Village Farms International Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Village Farms International's Third Quarter 2024 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the Q3 ended September 30, 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 archived for replay both by telephone and via the Internet beginning approximately 1 hour following the completion of the call today.

Operator

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 the 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 ks MD and A for the year ended December 31, 2023 and 10 Q for the quarter ended September 30, 2024, which will be available on EDGAR and SEDAR Plus.

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

Speaker 1

All right. Thank you, operator. Good morning and thank you for joining us today. With me are Steve Rafini, Chief Financial Officer Ann Gillan Lafever, Chief Operating Officer Patti Smith, Corporate Controller and Sam Gibbons, Senior Vice President, Corporate Affairs. I have a little bit of a cold today, so I may do some coughing and I apologize for that.

Speaker 1

So let's get going. Our 3rd quarter reflects strong outperformance from our fresh produce business, which we anticipated following the softer pricing we experienced in Q2, as well as continued solid growth and leading market share in Canadian cannabis as our teams continue to excel across all brands, form factors and geographies. Fresh produce sales increased 20% to nearly $43,000,000 gross margin of 8% improved 400 basis points year over year and Fresh delivered positive adjusted EBITDA and net income of $2,300,000 and $400,000 respectively. Continued execution in these areas along with further expansion of our partner sales remain an important focus area to support the value of our Fresh Produce business as we work towards achieving sustained profitability in this business. As a reminder, we believe Fresh has great value as a top North American produce marketer and it's a critical component in our ability to maintain optionality of a potential rollout of a permissible cannabis strategy in the U.

Speaker 1

S. Either NASDAQ permitted or Texas based. Now turning to Canadian cannabis, total net sales grew 29% year over year, all organically without acquisitions to roughly CAD50 1,000,000. Branded resale sales grew 22% and we were once again profitable with positive adjusted EBITDA of CAD6,500,000 and cash flow from operations of CAD6,100,000. We're also very excited about continued growth in international medical sales, which doubled year over year with continued increases in sales to our Germany, Australian and UK partners in Q3 year to date.

Speaker 1

According to German cannabis outlet, Flows, Alstrane is currently ranked number 1 and 3 cultivars in the German market through a supply agreement with 1 of our partners, which reflect continued strong reception to our strains with international customers. We continue to hold the number 2 LP position in Canada and were the fastest growing Canadian LP over the past year, experiencing revenue growth across all sales channels. We maintain number one market share in Ontario and for the first time ever have achieved number one market share in Quebec, giving Village Farms a number one market share leadership position in Canada's 2 most populous provinces. We maintained a number one market share in Flower in Canada and then grew that market share by 2.7% during the Q3. We also continue to hold the number 2 position in pre rolls nationally and improved our market share in pre rolls by 2.3% as compared to last year.

Speaker 1

Over the last year, we've improved our market position in pre rolls from number 4 to number 2. Super Toast, our milk flower brand continues its outstanding performance despite the milk category being very competitive with a well entrenched leader. Supertoast currently sells in 5 provinces and remains the 3rd fastest growing of all brands nationally. During the Q3, we also began to realize sales from our recently announced BC trials program, our grower led initiative designed to bring exclusive access to limited release strains. We also introduced 3 trial strains that are driving revenues in British Columbia now and we are looking at expanding this small batch limited release strain initiative for other provinces in the coming quarters.

Speaker 1

And as we continue to adjust our product offerings to appeal to the many cannabis connoisseurs across Canada. Finally, we continue to innovate and flower with new strains that delight out consumers and we're pleased to announce that with this new strain called Neon Lambo, I'm a Corvette guy myself, but to the market during the Q4. Early reception to this strain has been excellent with our customers and initial order rates give us solid optimism that this strain could achieve similar success to our former launch of Cush God, which became a top 5 selling strain across all of Canada. We also have some exciting new brand and product introductions planned in the vape and infused pre roll categories, where we under indexed for later in this Q4 and Q1 of next year. And we're excited to be able to share more on these launches next quarter.

Speaker 1

But for now, they reflect continued execution by our brand and product innovation teams to identify opportunities for us to profitably grow market share across the white space opportunities. Moving to the U. S. Cannabis business, we're starting to see signs of stabilization and the team has begun to invest in growth initiatives. We're still exposed to challenges caused by proliferation of unregulated hemp derived products across the United States, but we're looking forward to more stable performance from this business in the future.

Speaker 1

And before I move on to discuss our international business, I want to provide some additional discussions of some of our out of stock cultivars, which impacted sales velocity during the Q3. After a very strong first half of sales in the Canadian cannabis space during the Q3, we experienced some out of stock inventory in several of our most popular SKUs, which impacted sales performance. We estimate this resulted in lower sales of approximately $2,500,000

Operator

during

Speaker 1

the Q3. Restocking of these SKUs began back began in September, improving our market share performance in the mill category after experiencing slight delays declines rather during the 1st 2 months of the quarter. And we believe we'll be back to normalized in stock levels across the board by early Q1 of next year. During the Q2, we made a strategic decision to move away from some lower profitability SKUs and raise prices on others as we plan to be more selective as we prioritize higher profitability sales over volume. We also chose to take advantage of strengthening pricing in the B2B market to sell non branded spec inventory.

