Earnings Call Transcript - VFF Q1 2025

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Village Farms International's First Quarter 2025 Financial Results Conference Call. Yesterday, Village Farms issued a news release reporting its financial results for the first quarter ended March 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 one hour following the completion of this 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 regulations, including its Form 10-K and MD&A for the year ended December 31, 2024 and the 10-Q for the quarter ended March 31, 2025, which will be available on EDGAR and SEDAR+. These forward-looking statements are made as of today's date except for 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.

Michael DeGiglio, CEO

Thank you, Jonathan. And good morning and thank you for joining us today. With me today are Steve Ruffini, our Chief Financial Officer; Ann Gillin Lefever, our Chief Operating Officer; Patti Smith, our Corporate Controller; and Sam Gibbons, our Senior Vice President of Corporate Affairs. Before we get into the details of our Q1 results, I'd like to spend a few minutes discussing our announcement yesterday that we have signed a definitive agreement to execute a transformative transaction for our company. Under that agreement, we will privatize the majority of our fresh produce division into a new joint venture backed by private investment firms, including Sweat Equities to be called Vanguard Foods LP. We will retain a 37.9% ownership interest in Vanguard and receive $40 million in cash proceeds. We believe this transaction will unlock tremendous long-term value for both our cannabis and produce businesses, and allow each of them to flourish independently. This transaction will drastically improve the upside potential for our 36-year legacy in the produce business as a private company with committed, experienced industry partners who have created significant value for their shareholders in the past. We are extremely excited about this joint venture and to partner with Charlie Sweat from Sweat Equities to transform the trajectory of our produce business and create a premier branded CPG foods company supporting healthy lifestyles and sustainable farming practices. For those of you who are less familiar with the produce industry, Charlie Sweat completely revolutionized the organic salad category during his tenure at Earthbound Farms, an organic produce company that he grew from $10 million to over $540 million in revenues during his 15-year tenure before selling the business for $600 million. Charlie knows our industry inside and out and together we see tremendous potential to build a new private produce company that will provide a wider array of products for our customers and compete effectively with our largest competitors in the marketplace. Vanguard is a holding company and will become part of the new parent of our Fresh division. Our Fresh division will serve as the cornerstone of Vanguard's commercial operations and growth strategy. And Vanguard will be backstopped by additional capital support from our private equity partners to execute a roll-up strategy of other leading produce brands and assets in North America. Under the terms of the agreement, we will contribute our Texas-based 40-acre Marfa II and our 40-acre Fort Davis facility, all of our fresh produce related intellectual property, except for the Village Farms name, and transfer all of our produce distribution facilities, employees, and operational control of these facilities to Vanguard. I will represent Village Farms' interest on Vanguard's Board and initially serve as interim CEO; Village Farms' CFO, Steve Ruffini, will also be appointed to Vanguard's Board. We will retain full ownership of all our Canadian greenhouse assets at Delta, British Columbia, as well as our Marfa I and Permian Basin Monahans facility for future cannabis market optionality. These assets represent an incremental near 5 million square feet of future expansion potential for cannabis, providing a clear runway to expand cannabis cultivation by more than 220% compared to our operational capacity today through our own greenhouse assets. In addition to drastically improving the long-term upside potential of our produce business, this split of produce and cannabis business acknowledges the strength of our cannabis business as one of the largest and most respected scaled cultivators and marketers of cannabis on the planet. This success grew from the lessons learned and expertise shared from our 36 years in controlled environmental agriculture, which we carefully apply to the launch of the cannabis business some eight years ago now. Now is the time to focus on executing our global cannabis growth strategy and invest our improved cash flow to continue supporting this growth while ensuring that we maintain