Good morning ladies and gentlemen. Welcome to Village Farm International’s fourth quarter and year-end 2023 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, 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 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 and MD&A for the year ended December 31, 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 laws, 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..

the shift of many of our peers to asset-light models, better demand forecasting as the industry matures, and a focus on working capital are factors which each LP controls. The decision on excise tax also helped due to the ongoing conversations with provincial boards who are aligned on supporting sustainable business models.

This is a positive for pricing and industry profitability in our Canadian cannabis business, as we continue to widen the gap as a low cost, high consistency quality cultivator with top market share. This includes pricing at retail, where we’re seeing some recent stabilization.

We view these developments positively as it stands as a validation of our founding thesis. Quality low cost cultivation at scale is incredibly difficult. Our three decades of experience is evident in our profitable position and leading market share. Few in Canada have been able to meet this incredibly difficult challenge.

I see this as the next leg of growth for the Canadian cannabis industry, and we will take full advantage to extend our lead going forward. Now Steve, I’ll turn it over to you..

Thanks Mike. Starting with the consolidated numbers for Q4, sales were up 7% to $74.2 million. Net loss narrowed to negative $22.5 million or $0.20 per share, a $27 million improvement from last year. Both the fourth quarter of 2023 and 2022 were impacted by non-cash goodwill impairment on our U.S.

cannabis division of $14 million and $13.5 million respectively. Our consolidated adjusted EBITDA improved $11.1 million year-over-year to negative $700,000. With respect to adjusted EBITDA, I will note here that based on feedback and guidance from the SEC during 2023, we no longer add back inventory write-downs to our adjusted EBITDA calculation.

Previously reported 2022 adjusted EBITDA figures for Q4 and the full year have been adjusted to reflect this change. There were no inventory write-downs in any of our divisions in Q4 or for the entirety of 2023.

Drilling down on Canadian cannabis results, which I will reference in local currency, Canadian dollars, in Q4, as Mike mentioned, we delivered record net sales and another quarter of positive adjusted EBITDA and positive cash flow. Net sales increased 14% year-over-year to $43.6 million.

Of this total, retail branded sales were up 4% to $33.9 million, a new quarterly record. We have continued to see strong branded sales carry over into early 2024 with some sizeable restocking orders from some of our large provincial customers.

Non-branded sales continued the growth we saw in Q3 at $7.9 million, up fourfold from Q4 last year and up 27% sequentially. Some additional color on this growth. During the second half of 2023, wholesale demand firmed up, which gave us a window to strategically capitalize on moving some of our non-branded inventory.

It was a good time to be in the market with biomass that is not designated for our branded or other growth areas. For context, during the fourth quarter we sold roughly three and a half times more non-branded biomass volume than the average of the prior three quarters of 2023.

Also for context, without these sales, our gross margin on Canadian cannabis would have been more in line with analyst consensus estimates for the quarter, so if you were thinking that we cleaned up our balance sheet this quarter, you would be correct. International sales for Q4 were $1.2 million compared with $3.2 million in Q4 of last year.

Sales in this growth area of our business continued to be lumpy as we were selling into what are essentially start-up mode medical markets. We stand by our goal for sales outside of Canada to contribute 10% of total sales as we continue to build commercial relationships in these markets.

Turning to operating profit and cash flow, our Q4 Canadian cannabis gross margin of 23% was below our target due to the heavier weight of non-strategic, lower margin biomass that we sold during the quarter. For context, in Q4 30% of our sales volume was sold below our target gross margins of 30% to 40%.

Our branded sales continued to be within our target gross margin range.

We are continuing to take advantage of the favorable market conditions to monetize non-branded spec biomass, which will drive additional cash generation with some continued effect on gross margin percentage in the early part of 2024, but we do expect to deliver Q1 in the low range of our traditional target gross margin of 30% to 40%.

Another highlight of the quarter is our continuous cost management mindset with SG&A expenses of $9.1 million, down $1 million year-over-year, which was a 400 basis point improvement as a percent of sales.

While our non-branded spec sales for Q4 did enhance our SG&A as a percentage of sales figure, we are expecting continuation of our cost management with the expectation that our 2024 SG&A to sales ratio will be a couple of hundred basis points less than our full-year ratio of 25.6 in 2023.

Our Q4 Canadian cannabis adjusted EBITDA was $2.1 million for the quarter, an improvement from Q4 of 2022’s restated adjusted EBITDA. As with gross margin, adjusted EBITDA was impacted by the opportunistic close-out of sales I discussed. We estimate these sales reduced adjusted EBITDA by $1.7 million.