Speaker 1

Overall, Canadian gross margins of 26% were impacted by these non branded spec sales. And if we executed those impacts, gross margin in the 3rd quarter would have been 31%. The Canadian cannabis industry has significant over has had significant overcapacity, which has resulted in unhealthy accumulation of inventory and created pressure on pricing, in addition to the egregious excise tax that the Canadian industry pays. Our team remains very in tune with supply dynamics. With a growing international medicinal business to an increasing number of attractive markets like Germany, we are in a great position to be more selective with our allocation of high quality flower across our various sales channels and customer relationships, sustaining our focus on driving more profitability from our sales.

Speaker 1

We've got a ton of opportunity internationally to make higher ROI capital allocation decisions. And given continued egregious challenges with the excise tax in Canada, we're not allocating additional capital from our balance sheet to increase capacity at our Delta 2 greenhouse at this time. We're focusing our resources on higher ROI investment opportunities, which brings me to the recent update at our Lely Holland subsidiary in the Netherlands. We put an updated investor presentation on our website yesterday, by the way, which continues which I'm sorry, which contains some new information about the Netherlands market. We would encourage you to all take a review of that information.

Speaker 1

But as a reminder, our Lely Holland subsidiary has one of 10 licenses to supply recreational cannabis to coffee shops in the Netherlands. We announced last month that we have completed construction of our indoor cultivation facility and dropped in the Netherlands, and I can confirm today that we've begun cultivation in October and are on track to have our first sales during the Q1 of next year. We believe a great comparison for the Dutch market is the province of Quebec in Canada, where I mentioned earlier, we established the number one market share position during the Q3. Some estimates based on comparable per capita consumption patterns with a Dutch population of 18,000,000 indicate that a full legal market could be somewhere between €3,000,000,000 and €3,500,000,000 revenue market opportunity annually at maturity. We believe the quality of our operations at Lely puts us on a clear path to profitability and generating strong returns on this investment.

Speaker 1

As there is no excise tax in this regulatory jurisdiction and much more favorable product pricing, which will enable us to have stronger fundamental performance than we do in Canada by far. Over the next couple of quarters, our Tracting facility will be ramping up to full annualized capacity of approximately 2,000 kilos of dried flower. We anticipate pricing per gram of approximately EUR 6, which would put us on track to generate revenues of approximately €12,000,000 on an annualized basis. Over time, we have the potential to vertically integrate by acquiring coffee shops, which would help improve margins and we look to add capacity as demand dictates. That concludes my summary of our Q3 highlights.

Speaker 1

I will now turn the call over to Steve to review the financials before I make some closing comments. Steve?

Speaker 2

Thanks Mike. Starting with our consolidated results, Total sales grew 20% year over year to $83,400,000 with strong top line growth in both Canadian cannabis and fresh produce. Net loss narrowed to $800,000 or $0.01 per share from a $1,300,000 loss last year, notably with positive net income contributions from both Canadian cannabis and fresh produce. Consolidated adjusted EBITDA was positive $5,300,000 up 65% from $3,200,000 for Q3 last year, again with positive contributions from both Canadian cannabis and fresh produce. I will now turn to the business segments individually starting with fresh produce.

Speaker 2

As expected, we saw a return to more normalized tomato pricing during the quarter. Q3 sales increased 20% year over year to $42,800,000 Growth was driven by higher volumes from both our own production and that of our partners. You can see the continuing positive impact of our success around yield expansion and cost efficiencies in our gross margin for the quarter, which was up 133% compared to that of Q3 last year. I will note that here the volumes from our own facilities for Q3 were up 25% compared to the same period last year. Adjusted EBITDA tripled to $2,300,000 compared to $800,000 last year.

Speaker 2

Canadian cannabis delivered another strong quarter of total net sales, up 27% year over year, driven by increases in retail branded sales, non branded sales and international sales. Together, these drove another quarter of positive adjusted EBITDA of CAD6,500,000 and operating cash flow of CAD6,100,000 Retail branded sales grew 20% to CAD37,200,000 It was also another strong quarter for non branded sales as we continue to be opportunistic with more favorable pricing, which is much improved from last year. Non branded sales were up 68% versus Q3 last year to CAD10,100,000 As Mike mentioned, we also saw continued momentum in our international medicinal sales, which were up 111% from Q3 last year. Canadian cannabis gross margin for Q3 was 26%, in line with Q2 and down from 35% in Q3 last year due to the increased non branded spec sales Mike mentioned earlier, which are lower margin. Excluding the non branded spec sales, gross margin for Q3 improved to 31%, which was up from Q2's 28%, returning us to our target range of 30% to 40%.

