Village Farms International Q2 2024 Earnings Report

Village Farms International EPS Results

• Actual EPS: -$0.10
• Consensus EPS: -$0.03
• Beat/Miss: Missed by -$0.07
• One Year Ago EPS: N/A

Village Farms International Revenue Results

• Actual Revenue: $92.18 million
• Expected Revenue: $84.32 million
• Beat/Miss: Beat by +$7.86 million
• YoY Revenue Growth: N/A

Village Farms International Announcement Details

• Quarter: Q2 2024
• Date: 8/8/2024
• Time: N/A
• Conference Call Date: Thursday, August 8, 2024
• Conference Call Time: 8:30AM ET

Village Farms International (NASDAQ:VFF) is a North American agricultural company specializing in greenhouse cultivation of fresh produce and cannabis. Through its wholly owned operations, the company grows a variety of high-quality vegetables, including tomatoes, cucumbers and sweet peppers, using controlled-environment agriculture techniques designed to maximize yield and sustainability. Village Farms leverages advanced climate and hydroponic systems to deliver consistent year-round supply to major grocery retailers across the United States and Canada.

In its produce segment, Village Farms operates large-scale greenhouse facilities in Texas and Canada. These facilities employ integrated pest management, energy-efficient technologies and rigorous food-safety protocols to meet the specifications of supermarket chains and foodservice distributors. By combining modern automation with traditional horticultural expertise, the company aims to reduce resource consumption while maintaining the flavor and nutritional value of its crops.

Complementing its fresh-produce business, Village Farms is a 50/50 partner in Pure Sunfarms, one of Canada’s leading licensed producers of recreational cannabis. Pure Sunfarms cultivates, processes and packages a range of dried flower, pre-rolls and cannabis oil products at its greenhouse campus in British Columbia, supplying federally regulated adult-use markets. This joint venture brings together Village Farms’ greenhouse know-how with Pure Sunfarms’ cannabis-specific licensing and distribution network.

Village Farms International Q2 2024 Earnings Call Transcript

Key Takeaways

• Canadian cannabis: Record consolidated sales grew 45% year-over-year to CAD 56 M, making Village Farms the only top-5 LP to gain market share and come within 2 percentage points of #1.
• Fresh produce: Q2 sales rose 7% to US$47 M but temporary pricing pressure drove an operating loss, though management expects improved results in H2 2024 as pricing recovers and efficiencies continue.
• Consolidated net loss was US$23.5 M (US$0.21/share) driven mainly by CAD 12 M US cannabis and CAD 8.3 M produce impairments, and adjusted EBITDA was negative US$3.6 M.
• Cash flow: Canadian cannabis generated positive cash flow from operations of CAD 7.2 M, enabling self-funding of the Netherlands facility and the acquisition of the remaining 10% of Rose.
• Netherlands expansion: Production at the new Dutch greenhouse is on track for Q1 2025 sales in a low-tax market with 10 municipalities and 85 coffee shops, positioning the company for international growth.

Presentation

[Operator]

Good morning, ladies and gentlemen. Welcome to the Village Farms International's Second Quarter 2024 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the second quarter ended June 30th, 2024. 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.

[Operator]

Certain material assumptions were applied in providing these statements, which 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 those 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, 2023, and 10-Q for the quarter ended June 30, 2024, which will be available on EDGAR and SEDAR+. Those 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.

[Operator]

I would now like to turn the call over to Michael DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGiglio.

[Michael DeGiglio, CEO at Village Farms International]

Thank you, Tanya. Good morning, and thank you for joining us today. With me are Steve Ruffini, Chief Financial Officer, Ann Gillin Lefever, Chief Operating Officer, and Patti Smith, Corporate Controller. So Q2 was another strong quarter for Village Farms, with record consolidated sales driven by Canadian cannabis, which reported a new quarterly sales record, and fresh produce, which tied its second-highest quarterly sales in the last five years. I'm very pleased with the continued growth in Canadian cannabis, which is broad-based across our brands, form factors and geographies. Total net sales grew 45% year-over-year, all organically without acquisitions, to $56 million. Branded retail sales grew 35%, and we were once again profitable, with positive cash flow from operations of CAD 7.2 million. In Q1, we noted that we had the fastest-growing market share of the top five Canadian LPs.

