Village Farms International, Inc. (NASDAQ:VFF) Q3 2023 Earnings Call Transcript

Village Farms International, Inc. (NASDAQ:VFF) Q3 2023 Earnings Call Transcript November 8, 2023

Village Farms International, Inc. beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.04.

Operator: Good morning, ladies and gentlemen. Welcome to the Village Farms International Third Quarter 2023 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the third quarter ended September 30, 2023. That news release, along with the company’s financial statements are available on the company’s Web site 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 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 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 31, 2022 and 10-Q for the quarter ended September 30, 2023, which will be available on EDGAR and SEDAR+. 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 DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead.

Michael DeGiglio: Thanks, Liz. Good morning, and thank you for joining us for today’s call. With me are Steve Ruffini, our Chief Financial Officer; Ann Gillin Lefever, Vice President of Corporate Affairs; and Patti Smith, Vice President of Corporate Control. As per our usual format, Steve and I will review the operating highlights and financial results for the quarter and then open the call for questions. So turning to the third quarter, I am pleased with the contributions from each of our businesses, particularly the across the board execution on improved profitability and cash flow, which is a true test to the sustainable business model. We generated positive cash flow in each of our operating segments, that’s bottom line cash flow not just from operations, not adjusted, pure cash flow.

Each of our Canadian and US cannabis businesses also delivered a positive adjusted EBITDA and net income. And our fresh produce operations saw another quarter of significant year-over-year improvement, also with positive adjusted EBITDA. I am also pleased with trends at the retail shelf, which are a true test of whether everything we do resonates with the consumer. I am proud to report that for the month of October, we regained a number two share nationally in Canadian cannabis, recovering from the number four share at the beginning of the quarter. And more on this in a moment. The consolidated results were a further narrowing of a net loss to just $0.01 per share, another quarter of positive adjusted EBITDA and positive cash generation on a consolidated basis.

These results are not possible without the business acumen, commitment and contributions from each of our team members, and I am grateful every day for the Village Farms team’s determination, and I am confident in our continued execution. Starting with our Canadian cannabis business. We are proving out what we believe is the most sustainable, profitable model in the Canadian industry. There are a number of highlights for Q3. The first is another quarter of positive adjusted EBITDA and cash flow generation. These are the direct results of our unrelentless focus on operational efficiencies. This in turn enables us to fund organic reinvestment in both the Canadian market and international markets as they become accessible. For Village Farms, organic reinvestment is critical.

Simply put, we strive to build competitive moats and the capabilities which will drive future growth. These pillars include cultivation and production, commercialization, branding and innovation, all with the consumer in mind. This quarter, our reinvestment wins include the launches of new brands and products as well as a continuous quality improvement, which are contributing to our top market share rankings and more importantly profitability. It also includes the development of our international business, both export and in country, which are based on our profitable Canadian business model. The second highlight for the quarter is that our strengthened focus on newness is showing up where it matters, profitable market share gains. As a reminder, we don’t chase unprofitable market share and sometimes that means forgoing top line growth for profitability and cash flow.

The increased pace of newness that I discussed in our last call continued in Q3 with a number of noteworthy launches. These included a new super brand Super Toast, targeted as a consumer preference for convenience and added strains through all three of our flower brands. We also saw the continued success of our Soar brand, which quickly became a top three premium dry flower and brand nationally after its launch one year ago. During Q3, one of Soar’s exclusive cultivars, Pineapple God, was one of the best selling premium dry flower products nationally. Also on the product side, our launch of Fraser Valley Strawberry Amnesia, which was the largest in BC history and launched as the number one SKU in Ontario. These are just a few examples of the new strains we add on an ongoing basis as part of our innovation calendar.

Recently, we also expanded our category offerings, including an entirely new vape offering with our first shipments rapidly selling out and our first infused blunts under the Soar brand, which also sold out. In Quebec, as many of you know, there are just two product calls a year with launches time during Q2 and Q4. So working with our existing portfolios in between these product calls is as important as new launches themselves to ensure sustainable growth. Our success in doing so is evidenced by our continued expansion and market share in Q3 from the existing portfolio, and I am decided to see the results from the Q4 product launches, which are currently underway. Importantly, in addition to cash flow generation, our efforts are proving out on the retail shelf.