Speaker 2

SG and A expense as a percentage of sales for Q3 improved to 22%, down from last year's 26%. Q3 adjusted EBITDA for Canadian cannabis of 6,500,000 was up 5% from Q3 last year. Before leaving Canadian cannabis, I will once again highlight the impact of the egregious excise tax we pay on retail branded sales. Total excise tax paid in Q3 was CAD 24,000,000 which brings our year to date total to CAD 78,000,000 As I have noted before, this is the largest single expenditure within our cannabis business and factors heavily into our capital allocation strategy decisions. Turning to our Canadian our U.

Speaker 2

S. Cannabis business. Q3 sales were $3,900,000 with a gross margin of 63%. Our Q3 sales were impacted by additional states moving to restricting intoxicating hemp based products as our responsible GMP produced natural hemp products are caught up in several states' attempts to deal with the proliferation of unregulated hemp based products, most notably synthetic products. We continue to progress in multiple initiatives to reinvigorate sales while we manage the cost side of the equation.

Speaker 2

The team has stabilized the business against these headwinds and has now turned to growth initiatives, which include new SKUs with innovative formulas and flavor profiles. Q3 adjusted EBITDA was negative 159,000 and net loss was negative $192,000 both were improvements over Q2. Finally, we are pleased with net income of $300,000 from Village Farms Clean Energy during the Q3. This project began operations at the Delta RNG facility in April and royalty payments are now being received from our energy partner provide a healthy stream of incremental profits for the company going forward. Turning to consolidated cash flows and the balance sheet.

Speaker 2

We generated cash flows from operations of $4,600,000 our 2nd consecutive quarter of positive operating cash flow. We ended Q3 with cash of $28,700,000 and working capital of $65,400,000 Total term debt at the end of Q3 was $43,000,000 split equally between fresh produce debt due May 2027 and cannabis debt, which matures starting in February 2026. We have long standing multi decade relationships with our lenders and are confident we will extend our cannabis term facilities in the coming months. We believe we are our lenders' top performing cannabis facility. Last quarter, we amended and extended the agreement our $10,000,000 revolving line for fresh produce, which was has a current balance of $4,000,000 to a May 2027 maturity day.

Speaker 2

We also have in place a Canadian CAD 15,000,000 cannabis line of credit, which is currently not drawn off. We remain comfortable with our net debt level of CAD 18,700,000

Speaker 1

dollars And I will now turn the call back over to Mike. Thank you, Steve. In closing, just to summarize, we are very pleased with our 3rd quarter results, our improved performance in our fresh business and continued solid execution with our cannabis strategy. We are building strong momentum in our international business, which should help us continue to improve overall profitability and ability to generate positive cash flow. Our flower is increasingly being sought out by international partners and consumers based on the reputation and success of our leading brands and cultivars in Canada.

Speaker 1

We are very excited about the commencement of sales from our Lelijan subsidiary in the Netherlands during the Q1 of next year, and we will continue to explore additional high ROI opportunities to expand our international business into new jurisdictions as policymakers in Europe continue to embrace the many benefits of the regulated cannabis industry. I'd like to close on a recent news that Village Farms was the only cannabis producer to be selected as a witness for the DEA's upcoming hearing regarding the proposed rescheduling of cannabis in the United States. As a U. S. Company with one of the leading global cannabis franchises, including our top ranked U.

Speaker 1

S. Cannabinoid brand, CB Distillery and some of the most attractive greenhouse assets in the United States, it was incumbent on us to submit an application to advocate for what we believe is one of the most important movements in health and wellness in our lifetime. Our inclusion in the hearing is a testament to the depth and breadth of our expertise and experience in the cannabis industry broadly, as well as right here in the United States, including our deep involvement in Colorado. We realize it has been a challenging last couple of days for cannabis following election results with much of the sector trading at all time lows. We have not rushed into the U.

Speaker 1

S. Market for these very reasons and we'll continue to be patient as we evaluate our opportunities to enter the market at a time that makes sense for our business and shareholders. That said though, I am however very upbeat on the new administration towards the legalization of cannabis in one form or another. Nearly after 0 impact towards cannabis legalization in the last 4 years, I really truly believe we have good blue skies ahead. We are also in a great position as one of the only profitable operators in Canada with a lot of compelling profitable growth opportunities in front of us.

Speaker 1

And we are proud of the opportunity to represent the industry as a credible voice with regulators. That being operating for almost 4 decades in controlled environmental agriculture, we look forward to the opportunity to share our diverse knowledge and unique perspective at this hearing, which is expected to be during the Q1 of 2025. And now, operator, we're ready for any questions.

Operator

Thank you. Our first question will come from the line of Aaron Grey from Alliance Global Partners. Your line is open.

