Good morning, ladies and gentlemen. Welcome to Village Farms International's First Quarter 2025 Financial Results Conference Call.
Yesterday, Village Farms issued a news release reporting its financial results for the first quarter ended March 31, 2025. That news release, along with the company's financial statements are available on the company's website at villagefarms.com under the Investors heading. Please note that today's call is being broadcast live over the Internet and will be archived for replay, both by telephone and via the Internet beginning approximately 1 hour following the completion of this 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 regulations, including its Form 10-K and MD&A for the year ended December 31, 2024, and the 10-Q for the quarter ended March 31, 2025, which will be available on EDGAR and SEDAR+. These forward-looking statements are made as of today's date, except for 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 DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGiglio.
Thank you, Jonathan, and good morning, and thank you for joining us today. With me today are Steve Ruffini, our Chief Financial Officer; Ann Gillin Lefever, our Chief Operating Officer; Patti Smith, our Corporate Controller; and Sam Gibbons, our Senior Vice President of Corporate Affairs.
Before we get into the details of our Q1 results, I'd like to spend a few minutes discussing our announcement yesterday that we have signed a definitive agreement to execute a transformative transaction for our company. Under that agreement, we will privatize the majority of our Fresh Produce division into a new joint venture backed by private investment firms, including Sweat Equities, to be called Vanguard Foods LP. We will retain a 37.9% ownership interest in Vanguard and receive $40 million in cash proceeds. We believe this transaction will unlock tremendous long-term value for both our cannabis and produce businesses and allow each of them to flourish independently. This transaction will drastically improve the upside potential for our 36-year legacy in the produce business as a private company with committed experienced industry partners who have created significant value for their shareholders in the past.
We are extremely excited about this joint venture and to partner with Charlie Sweat from Sweat Equities to transform the trajectory of our produce business and create a premier branded CPG foods company supporting healthy lifestyles and sustainable farming practices. For those of you who are less familiar with the produce industry, Charlie Sweat completely revolutionized the organic salad category during his tenure at Earthbound Farms, an organic produce company that he grew from $10 million to over $540 million in revenues during his 15-year tenure before selling the business for $600 million. Charlie knows our industry inside and out. And together, we see tremendous potential to build a new private produce company that will provide a wider array of products for our customers and compete effectively with our largest competitors in the marketplace.
Vanguard is a holding company and will become part of the new parent of our Fresh division. Our Fresh division will serve as the cornerstone of Vanguard's commercial operations and growth strategy, and Vanguard will be backstopped by additional capital support from our private equity partners to execute a roll-up strategy of other leading produce brands and assets in North America. Under the terms of the agreement, we will contribute our Texas-based 40-acre Marfa II and our 40-acre Fort Davis facility, all of our fresh produce-related intellectual property, except for the Village Farms name and transfer all of our produce distribution facilities, employees and operational control of these facilities to Vanguard.
I will represent Village Farms interest on Vanguard's Board and initially serve as interim CEO. Village Farms' CFO, Steve Ruffini, will also be appointed to Vanguard's Board. We will retain full ownership of all our Canadian greenhouse assets in Delta, British Columbia as well as our Marfa I and Permian Basin Monahans facility for future cannabis market optionality. These assets represent an incremental near 5 million square feet of future expansion potential for cannabis, providing a clear runway to expand cannabis cultivation by more than 220% compared to our operational capacity today through our own greenhouse assets.
In addition to drastically improving the long-term upside potential of our produce business, this split of produce and cannabis business acknowledges the strength of our cannabis business as one of the largest and most respected scaled cultivators and marketers of cannabis on the planet. This success grew from the lessons learned and expertise shared from our 36 years in controlled environmental agriculture, which we carefully applied to the launch of the cannabis business some 8 years ago now. Now is the time to focus on executing our global cannabis growth strategy and invest our improved cash flow to continue supporting this growth while ensuring that we maintain substantial future expansion potential as markets continue opening up to cannabis.
By privatizing 1/3 of our greenhouse assets and operations, we've generated $40 million in cash, created a greater upside potential for our ownership interest in the produce industry with committed private equity partners, significantly improved the forward visibility into our financial performance and transformed our company into one of the most attractive platforms for revenue growth and margin expansion across the global cannabis industry. For comparative purposes, our market cap was less than $80 million as of the market close yesterday. We expect this transaction to close during the second quarter, at which time we plan to provide the investment community with additional details surrounding our pro forma financial performance and outlook.
