Village Farms International, Inc.

Good morning, ladies and gentlemen, welcome to Village Farms International's third quarter 2024 financial results conference call. This morning, Village Farms issued a news release reporting its financial results for the third quarter ended September 30th, 2024. 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 the completion of the call today. Details of how to access the replays are available in today's dues release. Before we begin, let me remind you that forward looking statements may be made today, during or after the formal part of the conference call. Certain materials assumptions were applied in providing these statements. many of which are beyond our control. These statements are subject to a number of risks and uncertainty 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 ended December 31st, 2023, and 10Q for the quarter ended September 30th, 2024, which will be available on EDGAR and CEDAR+. These forward-looking statements are made as of today's date and accept 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. DiGiglio. All right, thank you, Operator.

Good morning, and thank you for joining us today. With me are Steve Ruffini, Chief Financial Officer, and Gillen LaFever, Chief Operating Officer, Patty Smith, Corporate Controller, and Sam Gibbons, Senior Vice President, Corporate Affairs. I have a little bit of a cold today, so I may do some coughing, and I apologize for that. So let's get going. Our third quarter reflects... strong outperformance from our fresh produce business, which we anticipated following the softer pricing we experienced in Q2, as well as continued solid growth and leading market share in Canadian cannabis as our teams continue to excel across all brands, form factors, and geographies. Fresh produce sales increased 20% to nearly 43 million, gross margin of 8%, improved 400 basis points year over year, and fresh delivered positive adjusted EBITDA and net income of $2.3 million and $0.4 million respectively. Continued execution in these areas, along with further expansion of our partner sales, remain an important focus area to support the value of a fresh produce business as we work towards achieving sustained profitability in this business. As a reminder, we believe Fresh has great value as a top North American produce marketer, and it's a critical component in our ability to maintain optionality of a potential rollout of a permissible cannabis strategy in the U.S., either NASDAQ-permitted or Texas-based. Now, turning to Canadian cannabis, total net sales grew 29% year over year, all organically without acquisitions to roughly 50 million Canadians. Branded resale sales grew 22%, and we were once again profitable with positive adjusted EBITDA of $6.5 million and cash flow from operations of $6.1 million Canadian. We're also very excited about continued growth in international medical sales, which doubled year over year with continued increases in sales to our Germany, Australian, and UK partners in Q3 and year-to-date. According to German cannabis outlet Close, our strains currently rank number one and three cultivars in the German market through a supply agreement with one of our partners, which reflect continued strong reception to our strains with international customers. We continue to hold the number two LP position in Canada and were the fastest growing Canadian LP over the past year. experiencing revenue growth across all sales channels. We maintained number one market share in Ontario, and for the first time ever have achieved number one market share in Quebec, giving Village Farm to number one market share leadership position in Canada's two most populous provinces. We maintained a number one market share in Flowerland, Canada, and then grew that market share by 2.7% during the third quarter. We also continue to hold the number two position in pre-rolls nationally and improved our market share in pre-rolls by 2.3% as compared to last year. Over the last year, we've improved our market position in pre-rolls from number four to number two. Super Toast, our milk flour brand, continues its outstanding performance despite the milk category being very competitive with a well-entrenched leader. Supertoast currently sells in five provinces and remains the third fastest growing of all brands nationally. During the third quarter, we also began to realize sales from our recently announced BC Trials Program, our grower-led initiative designed to bring exclusive access to limited release strains. We also introduced three trial strains that are driving revenues in British Columbia now. And we are looking at expanding this small batch limited release strain initiative for other provinces in the coming quarters. And as we continue to adjust our product offerings to appeal to the many cannabis connoisseurs across Canada. Finally, we continue to innovate and flower new strains that delight our consumers. And we're pleased to announce that we've introduced a new strain called Neon Lambo. I'm a Corvette guy myself, but to the market during the fourth quarter. Early reception to this strain has been excellent with our customers, and initial order rates give us solid optimism that this strain could achieve similar success