Speaker 3

Hi, good morning. Thanks for the questions. And I know stakeholders across the industry are wishing you luck in this rescheduling hearing. So appreciate the efforts made there. So first question for me, just in terms of the decision to not expand the Delta 2 facility at this time.

Speaker 3

As we think about planned allocation of product going forward, in the prepared remarks, you spoke a lot to focus on profitability. So as you're building out your international presence, not just in the Netherlands, which has its own facility, but more broadly speaking, how do we think about allocation in Canada versus international? And then within Canada, you mentioned moving away from the lower profitable SKUs. So I imagine that kind of goes in line with the thought of not expanding those 2 facility. So just a broad overview and how you're thinking about allocation of product with that?

Speaker 3

Thank you.

Speaker 1

Yes. Well, as I said, we've taken a strategy to really look at our margins and lower price SKUs, either we raise the price and the price sticks or we look at allocating that flower to higher margin markets and international is growing. We're very bullish on Europe. They're taking a very clear and pragmatic approach towards legalization. It is a large market potential.

Speaker 1

We're probably one of the only operators there that are both on the medicinal and recreational side with Holland. And when we look at Canada, we're very disappointed that there's been no update on any legislation since legalization happened 7 years ago. As both Steve and I mentioned, the excise tax is unbelievable. We're going to this year alone, we'll pay over $100,000,000 in just top line tax. It doesn't include tax for property, doesn't include payroll tax, doesn't include the $4,000,000 licensing fee just to have a license, it doesn't include income tax.

Speaker 1

It's crazy. So until we start seeing some movement in Canada, we just want to be more prudent where we're going to allocate our flower. And we're very bullish on investment in Europe right now. So we want to be cautious with any CapEx we spend in Canada. That being said, remember, we have the largest footprint in Canada.

Speaker 1

So it's not like we would be looking at building a new facility. It's just converting additional space and we can turn that on very quickly when the time is right. So and we could that footprint, remember, Aaron, we could do 40% of the entire Canadian market from just our one facility in BC. So it won't take long to convert when the time is right, but we decided at this point, let's hold steady. Let's not take more than we can chew because we are putting a lot of resources in Europe and then we'll evaluate it on a quarter per quarter basis.

Speaker 3

Okay, thanks. Appreciate that color and commentary there. Second question for me. Just within the Canadian market, some of the impact you mentioned on the Addus stocks on some popular SKUs. So just more color you could offer in terms of was there some impact that was specifically due to the provincial buyers there?

Speaker 3

Or was it more so just your need in getting the right products inventory? I know you mentioned you expect it back to normal levels in 1Q 2025. So just some additional color in terms of the drivers of the impact there? Because I know sometimes it can be internal and sometimes it can be just structural issues with the provincial buying boards as well. Thanks.

Speaker 1

Sure. I'm going to let Anne respond to you, Erin.

Speaker 4

Hey, good morning, Erin. Great question. The answer is it's entirely on us. So it's all internal. And it had a lot to do with higher demand that we experienced and expected.

Speaker 4

And as you know, you can't just speed grow a plant. So you got to catch up the growing to the demand. And so that's why we're projecting improvement by Q1.

Speaker 3

Okay, great. That's helpful color there. Appreciate that. I'll jump back in the queue.

Operator

All right.

Speaker 1

Thank you.

Operator

One moment for our next question. Our next question comes from the line of Eric De Lauryn from Craig Hallum Capital Group. Your line is open.

Speaker 5

Great. Thank you for taking my questions and congrats on the strong results this quarter. First question, maybe to piggyback a bit on one of Aaron's questions. Can you just elaborate on your overall pricing plans? I mean, should we think of this as mostly being a sort of mix shift from perhaps non branded spec in Canada to then just shifting that towards international where you get sort of higher average pricing or other plans to increase pricing across the board or in certain categories?

Speaker 5

Just wondering if you can elaborate a bit more on the pricing plan. Thanks.

Speaker 1

Well, I'm going to let Ann give you color on that, but I would say all of the above. It's just a continuous process of looking how the market is changing in Canada. We think we're the number one player in Canada. I totally do. When you look at not just our number 2 market share, number 1 in a lot of the categories, almost 3 years in flower and being cash flow positive and EBITDA positive the entire time, because the business is only a business if you're making money.

Speaker 1

And so we love our position in Canada, but we want to obviously drive higher profitability. Specific to Canada though, Anne, you want to answer that?

Speaker 4

Yes. So Eric, we're a couple of things. The retail market pricing is no longer dropping like it was in the prior years. So we've seen a stabilization of average price per gram at retail across Canada. That said, we don't think there's an opportunity for an across the board price increase.