Now let's move to a summary of our Q1 performance, which reflects an excellent start in 2025 of our pro forma operations. Canadian cannabis had one of the strongest quarters over the last 3 years as we continue to successfully execute on our strategy to leverage our experience and leadership in Canada into other international markets as we remain focused on profitability. Importantly, our focus on prioritizing more profitable sales over competing for low-margin business to drive volume is reflected meaningfully in our results. Higher-margin medical export sales from Canada for Q1 grew 285% year-over-year as the business continues to gain momentum. We continue to benefit from the addition of our fifth market, New Zealand as well as continued growth in existing markets in Germany, the U.K. and Australia, placing us firmly on track to achieve our stated goal of at least tripling our medical export sales this year.
Lower retail branded sales in Q1 were expected and also reflect our focus on improving profitability, specifically our conscious decision to move away from lower-tier categories that don't align with the quality of our flower and longer-term global strategic objectives. We also continue to be optimistic about our wholesale channel in Canada, again, with a focus on profitability. While sales have been relatively steady for the last 4 quarters, gross margin on those sales for Q1 was up dramatically compared to Q1 of last year. As we discussed on last quarter's call, we felt we were entering 2025 with a very healthy inventory position, which would enable our teams to focus on quality and profitability, and we are seeing the impact meaningfully in Q1 results and we expect this trend to continue.
All of this contributed to the expansion of our gross margin for Canadian cannabis from 25% in Q1 of last year to 36%, in line with our targeted range of 30% to 40% gross margin. And given the more favorable margin profile of our international medical sales, we anticipate that we'll be able to sustain this range for the foreseeable future. These favorable impacts drove strong increases in adjusted EBITDA and net income of 75% and 291%, respectively, CAD 9.6 million and CAD 4.3 million with another quarter of positive cash flow from operations.
Q1 also marked the first quarter revenue contribution from our Leli Holland subsidiary in the Netherlands, which you will now see broken out as a separate segment in our reporting financials. Sales of nearly $0.5 million reflected approximately 1 month of revenue. Importantly, pricing, which is very attractive relative to Canada, continues to be in line with our expectations. Adjusted EBITDA was essentially breakeven with just 1 month of revenue.
We are now well underway on construction of Phase 2 of our Netherlands operation, a brand-new state-of-the-art indoor facility in the town of Groningen. This facility, which we expect will be completed in Q1 of next year, will quadruple our annual production capacity. Given the more favorable margin profile of our Netherlands recreational sales, the completion of our Phase 2 facility is expected to enable us to drive a strong year of profitable growth in 2026.
In summary, we feel very good about our start to the fiscal year of 2025. We are seeing our prioritization of more profitable sales reflected in our financial results across our cannabis business with continued momentum in international export sales in Leli Holland. Our joint venture for Fresh Produce will afford us greater focus and resources to execute our global cannabis strategy and enable us to generate stronger cash flows to continue to fuel that growth, all while retaining a meaningful ownership position in what we believe is a very attractive opportunity to realize significant long-term value with the support of outstanding private equity partners.
So this concludes my prepared remarks, and I'll now turn the call over to Steve to review the financials before I make some last closing comments. Steve?
Thanks, Mike. I'll start with a review of our consolidated results. We appreciate the substantive nature of the Vanguard transaction will have on our financial results. And after closing, we will provide pro forma results for the full year 2024 and the first quarter of 2025.
As our Canadian produce assets do not generate much operational activity due to seasonality in Q1, while not official, one could eliminate the VF fresh column in our reported segmented results and ascertain the substantive nature improvement in our reported results. Consolidated revenues USD 77 million were roughly in line with our prior year first quarter revenues of $78 million. The slight decrease of 1% is due to lower Canadian cannabis revenues, which were negatively impacted by a stronger U.S. dollar in Q1 '25 versus Q1 2024.
Our net loss of $6.7 million or $0.06 per share was lower than our prior year first quarter loss of $2.9 million or $0.03 per share solely due to our weaker year-on-year performance in VF fresh. Our VF fresh and consolidated results were negatively impacted by a $4.3 million incremental noncash accounting charge to our VF fresh cost of sales due to the impact of dust storms that occurred at our Texas facilities in March and April. Our actual cultivation costs were in line with our budget and prior year expenditures.
As a reminder, our tomato crops are annual crops, and we harvest them once a year. In our Texas greenhouse that crop season runs from September to June, as we produce and sell tomatoes, we charge the estimated full crop cost against the sale of crops from each facility. The collective damage of these dust storms puts tremendous stress in our plants, and we lost a good portion of our expected full crop yield, which requires us to take an incremental charge to our cost of sales to catch up our full crop costs through March 31 based on our latest crop forecast.
