Good morning, ladies and gentlemen. Welcome to Village Farms International's First Quarter 2023 Financial Results Conference Call.

This morning, Village Farms issued a news release reporting its financial results for the first quarter ended March 31, 2023, 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, 2022 and 10-Q for the quarter ended March 31, 2023, which will be available on EDGAR.

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..

If we were an alcohol tobacco company, we'd have paid roughly CAD 14 million less in tax this quarter alone. It's ludicrous. It's not surprising that then, as others have noted, the majority of LPs are not paying these taxes. We suspect the economics do not allow it.

It has been well documented by industry experts that the government is solely the most profitable entity in the Canadian cannabis supply chain, and we believe the illicit trade is likely the most profitable.

This has provided the illicit markets ample room to underprice the legal, safe market, a major reason why the illicit market remains strong and underground for the industry. It's questionable then if the legal industry will be able to convert to remain 40% or so of all Canadian cannabis sales, that is still illicit product under excise tax regime.

This is clearly inconsistent with the industry's desired contribution in that it challenges local enforcement efforts. It challenges profitability. Just look at the lack of the corporate income tax contributions, the thousands of job losses and impacts on ancillary businesses and local communities. And it challenges future investment.

Innovation cannot be filtered out of continued capital injection. I feel this is another area that illicit trade can surpass the industry. More [indiscernible] tax structure, flat per gram tax takes the absurd to another level in the contents of the rapid expansion of the value segment of the market, including our own Fraser Valley Weed Company.

All of this is one reason we are attracted to the opportunities in international markets. The second highlight for our Q1. Leveraging experience in Canada for international opportunities, with their attractive profit profile is a core part of our cannabis strategy, and we are seeing very good momentum.

Year-over-year export sales were up more than tenfold and now contribute nearly 7% to our Canadian cannabis segment sales. Most of the export growth to date, including this quarter, has come from our first export market [indiscernible]. Earlier this year, we added a second export market with the launch of Pure Sunfarms brands in Israel.

And last week, we announced our launch in the German medicinal market, after successfully completing all testing protocols and testament to our team and local partner, IUVO Therapeutics.

While the lead up to both market launches had its delays, I'm pleased that we have received follow-on orders for both countries, and we are thrilled to build our business with some local partners. And then finally, my third takeaway for Q1 is a significant turnaround in our fresh produce business.

Fresh is an important strategic business for Village Farms. We are committed to de-risking it and returning it to profitability as part of our long-term growth strategy. Q1 was another very encouraging step in that direction. The macro environment has improved, oversupply is getting under control and we have made adjustments for inflation.

We continue to work on our improvements across all aspects of our operations from greenhouse to customers receiving docs, including best-in-class operating protocols to manage plant viruses, as you know, that's been difficult the last few years.

Our fresh results for the first quarter continue to support our confidence in sustainable improvement, improved financial performance for our produce business this year and reinforce our belief in the value of this business. Fresh and cannabis are synergistic. Each benefits from the other's expertise, assets and deep rooted experience.

We have capitalized on these synergies in Canada and have long eyed the United States. As such, we have formally applied for a medicinal license in Texas, where the lead use of medicinal cannabis may be greatly expanded to include chronic pain.

While the number of potential licenses and timing of when a state will make a decision are unknown, we are encouraged by the potential to contribute our cannabis expertise of decades of investment in the state of Texas and our deep agriculture routes to any future plans by Texas to award additional licenses.

Should we receive a license, we will work with the stock exchanges towards an acceptable ownership structure that would enable us to participate in the market. With respect to our current CBD business in the United States, Balance Health Botanicals continue to hold its own in another very difficult market in which to operate.

We continue to benefit from the success of Synergy+ and its line of products last year. So far this year, this business is operating more or less on plan. And with the continued focus on costs supporting near breakeven adjusted EBITDA.

Regulation of the CBD business would be a meaningful game changer for this business, and we eagerly wait the outcome of the Farm Bill 2023 this year.

The potential review of the category, in the meantime, the team is operating under the highest production standards, both from our current customers as well as the opportunity to expand when food drug mass retails are ready and open. So with that, I'll turn the call over to Steve for a more detailed review of financials.

Steve?.

Thanks, Mike. Consolidated sales for all of Village Farms for the first quarter were $64.7 million, a decrease of 8% from Q1 of last year, with the decrease due to lower sales from fresh produce and U.S. cannabis, which were partially offset by Canadian cannabis sales. On a constant currency basis, sales declined 5%, with a stronger year-over-year U.S.

dollar reducing our reported number by 2.6%. On a constant currency basis, our cannabis business sales were 48% of our consolidated U.S. dollar sales. Consolidated net loss for the quarter was $6.6 million or $0.06 per share compared to a net loss of $6.5 million or $0.07 per share for the same period last year.

