Village Farms International Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Morning, ladies and gentlemen. Welcome to the Village Farms International Second Quarter 2023 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the Q2 ended June 30, 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.

Operator

Details of how to access the replay 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 are 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 ks MD and A for the year ending December 31, 2022, and 10 Q for the quarter ended June 30, 2023, which will be available on EDGAR.

Operator

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 Digirio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. Digilio.

Speaker 1

Thank you, Lisa. Good morning and thank you for joining us for today's call. With me are Village Farms' Chief Financial Officer, Steve Ruffini, Village Farms' Head of Canadian Cannabis, Mandesh Dosanj and Anne Gillan Lefebvre, Village Farms' Executive Vice President of Corporate Affairs and Patti Smith, Vice President of Corporate Controller. As per our usual format, Steve and I will review the operating And then open the call for questions. Turning now to Q2's highlights.

Speaker 1

We're very pleased with Q2's significantly improved financial results, which builds on a very solid start to 2023 last quarter. There are 3 noteworthy highlights. First, we delivered continued strong and consistent growth in our Canadian cannabis retail sales, fully aligned with our strategic goal to be a leader for the long term in the largest federally legal cannabis market in the world. 2nd, we have stabilized our U. S.

Speaker 1

Cannabis business and in fact returned it to sequential top line growth while generating profitability and positive cash flow. And our fresh produce business saw another quarter of significant year over year improvement. Importantly, with our fresh produce strength of our strategic decision to build upon our unmatched expertise and controlled environmental agriculture to deliver leading revenue growth, profitability and ultimately cash flow in each of our businesses. To do this, we lean heavily on the breadth and depth of our multi talented team's capabilities, and we leverage our wealth of experience To succeed even in difficult market and regulatory conditions and unfavorable economic cycles, Not to mention the artificial pricing environment in the Canadian cannabis industry due to the lack of enforcement of the illicit market. Addressing each of these businesses in detail, I'll begin with the continued improvement in fresh produce.

Speaker 1

Against a still challenging macro environment, most notably high interest rate and high inflation, We continue to see the benefit of the actions we have taken under our ongoing plan to return the business to sustainable, long term profitability, including our significant progress in managing the brown rugosa virus, while increasing our planting of virus resistant strains. Fresh Produce delivered its 4th consecutive quarter of sequential improvement and generated positive adjusted EBITDA of more than $1,000,000 This is an improvement of nearly $12,000,000 from Q2 last year, which brings the improvement in adjusted EBITDA for the first half of twenty twenty three Close to $17,000,000 and moved our year to date EBITDA into positive territory, a committed effort by TireFresh team. Execution on the multipart operational plan for Fresh continues. We are committed to long term Continuous improvement to partner with our customers and win with consumers. We are strengthening our operations with investments in infrastructure And technology, including artificial intelligence for crop management, the initial results of which are very encouraging.

Speaker 1

We are planning more virus resistant strains, which will continue over the next few years. We have also been able to turn our attention back to And we have had great success in the past with development of exclusive varieties that command higher margins. As an example, one of our newest products, Sensational Sarah, is a novel tomato variety that has a perfect natural balance of sugar and acid and has been a hit with both retailers and consumers. It also marks the debut of our new sustainable packaging solution for produce, Biodegradable and recyclable that also addresses safety and shelf life. With the first half of twenty twenty three in the books, Fresh Produce continues to track towards our goal of achieving positive adjusted EBITDA for the full year.

Speaker 1

Turning now to our Canadian cannabis business, which continued to deliver Stand out performance. Retail branded sales for Q2 grew 24% year over year and 8% sequentially, both well ahead of underlying market growth. We delivered our 19th consecutive quarter of positive adjusted EBITDA, And importantly, we were profitable on a net income basis. We have proven again that Village Farms Canadian cannabis business has the best organic growth in the Canadian cannabis industry. Our growth has been achieved at a fraction of the capital cost of most other large LPs, And we have done so faster, absent a first mover advantage.

Speaker 1

The majority of that growth has been generated internally and not purchased. Our one and only acquisition in Canada, Rose Life Sciences in Quebec has posted a 300% sales growth since acquisition, More than tripling market share as it contributes meaningfully to the growth of the cannabis industry In the very important partner, Province of Quebec. Rose has proven without any doubt in my mind to be the best acquisition ever done in the Canadian cannabis industry to date, bringing with it invaluable insight and capabilities around consumer trends, product innovation and distribution as well as industry relevant management expertise. Our Canadian Cannabis results are very much the product of our deliberate strategy to realign our business to continue to win In an environment that, as we accurately predicted, would not see any relief from the challenging conditions I described earlier. We are managing our business for the realities of the market that we have today, which is a long way from a normalized CPG playing field.

Speaker 1

The expected thinning of both competitors and excess capacity has been slow and protracted, and there has been no tax relief and very little enforcement And I predict we will never see any real enforcement in Canada. To be clear, I'm not complaining. It is simply What it is and we must manage accordingly. So on the production side of our mandate on the production side, protocols building out our industry lead aimed at consistently generating efficiencies. Steve will speak more To this in a few moments.