substantial future expansion potential as markets continue opening up to cannabis. By privatizing one third of our greenhouse assets and operations, we've generated $40 million in cash, created a greater upside potential for our ownership interest in the produce industry with committed private equity partners, significantly improved the forward visibility into our financial performance, and transformed our company into one of the most attractive platforms for revenue growth and margin expansion across the global cannabis industry. For comparative purposes, our market cap was less than $80 million as of the market closed yesterday. We expect this transaction to close during the second quarter, at which time, we plan to provide the investment community with additional details surrounding our pro-forma financial performance and outlook. Now let's move to a summary about Q1 performance, which reflects an excellent start in 2025 of our pro forma operations. Canadian cannabis had one of the strongest quarters over the last three years as we continue to successfully execute on our strategy to leverage our experience and leadership in Canada into other international markets as we remain focused on profitability. Importantly, our focus on prioritizing more profitable sales over competing for low margin business to drive volume is reflected meaningfully in our results. Higher margin medical export sales from Canada for Q1 grew 285% year-over-year as the business continues to gain momentum. We continue to benefit from the addition of our fifth market New Zealand, as well as continued growth in existing markets in Germany, the UK, and Australia, placing us firmly on track to achieve our stated goal of at least tripling our medical export sales this year. Lower retail branded sales in Q1 were expected and also reflect our focus on improving profitability, specifically our conscious decision to move away from lower tier categories that don't align with the quality of our flower and longer-term global strategic objectives. We also continue to be optimistic about our wholesale channel in Canada, again, with a focus on profitability. While sales have been relatively steady for the last four quarters, gross margin on those sales for Q1 was up dramatically compared to Q1 of last year. As we discussed on last quarter's call, we felt we were entering 2025 with a very healthy inventory position, which would enable our teams to focus on quality and profitability. And we are seeing the impact meaningfully in Q1 results and we expect this trend to continue. All of this contributed to the expansion of our gross margin for Canadian cannabis from 25% in Q1 of last year to 36%, in line with our targeted range of 30% to 40% gross margin. And given the more favorable margin profile of our international medical sales, we anticipate that we'll be able to sustain this range for the foreseeable future. These favorable impacts drove strong increases in adjusted EBITDA and net income of 75% and 291% respectively to 9.6 million and 4.3 million in Canadian dollars with another quarter of positive cash flow from operations. Q1 also marked the first quarter of revenue contribution from Leli Holland subsidiary in the Netherlands, which you will now see broken out as a separate segment in our reporting financials. Sales of nearly half a million dollars reflected approximately one month of revenue. Importantly, pricing, which is very attractive relative to Canada, continues to be in line with our expectations. Adjusted EBITDA was essentially breakeven with just one month of revenue. We are now well underway on construction of phase two of our Netherlands operation, a brand new state-of-the-art indoor facility in a town of Groningen. This facility, which we expect will be completed in Q1 of next year, will quadruple our annual production capacity. Given the more favorable margin profile of our Netherlands recreational sales, the completion of our phase two facility is expected to enable us to drive a strong year of profitable growth in 2026. In summary, we feel very good about our start to the fiscal year of 2025. We are seeing our prioritization of more profitable sales reflected in our financial results across our cannabis business with continued momentum in international export sales in Leli Holland. Our joint venture for fresh produce will afford us greater focus and resources to execute our global cannabis strategy and enable us to generate stronger cash flows to continue to fuel that growth, all while retaining a meaningful ownership position in what we believe is a very attractive opportunity to realize significant long-term value with the support of outstanding private equity partners. So this concludes my prepared remarks. And I'll now turn the call over to Steve to review the financials before I make some last closing comments.