Year-to-date, we are the number three rank licensed producer nationally. And as I noted at the onset, we have reclaimed the number two spot in October. As we were the second top selling producer of dry flower nationally for the third quarter, sitting only behind a competitor who attained the top spot by purchasing market share via acquisitions. I have challenged the team to retake the top spot in flower, again, through organic efforts. To that credit, the latest data shows that we are now neck-and-neck without competitor for that number one position. And I will note here that at the end of October, we had achieved five consecutive months of expansion in our share of the dry flower market nationally. What’s especially noteworthy here is a increasing breadth of contributions to our market share, by brand, by product and by geography.

With respect to geography, I want to recognize the contribution of ROSE LifeSciences. ROSE holds the number two market share position in Quebec and is the fastest growing producer in the province. ROSE has been one of the most, if not the most successful acquisitions in Canada, largely due to our relentless strategic focus on driving shareholder value and a strong partnership between the Pure Sunfarms and ROSE teams. During the third quarter, we also highlighted increase in bulk non-branded sales, reflecting a purpose driven decision to return to this channel as supply dynamics improve the profitability of these sales. We achieved this alongside our return to the number two ranking nationally in branded sales, proving out the benefit of our leadership in cultivation, commercialization and innovation for multiple growth opportunities.

International sales contributed less in Q3 than it did in the first two quarters of the year, a variance which reflects the start-up nature of the industry in our business. Year-to-date international sales are up more than two-and-a-half fold from last year. And I admit it’s a small base but it does underscore the growth potential and long-term trend we expect from these markets, which I will remind you typically have higher margins than the Canadian market. As we add customers in new geographies, we expect growth in this business to be more steady and predictable. Speaking of which, the Netherlands government recently issued a favorable final update to the rollout of its legal recreational cannabis program. This has provided clarity for our plans for Leli Holland, which has just — which is just one of 10 licenses that allow participation in the program.

We are moving forward and excited about the opportunity what now looks to be a fully integrated supply model. Turning now to US cannabis. Balanced Health Botanicals demonstrated another quarter of stabilized performance, once again generating positive net income, adjusted EBITDA and positive cash flow. Last month we launched a new [visual] brand for CBDistillery, including a revamped website focused on wellness and attributes of its products. Even in the challenging US market for CBD, we are focused on and we are achieving profitability and cash flow generation with our continued belief in the potential of this business in a favorable regulatory environment. Now moving on to fresh produce. Our Q3 performance took another step forward of our goal in achieving sustainable long term profitability.

We are effectively managing the higher cost environment, which we now operate. And we continue to make strong, steady progress in managing the Brown Rugose virus. This is not only through enhanced operating procedures across all operations, but also the implementation of virus tolerant and increasingly virus resistance strains, and minimizing the potential for future impact. We are also benefiting from higher pricing. As a result, fresh produce delivered positive adjusted EBITDA, adding to our positive total for 2023 so far, that’s a $5 million improvement over Q3 last year and brings the improvement for the year-to-date to more than $22 million. This is a great start to a new chapter for fresh produce. Our next goal is for fresh [Indiscernible] sustainable profitability and ultimately cash flow generation, and I am confident we can get there.

I will now turn the call over to Steve for a more detailed review of the financials. Steve?

Steve Ruffini: Thanks, Mike. As Mike noted, another quarter of solid performances from each of our businesses. Consolidated net loss for the quarter narrowed to $1.3 million or a $0.01 earnings per share from a net loss of $8.7 million or $0.10 per share for the same period last year. Notably, each quarter of this year has posted a sequential improvement over the prior. Consolidated sales for Q3 were $69.5 million compared with $71.1 million. The 2% decrease was largely the result of slightly lower cannabis sales compared to the same period last year, as well as the small negative impact on FX due to a stronger US dollar in Q3 2023 versus Q3 2022 as the USD is our reporting currency. We delivered another quarter of positive consolidated adjusted EBITDA in Q3 at $3.2 million, up $5.4 million improvement from the negative $2.2 million in Q3 last year.