[Michael DeGiglio, CEO at Village Farms International]

In Q2, we were the only top five producer to grow share, the only one. We are now less than two percentage points from the number one market share rank in Canada. Importantly, our market growth is diversified across leading brands, multiple cannabis form factors, consumer segments, and geographies. So let me give you a few examples which show the depth of our business model. We are the fastest-growing producer in pre-rolls year to date. In just the last 12 months, with investment in innovation and a renewed focus on assortment and pricing, our brilliant team has expanded our share on the national pre-roll market by just under three percentage points to nearly 8% of the market. Our game-changing Hi-Def Pre-Rolls remain a true innovation in the category, and we are also gaining share through our focus on quality inputs across all of our pre-rolls.

[Michael DeGiglio, CEO at Village Farms International]

Super Toast, our milled flower brand, continues its outstanding performance, despite the milled category being very competitive with a well-entrenched leader. It's the third fastest-growing brand nationally, despite selling in just four provinces, and growth is accelerating. We have 20% share of the milled category nationally, 25% in Ontario, and that's despite launching just one year ago. We have a 94% repeat purchase rate among our consumers. In May, Super Toast Sgt. Pineapple took over as the top milled SKU in Ontario. This is a great example of extending our quality and into new categories that resonate with our consumers. We are also building share across different consumer price points. In the premium segment, our Soar brand continues to excel. Strong performance in flower is being complemented by innovation in the infused pre-roll category. Soar's Pineapple God is the fourth best-selling premium SKU nationally.

[Michael DeGiglio, CEO at Village Farms International]

Finally, we continue to innovate in flower, with new strains that delight our consumers. We have the number one flower products nationally in both Q1 and Q2 of this year. Our Fraser Valley's Donny Burger, Pure Laine Big Pleasures were in that category. We recently launched three new cultivars in British Columbia under our grower-led trials by Pure Sunfarms strategy, with its unique, limited release, small batch offerings. In addition, our new in-house bred Pure Sunfarms Kush God strain, derived from two Village Farms iconic parent strains, Pink Kush and Pineapple God, and our new Pure Sunfarms Gold Face strain, have each added meaningfully to market share with demand outstripping initial expectations. Another important metric is the geographical ranking, which tells us our products are resonating across Canada's many consumer preferences. We are strengthening our number one and two position in Ontario and Quebec.

[Michael DeGiglio, CEO at Village Farms International]

We are now tied for the number two rank in British Columbia, moving up 2 positions in the last year. In Alberta, we improved our rank to fourth. That's up four positions from eight this time last year. We are also growing our international export business. Q2 was another good quarter, with solid contributions from Germany and the United Kingdom, as these countries ramp up and become an increasingly bigger proportion of our export sales. Notably, in Germany, we have seen higher demand following the regulatory change there in April. Sales to Australia overall are growing. While those reported as international sales decreased from Q2 last year, total Australian sales, including those that get reported as non-branded due to the nature of the customer, grew fourfold from Q2 last year. Our flower strategy has proven successful in Canada and is now doing the same internationally.

[Michael DeGiglio, CEO at Village Farms International]

In the Netherlands, we are just months away from the start of production for our Dutch consumers. The program recently completed its startup phase, expanding the number of municipalities in the Netherlands in which legal cannabis can be sold in coffee shops from two to 10. I just returned from there, and I am so impressed with the build-out. It's an incredible facility, and I'm very excited about our future in the Netherlands. We look forward to our first sales in Q1 2025. Now I'll turn to fresh produce, which also delivered strong sales growth, despite temporary pricing pressure on the back half of the quarter. Steve's gonna provide more detail, but I would like to highlight a couple of trends that set this business up for an improved second half as pricing recovers.

[Michael DeGiglio, CEO at Village Farms International]

First, our gross margin for the first six months of the year has improved by over 150 basis points, despite the pricing challenge. The underlying cost structure continues to improve, and second, volumes are stronger, which will drive improved results as pricing recovers. This quarter, we added more partner sales than we had, and we had higher yields in our Texas operations. Both are important to maintaining the value of a fresh business with our customers and consumers to be able to share assets with our cannabis strategy. In short, we are expanding our asset-light growth strategy in fresh to supplement our cannabis plans. A question I get asked is: Why invest in fresh produce?

[Michael DeGiglio, CEO at Village Farms International]

The answer is simple: The business has great value as a top five North American produce marketer, and the rollout of permissible cannabis in the U.S., either Nasdaq-permitted or Texas-based, is taking longer than we predicted in the last four years. Our excellence as an operator stem from our deep cultivation expertise. I'll turn the call over to Steve now to review the financials and then come back. Steve?

[Steve Ruffini, CFO at Village Farms International]

Thanks, Mike. Starting with our consolidated results, total sales grew 19% year-over-year to $92.1 million, strong top-line growth in both Canadian cannabis and fresh produce. Net loss was $23.5 million, or $0.21 per share, compared with a net loss of $1.4 million last year. This quarter's net loss breaks down as follows: approximately half, or $12 million, was a non-cash impairment charge on our U.S. cannabis business. Roughly 1/3, or $8.3 million, was driven by our produce business due to poor market pricing, which I will give more color on. And $2.1 million was due to incentive stock compensation issued in the quarter.