Speaker 4

We're still very focused and the team does an excellent job of really drilling down on the SKU by SKU opportunities or brand by brand opportunities and making decisions to propose pricing at that level. Last thing I would mention is increases in pricing are not just good for us, they're also good for the retailer and the provincial board support pricing when they see the opportunity. So it is if we analyze it right and propose it correctly, it is something that we see as an opportunity to spend we've already executed in 2024.

Speaker 2

All right. That's very helpful.

Speaker 5

And then next question for me, just regarding the indoor grow in Holland, obviously, this is early days. You guys just planted last month. But can you just kind of talk about your confidence in the overall cost structure of that operation? And I guess just overall sort of operational differences between indoor versus obviously your greenhouse expertise. Just wondering sort of how you're thinking about that and how confident you are that you can produce at a nice profitability level?

Speaker 5

Thank you.

Speaker 1

Well, sure. I mean, we do have an indoor facility, as you know, in Canada, 55,000 square foot. So look, indoor is easier as far as than greenhouse. I'll just tell you straight out because everything is more or less in your control. Of course, it has a higher price to it.

Speaker 1

You have to be very selective. The design we create, I mean, we've been designing cultivation facilities for near 4 decades. So the team we have is excellent. We don't overdo it. And we think we built just a fantastic facility.

Speaker 1

We have plenty of megawatts there. We put the most advanced lighting in and we're very bullish on it because remember at €6 that's equivalent to almost CAD9, CAD10 with no tax. Even if the cost is 15% more, the selling price is 8 times more. So we're very bullish on it. And in fact, we're very proud that we've gone to totally a seed base here first time for the company to growing.

Speaker 1

We're growing from seed. This way, we just keep it sterile and excited about the future there.

Speaker 5

Awesome. Thanks for the color.

Speaker 1

Thank you, Eric.

Operator

One moment for our next question. Our next question comes from the line of Mike Regan from Exosio Equities. Your line is open.

Speaker 6

Hey, thanks for the question and congrats

Speaker 1

on a great quarter. I guess

Speaker 6

just sort of following up on Eric's comments and that's great color on the comparative costs of the Holland facility versus the Canadian facility. But I'm just sharing this directly with, like you said, 8 times the pricing, no excise tax and costs that are frankly only 15% higher than Canada. The margin should be much, much higher than you're currently seeing in Canada? Or is there some other factor that I'm forgetting there compared to the 13% EBITDA margins?

Speaker 2

The cost will be more than 15% higher than our greenhouse costs. It is indoor.

Speaker 6

Got it. Okay. So is there any reason it wouldn't be at least the Canadian cannabis margin

Speaker 1

adding back to the economic environment?

Speaker 2

It will be well in excess of the Canadian and more the margins will be more in line with our U. S. Margins.

Speaker 1

Which are?

Speaker 2

60%.

Speaker 1

Our U. S. Margins are in the 60%, 70% range. So just to be clear, I mean, we haven't published a lot of the information. So apologize if we're being a little conservative here.

Speaker 1

Don't want to let everything out. So but Mike, you know the industry, you can do the math on it, compare it to Canada. So and keep in mind that overall costs are higher in Holland, but that's a reflection of again the price. And in our model, euros 6, but there are products that sell up to €50 in the Netherlands. I've seen it there.

Speaker 1

So it's early days. We'll see where it goes, but we're extremely bullish.

Speaker 6

Got it. Okay. And then, I guess, following up in Canada, in terms of the non branded sales, are those sort of more opportunistic as the pricing is favorable to you and you have inventory to sell? Or is there sort of more any sort of relationship building or sort of recurring selling as some of those larger operators shifted to the asset light model?

Speaker 4

The sales that you're seeing in this quarter and pretty much year to date have been opportunistic related to the opportunity that we're seeing in the pricing. B2B pricing has strengthened significantly over the year. Got

Speaker 7

you. Okay, great.

Speaker 1

And remember, Mike, there's no excise tax on B2B or international unlike branded sales in Canada. And at that level of insanity, you have to take that into account at times.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Doug Cooper from Beacon Securities. Your line is open.

Speaker 7

Hey, good morning. Terrific work in the quarter. Just a quick one, Mike. So you're number 1 in Quebec, number 1 in Ontario, the top most populous provinces in the country. So how are you not number 1 across the country?

Speaker 7

So you must I guess Alberta and BC are the only other ones. So where are you ranking there and how is the trend in those provinces?

Speaker 1

Well, we want to give a chance to others to catch up to us. So we do care about the overall industry, Doug. But no, I mean, BC is a little different of a market. It's our home territory. And we're definitely increasing from where we were to number 4 in BC.

Speaker 1

Alberta, we're sort of at the number 6 position. That's been a slight drop. But overall, what can I say? I mean, we're working to do better in those provinces. But overall, we're number 2 in Canada, and there's always going to be some variability.

