Village Farms International, Inc.

Good morning, ladies and gentlemen. Welcome to Village Farms International's first quarter 2026 financial results conference call. This morning, Village Farms issued a news release reporting its financial results for the first quarter ended March 31st, 2026. That news release, along with the company's financial statements, are available on the company's website at villagefarms.com under the investors headings. 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, uncertainties, It's 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, 2025, and 10-Q for the quarter ended March 31, 2026, 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. DiGilio.

Thank you, Lateef. Good morning and thank you for joining us for our first quarter results call. With me today are Steve Ruffini, our Chief Financial Officer, and Gillian Lefevre, our Chief Operating Officer, and Sam Gibbons, our Senior Vice President of Corporate Affairs. I will begin with my customer review of our highlights from the quarter, and then Steve will review the financials in more detail before I provide some last closing comments. Before we begin, though, a quick note to everyone on some changes to our SEC segment financial reporting after effectively becoming a pure play cannabis company, following the completion of our produce transaction last year. We're all in on global cannabis, one global company with purpose-built production facilities that serve our commercial sales channels. Accordingly, we have now realigned our operating structure and financial disclosures to reflect a singular, unified cannabis business with a single cannabis segment. The change reflects the true nature and focus of our business today. Steve will address the new reporting in more detail momentarily. Okay, so let's move to our first quarter performance, which reflects a strong start to the fiscal 2026 year for Village Farms. We are pleased to begin this year with continued momentum in our largest markets. We generated total net sales growth of 27% year over year driven by our international business and continued leadership in Canada. In terms of sequential performance from Q4, revenue was up roughly 2%, which was in line with our expectations given our capacity constraints ahead of our expansion projects coming online during the second half of this year. Consolidated just EBITDA growth of 118% year-over-year significantly outpaced sales. and we delivered a fourth consecutive quarter of positive net income, clearly demonstrating the sustainable profitability of our expanding global cannabis enterprise. The continued strength of our international medical business was once again a powerful driver of growth and profitability, with international export sales increasing 171% year over year and 60% sequentially to a record of nearly $15 million. And I will note here, we achieved this record net of the orders initially expected to ship in Q4 that slipped into Q1, which we mentioned on our last call. The German market continues to stand out in terms of its contribution to our international sales. We continue to have three of the top five leading cultivars in Germany and four of the top 10 throughout distribution partners. And we're capturing increasing share of the market which continues to grow after the temporary decline we observed during the fourth quarter. We mentioned on last quarter's earnings call that we anticipated returning to sequential growth in Germany during Q1, and we did. Outside of Germany, we're experiencing steady performance in our other international markets, and we continue to expand, I'm sorry, we continue to expect that we will enter multiple new jurisdictions during the remainder of the year. Our team has also begun to explore opportunities outside of flour for us to potentially export other form factors to our growing list of international partners. Finally, I'll note that demand from our international customers continues to increase and that pricing for our EU GMP compliant flour is holding steady, whereas we are seeing price compression in many other parts of the supply chain. There have been several reports recently about declining pharmacy sales over the past year. While price normalization is a known trend in early stage cannabis markets, key price differentiators are emerging in international markets that result from our ability to consistently deliver compliant product at industrial scale. We have good visibility and confidence that our pricing in Germany will remain relatively stable for the foreseeable future. which should give the investment community greater confidence in the continuing strength of profitability and our expanded capacity comes online and contributes to increased sales during the back half of this year. Demand for our products continues to increase and our partners are increasingly seeking our EU GMP compliant product in the wake of stricter regulations and enforcement that are restricting the flow of non-compliant product in several jurisdictions. In response to increasing demand, we recently completed facility upgrades at our production campus in British Columbia, which significantly expanded our total production capacity for EU GMP compliant cannabis. As a result, we now believe we operate the world's largest EU GMP certified cannabis facility, which further strengthens this competitive advantage to our business. Before I shift my discussion to operating highlights from other regions, I want to make clear that our success in international markets did not happen overnight. Delivering consistent EU GMP compliant product is a complex process requiring multiple disciplines to work perfectly. Our team had the foresight to pursue EU GMP certification six years ago, and it was quite difficult to achieve. And it's even harder to recertify, which we have also done. The investment is costly and time-consuming, and the learning curve to capably service these markets from an infrastructure, compliance, quality assurance, stability, product attributes, and supply chain excellence perspective is very steep. Not to mention the fact that our