[Steve Ruffini, CFO at Village Farms International]

Consolidated Adjusted EBITDA was -$3.6 million, compared with -$1.1 million for Q2 last year, excluding the $5.6 million settlement of a legal matter that contributed to our prior period's produce results. Let's look at the business segment, starting with fresh produce. Q2 sales increased 7% year-over-year to $47 million, equaling our second-best quarter in the last five years, due to higher volumes at our Texas greenhouses and the strategic addition of third-party volume, which were partially offset by pricing. Tomato pricing swung dramatically lower in the back half of the quarter, driving a larger-than-expected operating loss. Adjusted EBITDA was -$6.4 million. For context, prices in May and June were 31% lower than the January to April period, and 11% below our forecast.

[Steve Ruffini, CFO at Village Farms International]

Historically, May-June pricing is around 20% lower than the first four months of the year due to the seasonality of industry supply. Our ongoing focus on cost efficiencies and yield expansion drove a meaningful improvement in our gross loss for the first half of the year. In fact, on our own produce facilities, without an incremental Q2 third-party supply loss, we would have been very close to break-even, a break-even gross margin for the first six months of the year. Just a reminder that we strongly encourage analysts and investors to look at our produce business the way we do, on a full year basis, as quarterly adjustments and cost of sales can distort any quarter due to accounting for our annual crop cycle.

[Steve Ruffini, CFO at Village Farms International]

With the current improved pricing environment, partially due to seasonality and partly due to supply issues within the industry, coupled with further improvements in our cultivation technologies, including AI, we expect significantly improved performance for fresh produce for the balance of 2024. Canadian cannabis delivered another quarter of record sales, record retail branded sales, and a strong quarter for non-branded sales. These drove another quarter of positive Adjusted EBITDA and operating cash flow of CAD 7.2 million. Importantly, this cash flow is enabling us to self-fund our first Netherlands facility and fund the acquisition of the additional 10% ownership of Rose during the quarter. Total net sales grew 45% year-over-year to CAD 55.8 million.

[Steve Ruffini, CFO at Village Farms International]

Retail branded sales grew 38% to CAD 41.8 million. Non-branded sales tripled to CAD 11.3 million as we continued to be opportunistic in the improved B2B pricing environment to reduce non-branded spec biomass inventory and generate cash. This has become an interesting opportunity as other operators continue to shutter production and move to asset-light models. We will continue to take advantage as long as it makes sense for our branded and international sales channels, which will always come first. It was another good quarter for international export sales, which were CAD 2.1 million, up 11% from Q2 last year. The first half of this year has been our best period for ongoing international sales to date, excluding those periods with load-in to new countries. We remain on track to deliver solid year-over-year growth this year.

[Steve Ruffini, CFO at Village Farms International]

Canadian cannabis gross margin improved from Q1 to 26%. Excluding low-margin, non-branded spec B2B sales, gross margin for Q2 was 28%, reflecting a higher proportion of value brand sales, mostly Fraser Valley and Pure Sunfarms, as compared to prior year. SG&A expense as a percentage of sales for Q2 improved to 22% or 28%, driven by higher sales. Q2 adjusted EBITDA for Canadian cannabis was $6.6 million, was in line with Q2 last year. Before moving on from Canadian cannabis, I would be remiss if I didn't point out the significant excise taxes we are paying as we expand our branded business. Our excise tax for Q2 was CAD 27 million, and for the six months was CAD 54 million dollars. By far, our largest single expenditure for our cannabis business.

[Steve Ruffini, CFO at Village Farms International]

Very few can build a sustainable, profitable business in Canada with such a tax. An excise tax of 30%-40% is a burdensome tax in any industry, let alone a young and developing industry. Until there is change, we will continue to see CCAA activity occurring within the industry, with thousands of jobs lost or continued creative ways for some to try to circumvent their unpaid excise taxes. Supply is not only drying up in Canada due to some moving to asset-light models, but others are simply going dark due to the burdensome excise tax. Turning to our U.S. cannabis business. Q2 sales were CAD 4.3 million, with a gross margin of 31%.