The slight increase in net loss was mainly due to our improved operating loss of improvement of $2.2 million, being offset by a higher year-on-year in our income tax expense of $2.3 million as we are booking a valuation allowance for our U.S. tax losses, which we started in Q4 of 2022. Operating loss before tax for Q1 improved 27% from Q1 last year.

Improvement was mainly the result of the improved operating performance from VF Fresh. Consolidated adjusted EBITDA for Q1 was $519,000.

This is a significant year-over-year improvement from negative $6.1 million for Q1 last year, which is mainly the result of a $5.2 million fresh produce EBITDA turnaround Mike discussed earlier, as well as higher EBITDA from our Canadian businesses and a 13% year-over-year decrease in corporate costs to $2.2 million, excluding stock compensation.

Turning to our Canadian cannabis results, which I will discuss in Canadian dollars to provide a more accurate gauge of period-to-period performance without exchange fluctuations. Net sales for Q1 grew 23% year-over-year to CAD 34 million, with retail branded sales growing 40%, once again outpacing overall Canadian market growth by a wide margin.

Beginning this quarter, we are breaking out our international export sales in our Canadian cannabis business as they are becoming a larger part of our sales mix. And as Mike discussed, with more favorable margins, is an increased focus for us. International sales were $1.7 million, which was a 750% increase over Q1 of last year.

Non-branded or wholesale sales for Q1 were $2.3 million compared with $4.9 million in Q1 last year. As already low spot prices in an oversupplied market were further eroded by large inventory liquidations.

As we have discussed many times, the wholesale market is opportunistic for us, and we have been selective around our participation in the current market environment, with the expectation of improved pricing when supply is more aligned with the [indiscernible].

Gross margin for Canadian cannabis in Q1 was 33%, essentially in line with our 34% in adjusted gross margin we reported in Q1 of 2022, which excluded the purchase price inventory adjustment in that period.

The slight decrease in margin was primarily related to a sales mix with a higher portion of lower-margin Fraser Valley sales as that brand continues to have success in the value segment of the market, and it was not launched until the back half of 2022, being, for the most part, offset by the higher margins on our higher international sales.

Selling, general and administrative expenses for Canadian cannabis for Q1 were CAD 9.3 million or 27% of net sales, unchanged from CAD 9.3 million in Q1 last year, but down as a percentage of sales from 34% in Q1 2022. On a sequential basis, SG&A costs were down on a dollar-on-dollar basis, from $9.8 million in Q4 and unchanged as a percent of sales.

I will note that Q1 is typically elevated on a percentage of sales basis due to seasonally lower sales. SG&A cost efficiency remain an organizational-wide focus. Our Canadian cannabis operations delivered their 18th consecutive quarter of positive adjusted EBITDA of CAD 5.3 million, which was up 95% from CAD 2.7 million for the Q1 of last year.

We continue to generate solid positive EBITDA in a tough and uber-competitive pricing market. Moving now to our U.S. cannabis operations, for which I will revert back to U.S. dollars. U.S. cannabis sales for Q1 2023 generated entirely by our CBD business, Balanced Health were $5 million, generating a gross margin of 65%.

This compares with sales of $7 million and a gross margin of 67% for Q1 last year. The sales decrease was primarily due to the industry-wide challenges, which we have mitigated with new product introductions, including our Synergy+ line of hemp-derived THC products. Adjusted EBITDA for U.S.

cannabis was just under breakeven at negative $151,000 compared to a positive $580,000 in adjusted EBITDA in Q1 of last year. Based on the information we have, we continue to believe that we are outperforming the majority of CBD-focused peers. Turning now to fresh produce.

Although our financial performance continues to be impacted by inflationary pressures, we achieved our third consecutive quarter of sequential improvement in this business, which resulted in a considerable year-over-year improvement.

Produce sales were down 16% year-over-year with an increase in sales from our own facilities being offset by lower produce sales from our other suppliers due to lower year-on-year volumes, as we transition our partner growers during 2023.

The lower year-on-year volumes were offset by a 27% increase in price due to both generally higher market pricing in early 2023 versus early 2022, as well as our success in having a higher percentage of VF Fresh sales going direct to retail accounts, who generally pay a higher price than our wholesale accounts, which is one of the early wins in our operational plan.