size, scale, and efficiency of operations are not easily duplicated. There has been speculation about the potential for U.S. cannabis exports following the recent order to reschedule medical cannabis. I will be clear that we are thrilled with the final order because we have built a compliant supply chain for medical cannabis that can succeed or be replicated with our assets in the United States. And in fact, if you extend the speculation of potential outcomes of the final order, we would be even more thrilled by continued progression towards free trade and open borders with Canada for imports of medical cannabis in the U.S. market in the future. Our viewpoint has always been that to be successful in plant-based consumer goods, you must simultaneously be a low-cost producer while delivering exceptional quality and value for customers. While we don't disclose our cost of production, We can confidently say that we are one of the low-cost advanced greenhouse producers of cannabis in the world, and we work every day to continue driving our costs lower, and we continue to see opportunities to improve our cost of production. I'll now shift to review of our Q1 performance in the Canadian market, where we continue to benefit from the success of our shift towards higher margin products last year. Branded sales were up about 5% year over year with sequential performance in line with our expectations given seasonal and ongoing capacity constraints that we have discussed. I'd also like to take the opportunity to acknowledge that while some of our competitors have shifted their focus away from the branded sales channel in Canada, we remain committed to servicing our Canadian customers. We're very proud of the consumer and brand loyalty we developed in Canada over the past eight years. And we've been especially pleased to witness recent improvements of our performance in several of our targeted sales channel and product categories. We continue to maintain a top five overall share position in Canada's adult use market and hold the number one market share position in dried flour, a seat we expect to occupy for the foreseeable future based on our current view of the competitive landscape. Notably, our flagship PureSun Farms brand achieved its 15th consecutive month of market share gains in the flour category during the month of April. And our Fraser Valley brand is also making similar strides in addition to several other wins for our team with recent product launches in the vape and infused pre-roll categories. I also think it's important to point out that our team has achieved all of this organically with a strict focus on optimizing profitability and enhancing our balance sheet strength as compared to many of our competitors. In March, we began planting the first half of our additional capacity at our Delta II greenhouse. We are realizing the benefits of having done this before and are thrilled with what we're seeing so far from this first planting. Our first harvest is expected to occur the week of May 18th, and we expect initial contributions and sales in late second quarter or early Q3. As a reminder, the Delta II expansion will ramp up its expected 40 metric tons of annual capacity by mid next year, which represents a 33% increase in our British Columbia cannabis production compared to fiscal year 25. And we will continue to expect that we will harvest an incremental 15 metric tons of production from the expansion this year. All of this will drive economies of scale cost efficiencies, and improved flexibility to meet demand across our various sales channels. Turning now to our recreational cannabis business in the Netherlands, where I'll note that we believe the minor sequential sales decline we observe from our drop-in facility reflects typical Dutch consumer behaviors and seasonality following the holiday season. We recently hosted a ribbon-cutting ceremony for the celebration of the completion of construction of our phase two facility in Kroningen on April 24th. We hope you were all able to see the video we shared on social media channels last week celebrating this important milestone. We're incredibly proud of this facility and we believe it to be one of the most advanced precision agricultural facilities, not just in the Netherlands, but potentially the world. Our asset management and facilities development teams have been designing, building, and operating cultivation assets across the world for over 30 years, and the environmental, HVAC, and notably odor controls in this facility are truly next level. As a reminder to those of you who may not be aware, the Croningen facility has access to three times our current electricity needs, and the building was designed to accommodate a second story if needed for expansion in the future. While we have previously communicated that we expected to have our first plants in the facility in late March, we are still awaiting final certification and regulatory approval to commence full operations, which we expect will occur over the next couple weeks. We have received both written and verbal communication that formal approval documentation is forthcoming in May, and we are looking forward to commencing all operations in Croningen before the end of Q2. I will also add that we don't expect the Netherlands of late to impact our sales outlook for the full year given the quality of plants we are seeing in our Delta II expansion in Canada. In summary, our first quarter was one of disciplined execution and performance that was in line with our expectations. And we're experiencing no meaningful changes with respect to our medium and long-term outlook for the business. We believe we have one of the most attractive cannabis growth platforms in the world, and we're looking forward to showcasing the combined strengths of our expanding footprint as the year progresses. We'll start the year on strong footing and what we believe is a clear line of sight to continued profitable growth for the remainder of this year and through 2027. This concludes my introductory remarks, and now I'll turn the call over to Steve. Steve? Thanks, Mike.