Speaker 1

We are actively, prudently and continuously managing our cost structure for our growth forecast. And we have successfully increased our market presence and coverage, transitioning from a branded house to a house of brands as consumer preferences evolve. Since the start of 2022, we have launched 7 new brands to address consumer trends and preferences, Building on our original Pure Sunfarms brand's domination in the core price segment of the flower category and added more than 300 new SKUs. Our store brand launched less than a year ago quickly became the top selling premium brand in the flower category in Ontario, Meaning we now have 2 number 1 flower brands in their respective price segments in Canada's largest provincial market. And Fraser Valley, which was launched just a year ago, is not only the 3rd best selling flower brand In the value category in Ontario, but also continues to be the fastest growing.

Speaker 1

Adding to this Brand tripled throughout last month we launched Super Toast, which is uniquely focused on convenience and ready to go products and which is off to a great start. And further, in just a short period of time, Promenade has become the 2nd largest selling brand in Quebec. At the top line of the Canadian share rankings with a number of the large early leaders having given way to smaller up and comers, We stand out as consistent performer, maintaining a top three position nationally in Q2. In Quebec, Rose became the top selling producer by market share in dollars in Q2 and was the fastest growing producer. We achieved this in what has been an increasingly competitive environment there.

Speaker 1

And notably, with the addition of HEXO's distribution in Quebec, Rose now touches approximately 1 third of every dollar of cannabis sales in that province. Soon, we will start preparing a portion of our world class indoor facility in Quebec for supply to our growing export business for 2024 and beyond. There is clearly a lot going on very well and a lot to be proud of on our Canadian cannabis business, But there is also a number of areas that we are working on to deliver future growth, and I'd like to share those as I always do. Our data shows that in some markets more than 70% of SKUs and products on the shelf today were not in existence a year earlier. We have seen some dampening of our overall market share as we under indexed on newness in the core price segment.

Speaker 1

We have plans to return to being a meaningful contributor to the innovation and growth of the core segment, which is important for our retail partners. Q2 saw a marked increase in the number of our new product Launches in the core price segment with 4 new strains in flower and our all new high THC1 gram vapes with high performance hardware. These are formulated to maximize potency and flavor with 7 flavors rolled out initially. We've added even more new strains in July with a very active launch calendar throughout the remainder of this year that includes more new strains, more new vape flavors and new infused pre rolls across our brand portfolio. In Quebec, we launched 15 new SKUs under the first product call this year and targeting another healthy number of launches later this year.

Speaker 1

As we innovate, we are Continuing to elevate quality, delivering bigger, better buds through harvesting and trimming, enhanced bud sorting and hand packing, Achieving better moisture levels through our drying process and offering humidity packs in store and Pure Sunfarms flower. And we are delivering quality on a more consistent basis with enhanced Q and A controls. Again, this is part of our commitment To continuous improvement in every part of our organization, even those in which we are excelling. This is our DNA. We have also dealt with some internal supply issues for our market leading flower strain, Pink Kush, as it exhibited longevity with consumers that is un Characteristic of most products in the Canadian market.

Speaker 1

The good news here is that our PinkCush has proven that Canadian consumers will stick with great products, We have the ability to offer those great products. We have addressed those supply issues and expect Pincush sales to respond accordingly. Importantly, we do not believe that price increases we took on certain high velocity SKUs had any meaningful impact on share in Q2. We work closely with provincial partners on the implementation and are encouraged by markup changes That the OCS is planning for the second half of twenty twenty three. It would make sense for other LPs to take opportunistic price increases as well.

Speaker 1

Village Farms is a 30 year old company, which is executing its successful organic growth strategy in 2 complementary and international businesses, Fresh produce and cannabis. We have learned a lot about our capabilities, which we are consistently pushing the team to continue to exploit for future growth. We continue to pursue opportunities in those international cannabis markets where the rules are known and clear through both our rapidly growing export business from Canada and in country market opportunities to come. Q2 was another strong quarter for export sales, which were up more than 200% year over year, And we expect future growth as we continue to monitor medicinal and recreational regulatory developments, particularly in Europe. Turning now to our U.

Speaker 1

S. Cannabis business, Balance Health Botanicals. Sales for the 2nd quarter increased sequentially, While generating positive net income, positive adjusted EBITDA and positive cash flow, the success of our innovative new products prudent cost management have stabilized this business as the overall CBD industry has contracted. We continue to believe, however, that the U. S.

Speaker 1

Market CBD and other cannabinoids will be a high growth, multibillion dollar opportunity with the benefits of regulatory oversight to open mass market opportunities. We remain encouraged by what appears to now be progress on the U. S. CBD regulatory and political front. We are compliant with current FDA rules for other food and drink ingredients and good manufacturing practice standards under the NSF organization, A track record of safety and stand ready to work with regulators to realize this industry's full potential.

Speaker 1

And we have been underwriting multiple studies that support the efficacy of our products. In other words, we are ready to go. At this point, I'll turn it over to Steve for a more detailed review of our financials. Thanks.

Speaker 2

Thanks, Mike. This quarter, I want to begin by reviewing our significantly improved Profitability that Mike discussed earlier, consolidated net loss for the quarter improved to $1,400,000 loss or a loss of $0.01 per share compared with a net loss of $36,600,000 or $0.41 per share in Q2 of last year. Our consolidated operating loss was close to breakeven at just negative $42,000 again, a significant improvement From Q2 last year's operating loss of $43,800,000 which included a $30,000,000 goodwill impairment. Our results for Q2 this year was driven predominantly by the improved operating performance from fresh produce. Consolidated sales for the 2nd quarter were $77,200,000 a decrease of 7% from last year, with the decrease primarily due to lower volumes from our 3rd party growers in fresh produce and lower non branded sales from our Canadian cannabis Businesses, which were dampened somewhat in our by reporting currency of U.