[Steve Ruffini, CFO at Village Farms International]

Our sales continue to be impacted by the proliferation of unregulated hemp-based products, most notably synthetic products, and in response, a growing number of states that are severely restricting intoxicating hemp-based products to essentially ban synthetic hemp products, which in turn has negatively impacted our responsible, GMP-produced, natural hemp products sold under our CBDistillery brand. During Q2, we completed the internalization of gummy production to support margin, quality, and future innovation for this consumer-preferred format. We are progressing on multiple initiatives to reinvigorate our sales, recognizing that consumer needs clear messaging about the use of synthetic cannabinoids. Q2 adjusted EBITDA was negative CAD 240,000, with a net loss, excluding the $11.9 million intangible asset impairment of CAD 330,000. Both were improvements over Q1. Turning to consolidated cash flows and the balance sheet.

[Steve Ruffini, CFO at Village Farms International]

We generated cash flow from operation of CAD 5.7 million, compared with the use of cash in operations of $5.2 million in Q2 last year. The primary driver of the improvement was a reduction in our cannabis inventory. For those that read our financial statements, our finished goods cannabis inventory is down 30% since the end of last year. We ended Q2 with cash of CAD 29.7 million and working capital of CAD 6.1 million. Total term debt at the end of Q2 was CAD 44 million, split approximately equally between fresh produce debt due May 2027 and cannabis debt, with maturity starting in February 2026. During the quarter, we amended and extended the agreement for our $10 million revolving line for fresh produce, which has a current balance of $4 million with a May 2027 maturity date.

[Steve Ruffini, CFO at Village Farms International]

We also have in place a CAD 15 million cannabis line of credit, which is currently not drawn on. We remain comfortable with our net debt level at CAD 18.7 million. And with that, I will now turn the call back to Mike.

[Michael DeGiglio, CEO at Village Farms International]

Hey, thanks, Steve. At the half-year mark, I'd like to close with a few thoughts before we take your questions. We are delivering on our cannabis strategy, specifically revenue growth, market share, profits and cash flow in our Canadian operations. We're in the early stages of replicating that strategy in emerging markets. Our flower is increasingly being sought out by international partners and consumers based on the reputation and success of our brands and cultivars in Canada. We are proud to participate in the Netherlands' limited license country market, as well as Germany, the United Kingdom, and Australia, and other markets as they open up. We've been working hard over the last four years, and we've been ready to replicate these successes in the United States, but remain quite frustrated. I really feel much stronger.

[Michael DeGiglio, CEO at Village Farms International]

about what I could say here, but, I've been edited back to just saying I'm frustrated. And I'm frustrated by the lack of regulatory direction, further compounded by an environment of non-enforcement, even where there are regulations. It has created a race to the bottom, and as a result, consumers, employees, and an entire industry are in limbo. Perversely, it also is dividing the industry rather than uniting us. We see this currently within the hemp segment, where our subsidiary, CBDistillery, has developed responsible hemp-based products. Yet adjacent businesses are lobbying to ban all hemp. By the way, hemp is the deregulated model that I would conjecture we would all like marijuana to follow in the United States, so why are we lobbying against ourselves?

[Michael DeGiglio, CEO at Village Farms International]

At Village Farms, we believe these industries can coexist and prosper together, and that both forms of cannabis, hemp and marijuana, have their roles to play in benefiting consumers. We would welcome any other LPs or MSOs or beverage industry participants to all work together with us to speak as one voice with federal agencies and legislatures, and at the state level as well. I'm sure we have confused lawmakers with our differences rather than uniting over commonalities like other industries. Our door is always open to discuss this. Within Village Farms, we have strong regulatory cannabis and hemp talent. If we don't unite our basic messaging, we can only hold ourselves responsible for the regulatory abyss that just ends up hurting all participants and consumers. Operator, we'll take any calls at this point.

[Operator]

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question will be coming from Aaron Grey of Alliance Global Partners. Your line is open, Aaron.

[Aaron Grey, Managing Director and Head of Consumer Research at Alliance Global Partners]

Hi, good morning, and thank you for the questions. So first question for me, I want to talk about retail-branded sales. You know, really nice to see that growth both year-over-year and sequentially. So I wanted to just say, could you, could you give any color in terms of whether or not there was an impact in terms of the timing of provincial boards that might have pulled forward some revenue, or do you feel this reflects normalized purchase habits? And then on that front, you know, have you seen a change in the buying habits from the boards amid, you know, garnishing of payments or some of the boards just looking for LPs that can really supply quality products on a normalized basis? Thank you.

[Michael DeGiglio, CEO at Village Farms International]

Yeah, no, it's. I would say it's totally based on our performance, on our quality, our innovation, our genetics, all combined is what's driving those numbers, which are pretty, pretty incredible. We feel really strong about it. It's not really tied to timing or boards, just it's, it's pure execution at the Canadian cannabis level.

