Village Farms International, Inc.

Good morning, ladies and gentlemen. Welcome to the Village Farms International second quarter 2025 financial results call. This morning, Village Farms issued a news release reporting its financial results for the second quarter ended June 30th, 2025. That news release along with the company's financial statements are available on the company's website at villagefarms.com under the investor setting. 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 are 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 31, 2024, and 10-Q for the quarter ended June 30, 2025, which will be available on EDGAR and CDAR+. These 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 DiGilio, Chief Executive Officer of Village Farms International. Please go ahead.

Well, thank you, Tanya. And good morning and thank you for joining us today. With me are Steve Ruffini, our Chief Financial Officer, and Gillen Lefevre, our Chief Operating Officer, Patty Smith, our Corporate Controller, and Sam Gibbons, Senior Vice President of Corporate Affairs. I'll begin with a brief summary of recent events and our second quarter highlights, and then I'll hand the call over to Steve before some last closing comments. The second quarter was transformational. It was a transformational, quarter for Village Farms, just to be clear, operationally and financially, with record levels of profitability that demonstrate the improving earnings power of our business and continued success in scaling a profitable global cannabis enterprise. During the quarter, we announced and then quickly closed a transaction to privatize about one-third of our produce assets and operations through the formation of a new partnership with proven private investment partners. Most on this call are familiar with the details of the new Vanguard partnership, and they are available in our various communications and filings, so I won't repeat them here. But I do want to take the opportunity to reiterate what all this means for Village Farms, our future prospects, our partners and team members, and of course our shareholders. First, we believe we have dramatically improved the long-term upside potential of our 36-year legacy in the produce industry as a private company with access to significant financial resources that will add additional acquisitions in the future. Our commitment and experience partners have created significant value for their shareholders in the past, and we are positioned to participate in this renewed opportunity throughout near 38% equity ownership interest. Second, we believe Village Farms has transformed into one of the most attractive platforms for revenue growth and margin expansion across the global cannabis industry. With proven operational capabilities, we can now focus on our various cannabis opportunities around the world. Third, the transaction generated 40 million in cash proceeds further strengthening our balance sheet, which along with our improving cash flow generation profile, we will support additional growth investments across the platform. And finally, our shareholders and prospective investors can now see the improving earnings potential of our remaining global cannabis business, which significantly improved forward visibility into our financial performance that is evident in our second quarter results. Before I get into the second quarter highlights, I want to make clear that the strength of our Q2 performance is not simply a result of us privatizing our produce business. The closing of that transaction has happened to coincide with several other powerful catalysts, including our recent commencement of sales in Holland's adult use market, success of recent initiatives to align our product portfolio in Canada towards higher margin SKUs, And finally, a continuing wave of additional countries around the world following Canada's lead with pragmatic approaches to regulating cannabis. All of these events are coinciding with near impeccable timing, yet it is the competitive strengths we've established over 36 years in controlled environmental agriculture that we are leveraging to deliver as one of the world's largest and most trusted scaled cannabis operators. So now I'll shift to a review of our second quarter highlights, which I'll focus on our performance from continuing operations, excluding the impact of the gain of our sale of produce assets during the quarter. As we disclosed in this morning's press release, second quarter results reflected record levels of profitability for the company. And not just record since we expanded the cannabis in 2017, but record performance in our near 20 year history as a publicly traded company. While consolidated sales increased 12% year over year, consolidated net income from continuing operations improved to 9.9 million, or nine cents per share. Adjusted EBITDA from continuing operations was 17.1 million, or roughly 29% of sales, both of which reflect record performance and improved sustainability from Q2 of last year. And adjusted EBITDA margin was up over 2,300 basis points. In our flagship market in Canadian cannabis business, retail branded sales in Q2 were in line with our expectations given our planned reduction in several low margin domestic SKUs. We are not yet seeing the types of price increases that one might expect given the changing supply dynamic in the retail market, but we have been pleased to see stronger contribution margin from our retail branded sales in Q2, which demonstrates the success of our recent margin improvement initiatives. In our wholesale channel, we continue to be optimistic in the contents of our focus on profitable sales. Q2 wholesale sales were consistent with the levels of last year or so. However, gross margin on these sales were up significantly on a year-over-year basis, as we believe supply and demand dynamics are driving more favorable outcomes in the wholesale channel. These dynamics resulted in another quarter of improvement in overall Canadian cannabis gross margin, which was at the top of our target range at 39% and our best quarterly gross margin in three years. We now deliver two consecutive quarters of gross margin within the targeted 30 to 40% range, and we are optimistic about our ability to sustain gross margin at the upper end of this range for the foreseeable future. Continued growth in Q2 was driven mainly by the successful execution