Mike noted our focus on cash flow generation, another area in which we believe our Canadian cannabis division is in a leadership position.

For the full year of 2023, Canadian cannabis generated strong cash flow from operations of $18.2 million, which is close to our Canadian cannabis full-year EBITDA of $20 million with capital expenditures of $1.1 million and principal debt repayments of $9.9 million, for a net cash generation of $7.2 million. I will now turn to our U.S.

cannabis business. Q4 sales and gross margin were roughly in line with those of last year at $5.1 million or 66%. Adjusted EBITDA doubled to a small but positive $400,000. Net loss, which includes the $14 million impairment charge, improved year-over-year.

While we acknowledge the accounting rules driving the impairment charge, it is primarily driven by the ongoing lack of growth in this segment as we continue to await FDA clarity on the commercialization of CBD. Even so, we continued to generate positive cash flow for both the fourth quarter and the full year.

Moving to fresh produce, sales for Q4 increased to $37.1 million, gross margin was in positive territory for the second consecutive quarter at $800,000, while adjusted EBITDA was a negative $600,000 in Q4, which was slightly below our Q3 forecast for the fourth quarter because the seasonal improvement in winter pricing, which normally kicks in in December, was delayed with pricing firming up in January especially on smaller tomatoes, which continued into early March, and we are expecting another quarter of substantive year-on-year improvement for this division.

For the year, fresh produce adjusted EBITDA delivered a remarkable $25 million improvement, and as noted earlier, ended the year in positive territory. Q4 net loss for fresh produce improved by over $16.5 million to negative $4 million - that brings the total improvement for the year to $32.3 million.

Switching to cash flow, consolidated cash flow from operations for the quarter was negative $1.5 million. This was primarily a result of an increase in accounts receivable due to our higher sales, which resulted in a net use of working capital of over $2 million in the quarter.

Our capital expenditures for the quarter of $1.7 million, or roughly 30% of our total 2023 capex spend, was primarily for enhanced operational pack house equipment for our Texas greenhouses, which will lower our labor costs in 2024 with an expected payback period of 18 months.

We’ve also invested capex of roughly $1 million for our Leli Holland project in the Netherlands. Finally, we paid $1.4 million in recurring quarterly principal payments, resulting in a net decrease in our consolidated cash for the quarter of $5.2 million.

Looking ahead to 2024, the first quarter is seasonally our toughest working capital quarter for produce as we gear up our Canadian produce assets, i.e. build inventory in a form of tomato plants in the Delta 1 and Delta 2 facilities, both of which are about to start harvest, so cash flow from these facilities will start in late April.

Our Texas crops are performing well, well into the 2023 - 2024 crop season. Our Canadian operations are having a strong quarter of cash generation as a result of our strong fourth quarter sales and early 2024 sales.

Our primary capital spend for this year will be our Leli project, which we are forecasting to finance 100% from existing cash and 2024 operating cash flow. We ended Q4 with $35.3 million in cash and working capital decreased slightly to $79.6 million, both much improved from the end of 2022.

Total term debt at the end of Q4 was $48 million, composed of $23 million of fresh produce debt which is due in May 2027, and $25 million of cannabis debt which is matures starting in February 2026. Our total net debt is $13 million, a level that we are very comfortable with. Now I’ll turn the call back to Mike..

Thanks Steve. I want to reiterate a few comments before the Q&A on why I remain so optimistic as Village Farms’ Founder, CEO, and largest shareholder. One, we are executing on our original thesis that we would build a profitable cannabis company by replicating our best-in-class 30 years-plus in agriculture expertise.

We have started 2024 with a tremendous amount of momentum. Second, we are growing our share of the expanding Canadian cannabis market. At the end of February, the gap between our number two overall position and the number one ranked LP has shrunk to less than 300 basis points, and we are not done. Our target still remains 20% market share.

Three, our profitable growth model is uniquely positioned to benefit from improving supply dynamics, stabilizing pricing, and excise tax enforcement currently underway within the Canadian market, and finally, we are driving the next level of Village Farms’ growth.

We are pursuing emerging opportunities in medical markets such as Germany and the limited license country of the Netherlands. We stand at an incredible vantage point, and as I told my senior management team, go crush it. With that, Shannon, we’ll turn it over to Q&A..

Thank you. [Operator instructions] Our first question comes from the line of Eric Des Lauriers with Craig Hallum Capital Group. Your line is now open..