[Ann Gillin Lefever, COO at Village Farms International]

In fact, Aaron, if anything, we hit some out of stocks this quarter. So because we outsold our initial expectations on some of our better-selling strains in particular. So, it really is just great sales at this for the quarter.

[Aaron Grey, Managing Director and Head of Consumer Research at Alliance Global Partners]

Okay, great. Thanks for that. It's great to hear on the implied velocity there. The second question for me then, in terms of gross margins, Steve, I believe you said 28% ex the spec impact. So just as we look going forward, you know, how do we think about gross margin evolution? Historically, you've been saying, you know, 30%-40% in that range. It sounds like, you know, some of the value products, like Fraser Valley, you know, weighed a little bit more on margins, you know, in the quarter. So part of that might have been higher cultivation costs than I believe you have in this season as well.

[Aaron Grey, Managing Director and Head of Consumer Research at Alliance Global Partners]

Just want to get some color in terms of gross margin expectations going forward as we think about format mix, both in terms of Canadian adult use as well as international and the B2B business. Thank you.

[Steve Ruffini, CFO at Village Farms International]

Yeah, the branded gross margin, 28%, was lower due to the higher, as I said, the higher percentage of value brand. You know, we still support our the range of guidance of 30%-40%, and we are, you know, actively analyzing, you know, our current SKU in market.

[Ann Gillin Lefever, COO at Village Farms International]

Yeah, so, Aaron, I'll add here, too, that, you know, we have some very strong positions in that segment right now, and that is due to the hard work by all of our teams. That is where the consumer has moved to. I think, the number right now is about 34% by volume of consumers are in that price segment. And so as now, you know, a clear leader, across the board, it's our job to work very carefully on profitability at that segment with our partners at the provincial boards and our retail customers.

[Aaron Grey, Managing Director and Head of Consumer Research at Alliance Global Partners]

Okay, great. Thank you very much for the call. I'll jump back in the queue.

[Operator]

Thank you. Our next question will come from Eric Des Lauriers of Craig-Hallum Capital Group. Your line is open, Eric. Again, Eric, your line is open.

[Eric Des Lauriers, Senior Research Analyst at Craig-Hallum Capital Group]

Oh, sorry about that. I was on mute. Thank you. Thanks for taking my question, and congrats on the strong performance up in Canada. My first question here is kind of a bit of a follow-on from Aaron's question. Just with the increased mix of value products, I'm just wondering what ability you have to sort of manage margins and costs there as you were kind of touching on there at the end, Ann?

[Ann Gillin Lefever, COO at Village Farms International]

Good morning, Eric, and no problem being muted. I'm sure it's a busy morning for you. The reality is that we'll be continuing to work on this, you know, with all of our customers. We have a pretty strong discipline around return on any of our expenditures across the company, and that includes our marketing spend. So when we go into any discussions, we have an expectation of what that looks like, and we monitor that against that very, very closely.

[Eric Des Lauriers, Senior Research Analyst at Craig-Hallum Capital Group]

All right, great. And then my next question is just on produce supply dynamics. So, Steve, you mentioned excluding some supply loss, gross margins would have been roughly break even for the first half. Can you expand on that? And then expand on the. I think you mentioned some industry-wide supply issues that point to some improved profitability in the second half. If you could just expand on both of those, that'd be great. Thank you.

[Steve Ruffini, CFO at Village Farms International]

Yeah, what I meant by close to break even would be for our own greenhouses for the full six months. We have improved significantly on our volumes and labor efficiencies at our Texas operations. My comment about when you look at, you know, quarter to quarter, can be a bit misleading, simply the way we account for our cost of production. So now the Texas crops are over, for those that follow Village Farms, the Texas crop essentially starts in September and ends in June. You know, some of the second quarter costs, now the Texas crop is over, you know, hindsight being 20/20, should have been charged in the first quarter. But for the full six months, the gross margin would have been close to break even.

[Steve Ruffini, CFO at Village Farms International]

We did take on some incremental, especially tomatoes, to fulfill winter contracts this coming winter. And market pricing was, it's – as I said, it's always lower in May, June because of industry supply. The U.S. growers and most of the Mexican growers are not in market, you know, in the later summer months, which, again, provides much significantly improved pricing in the July, August period. So very confident that we'll have a, you know, much improved second half of the year versus the second quarter, certainly.

[Eric Des Lauriers, Senior Research Analyst at Craig-Hallum Capital Group]

All right, great. Appreciate your comments. Thank you.

[Operator]

And our next question will come from Mike Regan of Excelsior Equities. Your line is open, Mike.

