Village Farms International, Inc. (NASDAQ:VFF) Q1 2024 Earnings Call Transcript May 8, 2024
Village Farms International, Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $-0.02. Village Farms International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to Village Farm International’s First Quarter 2024 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the first quarter ended March 31, 2024. That news release, along with the company’s financial statements, are available on the company’s website@villagefarms.com, under the investors heading. Please note that today’s call is being broadcast live over the internet and will be archived for replay, both by telephone and via the internet, beginning approximately one hour following completion of the call. Details of how to access the replays are available in today’s news release. Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call.
Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in the company’s various securities filings with the SEC and Canadian regulators, including its Form 10-K and MD&A for the year ended December 31, 2023, and 10-Q for the quarter ended March 31, 2024, which will be available on EDGAR and SEDAR+. These forward-looking statements are made as of today’s date and, except as required by applicable securities laws, we undertake no obligation to publicly update or revise any such statements.
I would now like to turn the call over to Michael DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGiglio.
Michael DeGiglio: Thanks, Eric. Good morning and thank you for joining us today. And I’m happy to be here. With me are Steve Rafini, Chief Financial Officer, Ann Gillen Lefever, chief operating officer and Patty Smith, corporate controller. For today’s call, I’ll begin with some perspective from my point of view on what’s driving our strong start to 2024. Then I’ll share my thoughts on how we are leveraging, the unmatched capabilities we have built to lead in the global cannabis industry. My first topic will be Q1 highlights; how Canadian cannabis business once again achieved several sales records while delivering profitability and cash flow, and our fresh produce business generated net income on a solid year-over-year sales growth.
Together, these drove a 21% increase in consolidated sales and a six fold increase in adjusted EBITDA. Q1 was especially strong for our Canadian cannabis business. Retail branded sales grew 28% from Q1 last year, all of it organic, meaning we generated these sales this sales growth entirely in house, without acquisitions, which drove a record net sales of over $50 million in Q1. This strong growth, nearly four times out of the Canadian market on a year-over-year basis, is a result of our focus on delighting consumers with quality and innovation across a range of brands positioned for different usage occasions and price points. I can’t overemphasize how important or how difficult this is in any industry, but especially in the Canadian market with its highly restrictive marketing.
In my view, our operational expertise is translating into higher quality products, which in turn is translating into market share success, across all our brands. Of course, this growth would also not be possible without strong partnerships with our trusted provincial distributors and retailers. It was roughly a year ago that I challenged a Canadian cannabis team to find new opportunities for growth in our pursuit to be number one in the market to renew our market share momentum in flower and deliver share gains beyond the core flower category. During Q1, we were the fastest growing of the top five producers, further narrowing the gap to number one. Our share expansion, which has continued into April, our ninth consecutive month of market share growth, was driven by both the flour and pre roll categories.
We moved into the number two position nationally in pre rolls, the result of relentless focus on leveraging our high quality flower into products that consumers trust. We will keep doing this in profitable categories. Importantly, the entire team embraced this challenge, leadership, growers, innovation and branding teams, production and sales teams as well as our third party producers. We are proving that we are the leaders not just in cultivation, post harvest disciplines and manufacturing, but across all the competencies critical for our share growth, innovation, brand building and understanding the consumer, specifically where consumer preferences are going. Second topic, examples of capability beyond cultivation; I want to share three examples that demonstrate this.
The first is an innovation mindset across everything we do. This mindset means that we are laser focused on improvements to our existing brands and products. We do not launch them and leave them. We continually strive to improve them. These three quick examples of this first, two years ago, we invested to move our BC production to hang dry. The first, and probably only to do so at scale. That conversion was just the beginning of an all hands on journey to improve our flower quality in other ways as well. In total, I believe all these incremental improvements are contributing to our market share gains. Second, in Quebec, our team has innovated around deep and accurate data insights to anticipate consumer needs, which they met by commercializing existing products differently.
This has also contributed to our market share gains. And then finally, earlier this year, the team revisited packaging appeal like the Pink Bags we recently launched, which honors our iconic best selling Pink Kush products. Consumers in Bud Ten, their engagement was wonderful. We also are evaluating selective packaging opportunities to further elevate product quality and freshness. The second example is last month’s launch of our Hi-Def Pre-Rolls, a true game changer in the Pre-Roll category. These pure ground flour with THC of 36% to 44%, with no concentrates, no infusions, not even keef, just pure flour from pure sun farms. There is nothing else like it on the market initial response from retailers and boards are exceeding our expectations.