The higher sales price is the primary driver of our improved EBITDA. Adjusted EBITDA loss for fresh produce took another step closer to breakeven with a loss of $995,000, which was a substantial improvement over the loss of $6.2 million in Q1 of last year, as well as the negative $3 million for Q4 of 2022.

A continued stabilization of the macro environment and our work on improving yields and customer profitability continues to support our confidence in substantially improved financial performance from this business in 2023. Turning now to cash and the balance sheet.

At the end of Q1, we had cash of $34.9 million and $80.3 million of working capital, which are substantial increases from the $21.7 million and $60.8 million, respectively, at the end of the fourth quarter of 2022.

Total debt at the end of Q1 was $52 million, down slightly from $53.5 million at the end of the prior quarter as our recurring loan amortization is close to $1.5 million per quarter.

I'm also very pleased to report we extended the Pure Sunfarms revolving and non-revolving credit facilities, which now expire in February 2026 from February 2024 under the same terms, conditions and covenants.

In the current environment of tighter credit, higher interest rates, lower risk tolerance, financial challenges of many of our Canadian cannabis peers, as well as the regulatory focus on the health of our financial institutions, the extension is a strong indicator by our lenders in our cannabis business operations.

And now I'll turn the call back to Mike..

Thank you, Steve. So in closing, I want to reiterate some points. One, we are pursuing return-enhancing growth opportunities that line up with our expertise and core capabilities. This focus matters.

We are still in the very early stages of cannabis markets in North America and around the world, and there are many wrinkles in these markets still to be ironed out. Two, we are holding ourselves accountable for what is in our control. And finally, I appreciate listening to our reflections on the challenges in the Canadian cannabis sector.

I also appreciate the partnership of many in this industry. Governments are making bold decisions to revise decade long entrenched stigmas about cannabis, and we applaud their strategic rationale to provide a safe, regulated product. This is core to our DNA also.

Village Farms will continue to work with all regulators to get the balance right to achieve these goals for the benefit of the industry, for the benefit of consumers and for the benefit of Village Farms and all its stakeholders. We'll turn over for calls at this point. Operator, Bella, we're ready..

[Operator Instructions]. And our first question comes from the line of Frederico Gomes with ATB Capital Markets..

First question is on the produce side.

Can you maybe provide some more color on what exactly drove the margin improvements in produce? How much of it you think is under your control to maybe continue driving those improvements over the remainder of the year? And how do you see that segment performing for the next 2 quarters?.

Well, I mean, as I said, we are very focused on what's in our control and margins. So that's going to be driven by, obviously, there's been price compression that continues out there offset by innovation. And we see about 30% of each quarter, 30% of process being sold. There are new SKUs that are entering the market -- on produce, I'm sorry.

Misunderstood that. So on produce, one of the examples is we are investing heavily in artificial intelligence and autonomous growing systems. As an example, we put one in 1.5 years ago, and we've had great results from it. And now we're expanding that to all of our Texas facilities and our Canadian produce facilities starting in 2024.

Early results are positive in helping to drive increased yield, more efficiency, lower cost. We're investing heavily in automated equipment that will be operational in the fall with the new crops out of Texas. Significant capital expenditures there, close to $3 million that will drive greater efficiency in labor.

So we're managing that at the facility level. And as Steve has said, we continue to manage and evaluate our retail customers to rightsize our business for our most profitable customers regardless of what that may do to revenue up and down, which is going to drive for positive EBITDA and eventually positive cash flow.

So I think the contribution of all those factors and more will continue to drive higher margins. But keep in mind, it is a commoditized business and we are competing with Mexico, and there is a limitation on driving higher gross margins, especially derived from price..

Okay. Thanks, Mike, for that color. Just maybe moving on about your application for a medical cannabis license in Texas. Can you talk maybe a little bit more about the potential opportunity you see, and then what sort of time line can we expect there in terms of not only a decision on the license, but also actually potential start of sales..

Sure. So as you know, we've reported that even though we're expanding internationally and both on exports and looking at operating in other countries, for us getting into the U.S. market was always a priority. And we've undertaken that we will enter the U.S. market one way or another. We have a number of different entry points that we're working on.

And Texas is one. Now as you know, 4 years ago, the state of Texas issued 3 licensed medicinal cannabis, which were incredibly restrictive. The only script that doctor can write was for one form of at least 13 different forms of epilepsy. So really had no traction there, and that's why 2 of the 3 license holders currently have really done nothing.

Two years ago, in the last legislative session, they meet every 2 years in Texas, nothing was done in terms of additional licenses nor any improvement to the current restrictions. However, this session -- what's happened now is both simultaneously Department of Public Safety for Texas has agreed to issue additional licenses. How many, we don't know.

