opportunistic price increases as well. Village Farms is a 30-year-old company which is executing a successful organic growth strategy in two complementary and international businesses, fresh produce and cannabis. We have learned a lot about our capabilities, which we are consistently pushing the team to continue to exploit for future growth. We continue to pursue opportunities in those international cannabis markets where the rules are known and clear through both our rapidly growing export business from Canada and and in-country market opportunities to come. Q2 is another strong quarter for export sales, which were up more than 200% year over year, and we expect future growth as we continue to monitor medicinal and recreational regulatory developments, particularly in Europe. Turning now to our U.S. cannabis business, Balance Health Botanicals, sales for the second quarter increased sequentially while generating positive net income, positive adjusted EBITDA, and positive cash flow. The success of our innovative new products and prudent cost management have stabilized this business as the overall CBD industry has contracted. We continue to believe, however, that the U.S. market for CBD and other cannabinoids will be a high-growth, multibillion-dollar opportunity with the benefits of regulatory oversight to open mass market opportunities. We remain encouraged by what appears to now be progress on the U.S. CBD regulatory and political front We are compliant with current FDA rules for other food and drink ingredients and good manufacturing practice standards under the NSF organization, a track record of safety, and stand ready to work with regulators to realize this industry's food potential. And we have been underwriting multiple studies that support the efficacy of our products. In other words, we are ready to go. At this point, I'll turn it over to Steve for a more detailed review of our financials.

Thank you. Thanks, Mike. This quarter I want to begin by reviewing our significantly improved profitability that Mike discussed earlier. Consolidated net loss for the quarter improved to $1.4 million loss or a loss of one penny per share compared with the net loss of 36.6 million or 41 cents per share in Q2 of last year. Our consolidated operating loss was close to break even at just negative $42,000. Again, a significant improvement from Q2 last year's operating loss of $43.8 million, which included a $30 million goodwill impairment. Our result for Q2 this year was driven predominantly by the improved operating performance from fresh produce. Consolidated sales for the second quarter were $77.2 million, a decrease of 7% from last year, with the decrease primarily due to lower volumes from our third-party growers in fresh produce. and lower non-branded sales from our Canadian cannabis businesses, which were dampened somewhat by a reporting currency of U.S. dollars due to the weaker Canadian dollar in 2023 versus 2022. Consolidated adjusted EBITDA for Q2 came in at $4.5 million, our second consecutive quarter in positive territory, and nearly a $15 million improvement from the negative $10.3 million in Q2 last year. Again, this was driven mainly by the improvement in fresh produce, but also higher EBITDA from our Canadian cannabis business, as well as lower corporate costs, excluding stock compensation, which fell to just under $2 million. I will now review our Canadian cannabis results, which, as usual, I will discuss in Canadian dollars to provide more accurate comparative without exchange rate fluctuations. Retail branded sales, which represents a vast majority of our Canadian cannabis sales increased 24% year-over-year, once again outpacing the overall Canadian market growth by a wide margin. International exports from Canada of nearly 1.9 million from 600,000 in Q last year is nearly a three-fold year-on-year increase. Non-branded or wholesale sales of Q2 were 3.9 million, which compares with 10.3 million in Q2 from last year, and especially outsized quarter for non-branded sales. We are seeing renewed inquiries recently for non-branded sales and will continue to operate our non-branded channel opportunistically, being selective around our participation in the current market environment, always with profitability in mind. These channels netted out to total Canadian cannabis sales of 37.7 million compared with 38 million Q2 of last year. Gross margin for Canadian cannabis of Q2 was 38%, compared with our reported 39% for Q2 last year, which included a purchase price inventory adjustment in that period. Excluding last year's purchase price adjustment to our cost of sales, our Q2 2022 gross margin was really 33%. The year-on-year increase was primarily related to the higher proportion of retail-branded products sold in Q2 of this year versus last year. Earlier