Speaker 2

S. Dollars due to the weaker Canadian dollar in 2023 versus 2022. Consolidated adjusted EBITDA for Q2 came in at 4,500,000 Our 2nd consecutive quarter in positive territory and nearly a $15,000,000 improvement from the negative $10,300,000 in Q2 last year. Again, this was driven mainly by the improvement in fresh produce, but also higher EBITDA from our Canadian cannabis business as well as lower corporate costs, excluding stock compensation, which fell to just under $2,000,000 I will now review our Canadian cannabis results, which as usual, I will discuss in Canadian dollars to provide more accurate comparative without exchange rate fluctuations. Retail branded sales, which represents a vast majority of our Canadian cannabis sales, increased 24 Year over year, once again outpacing the overall Canadian market growth by a wide margin.

Speaker 2

International exports From Canada of nearly $1,900,000 from $600,000 in Q last year is nearly a threefold year on year increase. Non branded or wholesale sales of Q2 were $3,900,000 which compares with $10,300,000 in Q2 from last year, And especially outsized quarter for non branded sales. We are seeing renewed inquiries recently for non branded sales and will continue to operate Our non branded channel opportunistically being selective around our participation in the current market environment, Always with profitability in mind. These channels netted out to total Canadian cannabis sales of $37,700,000 compared $38,000,000 in Q2 of last year. Gross margin for Canadian cannabis of Q2 was 38% compared with our reported 39% for Q2 last year, which included a purchase price inventory adjustment in that period.

Speaker 2

Excluding last year's purchase price adjustment to our cost of sales, our Q2 2022 gross margin was really 33%. The year on year increase was primarily related to the higher proportion of retail branded products sold in Q2 of this year versus last year. Earlier, Mike mentioned our redoubled focus on realizing production efficiencies, generating more output per dollar spent. We are realizing improved efficiencies through the optimization of growing space during the best growing seasons and continued refinement of our cultivation as well as strategic pruning, pun intended, of input costs. We've also realized a 2.5 times improvement in our overall pre roll production per hour as we move manufacturing entirely in house, which we expect to have completed this fall.

Speaker 2

Selling, general and administrative expenses for Canadian cannabis for Q2 were $10,500,000 or 28 percent of sales, down slightly from 10 point EBITDA of $6,700,000 which is up 97% from $3,400,000 for Q2 last year And up 26% sequentially from $5,300,000 in Q1 of this year. Notably, our adjusted EBITDA margin doubled from Q2 last year. Canadian cannabis also delivered positive net income, which came in at $1,700,000 as well as positive cash flow after capital expenditures and all debt service payments. I will now turn to our U. S.

Speaker 2

Cannabis business and revert to U. S. Dollars. To reiterate Mike's comments earlier, we have stabilized this business from both a sales and profitability perspective. U.

Speaker 2

S. Cannabis sales for Q2 Generated entirely by Balance Health Botanicals were $5,300,000 compared with $5,800,000 in Q2 last year and $5,000,000 in Q1 of this year. I will note here that this year's Q2 sales were dampened by 2 factors specific to the quarter. First, we were out of stock in 2 of our best selling gummy SKUs due to the bankruptcy of our supplier. We've begun shipping these specific SKUs from our own manufacturing facilities this week.

Speaker 2

2nd, Q2, there was a change by a major online search provider in an algorithm which affected our affiliate partner sales. U. S. Cannabis gross margin for Q2 was 67%, up slightly from 66% from same period last year. Adjusted EBITDA for U.

Speaker 2

S. Cannabis was $400,000 compared with negative $600,000 last year, a $1,000,000 improvement and U. S. Cannabis generated net income of $200,000 as well as Positive cash flow in the quarter. Turning now to fresh produce.

Speaker 2

We delivered our 4th consecutive quarter of sequential improvement which was down 7% from $47,200,000 last year. The decrease was primarily due to lower volumes from 3rd party growers as we lost 2 of our larger Supply Partners at the end of 2022, one of which left the fresh produce space, but are picking up new growers in the forthcoming crop cycle and expect to Fully recover to our former level, but up 3rd party sales by the end of 2023. Sales from our own facilities are up year over year due to higher prices In a better market environment, more than offsetting our reduced production footprint in 2023 versus 2022. As I noted in our Last call, our average selling price is benefiting from our focus on more profitable customers with a higher percentage of produce sales going direct to retail accounts. I am pleased to report with the continued improvement in our operations fresh produce achieved positive adjusted EBITDA of $1,300,000 That's an $11,600,000 improvement over Q2 of last year and a $2,300,000 improvement from Q1 of this year, which pushed adjusted EBITDA for the first half of this year into positive territory.

Speaker 2

With the stabilization of the macro environment, Our ongoing improvements in managing the brown rugose virus and our focus on customer profitability, we continue to be confident in our substantially improved financial performance for this business in 2023. Our net loss from fresh produce improved to a negative $700,000 for the quarter. Turning now to cash and the balance sheet. At the end of Q2, we had cash of $31,700,000 compared with $34,900,000 at the end of Q1 of this year and $84,900,000 in working capital, up from $80,300,000 at the end of Q1. Both are significant improvements from $21,700,000 $60,800,000

Speaker 3

at the

Speaker 2

end of last year. Total debt at the end of Q2 was 51,000,000 down slightly from $53,000,000 at the end of Q1 on a stronger Canadian dollar versus U. S. Dollar in Q2 versus Q1. The sales process for our Monahan facility in Texas continues to advance with expressions of interest expected during this quarter.