With the start of a new fiscal year, as Mike noted earlier, the company realigned its global operating model enough as required its financial reporting. The company's operations are now organized, managed, and classified into one reportable segment, reflecting our global cannabis business. The company's remaining operations are now classified as others. We continue to report our consolidated segmented results in U.S. dollars and financial results for comparative prior periods have been adjusted accordingly. Also starting this quarter, we are allocating costs for shared corporate services to the respective operating units. Most of these costs were previously recorded within our corporate unit. I'll start with the review of our consolidated Q1 results. Consolidated net sales increased 27% to $50.2 million, driven by continued strong performance in our largest cannabis markets, as Mike discussed. Consolidated net income from continuing operations improved to $2.7 million or $0.03 per share, compared with a net loss of $2.1 million or $0.02 per share loss in Q1 of last year. Consolidated adjusted EBITDA from continuing operations increased 118% to $9.9 million from $4.5 million in Q1 of last year, resulting in an adjusted EBITDA margin of 20%, up from 11.4% in Q1 of last year. As I mentioned last quarter, in 2025, we accrued Canadian corporate income taxes of $16.4 million in Canadian dollars or $12.1 million in US dollars, which was paid in February of this year, along with monthly prepayments towards 2026 Canadian corporate income tax. In prior years, we did not pay income tax due to carryover tax losses, all of which we have now utilized. The impact of the large Canadian corporate income taxes in Q1 resulted in negative cash flow from operations of $16.8 million. Cash flow from operations was also impacted by non-cash changes in working capital, which reflects some investments made during the quarter to support our domestic business in Canada. And I'll note that we expect a return to positive consolidated cash flow from operations during Q2 and through the remainder of this year. Turning now to our cannabis segment. Net sales were 49.9 million for a 27% increase versus Q1 of last year. The year-on-year improvement was driven by the strong performance in our international medical exports, which increased 171% over Q1 of last year and 60% sequentially, predominantly from village farms taking larger share of Germany's growing market with continued stable performance in other markets. as well as a full quarter of performance from our Draxen facility in the Netherlands compared to a partial quarter last year. As Mike mentioned, we've experienced a slight delay in the commencement of operations in our Phase II facility in Holland, but continue to expect this facility will contribute to stronger sales and adjusted EBITDA performance as it continues to ramp during the second half of this year. Canada's gross margin was 43% up from 39% in Q1 of last year, reflecting higher international export sales as well as a larger contribution from our Netherlands operations and benefits from our strategic shift toward higher margins products in Canada. This reflects another consecutive quarter of gross margin performance above our targeted 30 to 40% range. SG&A's percentage of sales was 30%, level with Q1 of last year, reflecting the continued efficiency across our cannabis operations, offset by the ramp-up staffing to support the launch of our Phase 2 facility in the Netherlands. Q1 adjusted EBITDA from continuing operations for cannabis improved 48% to $10.2 million. from 6.9 million in Q1 of last year, resulting in an adjusted EBITDA margin of 20.5% of sales. Q1 cash flow from cannabis operations was negative 11.8 million compared to positive 2.9 million. Excluding the impact of our tax payments I mentioned a moment ago, cash flow from operations would have been 4.1 million. I'll note that we believe we are the only major Canadian cannabis LP in the position of paying corporate income taxes, which is a testament to the strength of our operating capabilities and strong stewardship of capital on behalf of our shareholders and a sign of a sustainable, long-term, profitable business platform. As we do each quarter, I will point out that in Q1, we also paid Canadian excise taxes on our retail branded sales of $15.9 million, or nearly 40% of gross retail branded sales. Turning to the balance sheet, we ended Q1 with cash of approximately $56 million, which includes restricted cash of $5 million, in a net cash position of $20 million. With expected strong cash flow from operations throughout the remainder of the year, and taking into account the 15 million of income taxes, 9.2 in capital expenditures, and 6.4 million of share repurchases in Q1, we expect to increase our cash balance from positive cash flow from operations through the remainder of this year. Our total debt at the end of Q1 was 36 million. We remain very comfortable with our debt level. During the quarter, we favorably amended and extended our loan agreement with Farm Credit Canada with an improved interest rate and extended the maturity date by nearly four years to February 2031. Finally, we continued to be active with our share repurchase program. As a reminder, our board approved up to a $10 million buyback, but under Canadian statute, we could purchase up to 5% of our shares in a 12-month period. During Q1, we purchased over 2 million shares at an aggregate cost of $6.4 million, and during this second quarter, we completed the board-approved repurchase authorization in its entirety. Our board and management will continue to evaluate capital allocation decisions on a quarterly basis, and we expect to maintain a balanced approach to capital allocation to drive returns to shareholders. I will now turn the call back to Mike for some closing comments.