The improvement was driven mainly by fresh produce but also higher EBITDA from our US cannabis business as well as lower corporate costs. I will now turn to our Canadian cannabis results. As usual, I will discuss these in Canadian dollars to assist in year-over-year comparisons, absent the impact of exchange rate fluctuations. As Mike noted, our Canadian cannabis operations delivered another quarter of positive EBITDA, as well as positive cash flow and positive earnings. Total Canadian cannabis sales were 38.7 million compared with 39.8 million for Q3 last year. Breaking is down into its component parts, retail branded sales, which comprise about 80% of total Canadian cannabis sales for Q3 were $31 million, down slightly from 32.8 million in Q3 2022.

International exports from Canada were down slightly to 900,000 compared to 1.1 million in Q3 last year. Export sales for the year-to-date were up 162% compared to the same period last year. As I mentioned last quarter, we are seeing an increase in inquiries in sales for non-branded or wholesale product due to what we believe is less availability, a consistent high quality biomass as many producers have been moving to asset light models or have sold through inventories to generate cash. That translated into higher non-branded sales for Q3 of $6 million, which was up from both $4.9 million in Q3 last year and $3.9 million for Q2 of this year. Pricing in this channel has improved. While demand is up, we continue to be very strategic and selective around our non-branded sales.

Gross margin for Canadian cannabis for Q3 were 35% compared with last year’s 32%. Last year’s gross margins figure of 32% excludes the impact on our reported Q3 2022 margin of 27% due to the impact of acquisition accounting and inventory adjustments in our Q3 2022 results. The year-on-year increase is primarily due to a continuing lower book cost per gram as well as a slight favorable exchange rate fluctuation. As we have stated since our entry into the cannabis space, we will continue to improve our operational efficiencies as we learn, innovate and broaden our cannabis experience expertise. Selling and general, administrative expenses for Canadian cannabis for Q3 were $10.2 million, down from $10.5 million both in Q3 last year and Q2 this year.

As a percent of sales, SG&A for Q3 was unchanged at 26%. Canadian cannabis adjusted EBITDA was $6.2 million compared with $6.7 million for Q3 last year as well as Q2 of this year. As already noted, adjusted EBITDA for the year-to-date is up 37% for a 400 basis point expansion into EBITDA margin to 16%. Canadian cannabis net income was $3.8 million, up significantly from net income of $200,000 for Q3 last year, more than double the $1.7 million for Q2 of this year. Cash generation after all capital expenditures and debt service payments was also positive at $5.1 million, up meaningfully from $1.3 million last year. As Mike noted at the onset, we have stabilized our US cannabis business and that is reflected in the financial results. US cannabis sales, which were generated entirely by Balanced Health Botanicals, were $5 million, down slightly from $5.1 million for Q3 last year.

US cannabis gross margin was 64% compared with 69% Q3 last year, primarily due to the ongoing transition of our customer from tinctures to gummies, partly due to the success of our Synergy+ line. Adjusted EBITDA for US cannabis was positive $200,000, a slight improvement over what was essentially breakeven performance in Q3 last year. Finally, US cannabis generated net income of $79,000 as well as positive cash flow in the quarter. Turning now to fresh produce. We delivered a positive EBITDA quarter, which I had not projected when asked during our Q2 earnings call in August. This is a result of improved pricing in the later half of our third quarter and better volumes from our third party supply partners as we slowly but surely regain our volume after losing two key third party suppliers to end of calendar year 2022.

Produce sales were up slightly year-over-year to $35.7 million with a strong increase in sales from our own greenhouses being substantially offset by a decrease in supply partner revenues versus last year. Sales from our own production increased 28%, which was driven by a 26% increase in the average selling price and an 8% increase in pounds produced. While there is a lot of good operational news in our third quarter report, I do want to note that, our VF Fresh gross margin was positive $1.5 million for a 4.2% gross margin versus reporting gross margin losses in this business line every quarter since Q4 2021 when we reported a positive gross margin percentage of 6.8%. Fresh produce delivered another quarter of positive adjusted EBITDA nearly $800,000, that’s a $5.7 million improvement over Q3 last year, which brings the year-to-date improvement to $22.5 million.

