Earnings Call Transcript - VFF Q4 2025

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Village Farms International's Fourth Quarter and Year-End 2025 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the fourth quarter and year ended December 31, 2025. 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 1 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, 2025, and 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, Mr. DeGiglio.

Mike DeGiglio, CEO

Thank you, Liz. Good morning, everyone, and thank you for joining us. With me today are Steve Ruffini, our Chief Financial Officer; and Gilan Lefever, our Chief Operating Officer; and Sam Gibbons, our Senior Vice President of Corporate Affairs. So I'm very excited to report our 2025 results, and I'll begin with a review of highlights for the full year and the fourth quarter. Then I'll turn the call over to Steve for a review of the financials before some last closing remarks. Our fourth quarter results again delivered strong profitability, gross margin, and cash flow from operations, which contributed to record levels of performance for each of these metrics in fiscal year 2025. It was also a year that reflected the accumulation of many years of hard work and long-term strategic planning that has prepared us to capitalize on many of the catalysts that are now unlocking value for our stakeholders. Not only did we deliver record profitability and cash flow generation in 2025, but we did so with step-function growth across several key metrics compared to 2024. We grew our global cannabis sales by 17% year-over-year with just a partial year of contributions from our outstanding Netherlands business, and international export sales increased more than sixfold as we continue to benefit from our leadership position as one of the world's largest EU GMP-certified cannabis operators. This resulted in consolidated and record consolidated performance, including net income from continuing operations of $21 million or $0.19 per share, a $49 million improvement compared to the prior year. Adjusted EBITDA from continuing operations of $50 million, another improvement of $48 million. And cash flow from continuing operations of $58 million, an improvement of $44 million compared to 2024. Our full-year performance is a result of solid execution against our long-term plan and a strategy focused on improving margin performance, profitability, and cash generation to enable additional growth investments across our platform. Those of you who follow us the longest know that we started with a crawl-walk-run approach to scaling out of cannabis business. And that's always been our view that we don't need to be first-mover advantage to build durable, defensible business models in our plant-based consumer goods. But what we do need is vision, patience, discipline, and excellence in asset development operations and commercial activities, coupled with world-class people capable of leading us forward. We believe we demonstrated all of these qualities since we expanded the cannabis in 2018 and particularly in 2025. Since 2018, we've taken a methodical approach to scaling our capacity and capabilities in Canada, including early recognition of the potential power of EU GMP certification, which we began pursuing nearly 6 years ago. We've now been EU GMP certified for over 4 years and international customers are increasingly seeking our products as more stringent regulations abroad have been restricting routes to market for other operators who can't meet our production and quality standards. The recent financial contribution from our Netherlands business have also been many years in the making. We acquired our Netherlands license 5 years ago and have been very patient and prudent with respect to commercializing our operations and aligning our commencement of sales with the launch of the pilot program last April. We've modeled our business to ensure a return on our investment in under a 4-year timeline, and our performance in 2025 clearly demonstrates Village Farms' strong stewardship of capital on behalf of our shareholders, with positive net income for the year after only 3 quarters of revenue performance. And finally, our transaction this past May to privatize our legacy produce business also reflected many years of hard work and preparation, to achieve confidence that our cannabis business was ready to stand on its own and to structure transactions that enabled us to retain the attractive long-term optionality that we see for our portfolio of advanced greenhouse assets in Canada and Texas. All of these important developments began unlocking value for our stakeholders in 2025 and provide more evidence of the success of our initial crawl, walk, run approach to scaling our operations. And now we believe we're ready to run as one of the world's largest and most respected scaled cannabis operators. Before I continue discussion on the fourth quarter, I'd like to again take an opportunity to acknowledge all our folks who are enabling our success. It truly does take a village, and our people raised the bar considerably last year. Congratulations to all our team members around the world on a tremendous year. Now turning to the fourth quarter, which demonstrates our third consecutive quarter of positive consolidated net income from continuing operations, adjusted EBITDA, and cash flow from operations.

Operator, Operator

Please standby.