to our former launch of CushCod, which became a top-five selling strain across all of Canada. We also have some exciting new brand and product introductions planned in the vape and infused pre-roll categories, where we under-indexed for later in this Q4 and Q1 of next year. and we're excited to be able to share more on these launches next quarter. But for now, they reflect continued stellar execution by our brand and product innovation teams to identify opportunities for us to profitably grow market share across the white space opportunities. Moving to the US cannabis business, we're starting to see signs of stabilization and the team has begun to invest in growth initiatives. We're still exposed to challenges caused by proliferation of unregulated hemp-derived products across the United States, but we're looking forward to more stable performance from this business in the future. And before I move on to discuss our international business, I want to provide some additional discussions of some of our out-of-stock cultivars, which impacted sales velocity during the third quarter. After a very strong first half of sales in the Canadian cannabis space during the third quarter, we experienced some out-of-stock inventory in several of our most popular SKUs, which impact the sales performance. We estimate this resulted in lower sales of approximately 2.5 million during the third quarter. Restocking of these SKUs began in September, improving our market share performance in the mill category after experiencing slight delays and declines, rather, during the first two months of the quarter. And we believe we'll be back to normalize in stock levels across the board by early Q1 of next year. During the second quarter, we made a strategic decision to move away from some lower profitability skews and raise prices on others as we plan to be more selective as we prioritize higher profitability sales over volume. We also chose to take advantage of strengthening pricing in the B2B market to sell non-branded spec inventory. Overall, Canadian gross margins of 26% were impacted by these non-branded spec sales, and if we executed those impacts, gross margin in the third quarter would have been 31%. The Canadian cannabis industry has had significant overcapacity, which has resulted in unhealthy accumulation of inventory and created pressure on pricing in addition to the egregious excise tax that the Canadian industry pays. Our team remains very in tune with supply dynamics. With a growing international medicinal business to an increasing number of attractive markets like Germany, we are in a great position to be more selective with our allocation of high-quality flour across our various sales channels and customer relationships. sustaining our focus on driving more profitability from our sales. We've got a ton of opportunity internationally to make higher ROI capital allocation decisions. And given continued egregious challenges with the excise tax in Canada, we're not allocating additional capital from our balance sheet to increase capacity at our Delta II greenhouse at this time. We're focusing our resources on higher ROI investment opportunities, which brings me to the recent update At our Lely Holland subsidiary in the Netherlands, we put an updated investor presentation on our website yesterday, by the way, which contains some new information about the Netherlands market. We would encourage you to all take a review of that information. But as a reminder, our Lely Holland subsidiary has one of 10 licenses to supply recreational cannabis to coffee shops in the Netherlands. We announced last month that we have completed construction of our indoor cultivation facility in Drakten, Netherlands, and I can confirm today that we've begun cultivation in October and are on track to have our first sales during the first quarter of next year. We believe a great comparison for the Dutch market is the province of Quebec in Canada, where I mentioned earlier we established the number one market share position during the third quarter. Some estimates based on comparable per capita consumption patterns with a Dutch population of 18 million, indicate that a full legal market could be somewhere between 3 and 3.5 billion euro revenue market opportunity annually at maturity. We believe the quality of our operations at Lely puts us on a clear path to profitability and generating strong returns on this investment. as there is no excise tax in this regulatory jurisdiction and much more favorable product pricing, which will enable us to have stronger fundamental performance than we do in Canada by far. Over the next couple of quarters, our drafting facility will be ramping up to full analyzed capacity of approximately 2,000 kilos of dry flour. We anticipate pricing per gram of approximately 6 euros. which would put us on track to generate revenues of approximately 12 million euros on an annualized basis. Over time, we have the potential to vertically integrate by acquiring coffee shops, which would help improve margins, and we look to add capacity as demand dictates. That concludes my summary of our third quarter highlights. I will now turn the call over to Steve to review the financials before I make some closing comments. Steve?