Great, thank you for taking my questions. First one from me is just on the U.S. cannabis side. With the vertical integration of the gummy production, can you just talk about how that may or may not impact either gross or EBITDA margins going forward, just how to think about that change in the business model there? Thank you..

Eric, it will essentially allow us to sustain our existing gross margins.

We have seen consumers switch from tinctures, which had a higher gross margin than gummies traditionally, but by in-sourcing it, we’ve been able to improve by not outsourcing our gummies, our own gross margin on our gummies, so we believe we’ll continue to sustain our high 60% gross margin.

We have additional capacity on that machine as well, so we’re looking at opportunities to assist others as well..

Okay, great. That’s very helpful, thank you. Then my other question, just trying to put all these pieces together in terms of margins on the Canadian cannabis side. It’s great to hear that we have some reduced biomass levels, kind of tightening supply, playing to your strengths here.

At the same time, we’ve had some of these opportunistic wholesale sales, which certainly makes sense as you mentioned improving quality of inventory, improving the balance sheet, etc.

You mentioned, if I heard correctly, that Q1, although there’s still some, I guess elevated wholesale sales, you do expect gross margins to come back to that historical level of between 30% and 40%.

Is there anything to consider with respect to EBITDA margins, potentially some ongoing inventory write-downs that you’re no longer adding back, or just--just wondering how we should be thinking about EBITDA margins in this new normalized environment. Thank you. .

Eric, this is Steve. Most of our inventory is spoken for. We’re not anticipating any inventory write-downs. It is agriculture, so things happen, but with our existing inventory as of today, no risk of any write-downs.

We continue to move some out of spec, which is generally lower potency, smaller buds, but we have seen increased demand for that and--increased demand and increased pricing, because we think it’s an indication that the market is short, and we’re very comfortable giving the range that we did, that we’ll be able to, even with these opportunistic movements in the non-brand spec inventory in Q1, to maintain our gross margins in the 30% to 40% range..

All right, that’s great to hear. Congrats again, and thanks for taking my questions. .

Thank you. Our next question comes from the line of Mike Regan with Excelsior Equities. Your line is now open..

Hey everyone, thanks for taking the questions.

Can you give us maybe a civics lesson on how exactly the Canadian governmental process would work on the potential 10% ad valorem change? We have the standing committee on finance recommended the tax change unanimously, it’s going to be tabled for April 15, and I think the 10-K added the word ‘near’ for when these changes could potentially come.

Could you just help us understand what the process is and what we should be looking for on that change?.

Yes, I think Mike, we’re not necessarily--we don’t have any idea what the Canadian government’s timing is, so. There’s just no way to get around it, but we just reflected that there is conversation going on and there are recommendations.

Now, it could happen this year, it may not - it could happen in the fall or even next year, but that trend is going there, and the reason we mentioned it, it’s a profound difference for us, profound.

Cannabis last year paid more tax to the government than all beer and wine combined, so at some point it will happen and the impact for the industry and for us is huge, so that’s why we brought it up. But we can’t necessarily say it will happen anytime soon, we don’t have any color on that..

Okay, but I guess in terms of the process, basically it’s going to be tabled for parliament and then they decide whether they’ll pass the law, either accepting or rejecting the recommendation? Is that basically how it would work?.

Yes, this is Steve. That’s basically how it will work, and we do appreciate your work and analysis on the--as Mike mentioned, the substantive impact on our cash flow and EBITDA. You’ve done good work on that..

Well, thanks. Yes, I guess in terms of how--I guess in terms of that actual impact, I mean, just using the 2023 numbers, you basically sold $150 million of branded cannabis and paid $58 million of excise taxes on it for net revenue of $92 million in U.S. dollars.

If the tax became a 10% ad valorem, it’d be 10% of 150, right, so that 58 would go to 92 and the delta would then push up the net revenue? Is that basically how I’m thinking about the accounting correctly?.

We’re paying obviously excise tax on the branded sales. You have to exclude non-branded sales from your calculation. But looking at your report, essentially you’ve done the calculation and we’re comfortable with the numbers that you’ve provided..

Got it, great. Thanks a lot..

Thank you. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Your line is now open..

Hi, good morning, and thank you for the questions here.