Mike DeGiglio, CEO

Okay, we lost connection, so I'll recap a bit. Talking about the Netherlands, our financial contribution to that business has been in the works for many years. We acquired the Netherlands license 5 years ago and have been careful about how we commercialize our operations, aligning our sales launch with our pilot program last April. We structured our business in the Netherlands to ensure a return on our investment within 4 years. Our performance in 2025 shows that Village Farms is managing capital well for our shareholders, demonstrating positive net income after just 3 quarters. Our transition to privatize our legacy produce business last May was a result of years of effort to ensure our cannabis operations could stand alone and secure a transaction that allows us to retain valuable long-term options for our greenhouse assets in Canada and Texas. These developments started creating value for our stakeholders in 2025 and proved our successful strategy of gradually scaling our operations. We are now prepared to operate as one of the largest and most respected cannabis operators globally. Before discussing the fourth quarter, I'd like to acknowledge our team members worldwide for their contributions to our success. They significantly raised the bar last year, so congratulations to everyone on a great year. In the fourth quarter, we achieved our third consecutive quarter of positive net income from continuing operations, along with adjusted EBITDA and cash flow from operations, which further supports our goal of long-term profitable and sustainable growth. We experienced a year-over-year sales growth of 9%, nearing $50 million, with net income from operations of $2.3 million, adjusted EBITDA of $8.6 million, and operating cash flow of $11.4 million. Our Canadian cannabis sales once again led the market, maintaining a top 5 overall market share and the #1 position in dry flower as of last month. In Q4, sales grew 10% year-over-year, fueled by a nearly 400% increase in international export sales. While retail branded sales remained flat compared to Q4 last year, we saw improved gross margins reflecting our shift towards high-margin products throughout the year. The gross margin in Canada was 43%, exceeding our target for the fourth consecutive quarter and significantly higher than Q4 last year. This resulted in substantial year-over-year profit improvements, accounting for CAD 7.5 million in net income and adjusted EBITDA of CAD 14.3 million, which is roughly 27% of sales, with cash flow from operations increasing to $21.5 million. Before discussing our ongoing capacity expansion projects, I want to address some sequential differences in our fourth quarter results compared to a record third quarter. We aimed to deliver record results again in Q4, but temporary supply constraints held us back. Notably, a labor strike impacted the cannabis supply in British Columbia, which we estimate reduced our Q4 sales by about $2.5 million. Our demand continues to significantly outpace our supply capabilities, and we entered 2025 with our leanest inventory in over five years. Our Canadian cannabis business faces seasonality due to variations in our growing climate, typically seeing declines in production and revenue during Q4 unless new capacity comes online, which also increases costs compared to Q3. We ended Q4 following back-to-back record performance quarters, selling all the cannabis we produced. In addition to supply constraints, the nature of our international export sales adds variability due to shipping timing and order sizes. Some shipments we expected from Germany were delayed to Q1. Despite these challenges, the fundamentals of our business remain strong with consistent domestic demand in Canada and international markets, positioning us for continued profitable growth in 2026 and beyond. We expect to see sequential growth in international exports in Q1 and plan to begin shipping to multiple new jurisdictions over the coming months. Our biomass constraints represent a positive challenge, which we are actively addressing through ongoing capacity expansion projects. I'm pleased to report that our Delta 2 facility expansion is on track and within budget. We began planting the first half of this expansion on March 2 and expect to see initial contributions in late Q2. We anticipate an additional production of 15 metric tons from this expansion this year, with full capacity expected by mid-2027, providing a 33% increase compared to fiscal year 2025. In the Netherlands, our Phase 1 facility in Drafton is operating at full capacity with healthy margins, and we are selling everything we produce. We've leveraged our Canadian experience to innovate new products, launching 10 unique offerings in the market. We are experiencing strong pricing with coffee shops and are well-positioned to capture market share in premium categories as our Phase II capacity comes online. I should note that Q4 profitability in the Netherlands was affected by increased operating expenses due to headcount growth in preparation for launching our Phase 2 facility in Groningen, which is nearing completion and remains on schedule and on budget. We expect the Groningen facility to achieve full capacity by Q2, which will increase our total annual production in the Netherlands to approximately 10 metric tons, up from under 2 tons in fiscal year '25. The capacity expansion projects in Canada and the Netherlands will enable us to scale profitably. We believe our strong balance sheet allows us to pursue further organic growth and acquisitions in the future. Most of our expansion funding has come from cash reserves, but we recently amended our Canadian credit facility to include an additional $15 million delayed draw term loan at slightly over 5% interest. We plan to use this financing for enhancements to our operations, starting with a $3 million investment to enhance our EU GMP capabilities this year. We ended the year with about $86 million in cash after completing a $3 million share repurchase in Q4, leaving us well-positioned to create shareholder value and drive profitable growth into 2026 and beyond. Now, I will turn the call over to Steve for his review of Q4 financials.