Speaker 2

Finally, I am pleased to report that we are forecasting not only continued positive cash flow from our cannabis division, but also positive consolidated cash flow from all operations for the Q3 of 2023. And with that, I'll turn the call back to Mike.

Speaker 1

Well, thank you, Steve. I want to reiterate one point about what we are building at Village Farms, which I think it's lost in all the headwinds of 2022, 2023, some of which we got caught in as well. The Village Farms model is a proven decades long survivor Of the intersection of a cyclical agriculture industry and a branded consumer products business. We understand both, And we are very focused on deploying out considerable expertise in each for industry leading returns in cannabis and produce. We are not distracted by non core businesses.

Speaker 1

We are not dealing with the legacy of poorly thought through investments made when capital was cheap And abundant. We have not gambled on a diversification strategy as the only path forward. We are equally focused on delivering Profitable growth with a prudent capital mindset, investing where there is regulatory clarity. I keep hammering in the organization on focus because we believe it is the most important factor to drive organic top line growth and take an outsized percentage of category profitability. We are already doing this.

Speaker 1

We believe organic growth, Leaning on partnerships, alliances and collaboration with very selective high quality investments At this point of the industry life cycle is the right path to creating shareholder value. That is our ultimate focus. I'll now turn things over to the operator for analyst questions. And while the operator queue is up for questions, I will comment on one question we've received regarding our NASDAQ status. So we received quite a few questions regarding that, And I'll address that here.

Speaker 1

We are currently on extension with MasTec and we are extremely confident That we will be able to get another extension come before that will take us well into 2024. Equally, although We are very confident that we will remain on NASDAQ and want to. We are also investigating what some other MSOs in the U. S. Have structured on the TSX And some Canadian LPs are even working with the NASDAQ to find a structure that will allow them to compete in the U.

Speaker 1

S. Market. So not that we'll necessarily go down that path, but we are investigating it. Now as just a reminder, coming out of 2022, 2023 post COVID, I think around 25% of all NASDAQ companies are trading under $1 currently, Just a sign of the time. So we're very confident that our share price will be increasing.

Speaker 1

And if not, our extension will go through into 2024. With that, operator, turn it over to you for analyst questions.

Operator

Thank You will then hear an automated message advising your hand has been raised. We also ask that you limit yourself to 2 questions. And our first question today is coming from Aaron Grey of Alliance Global Partners. Your line is open.

Speaker 4

Hi, good morning. Thank you for the questions and congrats on a strong quarter across the board. First question I have is on Canada and the price increases, specifically around that and share performance. You mentioned, Mike, that you don't believe the price increases had an Act on share, which that's great to hear, your sales outperformed the POS data. I Fully understand.

Speaker 4

As you've cautioned a number of times, you'll be careful reading the POS data versus your sales because your sales are to provincial boards. But can you speak The delta that we're seeing there because there was some share softness in the POS data that seemed to somewhat in line with the price increases, but you're not seeing it on year end. So maybe if you can kind of speak The POS and kind of what's given you that confidence that those price increases are not having an impact for you, that'd be helpful. Thank you.

Speaker 1

Yes. As I said, we're not seeing it, but I'm going to give more color to you, Aaron, from Mandeesh. Go ahead, Mandeesh.

Speaker 5

Thanks, Mike. Hey, Aaron. Thanks for the question. So Mike touched on a lot of the topics, but what we're seeing in the quarter, We're very consumer driven, insights driven looking at our product innovation strategy and we know Unis drives a lot of Like growth and maintenance of sharing and growth of share, we did have quite a bit of newness in this quarter and more coming. We did see some of that newness come late to the quarter, Specifically around our vapes, our all new vapes are performing ahead of our expectations and we're going to continue to innovate and push on that.

Speaker 5

And then with some of our flower strains, some of our high performance, high potency strains, seeing really good uptake, couple of them index Kind of medium to lower end on the potency scale. And we know that right now in the industry, there's just really hypercompetitive factors at play. The never ending chase for potency, we're seeing really poor dynamics in terms of how people are pricing their products to try and gain Share, we don't believe it's profitable share. So we think that the time and the road will run out or the runway will run out for those folks on how they're trying to come to market and gain that share in the short term. So we see that competitiveness there in the potency price equation.

Speaker 5

And then what we're also seeing is because there's still this abundance of supply, people are really taking premium product and throwing it into value pricing. So that creates some unstable dynamics in the industry and I think everybody was impacted a little bit by that. So hopefully it gives you the right color around kind of what we're seeing in the industry. And then your second part of your question was around what gives us confidence. And again, Mike alluded to something very important is that Specifically around Pincush and some of our longer term strains, Pincush being the first focus and then Fraser Valley being an entire brand in the value space, We see great resilience in performance.

Speaker 5

And when I'm in market myself and with the team, we talk to stores and consumers, they love our products. So There's a lot of noise right now. There's a lot of units every quarter, every month, and we just got to keep fighting that battle and keep doing what we're doing, which is launching great products, great strains, Bringing amazing brands to market, not just in the Pure Sunfarms portfolio, but also in the Rose portfolio and picking our spots to win And improving our margins, as you saw what we did this quarter with continued cost reduction and executional focus, because for us it's about profitable share. So we took it a little bit on the chin here and there, but we like where we're positioned and we like our Positioning for growth in the upcoming quarters.

