Village Farms International, Inc. (VFF) Q1 2019 Earnings Call Transcript

The success of our company will ultimately be judged by our ability to execute on our business opportunities and deliver in growth and earnings and the integrity that we all have here in Village Farms that we've had for 30 years. We are a very transparent, honest, and a company filled with integrity at every level. And we're very proud of that. So, with that said, that's a great segue, moving forward to our financial results. So, as I mentioned, we are very pleased to, once again this quarter, report positive net income from Pure Sunfarms, the second consecutive quarter of profitability. And with net income increasing substantially to $8.6 million from $5.5 million in Q4, that contributed to positive net income to Village Farms overall of $7.6 million or $0.16 a share after tax. Pure Sunfarms' sales in Canadian dollars tripled sequentially to $14.4 million or $10.8 million in US dollars. And EBITDA was $4.3 million Canadian or $6.4 million US for an EBITDA margin of 59%, up meaningfully from 48% in Q4.

And just a quick note that we had a few questions around our JV partner pre-releasing Pure Sunfarms revenue number on May 1st. And I just wanna say that it is our current policy here at Village Farms not to report preliminary numbers. So, with respect to our numbers, its' worth noting that Pure Sunfarms achieved these results with Delta 3 still very much in early ramp-up mode. Only quadrant 2 which is about a quarter of the one million square feet was harvesting throughout the entire quarter. Half of quadrant 3 was only licensed at the end of January and planted out in February and had no harvest in the first quarter. And quadrant 4, the final one, was only licensed mid-March by Health Canada and was brought in production in April this quarter. And quadrant 1 was also brought back into production in early April after being offline for several months with the installation of lighting. And those several months were during that first quarter.

So, we're really proud of the results based on just 25% of the operation and harvesting. Having overseen the start-up of numerous large-scale greenhouse operations for 30-plus years, I can tell you that this is a significant achievement to be posting these types of numbers at this point in the ramp-up to the operations. The performance makes Pure Sunfarms stand out in the Canadian license produce of landscape despite most others having a significant head start, in many cases, years ahead, and having spent tens or even hundreds of millions of dollars more to start up their operations. I have said this many times before, but it bears repeating now, especially that Pure Sunfarms has exercised its option on the second delta facility, Delta 2, which is approved on a back of success with Delta 3 and the strength of the outstanding team that's been put together at Pure Sunfarms.

Converting an existing greenhouse with the additional benefit of experience and know-how in developing and ramping up large-scale operations, the largest in North America, that Village Farms brings to the table has a significant advantage. As I have said before, lower capital cost to convert. And as a reminder, we were able to secure 24 megawatts of power for each of the Delta 3 and 2 facilities directly from the utility without spending nearly $2 million of megawatt for cogeneration. That's a huge capital cost savings versus competitors who have to put cogen in. Secondly, the speed of conversion is much quicker than building a brownfield site, new development. Seven-hundred-fifty years of combined grow experience, I've talked to that many times. The experienced skill force are ready in place. That's been on a site 20 years. That, by far, No. 1 in achieving these type of goals. Years of chronological data that our grow team can base it on.

So, we're seeing the benefit at Pure Sunfarms. And hopefully, we will be provided with the opportunity to demonstrate this same level of execution in Texas with hemp. Two months ago, since our last call, numerous additional harvests have been completed. I am pleased to report the facility continues to perform well, meeting our expectations. Yield and quality are continuing to meet or exceed expectations. Demand for product revenues product remains strong. Wholesale pricing remains buoyant. And Pure Sunfarms is taking full advantage, selling essentially everything it's producing to drive near-term cash flows. As per plan, last month, Delta 3 facility was fully planted out, as I mentioned. And we are now growing on the entire one million square feet of growing area. The Delta 3 facility will very shortly be operating at its projected annual production of 75,000 kilograms on a run rate basis when we start harvesting quadrant 1 and 4 this summer.

I wanna take this opportunity to provide some content throughout projected production numbers of 75,000 kilograms annually from our 1.1 million square foot facility. We have had a lot of questions and some criticism around this number, as many believe even most of our purest are projecting higher yields per square foot. Our projections are admittedly conservative. But we have three decades as a large-scale grower. We feel we have an advantage in our perspective. It takes time to wrap up a new growing operation, even one with inherent advantages, I discussed a moment ago. It's a process that cannot be cut short. And ultimately, it's farming subject to a number of different factors out of our control, temperature, sunlight. It's not about what goes right. It's about what doesn't go the way you had hoped and how quickly a team evaluates and finds a solution and then implements a strategy to correct it. So, we believe providing conservative production numbers as we ramp up is a prudent way to go.

That said, I have no doubt that when Pure Sunfarms and all of this appears, we'll be realizing yields at a minimum or on par with the industry average. And again, I think we are being conservative. So, Pure Sunfarms on the extraction front, continuing to move our extraction plans forward. Very much still on track to have in-house extraction operations in place by year-end this year and scalable to cover both Delta 3 and 2 or over two million square feet. Oils and derivative products will be party over on product strategy. And to the extent that we need to be ahead of having our own capabilities in place, we will use third-party extract in short term. And we're having those discussions right now. We're very comfortable with the progress and the path forward. As I said in the past, we take a imperial approach, initially. And that's get the operation converted, build on the foundation, put together a great corporation and team, get through the production wrap up, post-harvest, and now the process to move forward to extraction.

So, with the Delta 2, we announced that a few weeks back, the next greenhouse, another million square feet with the unmitigated success of Delta 3 and the confidence level that the entire team has to date, including the board. Converging licensing production ramp-up and quality of the product. We were thrilled that we exercised the option jointly with our partner on Village Farms' additional Delta 2 facility which is nearly identical to Delta 3 and adjacent to it. At a minimum, doubles Pure Sunfarms projected annual production to 150,000 kilograms of cannabis is a conservative number. Expect benefit from the learnings around Delta 3. As a reminder, Village Farms contributed the Delta 2 facility. And our JV partner is contributing $25 million toward the estimated $60 million conversion cost, with the remainder to be funded through Pure Sunfarms own cash flow and the recent $20 million credit facility with Bank of Montreal and Foreign Credit Canada.