Steve Ruffini, CFO

Thanks, Mike. As a reminder, as of May 30, the majority of our legacy produce assets were privatized and are now classified as discontinued operations. Reported financial results for comparative prior periods have been adjusted accordingly. I'll start with a review of our consolidated Q4 results and a reminder that comparable performance to the fourth quarter of last year reflects the impacts of a $10.5 million noncash impairment charge during Q4 of 2024, and related to nonflower inventory purchased primarily from third parties that we determined did not meet our quality standards. Consolidated net sales increased 9% to $49.6 million, driven by growth in our Canadian cannabis segment as well as the third full quarter of contributions of recreational cannabis sales from our Phase 1 facility in the Netherlands. Net income from continuing operations improved to $2.3 million or $0.02 per share compared with a net loss of $5.7 million or $0.04 per share in Q4 of last year. Consolidated adjusted EBITDA from continuing operations was $8.6 million compared to negative $2.9 million in Q4 of last year, resulting in an adjusted EBITDA margin of 17.3% in the quarter compared with a negative 6.4% in Q4 of last year, which was driven by the noncash inventory impairment I just referenced. Our cash flow from operations improved to $11.4 million compared to $10.9 million in Q4 of last year. Turning now to our segmented results. I will start with Canadian cannabis, which I will discuss in Canadian dollars. Total net sales were $52.7 million for a 10% increase versus Q4 of last year. The year-on-year improvement was driven by the strong performance in our international medicinal exports, which increased 384% over Q4 of last year. For the year, Canadian Cannabis net sales were up 12% to a record $228 million. Canadian retail branded sales for the fourth quarter were $55.6 million, essentially flat with the fourth quarter of last year and reflects both the realignment of our product portfolio to higher-margin SKUs as well as biomass constraints. As Mike noted, our retail branded sales in Q4 were impacted by a labor strike in B.C., which we estimate negatively impacted revenues by $2.5 million. Canadian cannabis gross margin was 43%, up from 3% in Q4 of last year, which was impacted by the inventory impairment, reflecting a higher proportion of higher-margin international export sales as well as our focus on higher-margin SKUs in the retail branded channel in Canada. This drove a full year gross margin of 44%, with both the fourth quarter and full year 2025 above the high end of our target range of 30% to 40%. SG&A as a percentage of sales was 22%, down from 28% last year, as we continued to drive efficiencies throughout our Canadian cannabis operations. Q4 adjusted EBITDA from continuing operations for Canadian cannabis improved to $14.3 million from negative $9.1 million in Q4 of last year, resulting in an adjusted EBITDA margin of 27%. For the full year, adjusted EBITDA increased nearly $58 million to $67 million for an adjusted EBITDA margin of 29%. Q4 cash flow from operations increased $24.8 million to $21.5 million. For the full year, cash flow from operations increased $61.4 million to $77.5 million. Finally, as we do each quarter, I will point out that in Q4, we paid Canadian excise taxes on retail branded sales of $21.5 million, nearly 40% of retail branded sales and almost double our SG&A costs. I'd also like to discuss our Canadian income tax situation, which will impact our cash flow from operations in 2026. In 2025, we accrued Canadian income taxes of $16 million, which was paid as required in February 28 of this year. In prior years, we did not pay income tax due to carryover tax losses, all of which have now been utilized. I'll note that we are the only major Canadian cannabis LP positions, 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. Turning now to our recreational cannabis business in the Netherlands. Q4 saw our third full quarter of sales from our Netherlands operations. Sales were $3.3 million with adjusted EBITDA of $700,000, which, as Mike noted, includes a sequential increase in operating expenses compared to Q3 as we began to ramp up staffing to support the launch of our Phase II facility. We continue to expect our Phase II facilities to drive a substantial increase in revenue and EBITDA performance in the Netherlands during the second half of this year. Turning now to our U.S. cannabis business. Q4 sales of $3.4 million continue to reflect the impact of various state actions and the ongoing proliferation of unregulated hemp products. Gross margin was down slightly year-over-year at 60%, resulting in a small negative adjusted EBITDA for the quarter. In our continuing produce operations, sales of $4.9 million were 21% lower than Q4 last year, reflecting the impacts of softer year-on-year pricing as well as the sales commission paid to our newly privatized produce business. In previous years, we were the exclusive sales agent for our produce as well as for others. Net loss from continuing gross operations was $1.6 million with adjusted EBITDA of negative $462,000. As a reminder, our produce operations moving forward will reflect contributions from our Delta One greenhouse as well as operating costs of our Monahans facility in Texas, which remains idle at this time. Our last tomato crop from the Delta 2 greenhouse was pulled in November to begin the conversion to cannabis. Turning to consolidated cash flows and the balance sheet. Total cash flow from operations was $11.4 million for the fourth quarter, bringing the total for the year to $58.1 million. We ended Q4 with cash of approximately $86 million, which includes restricted cash of $5 million, putting us in a strong net cash position of $53 million. Our total debt at the end of Q4 was $34 million, and we remain very comfortable with our debt levels, inclusive of the incremental CAD 15 million delayed draw term loan that Mike mentioned earlier, of which we've drawn $5 million. Finally, we have been active with our share repurchase program that our Board approved at the end of September. As a reminder, the program provides the purchase of up to just under 5 million common shares or 5% of our issued and outstanding shares as of the date of the announcement. During Q4, we purchased just under 813,000 shares at an aggregate cost of $3 million. And we have continued the program activity into Q1 of 2026 with the repurchase of roughly 1.1 million shares at an aggregate cost of $3.7 million. Our management team and Board continue to believe this reflects a prudent and balanced approach to capital allocation to drive returns to our shareholders, and we expect to remain active in this regard in the near term. I will now turn the call back to Mike for some closing comments.