Speaker 4

Thanks, Wendy. So that was really helpful color. I appreciate that. Second question for me, and I want to shift gears a bit. We don't always talk a ton about CBD, but you mentioned some things in your prepared remarks, Mike.

Speaker 4

So wanted to get Your perspective on line of sight of how the farm bill might potentially drive change at the regulatory level for CBD And other minor cannabinoids, I think you have a unique perspective at Village Farms because you've obviously had a lot of interaction with the Farm Bills from the legacy business over the years, I'm sure. Anything you might anticipate in terms of changes for regulations in the 2023 Farm Bill? And then what impact it might have on minor cannabinoids Such as Delta-eight, states have taken various actions, some banning, some putting regulations and age limits on it. So any implications you might have for the Farm Bill and how that might change the dynamics And impact the business? Thank you.

Speaker 1

Well, the past Farm Bill was so profound that it really kicked off the whole CBD industry As a start, so there's not a lot of leakage coming out of the USDA and what they're looking for. We don't expect to see some tangible Color on that too, probably October, November. But we are bullish that there will be some changes like on Delta-eight. I don't believe Delta-eight is going away. I don't necessarily believe in it, but I think it's here to stay.

Speaker 1

But I just don't think There's going to be tremendous change. But on the CBD side, I mean, we're encouraged that the Farm Bill may help us, but we're also encouraged that we're starting to see A big number of congressmen that are now putting pressure on the FDA, and I think that's even a more important Development, because really the FDA controls the persisting, so to speak. They are the ones that are Being sort of negative towards any movement forward. And that's what we as a group and industry are working towards. So I think that's The bigger win is what's the FDA going to do in 2024.

Speaker 1

So but we'll probably have some better color when we talk to you in November on that Aaron.

Speaker 4

Okay, great. Appreciate the color. I'll jump back in the queue.

Operator

Thank you. One moment for our next question. And our next question will be coming from Federico Gomez of ATB Capital Markets, your line is open.

Speaker 1

Hi, good morning.

Speaker 6

Congrats on the quarter. Just first on your Mike on your comment about These NSOLs of listings and how you look at that. I'm just curious if you have any update on the Texas Medical cannabis application, and when you look at the U. S. Market, is it really about taxes for you?

Speaker 6

Or No. Would you consider other potential markets as well? Thank you.

Speaker 1

Well, I think overall for the U. S, Look, it remains a huge market for us and we've done tremendous amount of homework internally and we don't think we're disadvantaged To enter the U. S. Market upon decriminalization or legalization, because we believe that there are some Great companies out there that are executing very well today. However, I think the game is going to change, really coupled to Interstate Commerce and where that's going to go and I think that's where we'll shine.

Speaker 1

I mean, AltaXis assets again are We believe are probably the best assets and best location for high quality, low cost cannabis that can be delivered throughout the United States. And that will make us compete, we believe, at any point in the future. But we're not going to sit here and just waste time Waiting for that to occur, we've heard so many promises on the U. S. Front.

Speaker 1

It's really kind of ridiculous when you think about 35 or 30 Six states that are legal for cannabis, medicinal or recreational. Just be in New York, there's 1400 legal Dispensees operating in cannabis on every corner, but yet the federal government is really not moving forward. So before I answer about Texas, That's why we're very focused on international, especially Europe, where the clarity is there. The decriminalization is occurring. We believe it's going to be a huge potential market, and we believe we can leverage everything we've done in Canada, in Europe and win there, along with collaborations and alliances, as I mentioned.

Speaker 1

Regarding Texas, It just blows our mind here, with all the effort we put forward in Texas, how it really comes down to 1 individual that controls North of 30,000,000 people the size of the Canadian market in Texas to not move the medicinal program forward. That was a real disappointment During this last legislative session ending in late May, the next round is 2 years away. However, Texas is granting additional medicinal licenses. We've applied for 1. So we'll probably move that forward.

Speaker 1

We're hoping we'll know If we've been allotted 1 in the fall, and that will help position us step forward to the future. So I hope that gives you some Caller, Frederico.

Speaker 6

Yes. Thanks for that. And then just on international, you mentioned, How should we think about growth in that segment? I know that you had a good increase there this quarter, but in terms of the ramp And how volatile those international sales can be? And just tied to that, any updates on the Netherlands?

Speaker 6

Thank you.

Speaker 1

Yes. I think the international study, I mean, you could see it will be lumpy at times because it's very nascent and it will get going. So I wouldn't have an that the growth curve is going to be sort of steady and steadily increasing, but it will Year over year increase, we are very bullish on that. And you'll maybe see some compression at times like Israel Due to some political issues going on there and others. But really the EU is the market we're focused on.

Speaker 1

Germany is leading the way, but France, I'd say the lead, Poland, all these other countries are looking at the German regulatory process that they went through. And it's happening. So there's a number of competitors looking at that market. Some are in, some have spent Just eons of money without the clear path. We've been prudent with that as we've reported to wait till the clarity There it is there.

Speaker 1

We're going forward, increasing our sales and our effort going forward. And this is all on medicinal. We anticipate that the majority of the European market will just operate on a medicinal platform for at least the next three 5 years, with the exception of certain countries, Luxembourg and specifically the Netherlands, where we're 1 of the 10 licensed owners. As you know, We've secured 2 our license with 2 locations. And there was some slight change in the government recently.