But we do know there were about 200,000 applicants, the cutoff date -- 200 -- I'm sorry, 200 applicants. The cutoff date was the end of April. So that's a cutoff date. How many will be approved is uncertain. And there's a second round of the ones that are approved by Texas, that will be up to the governor, Abbott, to decide how many he issues.

So that's one thing. Second thing that's happened simultaneously, which is incredibly positive, is a bill that has already passed the house and the legislation session comes to a conclusion at the end of May. So there's about 15 actual working days left. And should the Senate pass this revised bill, the big takeaway is it includes chronic pain.

And when you have chronic pain, which will include mental health issues, PTSD is already in. So it really drives Texas to be, sort of, a mainstream medicinal state. And that chronic pain will give doctors a great opportunity to write scripts for a number of different therapies and issues. So we're very excited if that passes.

So that's why we've talked a lot about Texas and the Texas optionality. This is a great step in Texas. And as far as timing goes, we expect -- well, we'll know what the bill does very soon by the end of this month, as far as the legislative session ending and passing, say, in advancement of the bill.

[indiscernible] as far as the licenses that will be issued. And if we will get one, we should know that sometime I would imagine by early fall, early to mid-fall. So we're standing by for that..

Okay. Maybe just a last question for me. Just looking maybe more big picture on your Canadian cannabis business. What we see so far is, as you mentioned, a market that's very competitive, very fragmented, something from pricing pressures and most of the value going to the government in the form of taxes.

So what sort of catalysts or events should investors be waiting for this year regarding Village, or the overall industry, that could change some of that -- some of those conditions?.

We always talk that a cannabis investor should be a long-term investor. And I think if -- this is the type of investment where it's going to be an incredibly large global industry at some point. And for investors, what I would do is take a percent of my portfolio and invest in long term because it will pay off some time.

It may be for your kids, but that's okay too. It's coming. So for us, as we've reported, we are hunkering down. We are watching all our costs. We are trying to increase our market share in innovation and be in a position that when there are these changes that will come, that we want to be #1 in the markets we enter.

And I think everything we do and we've proven, if we get some relief on regulations, and it's not just taxes, it's other things as well, and we have to be patient, but it will come. And I think -- I don't know what other consumer product currently has the potential of cannabis over the next 5 years. That's how I see it..

[Operator Instructions]. And your next question comes from the line of Aaron Grey with Alliance Global Partners..

First one for me, just in terms of pricing in the Canadian marketplace. It seems there might be some early signs of stability from some of the third-party data, particularly in the flower category. So I appreciate any color you might be able to provide in terms of what you're seeing in the marketplace on that stability.

Particularly given I know you took some price increases on certain SKUs. So what are you seeing in terms of flower pricing and how the price increases on those SKUs have been receptive in terms of the marketplace? ..

Sure, Mandy, why don't you take that question?.

Thanks, Mike. Thanks for the question, Aaron. So on pricing in the market, yes, your data and intel is pretty accurate. We're starting to see that flattening out and that stabilization, specifically around flower, and it kind of leveling out and not seeing a lot of major price activities. So you're spot on there, and we're seeing the same thing.

Second point on our general price increase that we started to take across the country, it started in late Q1, as I mentioned in the last earnings call in March. And so very positive reception. And what I mean by that is that retailers understood it, the Boards were very supportive of it.

And I think we started to even get some really good commentary from our competitive LP set that we were doing that. And I think it shows something needed and warrantied in the industry. And we're seeing good momentum behind it, and we're not seeing any backlash from any of our customers.

So all in all, right move, positive for us, positive for the industry and it's being viewed as such..

Okay, okay. That's great to hear. Second question for me. You talked about artificial intelligence and how that's going to help the produce business.

Sir, anything you can leverage from that potentially for cannabis as well, talk about helping drive increased yields, higher efficiency, lower costs, all things that are helping produce I would also imagine would help cannabis as well.

So anything that you might be able to leverage in terms of the artificial intelligence on produce and bring it into the cannabis side? ..

Highest quality, low cost. So this is part of our overall continuous improvement process, and we're excited to look at that as the next step..

And your next question comes from the line of Eric Des Lauriers with Craig-Hallum Capital Group. ..

First one from me, just wondering now that you're breaking out international and you reported financials.

If you could just comment on the expected pace of sales or perhaps timing of sales that you're expecting this year for international?.