Steve Ruffini, CFO

Thanks, Mike. I'll begin by reviewing our consolidated results. We recognize the significant impact that the Vanguard transaction will have on our financial results. After closing, we will share pro forma results for the full year 2024 and the first quarter of 2025, as our Canadian produce assets experience little operational activity in Q1 due to seasonality. While not official, one could disregard the VF Fresh column in our segmented results to understand the improvement in our overall results. Consolidated revenues reached $77 million, nearly matching last year's first quarter revenues of $78 million. The slight 1% decline was driven by lower Canadian cannabis revenues, which were adversely affected by a stronger US dollar in Q1 2025 compared to Q1 2024. Our net loss for the quarter was $6.7 million, or $0.06 per share, which is greater than the prior year's first quarter loss of $2.9 million, or $0.03 per share, due mainly to our weaker year-on-year performance in VF Fresh. Our VF Fresh and consolidated outcomes were negatively influenced by a $4.3 million non-cash accounting charge added to our cost of sales because of dust storms that hit our Texas facilities in March and April. Our actual cultivation costs aligned with our budget and previous year’s expenses. As a reminder, our tomato crops are harvested once a year, with the crop season in our Texas greenhouses running from September to June. We apply the estimated total crop costs to the sales of crops from each facility. The cumulative damage from these dust storms placed significant strain on our plants, reducing our expected yield, necessitating additional charges to align our costs through March 31st based on our latest crop outlook. These dust storms were unprecedented for Village Farms and significantly affected our Fort Davis facility, leading to a 31% rise in our cost per pound exclusively from that facility. This disappointment had a notable impact on our first quarter performance. Consolidated EBITDA remained virtually unchanged at $81,000 compared to $3.6 million in Q1 of last year. The drop in our adjusted EBITDA was entirely due to the Fresh Produce segment. Now moving on to our cannabis businesses, I will discuss the Canadian cannabis segment in Canadian dollars. It’s worth noting that the shift in the exchange rate compared to Q1 last year influenced our reported results, which are in US dollars. Net sales totaled CAD50 million, roughly consistent with last year’s Q1, mainly driven by strong international sales growth. We benefited from ongoing momentum in our international medicinal exports, especially to Germany as we expanded our customer base and entered new markets like New Zealand, resulting in a 285% increase in exports compared to last year. Our international first quarter sales of CAD7.7 million were nearly equal to our entire international sales for 2024 of CAD8.4 million. Non-branded sales rose 3% year-over-year to CAD9 million as we strategically aligned supply with demand at higher margins. As mentioned by Mike, we have shifted away from lower-margin SKUs and unfavorable margins to convert inventory into cash. In line with our focus on profitable growth, retail branded sales dropped 22% year-over-year to CAD32.7 million, reflecting a move away from lower-margin value offerings towards higher-margin branded sales and the international medicinal market. Canadian cannabis gross margin rose to 36%, up from 25% in Q1 last year, staying well within our target range of 30% to 40%, showing positive results from our expanded medicinal export sales and a focus on higher-margin business alongside ongoing production efficiency improvements. SG&A expenses as a percentage of sales for Q1 were 25%, compared to 21% in the previous year's Q1, mainly due to key account spends, which, while classified as SG&A costs, are linked to branded sales. Q1 adjusted EBITDA for Canadian cannabis stood at CAD9.6 million, which is over 19% of net sales, up a healthy 75% from the same period last year due to improved margins. As usual, I want to highlight that we paid $20 million in excise taxes on retail branded sales in Q1, representing nearly 40% of branded retail revenues and more than double our SG&A expenses. Following the recent Canadian election, we reiterate our call for excise tax reform to support the sustainable legal domestic Canadian cannabis industry. This quarter also included initial contributions from our first international recreational cannabis sales through our Leli Holland operations in the Netherlands, which began partway through the quarter in late February, generating $485,000 in sales and $77,000 in adjusted EBITDA, reflecting a margin of 15.8%. This level of margin is impressive for a startup operation and demonstrates our ability to leverage our cannabis knowledge and cultivation expertise in new markets. Regarding our US cannabis business, despite Q1 sales of $3.9 million continuing to decline due to ongoing state-level measures against unregulated hemp products—resulting in some states banning all intoxicating hemp-based products—we maintained a healthy gross margin of 66% and returned this segment to positive adjusted EBITDA. We believe we have stabilized this segment despite regulatory challenges, and we are actively working on initiatives to revive sales of our responsibly GMP-produced natural hemp products while awaiting improved regulations, as some states are now requiring GMP standards, a positive regulatory change for one of the few GMP hemp producers. Additionally, Village Farms Clean Energy generated $300,000 in net income from royalty payments received from our RNG partner, providing a reliable stream of incremental profits for the company. As for consolidated cash flows and our balance sheet, total cash flow from operations was negative $6.4 million in the first quarter, partly due to the timing of government payments that will balance out over the year. We closed Q1 with $15 million in cash and $50 million in working capital. We remain comfortable with our net debt of $19.3 million; post-Vanguard transaction, which will involve paying off our operating produce line of $5 million, we expect to be in a net cash position. Total term debt at the end of Q1 was $34 million. After the quarter ended, we amended our loan with Farm Credit Canada to enhance financial covenants, reflecting our business’s considerable expansion since the original agreement was set in 2013. The FCC loan is due in May 2027. We also refinanced our three Canadian cannabis term loans into a single facility with two of our current lenders, achieving a 50 basis point reduction in the interest rate along with more favorable financial covenants and a new maturity date of February 2028. In summary, we are confident in our financial position and the performance of our cannabis businesses. We believe the new ownership structure of our fresh produce business will help us generate significant long-term value as we concentrate more of our human capital and financial resources on our cannabis operations. I will now turn the call back to Mike.