[Mike Regan, Director of Research at Excelsior Equities]

Hey, well, thanks for the question. So I guess back then, sort of the pricing dynamics in Canada on cannabis. It sounds like a lot of the sort of price pressure and margin pressure was some mix shifts. Can you help us sort of understand how the pricing is moving on a like-for-like basis within categories, in Canadian cannabis?

[Ann Gillin Lefever, COO at Village Farms International]

I could grab that one. Good, good question, and you're correct. I would categorize it as more of a mix shift at this point. The at retail, the price per gram declines are starting to very much stabilize, slow down, flatline, depending on the segment. So that's the good news. It we think that the B2B business, which Steve mentioned we're participating in, is one of those leading indicators, because pricing at the B2B segment has been increasing, and we think that that's got to play through to the retail as well.

[Mike Regan, Director of Research at Excelsior Equities]

Got it. Okay, yeah, that would also make sense. And I think, Mike, you know that you're seeing actual declines in supply in Canada as the taxes sort of push people out of business, or they just can't make any money at this point. Is that also starting to support pricing?

[Ann Gillin Lefever, COO at Village Farms International]

I think that's one of the factors, for sure. I think the other factor is the move to asset light strategies by some players, and, you know, that's certainly helping to take out some of the biomass that might have gotten dumped into the market. And then, the third factor, you know, certainly was, is for those that can export, that's another market drawing down on Canadian supply.

[Mike Regan, Director of Research at Excelsior Equities]

Got it. Okay, great. Thanks a lot.

[Steve Ruffini, CFO at Village Farms International]

You're welcome.

[Operator]

Now, our next question will be coming from Doug Cooper of Beacon Securities. Your line is open, Doug.

[Doug Cooper, Managing Director and Head of Research at Beacon Securities]

Hey, good morning, guys. Just a quick one on the produce side, Steve. The improved pricing or improved better environment in the second half, do you think it's enough to get you to break even EBITDA for the year for the produce segment?

[Steve Ruffini, CFO at Village Farms International]

Not for the full year. We are expecting good EBITDA in the second half, but not enough to get us back to break even for the full year.

[Doug Cooper, Managing Director and Head of Research at Beacon Securities]

Okay. Mike, switching to the Netherlands, you said you were just there. Can you give us some more color about, you know, how big you think the market is now that they've moved from two to 10 municipalities? How many people would be captured in those 10 municipalities? And, you know, how, just walk through the sort of ramp and revenue expectations. I'm assuming there's no excise taxes there. I'm guessing obviously, you don't have to sell through provincial boards. And maybe just discuss what do you think the profitability will be like from that facility?

[Michael DeGiglio, CEO at Village Farms International]

Well, I think the profitability is gonna be solid. In fact, I think we can really produce some outstanding quality that is not typically found in the Netherlands market, maybe with the exception of illicit trade coming in from the United States or Canada, from what I've seen. But what's produced in the Netherlands and what comes in from other,

[Michael DeGiglio, CEO at Village Farms International]

... adjacent countries, that quality's never been great. So with the cultivars we're going forward with, from, Canada, and the, cultivation facility we have and our know-how, we're expecting some really great things. Now, as far as the way the Netherlands has done it, you know, there's not a lot of data because it's all-- it's, been an illicit market for 50 years, both at the cultivation and even at the coffee shop level. So there's not a lot of data. There are numbers that talks about the market in the Netherlands. It's about a billion-dollar market, but it's not substantiated. However, that's really not important for us. What's important for us is that there are 10 municipalities and about 85 coffee shops that are participating now in the legal side, and that's gonna be supplied by just 10 license holders.

[Michael DeGiglio, CEO at Village Farms International]

So, we see ourselves as being immediately sold out because the capacity of the 10 license holders is just not quite enough to fulfill those 85 coffee shops to start. Secondly, as you mentioned, there is no tax. The prices in the Netherlands are far superior to anything we've seen in Canada or even the U.S., and the government wants to keep it that way. So, if you really look at, you know, we take our hat off to how the Netherlands looked around at what would make the industry strong and sustainable. So I think we'll do well there, and, you know, we're prepared to talk more about it in the first quarter of 2025. We will start planting out in October, so we're only about eight weeks away.

[Michael DeGiglio, CEO at Village Farms International]

We're on track for that, and we should be generating, for sure, revenues in the first quarter.

[Doug Cooper, Managing Director and Head of Research at Beacon Securities]

Okay. I guess my last one, Steve. You mentioned the drop in inventories. What do you think this means, the read-through? Do you guys have to do some expansion at your Canadian facility to keep up with demand? You know, you guys just talked about being sold out, so maybe just talk a little bit about that.