Yes. I mean we're -- we think we feel very confident. I mean, first of all, Australia has really done well for us, very consistent. It takes a long time to really get through the whole testing procedures and protocols. It's really unbelievable, both domestically and in Canada, as well as the other countries. So that's number one.

But the good news is, like for Israel, where we shipped in January, and Germany, we've already received our secondary orders, so we're excited about it. But we want to be a little conservative going forward. We're looking for a 10% increase this year. I think that can rise to -- 10% this year, and then increasing to 15% going forward.

We are working on other countries, which I'm not going to put out now. We never announce a new country until we've actually made a sale, and it's been accepted. So I hope that answers your question..

No, that's helpful. I appreciate that. And then next question for me, I apologize if you touched on this already. But just looking for an update to the Texas greenhouse that you guys have listed for sale, just if there's any progress to comment on there..

Well, it is officially for sale, and that's all we know at this point. We have a long list of 260 possible folks receiving the package on it, and we want to move very quick. It is in production apparently, so it is a little bit of a cost drag on us because we're not in full production.

But hopefully, by the time we report in August, we'll have some good news on it..

Your next question comes from the line of Michael Freeman with Raymond James..

Congratulations on a terrific turnaround in the VF Fresh segment. That effort is quite fantastic. Wanted to talk about VF Fresh and about some market cost of sales reductions year-over-year. You've seen significant reduction in greenhouse costs, which I think I understand. But I wonder if you could touch on supply partner costs.

It looked like they reduced $4.8 million this quarter. I wonder if you could share some color on that. ..

This is Steve. The reduction in supply partner cost is directly related to the reduced volume. So less volume, obviously, less payments, so -- just the third party.

So we generally work, we take possession of the produce they produce under our labels, our various Village Farms labels and brands sell them to our retail accounts and essentially take a percentage off the top and remit the balance to our supply partner. So less volume, less payments. ..

Got you. That makes a ton of sense. Now the next question, year-over-year for Pure Sunfarms, there's been a big EBITDA margin expansion. Wondering if you could describe the, I guess, the improvements that have been made and what factors have been driving this massive year-over-year expansion? ..

Mandy, do you want to take that call?.

Yes, I can start off and if there's anything, Mike or Steve, that you want to add, you can chime in. Michael, thanks for calling that out and pointing it out. Mike alluded to some things earlier about it's always about looking at your costs, making sure you can compete and set yourself up for long-term success.

So we're always going to be looking at things around our cost structure, how we improve yield, how we look at our operating costs. And you've seen our SG&A fall as a percentage of sales. We know that when we talked about it last year, it's going to continue to be a competitive environment.

And so we're continually looking at where we can drive better margin on our SKUs, rationalizing our assortment, getting better performance out of our products. And then looking across all of our cost yield efficiency line items to continue to maintain our ability to drive through EBITDA performance and overall margin performance.

The pricing component that I touched on earlier didn't have a large impact in Q1 because it is at the tail end of that. So I did just want to call that out.

So again, looking at assortments, looking at costs, understanding how we can continually improve our overall operating structure and make sure we're setting ourselves up for that success and knowing that it's going to continue to be a tough time in 2023. I'm not sure if there's anything else you want to add, Mike, Steve..

No, I think that's good, Mandy..

And your next question comes from the line of Ben Klimber with Stifel GMP..

[Indiscernible] for Andrew. So guys, I'm flipping over a bit to operating cash flow. You guys had an operating cash burn of $3.7 million this quarter.

Wondering given that second quarter is seasonally a lower margin period, wondering if you can provide some color as to where you would expect operating cash flow to be for the next few quarters and for the full year..

This is Steve. So generally, the first quarter is a tougher cash flow quarter for us. As Mike mentioned, the Delta 1 facility in Canada is one of the largest, if not the largest, greenhouse in North America. That generates zero cash for us in the first quarter and obviously it's farming. So it's a significant cash outflow for us.

That facility, [indiscernible] doesn't have round reduce this year, that facility will generate positive cash flow for the next 3 quarters. And with respect to our cannabis business, generally, we see higher sales in -- particularly with branded, and we're expecting higher sales in international.

So I think our operating cash flow will improve as the quarters progress this year's operating cash flow..

[Operator Instructions]. We have a follow-up question from Ben Klimber from Stifel. It looks like he has withdrawn the question. Yes. We don't have further questions in the queue. I will now turn the call back over to Mr. DeGiglio..

All right. Thank you, Bella, and thank you to everyone for joining us today, and we certainly look forward to speaking to you at the time of our Q2 announcement and conference call in August. Have a great day. Thank you. Thanks, operator..

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