Speaker 1

Don't think it's going to impact our ability to move forward, which we hope that will commence in the Q4 of this year. But we've always prudent before we push the final button to make sure that the political situation is solid. So I think we'll be able to update you clearly by November on our progress there.

Speaker 6

Great. Thank you and congrats again on the quarter.

Speaker 1

Thanks Frederica.

Operator

Thank you for your question. One moment please for the next question. And our next question will be coming from Eric Lueres from Craig Hallum Capital Group, your line is open.

Speaker 3

All right, great. Thank you for taking my questions. I apologize if this was addressed already. I'm juggling another call. But I was wondering first if you could expand on the guide for positive Consolidated cash flow in Q3, just wondering if you could just expand on that a bit and help us understand the primary drivers of that.

Speaker 3

Thank you.

Speaker 2

Primary drivers of that are the management of our current assets. Some of those current assets Are going to flip from receivables to cash. So it's going to be a very strong Cash collection order across all our business lines. So it's pretty straightforward. We're obviously we're a good bid in 6 weeks into the quarter.

Speaker 2

So with confidence that we're very confident That is occurring in real time. Simple as that.

Speaker 3

All right, great. Thank you. I appreciate that. And then my next question is just on the Investments in produce and overall infrastructure and AI technology, etcetera. I'm just wondering if you can help us sort of Frame the either expected CapEx involved or expected timing of this.

Speaker 3

You characterized it as continuous improvement. So I'm assuming it's not necessarily just like there's a sort of Set date where everything will be completed, but just if you can help us kind of frame that in terms of either timing or dollar amount, that'd be very helpful. Thank you.

Speaker 1

Yes. So Texas operates predominantly not on a calendar year, but on a crop cycle, which commences It starts the beginning of that crop cycle depending on which asset we're talking about commences In June and sort of is in full plant out mode by September and then runs through the following summer. So we have I've done 2 years of experiments with the investment in AI in one of our facilities over the last 2 years and have rolled it out completely now in all Texas facilities. And In fact, we're rolling it out in our Canadian Delta facility and plan to roll it out next year as well in cannabis. It's proven to be a great partner to our growing operations.

Speaker 1

Secondly, this year alone, we've Already spent in the last 4 or 5 months approximately $3,500,000 in capital improvements in Packing technology, sorting and grading for efficiency, cutting labor cost, as well as shading systems and new technology Across the board from irrigation, CO2 capture and whatnot. So Yes. So we all of it is about continuing continuous improvement to cut our cost and increase our quality and yield going forward. We already have plans for 2024 CapEx improvement in all our facilities as well. So is that enough, Eric?

Speaker 3

Yes. So I mean, so you spent the $3,500,000 in CapEx thus far. Do you have I figure for us either in sort of second half or into 2024 that you're willing to share now?

Speaker 1

Not for 2024 because we haven't finalized that, but Possibly in November.

Speaker 3

All right, great. Thanks.

Operator

Thank you. One moment for our next question. And our next question will be coming from Douglas Cooper of Beacon Securities. Your line is open. Douglas Cooper of Beacon Securities, your line is open.

Speaker 3

Sorry, I was

Speaker 7

on mute. You got me now?

Speaker 1

Yes, we have you Doug.

Speaker 7

Okay, perfect. Thanks guys. Terrific work in the quarter. A couple of things, I'm just looking to get your comments on. Let's start with the Canadian industry as a whole.

Speaker 7

I mean, you talked about obviously the competitive nature of it and continues to be competitive out there with lots of players. Do you think how do you think this will play out over the next 12 months to 24 months? It just seems to me that a lot of these smaller guys are not going to be able to get capital to survive A. B, some of your major Historically, major companies have sort of left the adult use space either A, for the medicinal market Or B, pursuing an alcohol strategy. Lisha, how do you think this will play out?

Speaker 7

To me, it seems to me that ultimately this will end with 3 or 4 companies and obviously you've been The biggest of those.

Speaker 1

Yes. I'll answer part of that and I'm going to turn it over to Mandeep because he's in the trench every day fighting those battles Front line, so to speak. But from a macro perspective, I'm not going to comment on other LP strategy. I think What makes the industry unique and in certain cases fun being this nascent legal cannabis industry is that Every LP in Canada seems to be looking for what that magic path forward is, Whether it's a diversified strategy or focused strategy, as opposed to the U. S, even though it's not fairly legal, when we look at the U.

Speaker 1

S. MSOs, or at least I do, Very focused on cannabis. They're not diversifying. They're wanting to win in cannabis in the U. S.

Speaker 1

So it's very different. In Canada, For the reasons we have, companies are looking at different ways. So I don't know which is the winning formula, but We know that we want to focus on being number 1, not just in Canada. That's our goal, being number 1 internationally as well. It sounds bold, but we know the only way to get there is a total commitment and focus on The industries we're in and not dilute our ability to operate there.

Speaker 1

So that's sort of the macro level. As far as my comments were, we've talked a lot of quarters about the industry in Canada That there's overcapacity, there still is overcapacity. And that's from a number of LPs that continue to linger on. The capital markets are closed, interest rates are through the roof. So at some point, I think there's an We thought it would be here by now, but I think once the dominoes really start to fall, they'll fall away.