of our international growth strategy. International exports increased almost 700% year over year, and we're up over 120% sequentially from the first quarter. We have proven that our international model works, and we are now scaling it with purpose and precision. At just the halfway point of the year, we have achieved our full-year target of tripling out 2024 international export sales. And given continued strength in the third quarter, we expect similar levels of sales through the remainder of this year as compared to the first half. International prescribers and patients are constantly choosing our flour, and we are seeing a strong preference for many of the strains that have been our most successful in Canada. During Q2, we increased deliveries to existing customers and also onboarded several new partners. Most of this growth is being driven by continued strength of demand from Germany, along with further increases in the UK and steady performance across our other markets. Despite recent headlines about Germany's proposed telemedicine reforms potentially limiting growth, our sales in Germany are to partners operating within a traditional pharmacy network, and we do not currently work with any telemedicine platforms. We have not experienced any impact to existing patients or disruption with our pharmacy model customers and distributors. I would also note that recent measures in Portugal to implement more stringent standards are also not impacting our business. We have been pleased to see more effective enforcement to ensure product quality coming through this channel into Europe, which has contributed to our improving position as one of the world's premier providers of consistent and trusted sources of quality product. Operational integrity and adherence to import standards are core to our success internationally. And I'm pleased to also report that we passed our recertification inspection in July for GACP and certification inspection against revised Israeli medical cannabis good agricultural practice requirements. These are in addition to our EU GMP certification and will enable us to continue exporting bulk flour to Israel and continue to provide additional GACP flour and GMP finished product to international customers. We also benefit from our first quarter of recreational cannabis sales in the Netherlands, where we are seeing strong momentum as our phase one facility has begun to reach its full operational capacity. We now have product in 66 of the 80 participating coffee shops, reflecting a marked penetration of 82.5%. And we're consistently hearing that Outflow is earning preference with such consumers. The Holland market will be an incredibly exciting one for the company where new opportunities will emerge, the realms of product innovation and consumer experience in coffee shops. With a rich history of legacy in the cannabis industry, we are pleased to have the opportunity to participate in this dynamic market and look forward to launching additional products during the second half of the year, beginning with the launch of our hash offerings during the third quarter. We are also making steady progress on our stay in the yard phase two facility in the Netherlands, which we expect to be operational during the first quarter of next year and will quadruple our annual production capacity, helping drive continued profitability growth in 26 and beyond. We'd like to thank all of our global business partners for the continued trust and support of Village Farms. We are looking forward to continued success together in the years ahead. So given the improving performance of our business, increasing demand in Canada, and from international partners, our strong cash position, we announced last week that our board of directors has unanimously approved the conversion of the remaining 550,000 square feet of our Delta II greenhouse in British Columbia to cannabis cultivation. This equates to about 40 additional metric tons of annual production once fully ramped. And as we always have, we will continue to prudently monitor demand as we onboard new supply and carefully match our allocation of inventory with profitable sales. Physical conversion is expected to begin in November this year with the first planning of new grow rooms expected this coming spring. The additional capacity will come online in phases with a target for the full 550,000 square feet to be in full production by the first quarter of 2027. The total investment for this expansion project is expected to be approximately 10 million Canadian dollars and will be funded through cash on hand and ongoing operational cash flows and will be incurred mainly in 2026. Given the improvement profitability profile of our business and our visibility into continued strength of demand from our international partners, as well as improving supply and demand dynamics in Canada, We believe this expansion will provide a substantial return on our investment. In stark contrast to the majority of our peers, our team has a proven track record of consistently matching our supply with demand from both our Canadian and international customers. And given our prudent and disciplined approach to CapEx, there is no clearer indication of our confidence in the future of our cannabis business than our decision to make this investment. We have always taken a crawl, walk, run approach to scaling our business. Our facilities and grow rooms have been designed to vary production capacity relatively quickly. We have also always enjoyed the strategic advantage of already owning our advanced greenhouse assets in the United States and Canada through our legacy in the produce business. This has helped us be more efficient with our capital than many operators who build their facilities from scratch. And we've also benefited from having an existing labor force in our greenhouses, which has been another important strategic advantage that limits execution risk when we convert additional growing space to cannabis. So in summary, we are growing organically, profitably, and generating positive free cash flow. And the strength of our balance sheet and asset portfolio is enabling us to make additional growth investments that we believe will drive strong returns for shareholders. So this concludes my initial prepared remarks, and I'll turn the call over to Steve to review financials before I make some closing remarks. Steve?