[Steve Ruffini, CFO at Village Farms International]

Yeah, we are very actively looking at expanding our cultivation cannabis capacity. Obviously, as you know, we've only converted half of Delta 2, and we are very actively looking at converting the other half. So I'll leave it. I'll leave you with that at this stage.

[Doug Cooper, Managing Director and Head of Research at Beacon Securities]

Okay. Thanks very much.

[Steve Ruffini, CFO at Village Farms International]

Thank you.

[Ann Gillin Lefever, COO at Village Farms International]

Operator, next question? Tanya, we're ready for the next question.

[Operator]

I'm sorry. Again, our next question comes from Frederico Gomes of ATB Capital Markets. Your line is open.

[Frederico Gomes, Director of Institutional Equity Research at ATB Capital Markets]

Hi, good morning. Thanks for taking my questions. Mike, just to, just to clarify on the Netherlands, just wondering if that, you know, other operators, have they already started sales in the Netherlands? And, and if so, in that pilot program, you know, how is that evolving?

[Michael DeGiglio, CEO at Village Farms International]

Yeah, I think of the 10, three have already started generating revenue the last couple quarters, probably five to six more by year-end. So I think by year-end, it'd be eight of us, at least, generating revenue.

[Frederico Gomes, Director of Institutional Equity Research at ATB Capital Markets]

Okay, perfect. Thanks for that. And then, in Canada, how sustainable do you think, you know, those market share gains that we're seeing from you guys is? You know, I think that we've seen in the past, you know, LPs gaining share and then losing. You know, do you think that trend can continue just given the current underlying economics here, with the sector, you know, trending towards double-digit share and, and being sustainable, with that?

[Michael DeGiglio, CEO at Village Farms International]

Yeah. So I think what drives it, what we've found, you know, based on our consumer insights, is innovation, quality, newness, and price, and you have to drive, drive that constantly. And as long as you're innovating and providing new strains, new products, new innovation, and you're priced right, then I think you can continue to drive, at least sustain the market share. We feel very positive we can sustain the market share, but our goal is driving. We want to drive to number one and continue to do so. So I think, you know, we just look at the numbers over the last five months, it wasn't just sustaining it, it was actually increasing it. As I said in my opening remarks, we're one of the only top five that have done so.

[Michael DeGiglio, CEO at Village Farms International]

I think that's what's driving it at the end of the day, is really, you have to have products that resonate with the consumer. It's got to be a great quality every single day, and you have to innovate and provide newness, and that'll drive increased sales. So, you know, if the market continues to grow single digits over the next three to five years, mid- to high-single digits, then I think we could see Canada driving to CAD 6 billion-CAD 7 billion at the retail level in the next three to four years. And we plan to take that share with us as we go.

[Ann Gillin Lefever, COO at Village Farms International]

Fred, the only other thing I would add is, you know, just we still have white space that we're not playing in as you look at the universe or the where the consumer is. And so we pay attention to that very closely as well as we develop our plans and our products.

[Steve Ruffini, CFO at Village Farms International]

Yeah, I agree with that, and we have some exciting things happening that, probably talk about on the next call.

[Frederico Gomes, Director of Institutional Equity Research at ATB Capital Markets]

Thank you.

[Operator]

Our next question will come from Scott Fortune of Roth Capital Partners. Your line is open.

[Scott Fortune, Managing Director and Senior Research Analyst at Roth Capital Partners]

Yeah, good morning. Just to expand on that, kind of white space, you continue to build brands in the different segments of the market, you know, with Pure Sun, Fraser Valley, and Super Toast. Is there an area that you continue to lean in now, going forward? And just update, you know, you said you might update it, you know, in the future, but update kind of addressing these different categories, kind of, kind of timing on that strategy as you look out for, you know, continuing to gain market share overall in Canada from that standpoint.

[Michael DeGiglio, CEO at Village Farms International]

Well, I think what we've sort of proven is the way we've operated is let's be one—let's try to be number one, number two, in each market before we go on to something new, and I think we've proven that in flower. Been number one in flower for the last two years. Then, as we approached pre-rolls, let's drive that to a number one, number two position, and we've done that. In fact, we really didn't want to expand internationally till we felt that we can be a top-tier player in Canada on a long-term, sustainable basis, and I think that's true today. And then now we look at what other segments are we not indexing in, and let's just take vapes, for an example, that's an area that we want to focus on and continue.

[Michael DeGiglio, CEO at Village Farms International]

So I think you'll see that strategy going forward. We don't want to be all things unless we can be in a number one, number two position.