And the third success story is our Supertoast brand. Launched last summer, Supertoast was our entry into the milled flour category which we launch in Ontario, where milled over indexes compared to the rest of the country. Supertouris has taken share every month since launch. It’s now the second best selling milled brand in Ontario with more than 20% share and it’s still growing. This product is top-tier and competitively priced using the quality BC grown flour that we are known for. Quality is a theme here. It’s our DNA, including our premium brands, notably soar and tantams. Importantly, while growing our cannabis business, we also delivered healthy results in fresh produce. Our heritage business, which continues to build expertise we use in both produce and in cannabis.
Q1 built on a steady improvement throughout last year and saw our best financial results in several years. We not only generate year-over-year sales growth, but also another quarter of positive EBITDA as well as a profit. We look to build this through the rest of this year as we begin to benefit from our investments in cultivation, aided by AI, as well as implementing automation for labor savings and our unmatched world class growers and support teams. And the third topic is opportunity. The final topic I want to cover today is the global conversion momentum towards legalization of cannabis. First, my thoughts on Village Farm’s competitive advantages, our experience in Canada, which leverages our deep growing expertise and a stable core team every single day, and where we are the profitable market share leader with broad capabilities in branding, marketing, commercialization positions us very well to succeed and lead in emerging cannabis markets.
We are leveraging our brand and product success in Canada through exports to four of the largest legal medical cannabis markets outside North America, Australia, Germany, the UK and Israel, and where more as markets open. Notably, April 1 saw partial legalization in Germany, which will provide patients there with great access to high quality legal products. As an expected large market, Germany is an important focus for our international medical cannabis strategy. In fact, our EU GMP certification was obtained through the district government of Dusseldorf. We began shipping our best selling Canadian strain to Germany about this time last year and been adding both local distributors and sales since then. We are launching the first recreational cannabis market in Europe, the Netherlands, expecting to start production in Q4 with revenues in 2025.
We are not only that, we are the only North American participant in this limited licensed country which like Canada has a large legacy consumer base. Like Canada is a country where we have a long history, deep relationships and huge respect for their growing expertise. Indications are that the respect is mutual and then relative to Canada, has a significantly more favorable tax regime and supply chain and the program is designed to support our capital investment. We also think it can be a springboard into other EU markets as they emerge. Our experience also bodes well for the cannabis opportunities here at home in the United States, but first over to Steve for a more detailed review of the financials.
Stephen Ruffini: Thanks Mike. Some details on the quarter total sales grew 21% year-over-year to $78.1 million, with strong growth in both cannabis and in produce. Net loss improved to negative $2.9 million or negative $0.03 per share, a $3.8 million improvement from last year with adjusted EBITDA improved by $3.1 million to $3.6 million. Looking at the individual business segments, Canadian canvas delivered record sales, record retail branded sales and another quarter of positive adjusted EBITDA and cash flow. As Mike noted, net sales were up 49% year-over-year to CAD50.5 million. Reminder that all Canadian cannabis figures are in the local currency. Within this total, retail branded sales grew 28% to CAD39.2 million. In our non-branded channel, we continue to take advantage of the improved wholesale market conditions to monetize non-branded spec biomass inventory not designated for our branded and our growth areas.
Non-branded sales were CAD 8.7 million, which was 181% higher than Q1 last year and 10% higher than Q4. International export sales for Q1 were CAD 2 million, roughly in-line with Q1 last year which included a load in order to Australia ahead of a change to market regulations Q1 2024 export sales were nearly double that of Q4 2023, led by repeat orders to the UK and Germany. While we expect export sales to remain lumpy quarter by quarter, we are on track to deliver a solid year-over-year growth. In 2024, Canadian cannabis gross margin improved from Q4 to 25% but was still impacted by the lower margin non-branded spec biomass sales. Excluding these sales growth margins was 31% at the low-end of our annual 30% to 40% target range, a reminder that cost it cost more to grow in the winter months.