As Q4 is typically a seasonally stronger quarter for fresh, we expect to achieve positive gross margin in EBITDA in Q4. I will note, however, that we are still dealing with some inflationary pressures on some input costs, which are challenging to pass on to our big box retail customers. Q3 net loss for fresh produce also improved significantly to a loss of $950,000 from a loss of $4.6 million for the same quarter last year. I am pleased to report a reported positive cash flow from fresh produce, which benefited from the receipt of a vendor settlement in Q3 that we reported in our earnings of Q2. As we look ahead to next year, we have made the strategic decision to deploy half of our Delta 2 facility not currently being used to grow cannabis to grow tomatoes, at least for the 2024 calendar year.

Health Canada now permits other crops to be grown in licensed facilities, which was not allowed since the inception of the cannabis regulations. This pivot is due to a number of factors. One, the change in the regulations. Two, the continuing improvements in our cannabis yields, hence one of the key reasons for our cost of sales decreasing. And three, historically, our tomato operations in Delta 2 were profitable. The additional production is expected to contribute incremental cash flow and profitability to our VF Fresh division. This change will have no impact on our ability to meet expected cannabis demand, and is in fact a great opportunity for us to utilize what has been an idle area in our greenhouses to generate profitable revenues in this swing space now that regulations allow us to grow cannabis with other crops within a licensed facility.

Turning now to cash and the balance sheet. Cash at the end of the third quarter increased to $40.5 million, up from $31.7 million at the end of Q2 of this year, while our working capital at the end of the third quarters was relatively unchanged compared to Q2 at $84.3 million in working capital, which are significant improvements from $21.7 million in cash and $60.8 million in working capital at the end of last year. Total debt at the end of Q3 was $53 million, down sharply from $55 million at the end of Q2. Our quarterly principal debt service payments are close to $1.5 million per quarter. And now I’ll turn the call back to Mike.

Michael DeGiglio: Thanks, Steve. For 30 plus years, we have built Village Farms with a deep and reverent respect for cultivation as the core from which to build our business. Some refer to us as farmers. More recently, we were described as low cost or value growers who had no clue how to build brands. This quarter and in fact 2023 year-to-date challenges this simplistic viewpoint. It shows how deep experience and resulting competitive advantage in cultivation is enabling indeed funding leadership roles in critical areas that separate the best consumer goods companies from everyone else. Getting cultivation right as we are proving out is providing us with bandwidth to innovate and other critical functions which are now driving sustainable, profitable market share and cash flow.

Importantly, these are the same pillars of success that will be the foundation as we look to expand our Canadian model as new cannabis markets open around the world. It’s a continuing growth opportunity we farmers are very excited about. So operator, I’ll turn it over to you for any questions at this point. Thank you.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Aaron Grey with Alliance Global Partners.

Aaron Grey: Mike, I want to kind of jump off where you left off in terms of kind of proving out that CPG capability and going on beyond just kind of the produce that you had mentioned. So if you can speak to how you’re viewing brand architecture today, particularly with the launch of value brand Fraser Valley, which we understand was necessary to compete with some of the pricing pressure. Some of the third party does imply some of the mix shift from Pearson Farms to Fraser. So I just want to get some color in terms of how are you seeing the premium mainstream value mix evolving within the category and then as well within your own portfolio as we continue to see the industry evolve here?

Michael DeGiglio: Yes, it’s somewhat is testing. I mean, we really focus on consumer insights before we launch our brand. So clearly, with Fraser Valley, that was a segment, especially on the West Coast, but now resonates on the East coast or at least in Ontario where we had sort of the number one launch there with Fraser Valley. And then the quality of Fraser Valley is just exceptional. So the quality and the pricing resonated well and it’s become a strong player for us. But equally, we launched Soar a year ago, which is in that premium category and we never expected the premium category to be more than 5% or 10% with the current economic situation, but it’s doing very well. And then third, that’s put some pressure on our Pearson Farm brand.