Speaker 1

But I could tell you this, after 7 years we've been in the market, I firmly believe that on a long term durable sustainable basis that Village Farms will remain top 3 overall cannabis company in Canada. Whether that varies from 1 to 2, like we are now, to 3 to 2 to 1, it just depends on newness, innovation, what you're delivering to the consumer, consumer insights all working together. So we feel very good. Look, we wouldn't have moved into the international arena if we felt we had not achieved more or less what we wanted to in Canada. We want to achieve more.

Speaker 1

We definitely want to be number 1 overall. We want to make it a brand that people love and a company that people love, but we feel very secure with our position in Canada, and that's why we're now looking abroad both for not just for export from Canada, but making investments like we have in the Netherlands going forward.

Speaker 7

And just I want to get into Netherlands in a second, but just in the Canadian market generally, it looks like the last reported numbers I saw were in August, which looked pretty good, quite frankly. So I think $465,000,000 for the country, up from $453,000,000 in July. What are you seeing in the marketplace? Are you seeing a sort of pickup in sales growth, not just in market share, but actually the entire market? Hey,

Speaker 4

Doug, good morning. The sales growth of the overall market is slowing a bit, on a Q over Q basis. So we are experiencing some of that, a little slower than we budgeted, but, it is slower and I think it's going to be prudent for us and others in terms of the demand profile in the Canadian market next year to be thinking about it landing somewhere around the mid single digits in growth.

Speaker 8

Just on the Netherlands Just

Speaker 1

some color, Doug, just give some color on that. Just one thing I do want to say about the Canadian government is they have now issued a release that they're going to spend north of $30,000,000 against the illicit trade in Ontario. That's a really positive thing for once to go after that illicit trade because the illicit trade both at the dispensary level as well as the LP level is a concern. And if that starts to get cleaned up, I think that will have an impact on growth going forward. It just depends how much the Canadian government of the 1,000,000,000 that they receive in excise tax, they want to plow back in, in all honesty.

Speaker 1

The other thing is we've always taken the approach of crawl, walk, run. As you know, we've said that. We wanted to be number 1 in flower. We've maintained, as I said, 3 years running. We wanted to be number 1 in pre roll.

Speaker 1

We've come from number 4 about a year ago to number 2. As I mentioned in my comments, we've been under indexing in vape. We put a lot into our vape program, and we're very, very excited about launches coming up in the 4th Q1. And we don't just sit on our laurels. We want to be number 1 in those categories.

Speaker 1

So stand by and we'll see how things look in the Q1.

Speaker 7

Okay. And just moving on to the Netherlands and 12,000 kilograms s is the initial capacity. I think you said it's $6 a gram average, dollars 12,000,000 rev potential. When how long will it take to sell it out? Like, obviously, that's not a huge amount of product for the Netherlands potential.

Speaker 7

When do you think you might be in a position to add capacity?

Speaker 1

Well, first of all, we'll be fully ramped up in the Q2 because as we don't plant the entire flower rooms, it's continuous improvement process as you know. So we've already planted the first two flower rooms and then in 3 weeks, we'll plant the 3rd and then it will be continuous improvement. And all of it will be on a continuous harvesting starting in the Q2. I think we won't have inventory there honestly more than 2 weeks. I think it's going to go very quick.

Speaker 1

So I don't want to comment further at this point, but the statistics we threw out there and what the overall market potential is, I think it's pretty great.

Speaker 7

What was the cost to build? Just remind us what the cost to build that facility was?

Speaker 1

That's kind of putting that out there because we're just not revealing that to our competitors.

Speaker 7

Okay. Okay. Well, I guess from the metrics there and we sort of the ballpark metrics you put around, just even at 2,000 kilograms s the profitability or cash flow put out, be it seems like at least 20% of the Canadian cash flow you're getting currently. Is that a fair assumption?

Speaker 1

Yes, I think so. And I don't want to elaborate on that, but come on over and take a look.

Speaker 7

So yes, I like that. So obviously, the U. S. Market participants got drilled a little bit yesterday on the failing in Florida and maybe the extrapolation of what that potentially means. But your stock now looks like it's trading 3 times last quarter annualized EBITDA.

Speaker 7

You have some room in your facility. Would you consider NCIB in place or do you need the capital for potential in Europe, I guess is the question?

Speaker 1

So what was your exact question? I mean, first of all, I would say that Florida look, I looked at Florida as a positive. It's unfortunate that it didn't pass, but the majority of people voted for it. It's just that you need 60% on the Florida Constitution. And I'm sure in the next round it will happen.

Speaker 1

And that's a very good sign. And there's been some other areas, Dallas and so on. There's a movement happening. And that's one of the reasons I remain bullish. Just to take a moment to elaborate.

Speaker 1

The Trump administration did legalize hemp. So that was a big move back in 2017 under the Farm Bill. Farm Bill eventually, the new one will come out in the next year or 2. So yes, I think there's a huge movement and it's just a matter of when, not if we enter the U. S.

Speaker 1

Market.