First one from me, just in terms of some of the enforcement of tax code and garnishing of payments, have big of an impact do you think that could have in terms of some accelerated shake-out in the market, and have you already started to see some of it in terms of maybe the purchasing patterns of some of the provincial boards as they look to increase the amount that they buy from LPs that they know are in good standing with the CRA, and shift away from some of those that they may have been asked to garnish wages or see that they owe to taxes to CRA? Thank you..

I think on the second part of the question, we don’t know for sure if they’re going to shy away from those specific providers. Most boards, I think have indicated that they are willing and will collect the taxes, so that’s a strong move towards enforcement and collection which we think will put pressure on those companies that are delinquent.

The number is ballooning - it’s approaching $300 million, and that’s a big number. Now, it may force companies into bankruptcy - I think we’ve seen some.

Canada, unlike the United States, you can scrub your taxes through bankruptcy, but we think there is discussions going on in Canada where Health Canada may take your license away or the boards won’t issue orders if that happens, because it’s really an unfair way to not pay your taxes.

There’s a lot of things in motion, and I think over the next couple months, we’ll get better color on it as this sort of aggressive move by the tax collectors was very recent, the last four to six weeks, so more to come on that..

Okay, great. Thanks.

Then just in terms of international growth opportunities, a big one potentially coming with the expected German reform with opportunities to meaningfully grow the medical market, can you speak to your plans more to capitalize on the opportunity, particularly just given--you know, it seems the initiative to increase doctor and patient awareness of the brand, given the dynamics of being prescribed a specific brand versus just a broad medical prescription, where you can go to the store and buy it.

Just given that backdrop, how do you plan to potentially make investments ahead of the market to really capitalize on the opportunity that potentially is there? Thanks..

Yes, I think we’re going to go work with distributors, either--we’re talking to so many distributors over an array of countries, even countries that are looking at legalizing in the next 12 to 15 months.

The way we’ll look at that is having partners in each country and maybe there would be multiple partners that would cover a number of different countries, say in the EU - that’s worked for us well in Australia.

As you know in the EU, we did issue our strain, so we’re going to invest more in taking our strains to a more global platform going forward and how we measure that. That medicinal growth for us is a key priority for this year, and we now have formed a separate entity for international export.

It’s being headed by somebody very qualified, and I think that coupled with our footprint in the Netherlands for recreational, I think will help springboard us, where Germany may go in the next or third gyration of their de-scheduling and legalization, i.e.

when you have to cultivate in-country like the Netherlands, so a lot of moving parts but we’re very focused on it. You know, we continue to be frustrated at the U.S.

market and nothing happening, and of course that optionality that we’ve talked about for years is very strong and very alive for us, but in the meantime we’re just not going to sit here and wait.

We think there’s a great opportunity internationally and we wanted to wait until we can make very solid ground in Canada, be cash flow positive in Canada, EBITDA positive.

We’re number two market share across the board, so we feel now is the right time for us to aggressively pursue international opportunities while we continue to drive forward in Canada. We like where we stand, so more on that to come..

Okay, great. Look forward to it. Thanks very much for the answers, and I’ll jump back in the queue..

Thank you. Our next question comes from the line of Pablo Zuanic with Zuanic & Associates. Your line is now open..

Good morning everyone, thank you.

Mike, in terms of the 20% share target you mentioned, is that for flower or across all formats, if you can clarify that? As you do that, maybe a two-part question, as you’ve been narrowing the share gap with the industry leader, can you talk about more color in terms of formats and provinces where there’s still room for opportunity, and along those lines, infused pre-rolls, large size vape, all-in-ones are big drivers of market growth.

How are you performing there and, in terms of what you can disclose, what plans you may have there, just to understand better the share comment? Thank you..

Thanks Pablo. Yes, the 20% was something we put out and we’re steadfast on it. We believe at some point, we can get there, and that’s across all formats.

Of course flower, we still remain number one, and there’s been some shrinking of flower overall, but we almost consider pre-rolls as flower, just in another form, so I think our focus will be on flower, pre-rolls, infused pre-rolls, vapes. That’s really where we think the largest part of the market is going to be.

We’re not doing anything right now in beverage, nor do we probably see that on the horizon. We continue to make strides. This will be a big year for us to continue to go forward. Innovation is at the top of that, freshness.

It’s difficult, as I said in my remarks, it’s difficult to execute across the board where you have the right cost of production in order to generate positive cash flow and positive EBITDA, meeting consumer needs, understanding what the consumer is looking for, being able to invest heavily in product development.

We’ve always said we need to know what we’re launching in ’26 right now and plan for that, so that’s where we stand. With Delta 2, actually we’ve turned that back on and we see good things coming ahead there for us going forward, so..