Michael DeGiglio, CEO

Thanks, Steve. To reiterate, Vanguard's transaction monetizes one-third of our greenhouse assets, positions our produce business to thrive as an independent private entity, and maintains a significant expansion potential for us to continue building our leadership position and reputation in one of the largest and most respected scale cultivators and marketers of cannabis on the planet. Village Farms is well on the future of cannabis globally, and we're excited to write this next chapter. We have never had a clearer path to drive stronger revenue growth, margin expansion, and cash flow generation, which we believe will drive very strong returns for shareholders in the future. Thank you. Operator. We'll take questions now.

Operator, Operator

And our first question comes from the line of Frederico Gomes from ATB Capital Markets.

Frederico Gomes, Analyst

I guess the first question, talking about balance sheet, as you mentioned, Steve, with the transaction here, you've been on that cash position, really strong balance sheet and really focused on your cannabis platform. So I'm curious about what are you thinking about capital allocation here in addition to the expansion that's already undergoing in the Netherlands?

Steve Ruffini, CFO

Well, right now, we are very happy building our war chest, so to speak. We continue to monitor the US market for optionality going forward. We think it's going to be exciting when and if that day occurs, and hopefully, it'll be in the next couple of years. So that's the market we really want to keep an eye on and stay close to. So I think we're very happy with organic growth as opposed to non-organic growth. Non-organic growth is tough. Bringing in companies that maybe do not have tremendous value, accretive value for us. So I think, we're going to see where we go to build our infrastructure for the rest of the year and wait and see what happens. I think we started this year sort of very balanced on our inventory levels and in fact, we are short of capacity. So I think we'll look at further expansion that's on our radar screen of producing cannabis in Canada at our current facilities for 2026 and beyond, and we'll make that decision here probably in the next quarter. And then we want to get Leli phase two as they sit up and running. So I think that we're in a good position and we'll just leave it at that, Fred.

Frederico Gomes, Analyst

Regarding your question about the non-branded segment, you've noted an increase in average selling prices for both bulk flower and bulk trim, with strong prices overall. Are you seeing continued price improvements in Canada for the non-branded channel? Do you believe there is potential for further growth in wholesale?

Ann Gillin Lefever, COO

We are observing ongoing improvement in pricing, particularly when comparing year-over-year figures. The fluctuations might be more pronounced in month-to-month comparisons or previous periods. However, overall, the B2B sector is gaining strength. We believe this is due to a decrease in excess supply coupled with the rising demand we're experiencing, along with similar trends in international markets. As demand has tightened, supply has also become more constrained, which has contributed positively to pricing.

Operator, Operator

And our next question comes from the line of Douglas Cooper from Beacon Securities.

Douglas Cooper, Analyst

Just to clarify, what do you have left after moving some assets into Vanguard? Are you referring to D1 and Delta, specifically in the produce sector, along with a few assets in Texas?

Steve Ruffini, CFO

D1 and Delta will continue to operate for the foreseeable future, while D2 is split between produce and cannabis. We are considering a full conversion of D2, and if that decision is made, D1 will be our sole cannabis production facility. Additionally, we still own Marfa I, which will be leased to Vanguard, and our Monahans facility, which is not expected to produce produce in the near future. I hope that clarifies things.

Douglas Cooper, Analyst

So the only produce that we'll see on the financial statements post the transaction with Vanguard will be coming out of Delta 1?

Steve Ruffini, CFO

Correct.

Douglas Cooper, Analyst

And is that profitable at that segment or is D1 profitable?

Michael DeGiglio, CEO

Yes, it's always been profitable. It's most profitable facility.

Douglas Cooper, Analyst

I know Steve you mentioned the pro forma, which will be released in Q2, but can you give me a rough estimate? I've got the Canadian cannabis, US cannabis, and Netherlands at 39 million US in revenue and 6.9 million in EBITDA for the quarter.

Steve Ruffini, CFO

Yes, that's correct.

Douglas Cooper, Analyst

And the actual net income shows that those three groups are profitable.

Steve Ruffini, CFO

Yes, this quarter they are. Accounting charges can impact net income, but yes. If you look at operating, they all show positive operating income for that month.

Douglas Cooper, Analyst

And then you'll be in a net cash position, as you talked about, to the tune of about 15 million?

Steve Ruffini, CFO

We'd be higher than that. We didn't give a number but higher than that number.

Douglas Cooper, Analyst

Are you focusing on the Canadian or cannabis segment of operations, particularly in relation to the earlier question about the Netherlands? Are there any M&A opportunities in Canada, or will you mainly focus on wholesale and the international market, specifically the Netherlands?