Operator

Well, I guess the question was just, do

Speaker 7

your stocks now trading 3 times EBITDA? Would you put in NCIB in place or do you is the capital more of in need to expand Europe later this year, for example?

Speaker 1

Yes. I'm probably not going to answer that question. I will answer the question that all in all, we started in Netherlands 4 years ago. And we've invested €10,000,000 of our own money in the Netherlands. We have no debt.

Speaker 1

Now that did not all go to the cultivation facility. That's the cost of getting to the point where we are today with the footprint we have. And that's been self funded so far. So what we do and make a decision on how we allocate capital where we'll just keep we're going to reserve the answer to that right now. But we'll give you some more color probably when we report year end.

Speaker 7

Okay. Okay. Thanks, Mike.

Operator

One moment for next question. Our next question comes from the line of Pablo Zwaneck from Zwaneck and Associates. Your line is open.

Speaker 8

Thank you. Mike, just following up a little bit on the international discussion in terms of capital allocation. So you said in the past that part of your B2B sales are getting reexported by others and your direct international sales have grown and doubled, I believe, based on the numbers you reported. And you hinted that you could be looking at M and A. And what I mean by that, so far your model has been very much shipped to the dock and let the local partner handle everything else.

Speaker 8

Are there opportunities for you to take more control of the route to market? I believe in the case of Australia, you own 9% of the company there. Could you take more ownership of that company there? I mean, is there room for you to take more control of route to market and making investments of those nature in Germany, Australia and even the UK? Thank you.

Speaker 1

Absolutely. We want to be patient and prudent and be very clear where it's going. When we look at some of the incredible amount of money that's been spent in the international markets, especially the EU by others, many Canadian companies in the last 5, 6 years, it kind of blows our mind, both on the cultivation side and distribution side. So we've learned a lot from watching what folks have done. We see a great opportunity that had to be vertically integrated and control that.

Speaker 1

Look, the hardest thing is to have consistently high quality flower at the right price. And we that's what we have. That's a pillar of excellence in our company. And if you don't have that, but you try to do acquisitions without that foundation, I think that's a risky road. We have that and we're very proud of that.

Speaker 1

So built on that foundation, the other opportunities to build on that are there. And we talked to a lot of folks. We're seeing how it's going, I think both. So the M and A is wide open, not just on the medicinal side and the path, the conduit to the consumer, but also on the international side when it comes to rec as well. One of the things in the Netherlands, no restriction, but really love the Netherlands, just pragmatic professional approach by the government, the regulators.

Speaker 1

They're pro business all the way, no restriction on the M and A or being vertically integrated. So absolutely, yes. And I think we feel good that we didn't answer the U. S. Market to this point and really focus.

Speaker 1

Remember, we want to be a winning company in the U. S. When we answer it, we will go all out. But this is a great expansion for us from Canada now to Europe. So that's a long answer to your question, but the answer is yes.

Speaker 8

Yes. Quick follow-up and maybe quick answers, but just remind us in terms of those markets where you can ship from Canada, is your facility EU GMP or not yet? And I should know, but can you remind us of that?

Speaker 1

Yes, we are EU GMP. In fact, we just got a renewed our license. So we're very proud of that. I think we're the only greenhouse company that I know of that has EU GMP and it's the highest German standard by the way of all. And we just had that license renewed and extended.

Speaker 1

So we are one of the few. Yes. And we as more countries roll out in on the medicinal side, we're going to be right there to do it. So your question earlier, yes, on B2B, we're pretty restrictive to not have B2B sales competing with us in the Canadian market at the branded level, but we will work with some of our partners on the international. And one of the reasons, if folks say, well, why would you do that ability yourself, because overall, we want to move we want to help companies succeed as well on the international market.

Speaker 1

That's going to help drive more countries to open up and ultimately a rising tide raises all ships.

Speaker 8

Right. And then just a quick question in the case of the Netherlands. Do we know when the coffee shops in the pilot towns will be forced to buy only from the licensed producers? Because right now they can still buy from both, right? But do we know is there a date and will that be enforced?

Speaker 1

I think the date will be based on when all ten license holders are at full capacity. So that's the key. So that's really the key. And it's changing all the time. I mean, Orville, as you know, our Orville Pure Sunfarms is overseeing lately and it's a lot of moving parts.

Speaker 1

And I think the last I heard was probably by year end, there'll be 8 in producing, cultivating, 8 to 9. So it's getting pretty close.

Speaker 8

Understood. And look at the one last one regarding hemp, right? I think that your business, CBD Distillery, has been involved, as you said, in hemp derivatives, right? They weren't 2 or 3 years ago, but they've been recently. Yes, there's been changes at the state level, so that's been an issue.