Mike DeGiglio, CEO

Thanks, Steve. So in closing, 2025 was a watershed year for Village Farms as we steadily and successfully executed on our strategy to scale our global cannabis platform, generating not just record results but a step function transformation and profitability and cash generation. Our performance in 2025 for a new baseline as we realize the benefits of our investments in capacity to continue to transition demand growth into long-term sustainable growth in earnings and cash flow, and we are continuing to benefit from multiple catalysts and unlocking value for our stakeholders. Our focus remains on execution, but we are looking to the remainder of this year with a growth-oriented mindset. We are investing behind our proven teams with enhancement to our operating facilities, and we expect to maintain a balanced approach to capital allocation to deliver value for our shareholders. We are continuing to capitalize on the opportunity to enhance shareholder value through our ongoing share repurchase program. We're also giving prudent consideration to incremental growth, accretive organic and acquisition growth investments. Our expanding global platform, combined with our strong balance sheet, industry-leading cost of capital, and an incredibly talented global team, we believe we're well positioned for continued success in 2026 and beyond. With that, Liz, we're now ready to open the call for questions.

Operator, Operator

Our first question comes from Frederico Gomes with ATB Capital Markets.

Frederico Yokota Gomes, Analyst

My first question is regarding your share repurchases. I guess, from a capital allocation standpoint, what does that tell investors regarding how you view your current valuation and the trajectory of the business as well as the opportunities you see for maybe additional investments in the business and M&A.

Mike DeGiglio, CEO

The business always takes priority, but we are very confident in the cash generation we just reported and our outlook moving forward. This is why we believe that the approved share repurchase amount of more than $10 million won't significantly affect our operations or any internal investment or growth opportunities we see. We’ve adopted a balanced approach, remaining mindful of shareholder value. At present, we consider it a prudent decision. We don't have immediate plans for additional repurchases, but we will reassess as we progress.

Frederico Yokota Gomes, Analyst

Mike, I appreciate that. My second question is about Germany. We noticed a sequential decline in import volumes in Q4 for that market based on the local data. This seems to have been influenced by some issues in Portugal and possibly the quota permits. Regarding growth and demand in that market, should investors be concerned about growth there, or are you still seeing increases in import volumes for that market?