SG&A expenses as a percentage of sales for Q1 improved to 21% 27%. We continue to expect the SG&A to sales ratio for 2024 to be a couple of points lower than last year. Q1 adjusted EBITDA for Canadian cannabis of CAD 5.5 million was at 4% increase from Q1 last year. Finally, for Canadian cannabis, we generated nearly CAD 5 million in total cash, right in line with adjusted EBITDA, and it was another quarter of strong free cash flow of CAD6 3 million, up 20% from last year. Turning to our us canvas business, Q1 sales were CAD 4.5million with a gross margin of 59%. Adjusted EBITDA loss was 600,000 and for a net loss of 700,000. The business is being challenged by two factors, prevalence of synthetic hemp based products, primarily delta eight, which the consumer is not differentiating from naturally occurring hemp based THC.
Second, not surprisingly, these products are also being challenged in states where legal cannabis is being sold. Unless and or until we get FDA clarity, these challenges will remain. We believe the future of the CBD market is a viable alternative to the higher THC products and continue to hone our capabilities, including internalizing our gummy production, a category which continues to have strong growth. We are also acting on a number of strategies designed to optimize revenue in the current environment, including building on our strong subscription based sales and adjusting our price structure as we continue to manage costs. We’ve already seen some encouraging improvements in the velocity of purchases by our subscribers. Moving to fresh produce, Q1 sales increased to $36.1 million, with positive gross profit for the third straight quarter of $3.3 million.
Adjusted EBITDA was also positive $2 million. That makes three out of the last four quarters in positive territory, with a trailing twelve month total of more than $3.5 million, and Q1 was our best quarter since Q4 2021 and I’m pleased to report we achieved profitability for fresh produce in Q1, with net income improving more than $2.7 million to a positive 100,000. Turning to our consolidated cash flows in the balance sheet, cash flow from operations for the quarter improved by $3.6 million. To breakeven, we ended Q1 with total cash of $31.7 million and working capital of $78.2 million. Total term debt at the end of Q1 was $46 million, composed of $22 million for fresh produce due in May 2027 and $24 million of cannabis debt with matures starting in February 2026 remain comfortable with our net debt level of $18 million, which includes our $4 million produce operating line.
Finally, note that in early April, our clean energy subsidiary saw the startup of operations at the renewable natural gas facility adjacent to our grow operations in Delta BC facility, which was financed and built by our partner to Riva renewables converts landfill gas under our contract with the City of Vancouver to natural gas. We receive a royalty from the facility’s revenues and you will see resulting profitability beginning in our Q2 results and now I turn the call back to Mike.
Michael DeGiglio: We’ll, thank you Steve. So, like most in the industry, we were disappointed that we did not see a change to the excise duty in April’s Canadian budget. We are, however, encouraged that the topic has the attention of a number of federal agencies, including a review by the finance department. We will continue to work and partner with government and peers on this important initiative that will support the industry long term, which is not only contributing to local economies and safety for consumers, but supporting a product category that has increasingly shown to have a range of health benefits. In the interim, we remain uniquely positioned in Canada and the Canadian market to deliver market share and sales growth with profitability and positive cash flow.
The momentum towards cannabis legalization in the United States appears again to be getting its rightful priority with those who can affect needed change in Washington. We applaud the many leaders who are pressing the conversation into action. It is critical for those who are still unjustly criminalized and for the safety of those currently working in the industry. Full federal legalization has been proven in Canada to reduce assets to illicit product, particularly for underage users, ensure a safe, consistent product for all consumers and contribute to both the employment and tax revenues for local communities. The United States needs to remove all criminalization inconsistencies, open access to capital markets for the safety and viability of the industry, and realize the benefits of full federal legalization, and we deserve nothing less than that.
Then, finally, we are often asked how we translate our leading Canadian expertise into a US strategy once we are permitted to do so as a Nasdaq listed company. Much of the detail depends on how far Washington proceeds towards legalization, but we will either find a way or make a way. Our preferred option is to deploy assets in Texas which are very similar to and larger than the Canadian assets from which we built our leading profitable cannabis business. As we access all options, be assured we will take a measured approach to optimize any investments for our shareholders. Let me be clear, we remain as focused on the US market as we were before entering the Canadian market. I have every confidence we will succeed and we are even more cannabis experience with five years in Canada.
As Frank Sinatra once said, if you can make it there, you can make it anywhere. So with that operator, I’ll turn it over to you for Q&A.
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