Speaker 8

But we're seeing more companies, Tilray with our hemp drinks, Curaleaf, Wana with edibles and other products. So a lot of companies are getting a lot more proactive and aggressive in terms of hemp infused products. And yes, we don't know what the rules will look like. We don't know what the farm bill will look like, but I'm very positive about it based on republicans taking control of the Senate. So we think that hemp derivatives are here to stay.

Speaker 8

Is this a time for you guys to make to be more active in that space? I don't know if that means investments or launching new products or you already have a full suite with our CBD distillery. Thank you.

Speaker 1

We continue to invest. We invested in a really high end gummy machine that we got online. It makes incredible gummies. So we are investing in it, new products, new technology. But let me say this, this is where we've always said, if you go back and you've been on all our calls that we try to make as Village Farms prudent decisions based on understanding the legal and regulatory framework.

Speaker 1

One of the mistakes that I take responsibility for is that when hemp was legalized, as an American thinking, okay, well, it's legalized, we finally got there, did not see the fact that the FDA or any department of the government would not then regulate hemp. There's been no regulation. It's going on 5 years and it's a free for all. If you buy steak oil at gas stations, so there's no regulatory environment. And that has to happen.

Speaker 1

What's the game here? We're producing the highest quality competing with people who are making stuff in their basement, who knows what's in it. So we need the U. S. Government or whatever agency like the FDA who has said they won't regulate it till Congress forces them to and funds them.

Speaker 1

And I can understand that, putting special interests aside, but that's what has to happen. And so we're going to be very prudent and pragmatic in our investments that we see hopefully under this administration, who's going to regulate the hemp market. And we're bullish on it. Believe me, this is about health and wellness all the way. And if you really look at besides us being the only company, cannabis company on the 25 list of the DEA, all the others are about all the other positive companies, I should say, are about health and wellness.

Speaker 1

It's a great product and the government needs to catch up on it. So we're looking we're feeling bullish as well.

Speaker 7

Got it. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Brenna Cunningham from ATB Capital Markets. Your line is open.

Speaker 9

Hi. This is Brenna on for Frederico and congrats on the results this quarter. Just regarding the gross margin decline in the Canadian cannabis segment, it seems like it was largely driven by the stock ups that you spoke to earlier. But just trying

Speaker 4

to clarify, has this been resolved? Or will there be

Speaker 9

a trickle effect on this drag into the current quarter?

Speaker 4

I'm sorry, I didn't catch the beginning of your question, Brenna. Could you just repeat the first part?

Speaker 9

So just regarding the gross margin decline in the Canadian Canvas segment,

Speaker 4

so it was largely driven

Speaker 9

by the stock outs, but just trying to figure out who Got it.

Speaker 4

Got it. So actually the gross margin decline is more because of the mix of B2B in the quarter. Our gross margin on our branded products where we had stock outs actually went up sequentially. So we're back in the 30% to 40% range that we've previously guided for this quarter.

Speaker 9

Okay. Got you. And then just a second question regarding the recent election results. Given that those will be participating in the hearing in the New Year. Just kind of curious what your thoughts are regarding the potential process and outcome of rescheduling, not that you have a crystal ball or anything, but just generally speaking.

Speaker 4

That's like a fool's errand, but I'll turn it back to Mike. Yes.

Speaker 1

I mean, I've probably been more very conservative on it over the last 4 years, but I'm feeling much more bullish. I just think that the majority of Americans are supporting cannabis again as a health and wellness. I can't say this is personal. It's not about spending 100 of 1,000,000 of dollars by LPs to try to promote legalization of cannabis for profit. Of course, companies have to be profitable.

Speaker 1

This is a movement for health and wellness. This is giving Americans a choice beyond opioids for stage 4 cancer patients and other wellness issues. That's what the movement is about. And that's what we want to try to get communicate very clearly. And I think the Senate plays a huge role in this, not just the President.

Speaker 1

As I said, I support this administration coming in only for the fact that they have demonstrated, as I said earlier, decriminalization of hemp in 2017. That's a check-in the box. There's been no checks in the box in the last 4 years. So I'm going on the past. And I think with new blood in the Senate, especially at the leadership level, this is going to afford us the opportunity to go into Washington and educate and communicate.

Speaker 1

And I'm really bullish on Robert Kennedy, hopefully running the FDA, because special interest has played a big role with big pharma, big food, as we all know, it's time for change, it's time for change, not just on the cannabis side, but also on food side. So I'm bullish and I haven't been that much in the past. So we're excited and we're very honored to be representing the industry.

Speaker 9

Awesome. That was good commentary. Thank you very much.

Speaker 4

Thanks, Matt.

Operator

Thank you. And I will now turn the call back over to Michael for any closing remarks.

Speaker 1

Thanks, everyone, for participating today. We're excited about 2025. A lot of things are coming together, both in the industry and for our company. So we look forward to reporting year end Q4. And thanks for your participation today.

Speaker 1

Operator, thank you.

Operator

Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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Earnings Conference Call
Village Farms International Q3 2024
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