Sam Gibbons, SVP of Corporate Affairs

Fred, it's Sam. Thanks for the question. So you're right, the official stats are that German imports fell 4%, and Canadian imports were down 11%. And you're right that there was regulatory uncertainty, and we think that caused pharmacies, distributors, and importers to lower their inventories. But we are seeing that those concerns have since abated and we expect to return to growth in Q1. Also notably, we had, and as Mike noted, some orders in that got delayed to Q1. Just to give you context, if those hadn't been pushed, our performance in Q4 in Germany would have outperformed the market performance. So just a caution that the nature of the export market means that there's going to be variability, but we are continuing to experience increasing demand as regulators in Germany have now started to apply more stringent restrictions on the quality and routes to market. And frankly, that's where our model shines.

Operator, Operator

Our next question comes from Aaron Grey with Alliance Global Partners.

Aaron Grey, Analyst

Very much for the questions here, and thanks for the commentary and in terms of quantifying some of the shipment order delays. I wanted to kind of carry on from that in terms of some of the capacity constraints that you touched on and some of the near-term variability. We understand the appeal of prioritizing international markets for the incremental capacity that we expect to come online with the Delta 2 ramping up. But I just want to get some further context of how you look to utilize that capacity for international versus Canada? Is it still fair to say that predominantly, most of that will be for international? And could you talk about the lens of how you're looking to maybe see Canadian market share aspirations as you might be utilizing more of the incremental capacity for international?

Mike DeGiglio, CEO

Aaron, first, let me just clarify. I mean, Canada's first and foremost, that's our additional market where we're balancing all the time the demand we have from international and meeting our commitments in Canada. And I think we're doing a very good job at that, but it could have some variability month to month, but that's why we're making tremendous investments in additional capacity. And keep in mind that there's no stopping capacity in our footprint in Canada with current assets. So that's what we are measuring a lot of time. But I would not say international's priority over Canada; a bit equal.

Sam Gibbons, SVP of Corporate Affairs

Aaron, just a couple of things to add. We did regain our #1 flower share position in January. And we expect that to be something you'll continue to see in 2026. We had several significant restocks during Q4 and new launches in Q4, which are starting to show up in Q1. And then with respect to our 3 primary brands, Pure Sunfarms brand had the highest dry flower sales for 12 consecutive months in 2025, showing sequential growth. Our Fraser Valley brand grew share of dry flower consecutively between January and September, that short-term supply constraints did kick in for that brand in October, but it recovered by December. In our convenience category, we've had a very successful launch of Super Toast, Liquid diamonds, and 510 Bates in Q4, and the team is constantly posting updates on the success of that basis point by basis point in market share.

Mike DeGiglio, CEO

Yes. And one final point is for Canada and international with current assets, we have the capability of more than doubling our 2027 forecast where I mentioned the 40 additional metric tons in 2027.

Aaron Grey, Analyst

Okay. And that's really helpful color in terms of how you're going to prioritize both markets there. Second question for me is kind of going back to some of the Village Farms grassroots talking about cultivation costs. I know you stopped disclosing cost per gram a while back, but it'd be great to get some color in terms of initiatives that you have to further lower the cost of production, potentially leveraging innovation that exists in the broader produce segments, like I know you've spoken to in the past and then also potentially touching on expected savings from leveraging costs with the second half of the Delta 2 facility coming online.

Mike DeGiglio, CEO

Well, we're not going to get into the specifics, obviously, but we continue to improve our costs. Let's just say that, and we're very pleased with continued reduction in costs. So when I touched on my comment, you have to look at the cost really over a full year. There is some seasonality: low light, higher light, so on and so forth. But on an annual basis, we continue to drive those costs lower, just like Steve mentioned on SG&A as well. So, in fact, I would say it's exceeding the target of cost improvement in the company today.

Operator, Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Mr. DeGiglio for closing remarks.

Mike DeGiglio, CEO

Okay. I want to thank everyone for joining us today. It was a great year in 2025, and we look forward that it will just be a short amount of time before we be reporting our first quarter and look forward to that day in early May. Thank you, operator.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.