Speaker 1

And in the end, I do believe there will be 3 to 5 companies that are meeting the Canadian And the Canadian export industry going forward. Now for the online for the frontline, Mandeep, you want to add color on that?

Speaker 5

Yes. Thanks, Mike. And I think you hit most of the pieces. Thanks for the question, Doug. We've been consistent, right, on our business strategy and how we've deployed everything from Being a branded house and under house of brands and with the Rose acquisition and kind of what they've been able to show and do in their agile their ability to be agile and nimble.

Speaker 5

And we still have a lot of opportunity in Canada, I think, I know, based on what we have in the pipeline and the work we're doing with Rose and Pure Sunfarms across And hope is not a strategy, so we're not sitting here hoping, waiting that other people will go by the wayside. Mike Articulated it very well that, we believe that that's going to happen. But underneath that, we just continue to operate and execute, generate cash, generate profitability, Create great products through innovation with a really strong assortment strategy that attacks the market from different consumer profiles and segments. And we think that's going to continue to allow us to be successful. And if the industry breaks open and people do certainly have to go by the wayside because on the trenches we see it, we We see products that are constantly hitting the market, great 1 week, not great pull through or sell through in the following weeks.

Speaker 5

We see the relationships we have with stores and book tenders. We value those. We have built a solid reputation across this country in Canada and we continue to want to execute on that. So we like how we're positioned. We think things will evolve, but We're going to continue to find ways to win and outperform where we can.

Speaker 7

That's great. So Mandeesh or Mike, any comments on the Fire and And what do you think is going to happen there and the impact that it's having or may have on the actual retail sale of product?

Speaker 1

Not really, Doug. I think we want to just be cautious about commenting on others. So Probably going to pass on that question, but if you want to ask another one, we'll take it.

Speaker 7

Okay. And just last one for me. Just from a balance sheet perspective, Maybe Steve, do you feel how do you feel about your balance sheet right now? And any color on the potential sale of the asset in Texas? I think you mentioned Steve that you expected Some expressions of interest this quarter.

Speaker 7

Do you expect something to play out before the end of the year? And is there a minimum threshold at which you will have Consider something below. And I'll leave it there. Thanks, guys.

Speaker 2

Yes. We feel good about our liquidity and our balance sheet At this stage of the year, obviously, Monahan's is an active process, probably taking a bit longer. Capital Markets That tightened up and I think that hasn't impacted the speed of which the process is Taken, but we haven't arrested parties actively looking at it, and we'll see how fast it plays out. Like any other real estate transaction, it's capital the buyer will have to bring capital to the forefront and We are capital markets are tightening. So we'll see how it plays out.

Speaker 2

Will it happen by year end or not? And yes, where we have some minimum, yes, we will have a minimum price, absolutely.

Speaker 7

Okay, great. Thanks very much, gentlemen.

Speaker 1

Thanks, Doug.

Operator

Thank you. One moment for the next question. And our next question will be coming from Scott Fortune of Roth. Your line is open.

Speaker 8

Hey, good morning. This is Nick on for Scott. First question for me just on the new product side. You mentioned launching 7 new brands in the last 18 months.

Speaker 4

Can you just give us

Speaker 8

a rough sense of what those are contributing now kind of in terms of mix? And are there any specific product categories you feel under indexed in that you're looking to address in the future? Thank you.

Speaker 1

Go on, Mandeep, take that one please.

Speaker 5

Yes. So We don't really break it out totally by brands. I mean Pure Sun Pharmacy is still our main state brand It contributes the most amount to our share. Some of the other brands have just started to launch and we think that they'll play very positively in certain consumer Spaces and index and with innovation behind it, but we don't really give out the components underneath that. Your second part of your question was around where do we feel our index.

Speaker 5

Infuze pre rolls has been probably one of the well, not probably has been the biggest story over the last 8 to 12 months In the industry and we're significantly under indexed there and then continuing to grow our pre roll share, just our base pre roll share. So when you think about How strong we are in flower and how we have over indexed on the flower side, we believe through our great brands and products and our specific great strains, We can use those as extensions to play in spaces where we're unindexed and that's what you're going to start to see. So specifically in pre rolls, And then fuse pre rolls and then with the launch of our new vapes, we're starting to really regain some of the share we lost. And we think there's some upside there. So vapes, pre rolls and fuse pre rolls.

Speaker 8

I appreciate that color. Thank you. And then second one for me, just wanted to follow-up on the international side. Germany specifically, you launched products through IUVO in May. Just kind of any early puts and takes on that side.

Speaker 8

I'm just wondering if you had any color on the competitive landscape and maybe the pricing environment there. Any color would be helpful. Thank you.

Speaker 1

Yes, I think the competitive environment is going to be I think it's going to be pretty solid going forward because for the Canadian LPs that are all dealing with the macro issues in Canada tax and others, which a number of companies are not able to get cash flow positive. They're looking at The international markets, of course, where there is no tax. So but I think to win in that market, it's going to take the same Vision we had in Canada that's going to be high quality, low cost. And there is price compression already happening in that market Just like we've seen in the U. S, very quickly price compression.

Speaker 1

We predicted that early on even in Canada, and I think the same will happen in Europe. But that being said, we think we can win there. It's still much more lucrative from a gross margin perspective. And we're bullish on it. So and I don't think everybody it's not as easy.

