Village Farms(VFF)2024-11-07 16:42Financial Data and Key Metrics - Total sales grew 20% year-over-year to 42.8 million, with gross margin improving by 400 basis points to 8% [9][30] - Canadian cannabis total net sales grew 29% year-over-year to CAD 15 million, with positive adjusted EBITDA of CAD 6.5 million and operating cash flow of CAD 6.1 million [11][32] Business Line Performance - Fresh Produce segment delivered positive adjusted EBITDA of 0.4 million, driven by higher volumes and improved pricing [9][30] - Canadian cannabis retail branded sales grew 22% to CAD 37.2 million, while non-branded sales increased 68% to CAD 10.1 million [11][33] - International medical sales doubled year-over-year, with strong growth in Germany, Australia, and the UK [11] - U S cannabis sales were CAD 3 9 million with a gross margin of 63% impacted by regulatory challenges in certain states [36] Market Performance - The company holds the 1 market share in Ontario and Quebec, Canada's two most populous provinces, and maintains the 1 position in flower with a 2 7% increase in market share during Q3 [13] - In the German market, the company's strains are ranked 1 and 3, reflecting strong international customer reception [12] - The company improved its market position in pre-rolls from 4 to 2 nationally, with a 2 3% increase in market share [13] Strategic Direction and Industry Competition - The company is focusing on higher ROI opportunities, particularly in international markets like Europe, while being cautious about capital allocation in Canada due to high excise taxes [23][53] - The company is expanding its presence in the Netherlands, with the Leli Holland subsidiary expected to begin sales in Q1 2025, targeting a EUR 3 billion to EUR 3 5 billion market opportunity [25][26] - The company is prioritizing profitability over volume in Canada, moving away from lower-margin SKUs and raising prices on others [21] Management Commentary on Operating Environment and Future Outlook - Management highlighted the challenges of excise taxes in Canada, which totaled CAD 24 million in Q3 and CAD 78 million year-to-date, impacting capital allocation decisions [35] - The company is optimistic about the potential for cannabis rescheduling in the U S and is participating in the DEA's upcoming hearing on the matter [44][46] - Management expressed confidence in the stabilization of the U S cannabis market and plans to invest in growth initiatives, including new SKUs and innovative product offerings [18][37] Other Important Information - The company completed construction of its indoor cultivation facility in the Netherlands and began cultivation in October, with first sales expected in Q1 2025 [25] - The company's Village Farms Clean Energy project generated net income of CAD 300,000 in Q3, with royalty payments providing incremental profits [38] - The company ended Q3 with cash of CAD 28 7 million and working capital of CAD 65 4 million, with total term debt of CAD 43 million [39] Q&A Session Summary Question: Allocation of product between Canada and international markets - The company is focusing on higher-margin markets internationally, particularly in Europe, while being cautious about expanding capacity in Canada due to high excise taxes and overcapacity [50][53] - The company is moving away from lower-margin SKUs in Canada and raising prices where possible, with a focus on profitability over volume [51] Question: Impact of stock-outs on Canadian cannabis sales - The stock-outs were due to higher-than-expected demand and internal supply chain issues, with normalization expected by Q1 2025 [56] Question: Pricing strategy in Canada - The company is focusing on SKU-by-SKU and brand-by-brand pricing opportunities, with no plans for across-the-board price increases [60][61] Question: Cost structure and profitability of the Netherlands facility - The company is confident in the profitability of the Netherlands facility, with expected pricing of EUR 6 per gram and no excise tax, leading to higher margins compared to Canada [64][65] Question: Market share in Canada - The company holds the 1 market share in Ontario and Quebec, with 4 in BC and 6 in Alberta, aiming to maintain a top-three position in Canada [74][75] Question: Growth outlook for the Canadian cannabis market - The overall Canadian cannabis market growth is expected to slow to mid-single-digits, with the company focusing on innovation and market share gains [77] Question: Netherlands market potential and capacity expansion - The company expects to ramp up to full capacity of 2,000 kilos of dry flower by Q2 2025, with strong demand expected to sell out inventory quickly [82][83] Question: Potential for M&A in international markets - The company is open to M&A opportunities in international markets, particularly in Europe, to gain more control over the route to market and vertical integration [93][95] Question: Impact of recent U S election results on cannabis rescheduling - Management is optimistic about the potential for cannabis rescheduling in the U S, citing bipartisan support and the health and wellness benefits of cannabis [113][115] Question: Gross margin decline in Canadian cannabis - The gross margin decline was primarily due to the mix of B2B sales, with branded product margins returning to the 30%-40% target range [110]