[Scott Fortune, Managing Director and Senior Research Analyst at Roth Capital Partners]

That makes sense. Strategy's worked out. And just a follow-up on the international side, what you're seeing from Germany, kind of, kind of the opportunity, what you need to build out to continue to drive and grow that opportunity outside of, of the Netherlands on, on the international side going forward here?

[Michael DeGiglio, CEO at Village Farms International]

Well, you know, our strategy has always been, you know, crawl, walk, run, be the turtle, and win the race, not be the hare, and I think we've proven that in Canada, and we're gonna do the same there. But a lot of people talk a great game in the EU. It'll get there. I mean, it's a huge market, but it's you have. It's a hard business to be successful in, and I think that's been proven on both sides of the border here in North America. So, we're confident that we'll continue to make inroads going forward. We like our medicinal program. I mean, we're a low-cost producer in Canada. We would expect price compression in the EU markets over time. That's just natural.

[Michael DeGiglio, CEO at Village Farms International]

I think the same thing we've leveraged up in Ontario, in Canada, we could do the same in Europe. And of course, being on the Netherlands side, on rec, being that first rec market, if that expands, I think we can springboard out of the Netherlands to other markets as it opens up. So we really like what the horizon looks like for us in the EU.

[Ann Gillin Lefever, COO at Village Farms International]

Just specifically on Germany, we are, like others have stated in their calls, we are seeing increased inquiries and revenues as that market opens, so confirming the same trend. On the good news front, we went through a recertification of our EU GMP and our Canadian greenhouse, and we've passed that, so we're in our second term with the German municipality that sponsored us.

[Scott Fortune, Managing Director and Senior Research Analyst at Roth Capital Partners]

Appreciate the color. Thanks.

[Operator]

Our next question comes from Pablo Zuanic of Zuanic & Associates. Your line is open, Pablo.

[Mohammed Hossain, Equity Research Analyst at Zuanic & Associates]

Good morning. This is actually Mohammed Hossain. I'm on for Pablo, and we have two questions. What about your Texas produce greenhouses? Can you remind us of their scale and whether all are being utilized or some are idle? And also, please remind of us what benchmarks you are using to determine the value of the Texas greenhouses.

[Michael DeGiglio, CEO at Village Farms International]

We're not gonna comment on the value, since nobody really values our produce business anyway, but we're not gonna comment on the values of our Texas greenhouse at this point. But all our facilities are in production, with the exception of the Permian Basin, which we had reported as an asset for sale, but all the others are in full production.

[Ann Gillin Lefever, COO at Village Farms International]

Which means we have three in full production, and they're really very well detailed in our 10-K in terms of square footage and the like.

[Mohammed Hossain, Equity Research Analyst at Zuanic & Associates]

Thank you.

[Michael DeGiglio, CEO at Village Farms International]

I could tell you that the replacement value of those assets are probably-

[Ann Gillin Lefever, COO at Village Farms International]

Yeah. We're sorry. Go ahead.

[Mohammed Hossain, Equity Research Analyst at Zuanic & Associates]

For the second question regarding Holland, we understand some licenses already start to supply the coffee shops. Do you have a sense of how is the market performing so far, and what do you expect to start supplying the market there?

[Michael DeGiglio, CEO at Village Farms International]

Yeah, I mean, I got to meet with a number of coffee shop owners, both in the legal ones and the current non-legal ones. And the comment I received is the quality, for the most part, is the best they've seen in Holland. So I think it's very positive. It's early stages, and probably don't wanna add more color to it, but I think at this point I would say it's a positive start.

[Mohammed Hossain, Equity Research Analyst at Zuanic & Associates]

All right. Thank you for the information. You can put me back on queue.

[Ann Gillin Lefever, COO at Village Farms International]

Thank you.

[Operator]

I would now like to hand the call back to management for closing remarks.

[Michael DeGiglio, CEO at Village Farms International]

Thanks, everyone. Appreciate being on a call today, and we look forward to reporting in November.

[Operator]

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

Participants

Executives

• Ann Gillin Lefever, COO
• Michael DeGiglio, CEO
• Steve Ruffini, CFO

Analysts

• Aaron Grey, Managing Director and Head of Consumer Research at Alliance Global Partners
• Doug Cooper, Managing Director and Head of Research at Beacon Securities
• Eric Des Lauriers, Senior Research Analyst at Craig-Hallum Capital Group
• Frederico Gomes, Director of Institutional Equity Research at ATB Capital Markets
• Mike Regan, Director of Research at Excelsior Equities
• Mohammed Hossain, Equity Research Analyst at Zuanic & Associates
• Scott Fortune, Managing Director and Senior Research Analyst at Roth Capital Partners