Can you share some color at the provincial level - I mean, there’s been quite varied--according to Hifyre data, significant variance in terms of your penetration by province. Can you give color there in terms of what opportunity is like? Thank you, if you can..

Pablo, sorry - we missed your question.

Can you ask it again?.

In terms of provinces, whether it’s BC, Alberta or Ontario, whether you can give any color in terms of the momentum in share. When I look at the Hifyre data on [indiscernible], there seems to be significant variance in terms of the company’s share penetration across provinces.

I don’t know if those numbers are right, but whether you can give some color in terms of your room to increase share across the various provinces, if you can give that type of color. Thank you..

Pablo, it’s Ann. It’s a great question. You are correct - we have strongest share in Ontario and it tapers off from there, and this is something that Orville and his team are very focused on.

There are nuances in each province as we get closer and closer to understanding what drives consumption - it does vary, and they’re really onto addressing each province’s variances quite directly, so I think that’s a place that you’re going to see some share improvement going forward..

Okay, thank you. Then just one follow-up, Mike, on the international side. I guess again a two-part question. Your export number, 1 million to 2 million per quarter, that’s in the range recently, but I understand that a good chunk of your wholesale business not branded domestic gets re-exported.

I don’t know if you can give some color on that number, would it be, like half, one quarter? I don’t know if you have visibility on that.

But also related to that, when you look at the opportunity in Germany, do you need to get--I think the question came up before, but do you need to get more aggressive in terms of going deeper there, in terms of finding various importers or even selling branded product there? How are you thinking about that? Thank you..

Yes, we are very aggressive, and we will get more aggressive.

But you know, these companies that Steve had mentioned, a lot of them are starting up and they don’t have the wherewithal, the balance sheet, so we’re working with a number of companies, distributors actually in Germany, and very solid in the U.K., so I think it’s going to start showing more so, but we are aggressive about it.

We’re increasing our staff going forward.

But look - I would probably say, I wouldn’t be surprised if across the board, we approach a third of the cannabis that’s being exported in one form or another, through us or through others, is in the international market today, so we made a decision that with the capital markets the way they are and not knowing what the future is, we want to continue to generate earnings so we can plow that back into expansion, like Steve mentioned Leli Holland - we’re funding that completely ourselves.

So right now, that B2B business especially on the international side is interesting for us, but it’s on parallel track with us developing our own brands internationally as well, so we like that sweet spot right now, building out but keeping our balance sheet strong and generating cash flow.

But I would say probably 35% of the exports internationally are probably coming through Pure Sunfarms. .

Got it, thank you..

Thank you. Our next question comes from the line of Eric Livshits with ATB Capital Markets. Your line is now open..

Hi, Eric Livshits in for Frederico Gomes.

What kind of impact do you potentially you see from recent developments in Germany and the Netherlands having on near term international sales, and you mentioned that you are looking at expanding to other European markets, would you be able to provide some color on what other markets you currently find attractive? Thank you. .

Well, it’ the markets that become legal, like Denmark. Some of these markets are much smaller than others - you know, Germany is just a whale, but Switzerland, there are markets talking about recreational as well. The Netherlands for us, being the only North American company that has one of the 10 licenses, we love how the Netherlands has set it up.

When we look at how we operate in Canada--you know, the Netherlands is a limited license country and if you look at the U.S., where the greatest margins are by the LPs in the U.S.

they’re in limited licensed states, so take that same philosophy to the Netherlands, 10 license holders, no excise tax, the Dutch government wants to hold pricing, our pricing is very--the margins we expect there are very high.

Packaging, there’s clear packaging, there’s so many advantages, and I think the Netherlands, as they do many things well, will do this very well going forward, so we expect further growth in the Netherlands beyond this first cultivation facility going forward.

We think that would be a definite springboard for us, for other recreational markets that emerge in the EU going forward. We’re pursuing both sides. We think medicinal in certain countries will continue on, even if there’s a recreational program, more so than we’ve seen in other states in the U.S.

or in Canada, so we have sort of a two-pronged approach, but there are many EU countries talking, watching what Germany’s doing, the Netherlands, and moving the needle in that regard over the next one or two years. .

Thank you, and I’m showing no further questions at this time. I’d like to hand the call back over to Michael DeGiglio for closing remarks. .

Thanks Shannon, and thanks everyone for joining us today. We look forward to speaking to you on our next call in May. Thank you. .

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