Thanks, Mike. Starting to consolidate results. total sales grew 20% year-over-year to $83.4 million, with strong top-line growth in both Canadian cannabis and fresh produce. Net loss narrowed to $800,000, or one cent per share, from a $1.3 million loss last year, notably with positive net income contributions from both Canadian cannabis and fresh produce. Consolidated adjusted EBITDA was positive $5.3 million, up 65% from 3.2 million for Q3 last year, again with positive contributions from both Canadian cannabis and fresh produce. I will now turn to the business segments individually, starting with fresh produce. As expected, we saw a return to more normalized tomato pricing during the quarter. Q3 sales increased 20% year over year to 42.8 million. Growth was driven by higher volumes from both our own production and that of our partners. You can see the continuing positive impact of our success around yield expansion and cost efficiencies in our gross margin for the quarter, which was up 133% compared to that of Q3 last year. I will note that here the volumes from our own facilities for Q3 were up 25% compared to the same period last year. Adjusted EBITDA tripled to 2.3 million compared to 800,000 last year. Canadian cannabis delivered another strong quarter of total net sales, up 27% year over year, driven by increases in retail branded sales, non-branded sales, and international sales. Together, these drove another quarter of positive adjusted EBITDA of Canadian 6.5 million and operating cash flow of 6.1 million. Retail branded sales grew 20% to Canadian $37.2 million. It was also another strong quarter for non-branded sales as we continue to be opportunistic with more favorable pricing, which is much improved from last year. Non-branded sales were up 68% versus Q3 last year to Canadian $10.1 million. As Mike mentioned, we also saw continued momentum in our international medicinal sales, which were up 111% from Q3 last year. Canadian cannabis gross margin for Q3 was 26%, in line with Q2, and down from 35% in Q3 last year, due to the increased non-branded spec sales Mike mentioned earlier, which are lower margins. Excluding the non-branded spec sales, gross margin for Q3 improved to 31%, which was up from Q2's 28%, returning us to our target range of 30% to 40%. Aspenia expense as a percentage of sales for Q3 improved to 22%, down from last year's 26%. Q3 adjusted EBITDA for Canadian cannabis of $6.5 million, was up 5% from Q3 last year. Before leaving Canadian cannabis, I will once again highlight the impact of the egregious excise tax we pay on retail branded sales. Total excise tax paid in Q3 was Canadian $24 million, which brings our year-to-date total to Canadian $78 million. As I have noted before, this is the largest single expenditure within our cannabis business and factors heavily into our capital allocation strategy decisions. Turning to our U.S. cannabis business, Q3 sales were $3.9 million with a gross margin of 63%. Our Q3 sales were impacted by additional states moving to restricting intoxicating hemp-based products. as our responsible GMP-produced natural hemp products are caught up in several states' attempts to deal with the proliferation of unregulated hemp-based products, most notably synthetic products. We continue to progress on multiple initiatives to reinvigorate sales while we manage the cost side of the equation. The team has stabilized the business against these headwinds and has now turned to growth initiatives, which include new SKUs with innovative formulas labor profiles. Q3 adjusted EBITDA was negative $159,000 and net loss was negative $192,000. Both were improvements over Q2. Finally, we are pleased with net income of $300,000 from Village Farms Clean Energy during the third quarter. This project began operations at the Delta R&G facility in April. and royalty payments are now being received from our energy partner provide a healthy stream of incremental profits for the company going forward. Turning to consolidated cash flows in the balance sheet, we generated cash flows from operations of 4.3 million, our second consecutive quarter of positive operating cash flow. We ended Q3 with cash of 28.7 million and working capital of 65.4 million. Total term debt at the end of Q3 was 43 million, split equally between fresh produce debt due May 2027 and cannabis debt, which matures starting in February 2026. We have longstanding multi-decade relationships with our lenders and are confident we will extend our cannabis term facilities in the coming months. We believe we are our lenders' top performing cannabis facility. Last quarter, we amended and extended the agreement for our $10 million revolving line for fresh produce, which has a current balance of $4 million to a May 2027 maturity date. We also have in place a Canadian $15 million cannabis line of credit, which is currently not drawn on. We remain comfortable with our net debt level of $18.7 million. And I will now turn the call back over to Mike.