The dust storms were a first for Village Farms and had a significant impact at our Fort Davis facility, resulting in a 31% increase in our cost per pound from just that 1 facility. This obviously was a disappointing -- had a disappointing impact on our first quarter performance. Consolidated EBITDA was essentially flat at $81,000 compared to $3.6 million in Q1 of last year. The decrease in our adjusted EBITDA was driven entirely by our Fresh Produce segment.
Turning now to our cannabis businesses. I will start with Canadian cannabis, which I will discuss in Canadian dollars. I will add here that the change in the exchange rate compared to Q1 of last year did have an impact on reported results, which are reported in U.S. dollars. Net sales were $50 million, which was roughly in line with Q1 last year, driven mainly by the strong growth in international sales. We benefited from the continued momentum in our international medicinal export sales, particularly in German -- in the German market as we expanded our customer base as that market continues to grow as well as adding new markets like New Zealand, resulting in the 285% increase in exports in Q1 last year -- from last year.
In fact, our international first quarter sales of $7.7 million were nearly as much as our entire 2024 international sales of $8.4 million. Non-branded sales were up 3% year-over-year to $9 million as we continue to be opportunistic where possible to align supply with demand, notably, as Mike mentioned, at much higher margins. As a reminder that up until this quarter, for most of the past 2 years, we have been selling off lower-margin SKUs and non-spec inventory at unfavorable margins to convert inventory to cash. Consistent with our focus on profitable growth, retail branded sales were 22% lower than Q1 last year at $32.7 million, with the decrease reflecting a shift away from value offerings, i.e., lower-margin value brands with a stricter focus on higher-margin branded sales as well as the international medicinal market. Canadian cannabis gross margin was 36%, up from 25% in Q1 last year, well within our target range of 30% to 40% and demonstrating the positive results of our expanded medicinal export sales as well as our focus on higher margin -- the higher-margin business in Canada as well as continued progress in realizing production efficiencies.
SG&A expense as a percentage of sales for Q1 was 25% compared to 21% in Q1 last year. The increase being primarily key account spends which, while it is an SG&A cost, is tied to branded sales. Q1 adjusted EBITDA for Canadian cannabis was $9.6 million or as a percentage of net sales over 19%, up a very healthy 75% from Q1 of last year due mainly to improved margins. Finally, as we do each quarter, I will highlight that in Q1, we paid excise taxes on retail branded sales of $20 million, another direct cost of branded sales or nearly 40% of branded retail revenues and more than double our SG&A. With the recent Canadian election behind us, we renew our call in favor of excise tax reform to support the many benefits of a sustainable legal domestic Canadian cannabis industry.
This quarter also saw the initial contribution from our first international recreational cannabis sales through our Leli Holland operations in the Netherlands, which started partway through the quarter in late February. Sales were $485,000 and adjusted EBITDA was $77,000, reflecting an adjusted EBITDA margin of 15.8%. Not many start-up operations have such nice margins, which is a testament to our ability to bring our cannabis knowledge and cultivation expertise into new markets.
Turning to our U.S. cannabis business. Although Q1 sales of $3.9 million continued to trend lower due to continuing state-level actions to deal with unregulated hemp products, which in some states has resulted in all intoxicating hemp-based products being banned, we continue to generate a healthy gross margin of 66% and return this segment back to positive adjusted EBITDA. We believe we have stabilized this business segment even with the regulatory headwinds, and we're looking -- and we're working on a number of initiatives to reinvigorate sales on our responsible GMP-produced natural hemp products as we await improved regulations with some states now requiring GMP standards, which is a welcome regulatory change as one of the few hemp-based GMP producers. Finally, Village Farms Clean Energy generated $300,000 in net income from royalty payments we received from RNG partner, providing a healthy stream of incremental profits for the company.
Turning to consolidated cash flows and the balance sheet. Total cash flow from operations was negative $6.4 million in the first quarter, partially due to the timing of government payments, which will normalize over the full year. We ended Q1 with a cash of $15 million and working capital of $50 million. We remain comfortable with our net debt level of $19.3 million. When the Vanguard transaction closes, which will require us to at least pay off our operating produce line of $5 million, we will be in a net cash position.
Total term debt at the end of Q1 was $34 million. Subsequent to quarter end, we amended our loan with Farm Credit Canada to improve financial covenants. These changes reflect the considerable expansion and growth of our business since entering into the original agreement in 2013. The FCC loan matures on May 2027. We also refinanced our 3 Canadian cannabis term loans, consolidating them into a single facility with 2 of our existing lenders with a 50 basis point decrease in the interest rate, more attractive financial covenants and a new maturity date of February 2028. In closing, we feel very good about our financial position and performance of our cannabis businesses and believe the new ownership structure of our Fresh Produce business will allow us to realize more meaningful long-term value creation as we focus more of our human capital and financial resources on our cannabis businesses.
