Village Farms International, Inc. Q3 FY2024 earnings call

• Fresh Produce business showed strong outperformance with 20% sales growth and improved gross margin.
• Canadian cannabis had solid growth with 29% Y/Y net sales growth, profitability, and doubled international medical sales.
• Out-of-stock inventory in some popular SKUs in Canadian cannabis impacted sales, but restocking began in September and is expected to normalize by early Q1 2025.
• Leli Holland subsidiary in Netherlands started cultivation in October and is on track for Q1 2025 sales. Focus on higher ROI investments, not allocating capital to expand Delta 2 greenhouse in Canada due to challenges in the Canadian cannabis industry.

Fresh Produce: Sales increased 20% year-over-year to nearly $43 million. Gross margin was 8%, improving 400 basis points year-over-year. Adjusted EBITDA was CAD 2.3 million and net income was 0.4%. Canadian Cannabis: Total net sales grew 29% year-over-year to roughly CAD 15 million. Branded resale sales grew 22%, and it was profitable with positive adjusted EBITDA of CAD 6.5 million and cash flow from operations of CAD 6.1 million. International medical sales doubled year-over-year.

• Anticipate continued strong performance from Fresh Produce and Canadian cannabis.
• Expect Leli Holland subsidiary in Netherlands to start sales in the first quarter of 2025.
• Focus on identifying and pursuing higher ROI opportunities to expand international business into new jurisdictions.

• Canadian cannabis industry faces overcapacity, inventory issues, and high excise tax.
• Unregulated hemp-derived products in the United States pose challenges to the U.S. cannabis business.
• Regulatory uncertainties in international markets, including changing regulations in Europe and the U.S.

Q: How does Village Farms think about allocation of product between Canada and international, especially with focus on profitability and moving away from lower profitable SKUs in Canada?

A: Michael DeGiglio mentioned they are bullish on Europe with its large market potential and pragmatic approach to legalization. In Canada, due to high excise tax and lack of legislative movement, they are being prudent with capital allocation and focusing on higher ROI investments in Europe. They also noted they have a large footprint in Canada and could quickly convert space when conditions are right.

Q: Can you offer more color on the impact of out-of-stock SKUs in the Canadian market, including drivers and whether it's internal or structural?

A: Ann Gillin Lefever stated it was entirely internal, due to higher demand than expected that couldn't be immediately met as plants take time to grow, and restocking began in September with expectation to normalize by early Q1 2025.

Q: Talk about pricing plans in Canada, including mix shift from non-branded spec to international and across categories?

A: Ann Gillin Lefever said retail market pricing in Canada has stabilized. The team focuses on SKU-by-SKU and brand-by-brand pricing opportunities, with increases in pricing being proposed at that level and supported by provincial boards when analyzed correctly. Michael DeGiglio added they are looking at allocating flower to higher margin markets like international where there's more potential.

Q: Confidence in the cost structure of the indoor grow in Holland and operational differences from greenhouse expertise?

A: Michael DeGiglio said indoors is easier to control than greenhouses, but has higher costs. The team designed a fantastic facility with advanced lighting, and they are bullish on it due to the large market potential in the Netherlands with no excise tax and favorable pricing.

Q: Discuss capital allocation and potential M&A for route to market control in international markets?

A: Michael DeGiglio stated they are patient and prudent, seeing opportunities to be vertically integrated and control route to market. They have a strong foundation in high-quality flower and are open to M&A, especially in markets like the EU where they see opportunities to build on their medicinal and recreational presence.