Mike mentioned our redoubled focus on realizing production efficiencies, generating more output per dollar spent. We are realizing improved efficiencies through the optimization of growing space during the best growing seasons and continued refinement of our cultivation practices, as well as strategic pruning, pun intended, of input costs. We've also realized a two and a half times improvement in the overall and our overall pre-roll production per hour, as we move manufacturing entirely in-house, which we expect to have completed this fall. Selling general and administrative expenses for Canadian cannabis for Q2 were 10.5 million, or 28% of sales, down slightly from 10.9 million, or 29% of sales in Q2 last year. As Mike highlighted, our Canadian cannabis operations delivered their 19th consecutive quarter of positive adjusted EBITDA of $6.7 million, which was up 97% from $3.4 million for Q2 last year, and up 26% sequentially from $5.3 million in Q1 of this year. Notably, our adjusted EBITDA margin doubled from Q2 last year. Canadian cannabis also delivered positive net income, which came in at $1.7 million, as well as positive cash flow after capital expenditures and all debt service payments. I will now turn to our U.S. cannabis business and revert to U.S. dollars. To reiterate Mike's comments earlier, we have stabilized this business from both a sales and profitability perspective. U.S. cannabis sales for Q2 generated entirely by Balanced Health Botanicals were 5.3 million compared with $5.8 million in Q2 last year and $5 million in Q1 of this year. I will note here that this year's Q2 sales were dampened by two factors specific to the quarter. First, we were out of stock in two of our best-selling gummy SKUs due to the bankruptcy of our supplier. We've begun shipping these specific SKUs from our own manufacturing facilities this week. Second, Q2, there was a change by a major online search provider in an algorithm which affected our affiliate partner sales. U.S. cannabis Gross margin for Q2 was 67%, up slightly from 66% from the same period last year. Adjusted EBITDA for U.S. cannabis was positive $400,000 compared with negative $600,000 last year, a $1 million improvement, and U.S. cannabis generated a net income of $200,000 as well as positive cash flow in the quarter. Turning now to fresh produce, we delivered our fourth consecutive quarter of sequential improvement and a second consecutive quarter of significant year-over-year improvement. Produce sales were 43.8 million, which was down 7% from 47.2 million last year. The decrease was primarily due to lower volumes from third-party growers as we lost two of our larger supply partners at the end of 2022, one of which left the fresh produce space. but are picking up new growers in the forthcoming crop cycle and expect to fully recover to our former level of third-party sales by the end of 2023. Sales from our own facilities are up year over year due to higher prices in a better market environment, more than offsetting our reduced production footprint in 2023 versus 2022. As I noted in our last call, our average selling price is benefiting from our focus on more profitable customers with a higher percentage of produce sales going direct to retail accounts. I am pleased to report with the continued improvement in our operations, fresh produce achieved positive adjusted EBITDA of 1.3 million. That's an 11.6 million improvement over Q2 of last year and a 2.3 million improvement from Q1 of this year, which pushed adjusted EBITDA for the first half of this year into positive territory. With the stabilization of the macro environment, our ongoing improvements in managing the Brown-Rugos virus, and our focus on customer profitability, we continue to be confident in our substantially improved financial performance for this business in 2023. Our net loss from fresh produce improved to a negative $700,000 at the quarter. Turning now to cash and the balance sheet. At the end of Q2, we had cash of $31.7 million compared with $34.9 million at the end of Q1 of this year, and $84.9 million in working capital, up from $80.3 million at the end of Q1. Both are significant improvements from $21.7 million and $60.8 million at the end of last year. Total debt at the end of Q2 was $51 million, down slightly from $53 million at the end of Q1 on a stronger Canadian dollar versus U.S. dollar in Q2 versus Q1. The sales process for our Monahans facility in Texas continues to advance with expressions of interest expected during this quarter. Finally, I'm pleased to report that we are forecasting not only continued positive cash flow from our cannabis division, but also positive consolidated cash flow from all operations for the third quarter of 2023. And with that, I'll turn the call back to Mike. Well, thank you, Steve.