I will now turn the call back to Mike. Mike?
Thanks, Steve. To reiterate, Vanguard's transaction monetizes 1/3 of our greenhouse assets, positions our produce business to thrive as an independent private entity and maintains a significant expansion potential for us to continue building our leadership position and reputation in one of the largest and most respected scale cultivators and marketers of cannabis on the planet. Village Farms is all in the future of cannabis globally, and we're excited to write this next chapter. We have never had a clear path to drive stronger revenue growth, margin expansion and cash flow generation, which we believe will drive very strong returns for shareholders in the future.
Thank you. Operator, we'll take questions now.
And our first question comes from the line of Frederico Gomes from ATB Capital Markets.
Congratulations on the transaction and the results as well. I guess the first question, talking about balance sheet. As you mentioned, Steve, with the transaction here, you would be in a net cash position, really strong balance sheet and really focused on your cannabis platform. So I'm curious about what are you thinking about capital allocation here in addition to the expansion that is already undergoing in the Netherlands?
Well, right now, we are very happy building our war chest, so to speak, continue to monitor the U.S. market for optionality going forward. We think it's going to be exciting when and if that day occurs and hopefully, it will be in the next couple of years. So that's the market we really want to eyeball and keep close to. So I think we're very happy with organic growth as opposed to nonorganic growth. Nonorganic growth is tough, bringing in companies that maybe not don't have tremendous value, accretive value for us. So I think we're going to see where we go, build our infrastructure for the rest of the year and wait and see what happens.
I think we are -- we started this year sort of very balanced on our inventories levels. And in fact, we are short of capacity. So I think we'll look at further expansion that's on our radar screen of producing cannabis in Canada at our current facilities for 2026 and beyond, and we'll make that decision here probably in the next quarter. And then we want to get Leli Phase 2, as I said, up and running. So I think we're in a good position and we'll just leave it at that, Fred.
Great. Appreciate that color. Second question on your non-branded segment. You mentioned the financials here, you saw a good average selling price increase here in both flower and on bulk trim, pretty strong prices. Do you continue to see prices improving in Canada on the non-branded channel? Do you think that there's further upside here for wholesale?
It's Ann. We are seeing continued improvement in pricing. Certainly, on a year-over-year basis, the curve can shorten a little bit in terms of month-to-month or prior period comparisons. But overall, year-over-year, B2B is strengthening. We do think that's a function of both a reduction in excess supply from some reduction of growing as well as the demand that we're seeing and others are seeing from international markets. So demand has tightened -- sorry, supply has tightened up, and that helped pricing.
And our next question comes from the line of Douglas Cooper from Beacon Securities.
Congratulations on the transaction. It looks fantastic. Just to be clear, what are you left with after the -- you moved some stuff into Vanguard? So you'd be left with D1 in Delta. I'm just talking on the produce side, right? And then a couple of assets in Texas?
Yes. D1 in Delta, which will continue to produce produce for the foreseeable future. As you know, D2 is half produce and half cannabis. I just mentioned that we're looking at that full conversion of D2, that decision will be made. And if that occurs, then really D1 will really be only -- our only cannabis-producing facility. However, that being said, we continue to own the asset of Marfa I, which would be leased, triple net leased to Vanguard and continue to own our Monahans facility, which won't be producing produce anytime soon. So I hope that answers the question.
So yes. So the only produce that we'll see on the financial statements post the transaction with Vanguard will be coming out of Delta 1?
Correct.
And is that -- Mike, is that profitable at that segment? Or the D1, is that profitable?
Yes, it's always been profitable. It's our most profitable facility. Yes.
Okay. And so I know, Steve, you guys talked about pro forma, you'll release those in Q2 sometime. But ballpark figure, I've got Canadian cannabis, U.S. cannabis and in the Netherlands. Just correct me if these numbers are right, USD 39 million in revenue and $6.9 million of EBITDA in the quarter.
Yes, that's correct.
Okay. And then what -- and the actual -- that -- just those 3 groups, they're profitable on a net income basis, right?
Yes. This quarter, they are. I mean obviously, accounting charges can impact net income, but yes. I look at operating -- they're all positive operating income. Look at that line.
Okay. Okay. And then you'll be in a net cash position as you talked about to the tune of about $15 million?
We'd be higher than that.
I don't think we gave a number.