Speaker 1

Shipping internationally, especially trying to be under the EU GMP banner is a very difficult process and not everybody can do it. There are some greenwashing and there are some ways you could circumvent the system and ultimately that will play out. But again, for us, we believe we stand a great chance of leading in Europe as well. And As regarding Iyubo, yes, Iyubo, we've made multiple shipments. And then we have many other alliances that we're Working on throughout the whole EU that we haven't put out yet, but probably give some more color towards the end of the year on that, Scott.

Speaker 1

Thank you.

Speaker 8

Thanks, Yedanda. I appreciate the color. I'll pass it on.

Operator

One moment for our next question. And our next question will be coming from Mike Regan of Excellular Equities. Your line is open.

Speaker 9

Hi, thanks a lot and congrats on a great quarter. The produce turned around much faster than I think at least I expected. Real quick on the Canadian cannabis side. Can you Can you give us your perspective on how Ontario reducing their distribution margin is sort of going to work from your perspective in terms of how they decide the end real

Speaker 1

We appreciate it. Mandeesh?

Speaker 5

Yes. Thanks for the questions, good one. So earlier this year, the OCS Revised their markup pricing kind of strategy and approach where they were much more variable and they went to more of a fixed approach. They were playing around with how they were marking our products in the various segments and they kind of realigned everything to go to a fixed model. So for in some categories, I.

Speaker 5

E. Flower, actually they're giving margin back to the producer. In other cases such as concentrates Where the increased pre rolls come in, they're going to be taking a greater margin. So they're kind of balancing everything else and kind of A certain percentage will be fixed. So for a producer, we'll now know clearly like we do in other provinces when we submit a product, How the markup will play through the supply chain and how that will impact end pricing.

Speaker 5

So from a producer standpoint, some real big wins, Better margins for us, more visibility to end consumer pricing and given where Pure Sunfarms sits On the Canadian cannabis side, those will be positive for us given where we play and how we play. What we're also hearing in the industry is that there is stability now For producers to pass along that margin to consumers and reduce their pricing, but that's not what we're hearing. With our GPI increase we took earlier this year, we were a leader in kind of maintaining price, improving price and now we're hearing that the industry is going to follow us behind that. So It's a good news story, we believe, for the industry. It shows leadership in the Ontario market to Look at their margin structure and making sure they're doing the right thing when it comes to pricing.

Speaker 5

And we think it's great for the industry and we're excited about it.

Speaker 9

That sounds great, especially you can thread the needle of wholesale price increases and end user price Splats down to drive even higher volumes. And then quickly on the produce side, I guess you sort of guided to the goal of positive EBITDA for the year in produce And you've achieved that by June 30. Is there any reason to think going forward that you wouldn't at least be breakeven or We keep having continue seeing that positive EBITDA on the produce side going forward.

Speaker 2

This is Steve. So the produce will be quarter to quarter. So we would expect that in the 3rd Quarter, we will not have positive EBITDA and we'll have strong positive EBITDA in the 4th quarter and that's due to the seasonality of demand and supply. There's less supply of essentially sea controlled environmental ag tomatoes in the 4th quarter and demand is It's usually pretty steady and we usually see improved pricing such that we're profitable in Q4 and Struggle a bit with pricing in Q3. So but for the full year, we are expecting to land in positive territory.

Speaker 9

That's great. Thanks a lot for taking the question.

Speaker 1

Thank you, Mike.

Operator

And our next question will be coming from Ben Kjellberg of Stifel, your line is open.

Speaker 10

Hey, and good morning. I'm filling in for Andrew. I just want to turn back to international sales. There was some news out of Israel this week where the Health Ministry Announced some reform that could provide patients with easier access to medical cannabis. I'm wondering, is this something that you're watching closely?

Speaker 10

And if so, how should we be thinking about future shipments to Israel going forward given that these changes are supposed to come into effect at the end of this year? Thank you.

Speaker 1

Yes. We are watching it that and the political issues going on there that has sort of dampened some So we're in touch with our partner there and we're encouraged, but that may not start back up Until the Q4 or Q1 next year. So I don't have much more color on that at this point.

Speaker 10

All right. Thank you. That's all for me.

Speaker 1

Thank you.

Operator

Thank you. This concludes the Q and A session. I will now turn the call back over to Mike DiGiulio for closing remarks. Please go ahead.

Speaker 1

Just want to thank everybody for participating today and we look forward to our next call in November. And thank you for your continued belief in Village Farms. We are confident that we will lead the industry going forward. Thank you.

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Key Takeaways

  • Village Farms delivered significantly improved Q2 results, narrowing its net loss to $1.4 million (vs. $36.6 million a year ago) and recording $4.5 million of positive adjusted EBITDA.
  • Fresh produce achieved its fourth consecutive quarter of sequential improvement, generating $1.3 million in positive adjusted EBITDA (a nearly $12 million y/y swing) and is tracking to full-year profitability.
  • In Canada, retail branded cannabis sales rose 24% year-over-year and 8% sequentially, with C$1.7 million of net income, 19 straight quarters of positive adjusted EBITDA, and a top-three national market share.
  • The U.S. CBD business (Balance Health Botanicals) stabilized with Q2 sales of $5.3 million, delivering positive EBITDA and cash flow despite industry headwinds and positioning for regulatory-driven growth.
  • International cannabis exports more than tripled (+200% y/y) to C$1.9 million, with a focus on expanding in Europe (Germany, Netherlands) and preparatory work for a 2024 export ramp-up.
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Earnings Conference Call
Village Farms International Q2 2023
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