But I think it’s an ebb and flow and the economy has a lot to do with it. So we continue to innovate. The other side of it is really newness within those brands. And keep in mind that ROSE LifeScience has a number of brands that are resonating very well, not just in Quebec but in other provinces going forward. And now we continue to drive newness innovation. We need to know where we’re going to be in 2025 right now with our launches. And it takes a lot of energy, a lot of effort, a lot of time and money, you have to continue to trial. And we’re actually working on some very unique things, which we’ll probably talk about in the next quarter going forward. But I hope that gives you some color.

Aaron Grey: And then same question for me on non-branded sales. We saw a nice uptick sequentially. So was that driven more by a one-off sale, is there a new line of business you expect to generate from there on a reoccurring basis? You kind of alluded to that in prepared remarks. So just fair to say, some of that increase in mix. And then also on the other part of that on gross margin. Some of the pressure we saw in that sequentially, was that driven by some of the non-branded mix? So just how we think about that sales going forward in terms of new generating business on a reoccurring basis, and then how any type of gross margin impact we have there?

Michael DeGiglio: No, actually gross margin — we’re very satisfied with the gross margin on our B2B business. Extremely satisfied. We made a strategic decision at the beginning of this year to sort of open up. We wanted to prove internally to the company as well as to our consumers and distributors and the provinces that we can be a very strong branded company. And I think we proved that out, we continue to prove it out. So that there was a big focus on just being very myopic on the branding side. However, we are focused on cash flow generation. Those were the marching orders early on. And strategically, we decided let’s open up our [B&B] business. We have capacity, the margins are good., that’s not the reason we see margin change.

And then we were watching the dynamics in the industry. There was a lot of flower available and slowly that seemed to be driving up a number of companies change their model to a light asset model. And if we can drive greater profitability, greater revenue, greater sales, we are going to take that business on. And of course, for international, in a way that’s B2B as well. So this just parallels that very nicely and we’re going to continue moving forward B2B.

Operator: Our next question will come from the line of Eric Des Lauriers with Craig-Hallum.

Eric Des Lauriers: I was hoping you could drill in a bit more into some of the changes in produce this quarter. So I was thinking of some moving parts here. One of the profitability drivers here is the increase in volumes it sounds like. I am wondering if you could also just help us to understand or perhaps just kind of drill in a bit more deeply into some of the operational improvements that you have made. I know recently you have kind of spoken about AI investments for produce. If you could kind of just give us an update overall on the operational improvements that you have made in that segment and sort of how to think about perhaps the difference in operating expenses versus cost of goods sold kind of going forward, where should we look to see some of that improvement going forward? Thanks.

Michael DeGiglio: Well, I think, look, last year was the worst year we had in produce in 33 years. So it was a very difficult year. But it was really driven by a number of factors. It was a perfect storm. Inflationary pressures that really started post-COVID that were astronomical. When you look at diesel fuel shipping 1,000 plus trucks a year that’s in our cost of sales. It was crazy. Everything went ballistic. Fertilizer costs were up 65%, 70%, corrugated costs for all the packages across the board, and labor skyrocketed across the board, even based on our foreign worker program, Department of Labor continues to drive costs up 7% a year. So all that was happening while we were battling the virus. And we are always in agriculture dealing with items out of our control viruses, bacterias, insect so on, but this was sort of one of the worst I’ve ever seen.

Thank god. We’re seeing — we’re putting in every day more and more tolerance, more varieties that are tolerant, which means they may get the virus but they can tolerate it, and that’s very important. And we are now starting to see the first of totally resisted varieties. So it’s taken a long time. Even once the resistance gene was ready to be spliced into the new varieties, it still takes 11 turns of growing parent-after-parent-after-parent till it’s finally in there. So we had to be patient about it. So that’s probably the biggest impact. Simultaneously, we talked about putting AI systems that work concurrent as like a very strong co-pilot with our growers that are monitoring thousands of data points every second of the day, every day of the year.