Steve Ruffini, CFO

Yes, for the foreseeable future, that's our plan. We will concentrate on our organic growth in Canada, continue to drive our export sales, and focus on expanding in the Netherlands.

Douglas Cooper, Analyst

Can you remind us about the capacity or potential sales in phase one in the Netherlands? You mentioned that phase two would be four times the capacity once it's operational. Could you confirm that?

Michael DeGiglio, CEO

Yes, it's quadrupling our current footprint, almost 5 times actually.

Douglas Cooper, Analyst

And what would be the footprint post phase one and what is it post phase two?

Michael DeGiglio, CEO

Post phase two, we'll be producing at around 10,000 to 12,000 kilos on an annualized basis.

Steve Ruffini, CFO

And Doug, the current facility is 2,000.

Douglas Cooper, Analyst

Can you discuss the pricing in the Netherlands? Is it stable? Please share some insights on this topic.

Michael DeGiglio, CEO

It's very stable, but we'd rather say…

Ann Gillin Lefever, COO

It's in line with what we have expected and modeled. So, so far team's done a great job of delivering against that expectation, producing great quality flower already.

Douglas Cooper, Analyst

Can you discuss the demand, the size of the market, and the progress of the coffee houses joining the program?

Michael DeGiglio, CEO

So there's 590 coffee shops, about 80 are in phase one legalization, and as of April 7th last month, it's mandated they can only buy legal product. And of the 10 licenses that were issued, only seven are producing. So three aren't. So yes, there's a need for additional capacity for sure.

Operator, Operator

Our next question comes from Pablo Zuanic from Zuanic Associates.

Pablo Zuanic, Analyst

Can I just ask a couple of questions there? How did you determine the $40 million, I mean, what valuation metric was used for that? And then bigger picture, why not spin everything, all the produce division? I realize that you want to give the Texas optionality. But maybe if you can discuss your thought process in terms of why these assets specifically and not the rest?

Michael DeGiglio, CEO

Well, the transaction actually probably was at $80 million with $40 million in cash, that's what we're reporting for those assets. And I'm not going to get into the details. I could talk to you separately offline about it. But in the end the company did have a fairness opinion on it. So it was really structured as an $80 million deal and I'll explain that to you separately with $40 million in cash, $40 million in equity of those assets. And you have to understand this was very important structure for us, because we wanted to maintain optionality for cannabis and more importantly, find the right operating partners to work with. Those two is what we were focused on for the last couple of years. And in the end, we're very pleased with how the structure is, again, giving us optionality, both in Canada and the US for the future of cannabis. And having great partners that can continue to roll up the produce industry and hopefully that equity will be worth a great deal to shareholders in the future.

Pablo Zuanic, Analyst

And then just to verify, I know you said it's about one third of the produce assets, but in terms of revenue, it's a lot more than that. I think the press release says the Canadian revenue is 25 million but the total is 169, so it's like 84% of the revenue is being spun…

Michael DeGiglio, CEO

Yes, all the revenues will go to Vanguard except for the revenue generated from Delta 1. We have entered into an exclusive marketing agreement with Vanguard, similar to our existing revenues from third-party partners in Mexico and Canada. With this marketing agreement, Vanguard will sell to our retail customers, and we will record those revenues while maintaining a minority position.

Pablo Zuanic, Analyst

And then just two more quick questions. One, in the case of Holland, have the coffee shops in the pilot begun to buy only exclusively from the licensed producers or are they still being allowed to buy from the grey market? Because that date keeps on moving it seems, right, if you can clarify that and then maybe for Steve…

Steve Ruffini, CFO

So only for the legal market as of April 7th…

Pablo Zuanic, Analyst

And then the last one, Steve, in terms of what you talked about GMP in terms of hemp, you're manufacturing all the gummies in house. Could you offer that, could you offer co-manufacturing services to other companies out there? I know it's a very volatile industry. We don't know what's going to happen at the state level. But it seems that you have a unique opportunity there to use your capacity not to make just your own gummies but also to co-manufacture for other people. Is there an opportunity?

Steve Ruffini, CFO

Yes, it's an opportunity. We've had discussions with others about that.

Operator, Operator

Thank you. Our next question comes from John Chapman from Alliance Global Partners. This concludes the question-and-answer session of today's program. I'll hand the program back to Mike for any further remarks.

Michael DeGiglio, CEO

Thank you, Jonathan. I just want to once again thank everybody for attending today's call. And we look forward to reporting our second quarter in August. Thank you.

Operator, Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.