10-Q: Village Farms International Reports Improved First Quarter Results Driven by Strong Canadian Cannabis and Produce Segments

Village Farms International saw a significant improvement in its first quarter results, driven by strong performance in its Canadian cannabis and produce segments.

Summary

• Village Farms International reported a net loss of $2.85 million for the first quarter of 2024, an improvement from a $6.64 million loss in the same period last year.
• Sales increased by 21% year-over-year to $78.08 million, primarily due to growth in the Canadian cannabis segment and the produce segment.
• The Canadian cannabis segment saw a 49% increase in sales, driven by both branded and non-branded sales growth.
• The produce segment experienced a 4% increase in sales and a significant improvement in gross profit due to lower costs and higher prices.
• Adjusted EBITDA improved significantly to $3.59 million, compared to $0.52 million in the first quarter of 2023.
• The company's U.S. cannabis segment saw a decrease in sales of 9% due to increased competition from unregulated hemp-derived products.
• The company is in compliance with all its credit facility covenants as of March 31, 2024.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with significant improvements in financial performance, particularly in the Canadian cannabis and produce segments. The company is also making strategic moves in international markets and renewable energy. However, the U.S. cannabis segment's challenges and the overall net loss temper the sentiment slightly.

Positives

• The company experienced a significant increase in sales, driven by the Canadian cannabis and produce segments.
• The company's net loss improved substantially compared to the same period last year.
• Adjusted EBITDA showed a significant improvement, indicating better operational performance.
• The Canadian cannabis segment is experiencing strong growth and market share gains.
• The produce segment's gross profit improved significantly due to lower costs and higher prices.
• The company is in compliance with all its credit facility covenants.

Negatives

• The U.S. cannabis segment experienced a decrease in sales due to increased competition.
• The U.S. cannabis segment's gross profit decreased due to a shift in product mix.
• The Canadian cannabis segment's gross margin decreased due to a significant volume of non-brand-spec inventory within non-branded sales.
• The company reported a net loss for the quarter, although it was significantly improved from the previous year.

Risks

• The company faces risks related to the legal status of cannabis in the United States.
• The company is subject to risks related to obtaining additional financing on acceptable terms.
• The company is exposed to variability in product pricing and risks inherent in the cannabis, hemp, CBD, cannabinoids, and agricultural businesses.
• The company is vulnerable to rising energy costs and inflationary effects on costs of cultivation and transportation.
• The company is subject to risks related to regulatory compliance and obtaining and maintaining licenses.
• The company is subject to risks related to rules and regulations at the U.S. Federal, state and municipal levels with respect to produce and hemp, cannabidiol-based products commercialization.
• The company is subject to risks related to retail consolidation, technological advances and other forms of competition.
• The company is subject to risks related to transportation disruptions, product liability and other potential litigation.
• The company is subject to risks related to retention of key executives, labor issues, uninsured and underinsured losses, and natural catastrophes.
• The company is subject to risks related to rising interest rates and tax risks.

Future Outlook

The company expects international expansion to enhance profitability while expanding its brand and experience into emerging legal cannabis markets. The company also expects the Delta RNG Project to contribute incremental profitability. The company intends to use its assets, expertise and experience to participate in the U.S. Cannabis market subject to compliance with applicable U.S. federal and state laws and applicable stock exchange rules.

Management Comments

• The company's vision is to be recognized as an international leader in consumer products developed from plants.
• The company leverages decades of cultivation expertise, investment, and experience in fresh produce into branded and wholesale cannabis products.
• The company's focus for its Canadian Cannabis segment is to produce high quality cannabis, leveraging low-cost production.
• The company's long-term objective for its Canadian Cannabis segment is to garner and sustain the leading retail market share in Canada.
• The company has a strategy to participate in other international markets where cannabis attains legal status.
• The company intends to use its assets, expertise and experience to participate in the U.S. Cannabis market subject to compliance with applicable U.S. federal and state laws and applicable stock exchange rules.

Industry Context

The company's performance reflects the ongoing growth and evolution of the cannabis industry, particularly in Canada, where it is gaining market share. The company's expansion into international markets and its focus on low-cost production are aligned with industry trends. The company's produce business also benefits from its established market presence and supply chain.

Comparison to Industry Standards

• Village Farms' Canadian cannabis segment is performing well compared to other Canadian LPs, achieving the second-highest market share nationally and regaining the top position in Ontario.
• The company's focus on low-cost production in the cannabis sector is a key differentiator, similar to other successful large-scale producers like Canopy Growth and Aurora Cannabis, although Village Farms is showing stronger operating results.
• The company's expansion into international medical cannabis markets is a strategy also pursued by other Canadian LPs such as Tilray and Cronos Group, but Village Farms has a unique advantage with its EU GMP certification.
• The company's produce segment is a well-established business, similar to other large-scale greenhouse operators like Mastronardi Produce, but with the added benefit of diversification into cannabis.
• The company's Adjusted EBITDA of $3.59 million is a significant improvement compared to the previous year, indicating a positive trend in profitability, which is a key metric for investors in the cannabis industry.

Management Changes

Legal Proceedings

• The company is engaged in legal proceedings in the ordinary course of business, but does not believe any current legal proceedings are material to its business.

Related Party Transactions

• The company leases its Rose office building from a company employee who also owns a minority interest in Rose.
• One of the company's employees is related to a member of the company's executive management team and received approximately $30 in salary and benefits during the three months ended March 31, 2024.

Stakeholder Impact

• Shareholders will benefit from the improved financial performance and strategic growth initiatives.
• Employees may benefit from the company's growth and expansion.
• Customers will benefit from the company's focus on high-quality products and competitive pricing.
• Suppliers may benefit from the company's increased sales and production.
• Creditors will benefit from the company's improved financial position and compliance with credit facility covenants.

Next Steps

• The company will continue to focus on growing its market share in the Canadian cannabis market.
• The company will continue to expand its presence in international cannabis markets.
• The company will continue to develop and sell high-quality CBD and hemp-based health and wellness products in the U.S.
• The company will continue to operate its produce business and explore other uses for its Monahans facility.
• The company will continue to operate its renewable natural gas project.
• The company will continue to review, optimize and enhance its financial reporting controls and procedures.

Key Dates

Keywords

cannabis, produce, CBD, greenhouse, agriculture, renewable natural gas, Pure Sunfarms, Balanced Health, Rose LifeScience, VF Fresh, financial results, market share, EBITDA