We didn't give a number, but higher than that number.
Okay. Okay. And then what's the -- do you have -- so you focus on the Canadian or the cannabis segment of operation to -- as per the question earlier, I guess, the focus is in the Netherlands. Are you seeing any M&A opportunities in Canada, however, are you just going to focus on primarily the wholesale and then the international/Netherlands?
Yes. For the foreseeable future, that's what we're going to do, focus on our organic growth in Canada, continue our export, driving our export sales and focus on building out the Netherlands.
Okay. And just my last one, Netherlands, can you just remind us, Phase 1, what is the capacity or potential sales there? And then you talked about Phase 2, I think, was 4x the capacity once it's up and running? Is that -- can you just sort of confirm that?
Yes. It's quadrupling our current footprint, almost 5x actually.
And what would be the footprint post -- in Phase 1 and what is it post Phase 2?
Post Phase 2, we'll be producing at around 10,000 to 12,000 kilos on an annualized basis. The current facility is 2,000.
2,000. Can you talk pricing in the Netherlands, how is it, stable? Just talk a little bit about pricing.
It's very stable, but we'd rather not say it.
It's in line with what we have expected and modeled. So, so far, team has done a great job of delivering against that expectation, producing great quality flower already.
Okay. And in terms of the coffee houses who are on the program, are they all -- just maybe talk about the demand, the size of the market and how it's progressing with the coffee houses coming online?
Yes, it's really good. So there's 590 coffee shops, about 80 are in Phase 1 legalization. And as of April 7 last month, it's mandated, they can only buy legal product. And of the 10 licenses that were issued, only 7 are producing. So 3 aren't. So yes, there's a need for additional capacity for sure.
[Operator Instructions] Our next question comes from the line of Pablo Zuanic from Zuanic & Associates.
And of course, congratulations on the produce spin. Can I just ask a couple of questions there? How did you determine the $40 million? I mean what valuation metric was used for that? And then bigger picture, why not spin everything, all the produce division? I realize that you want to give the Texas optionality, but maybe if you can discuss your thought process in terms of why these assets specifically and not the rest?
Well, this transaction actually, Pablo, was at $80 million with $40 million in cash. That's what we're reporting for those assets. And I'm not going to get into the details. I could talk to you separately offline about it. But in the end, the company did have a fairness opinion on it. So it was really structured as an $80 million deal, and I'll explain that to you separately with $40 million in cash, $40 million in equity of those assets.
And you have to understand, this was a very important structure for us because we wanted to maintain optionality for cannabis and more importantly, find the right operating partners to work with. Those 2 is what we were focused on for the last couple of years. And in the end, we're very pleased with how the structure is, again, giving us optionality, both in Canada and the U.S. for the future of cannabis and having great partners that can continue to roll up the produce industry. And hopefully, that equity will be worth a great deal to shareholders in the future.
Of course. And then just to clarify, I know you said it's about 1/3 of the produce assets. But in terms of revenue, it's a little more than that, right? I think the press release says the Canadian revenue is $25 million, but the total is $169 million. So it's like 84% of revenue is being spun.
Yes. All the revenue is going over to Vanguard with the exception of the revenue that's generated out of Delta 1. So Delta 1, we tied up an exclusive marketing agreement with Vanguard just like we've -- part of our existing revenues prior to this deal comes from third-party partners in Mexico and Canada. So we've entered into a marketing agreement. So we will book those revenues going to -- and Vanguard will be selling that to our retail customers to the retail customers based on a marketing agreement, and we'll book those revenues. But we are in a minority position.
Okay. And then just 2 more quick questions. One, in the case of Holland, have the coffee shops in the pilot began to buy only exclusively from the licensed producers? Or are they still being allowed to buy from the gray market? Because that date keeps on moving it seems, right? If you can clarify that. And then maybe for Steve -- yes, go on.
Only from the legal market as of April 7.
April 7.
All 4 factors.
Okay. And then the last one, Steve, in terms of when you talked about GMP in terms of hemp, you are manufacturing all the gummies in-house. Could you offer that? Could you offer co-manufacturing services to other companies out there? I know it's a very volatile industry. We don't know what's going to happen at the state level. But it seems that you have a unique opportunity there to use your capacity not to make just your own gummies, but also to co-manufacture for other people. Is there an opportunity?
Yes, it's an opportunity and we've had discussions with others about that.
And our next question comes from the line of John Chapman from Alliance Global Partners. [Operator Instructions]
And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike for any further remarks.
Thank you, Jonathan. I just want to once again thank everybody for attending today's call and look forward to reporting our second quarter in August. Thank you.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