Thanks, Mike. With the produce privatization transaction closing on May 30th, some of our produce assets were privatized and are now classified as discontinued operations. The reported financial results for comparative prior periods have been adjusted accordingly. Our ongoing investment in the new produce partnership is recorded as an investment on our balance sheet, and the operational results of the produce partnership are not included in our financial results. We recorded a gain on the sale of these produce assets net effect of $19.1 million during the quarter. Results from continuing operations are composed of our cannabis and clean energy businesses, neither of which neither of which changed following the transaction, as well as the results of our Canadian produce operations that we retained. I'll start with a review of our consolidated results. Consolidated net sales increased 12% to $59.9 million, mainly due to growth in our Canadian cannabis segment and the first full quarter of sales from our recreational cannabis sales in the Netherlands. The increase in sales was matched by improved profitability across all segments. On the continuing operations basis, net income improved to $19.9 million or $0.09 per share compared to a net loss of $16.6 million or $0.15 per share in Q2 of last year. Consolidated adjusted EBITDA from continuing operations excluding our gain on sale was $17.1 million compared with $2.9 million in Q2 of last year, our adjusted EBITDA margin of 28.6% of sales compared to 5.4% of sales in Q2 of last year, which, as Mike mentioned, is a record performance for the company. Turning now to our cannabis businesses, I will start with our Canadian cannabis segment, which I will discuss in Canadian dollars comparative purposes. Total net sales were 61.4 million for a 10% increase versus Q2 last year, driven mainly by the very strong growth in international sales as we continue to take share in these growing markets with increased sales from existing customers as well as contributions from onboarding several new customers. Export sales to our five international medicinal markets increased 690% from Q2 last year to $16.6 million and are now roughly one half the size of our retail branded sales net of excise tax. As Mike stated, we have hit our full year target of tripling 2024 international export sales just halfway through the year. With our focus on profitable sales, our Canadian retail branded sales were 20% lower than Q2 last year $34.5 million, however, with an improved gross margin as we have realigned our SKU portfolio toward higher margin opportunities. Canadian cannabis gross margin was 39% up from 26% in Q2 last year and at the high end of our target range of 30 to 40%, which provides clear evidence of success in both growing higher margin international export sales and our focus on higher margin products in Canada. Our success in expanding gross margin combined with a small year-over-year decrease in SG&A expenses drove significant improvements in the profitability of our Canadian cannabis segment. SG&A expense as a percentage of sales was 19% compared to 22% last year, primarily due to continuing efficiencies throughout our Canadian cannabis operations. Q2 adjusted EBITDA for Canadian cannabis improved 150% year-over-year to our strongest performance in six years at $16.5 million, resulting in an adjusted EBITDA margin of 27%, which was more than double the 12% last year. Cash flow from operations decreased 233%, $18 million, our strongest quarter of operating cash flow we expanded into Canadian cannabis in 2017. Finally, as we do each quarter, I will highlight that in Q2, we paid Canadian excise taxes on retail branded sales of 20.5 million, nearly 40% of retail branded sales and almost double our SG&A. I will note, however, that the lower retail branded sales in Q2 as compared to last year resulted in lower excise taxes, which also contributes to our stronger profitability. Turning now to our recreational cannabis business in the Netherlands, Q2 saw our first full quarter of sales from our Lely Holland operations. Sales were $2.5 million and adjusted EBITDA was $1.2 million, which are firmly in line with our expectations. Our phase one facility has now reached its full operational capacity, so we expect revenue performance from the Netherlands to be similar in Q3 and Q4, with similar profitability until the end of Q4, when we do expect to increase operating expenses ahead of the commencement of operations in the phase two facility, which will be coming online during the first quarter. Our U.S. cannabis business, with Q2 sales of 3.8 million, continues to reflect the impact of various state actions trying to deal with the unregulated hemp products by restricting all intoxicating hemp-based products. We did, however, see gross margin improve year-over-year to 63%, which benefited from the internalization of our gummy production, resulting in a small positive adjusted EBITDA for the quarter. Having been successful in our efforts to stabilize this business within the regulatory headwinds, we are working on a number of initiatives to reinvigorate sales of our responsible GMP-produced natural hemp products. In our remaining produce segment, sales increased 2% to $8.6 million. Our produce operations to Q2 and through the remainder of this year reflect contributions from our Delta 1 greenhouse and half of our Delta 2 greenhouse. The greenhouse tomato crop will be pulled in November at the end of its life cycle to commence our conversion to cannabis production for the entire Delta II facility. Net income from continuing produce operations improved to $4.3 million from a loss of $1.3 million and adjusted EBITDA from continuing produce operations improved to $6.4 million. Both of those figures include a $4.3 million vendor settlement related to previous operating losses incurred by our continuing produce operations. Our Canadian produce business is seasonal. Historically, the Delta produce assets report their highest revenue in EBITDA in the third quarter of each calendar year. We will continue to maintain our Permian Basin Texas greenhouse, and while not operational at this time, it is reported as part of our continuing produce business segment. Turning to consolidated cash flows in the balance sheet, total cash flow from operations was $22.3 million in the first six months of the year. Our free cash flow during the first six months, including all our CapEx and debt service payments, was $12 million. With $40 million in proceeds from the privatization transaction, we ended QQ with cash of $65 million with a net cash position of $29 million. Our total debt at the end of Q2 was $39 million, but as noted in our 10Q this morning, we paid down $3 million U.S. of our term debt as part of our produce lender's approval terms for the profitization transaction in August. During the quarter, we refinanced our cannabis loan, consolidating the three previous loans into a single credit facility with two existing lenders. The new facility has a variable rate which is currently below 6% which reflects a 250 basis point improvement over the previous facilities with additional improved financial covenants and now matures in February 2028. In closing, our Q2 results demonstrate the improving earnings of our power of Village Farms and our enhanced balance sheet liquidity easily supports our growth investments beginning with our existing capacity expansion projects in both the Netherlands and Canada. I'll now turn the call back to Mike. Thanks, Steve.