Village Farms International, Inc. (VFF) Earnings Call Transcript & Summary

I would like to welcome you to our virtual annual and special meeting of the shareholders, Village Farms International, Inc. My name is John McLaren, and I'm Chairman of the Board of the directors of the company, and I will chair the meeting. We hope all our shareholders and their families are safe and persevering in this current environment. We know it has created many hardships. On behalf of the Board, I wish to express thanks to those shareholders who have submitted their proxies in advance. Only shareholders or their proxies are entitled to vote at this meeting. To make the best use of our time, certain shareholders have been asked to move and second the proposals, which are called for in the notice of the meeting. The meeting will now come to order. Stephen Ruffini, the Chief Financial Officer of the company will act as Secretary of the meeting; and Jenny Karim of Computershare Investor Services, Inc. the transfer agent register on the common shares will like the scrutineer. Notice of the meeting was mailed to shareholders on or before May 12, 2021, as confirmed by the company's transfer agent and registrar. I direct that a copy of the notice together with the confirmation of mailing from Computershare, be kept with the records of this meeting. The scrutineer has confirmed that proxies representing 60.7% total of the outstanding common shares have been properly deposited prior to the meeting, and the quorum is present. I therefore propose to proceed with the business of the meeting. I've been advised by the Scrutineer that all shareholders and proxy holders who wish to cast votes at today's meeting have done so in advance of this meeting. So I'll take a moment to ask any registered holders to appoint proxy holders who want to cast a vote online to do so now. We will leave the polls open for a minute for registered holders and proxy holders who have probably logged in with their control numbers and wish to vote. [Voting]

Thank you. I declare that the meeting is regularly called and properly constituted for the transaction of business. I now request the secretary to table the minutes of the Annual Meeting of the Shareholders of Village Farms International, Inc. held on June 25, 2020. The next item of business is the presentation of the consolidated financial statements of Village Farms International, Inc and it's subsidiaries as of December 31, 2020, and the independent auditors report thereon. I'll now ask Stephen Ruffini, the Chief Financial Officer of the company, to table the consolidated financial statements of the company and its subsidiaries as of December 31, 2020 and the auditor's report thereon. A copy of the consolidated financial statements of the company and the subsidiaries as December 31, 2020, and the independent auditor's report thereon, together with the related Form 10-K, has been mailed to the requesting shareholders and are available on the company's website as well as on EDGAR and SEDAR. We will now proceed with the election of the directors of the company. Six directors of the company are to be elected to hold office until the next Annual Meeting of Shareholders or until his or her successor is elected or appointed. Information regarding the nominees are caused by the management is set out in the proxy statement dated May 6, 2021. The Board has adopted a majority voting policy that will apply if any of the directors receive a number of for votes that is less than a majority of the votes cast.

I have the pleasure of nominating the following persons for election as directors of the company to hold office until the next Annual Meeting of Shareholders or until their successors are elected or appointed. Michael DeGiglio; John Henry; John McLernon; Christopher Woodward; David Holewinski; and Stephen Ruffini.

All right. Is there a seconder? Mike?

I second that, John.

Yes. Thank you. The company's bylaws require the nomination of directors by shareholders be received by the Board of Directors, the company in the prescribed manner advance of this meeting in order to be valid. As no nominations were received, I declare that the nominations for directors are closed. Based on the votes received, I now declare that Michael A. DeGiglio; John P. Henry; John R. McLernon; Christopher C. Woodward; David Holewinski; and Stephen C. Ruffini have been elected as directors of the company to hold office until the next Annual Meeting of the shareholders or until their successors are elected or appointed as described in the notice and proxy statement. We'll now proceed with the report with the reappointment of the auditors of the company.

I move that PricewaterhouseCoopers be reappointed auditors of the company to hold office until the next annual meeting of the shareholders.

I second the motion.

The motion is carried. It is now in order to proceed with the approval of the unallocated options and share-based awards under the amended and restated equity plan of the company. Noted to save time and with consent of the meeting I proposed dispensed with the full reading of the resolution that for purposes of this meeting, the text will be taken as having been read in full at this meeting. The full text of the resolution to be voted on is Appendix B of the proxy statement. Do we have a motion, please?

I move that the unallocated options and share-based awards on the terms set forth in Appendix B to the proxy statement be approved.

I second the motion.

The motion is carried. It is now in order to proceed with the approval of certain amendments of the company's equity plan and the renewal thereof. Shareholders are now asked to consider an ordinary resolution, the amendment of resolution to approve the amendment provision updates. In order to save time and with consent of the meeting, I propose to dispense for the full reading of the resolutions, and that for the purposes of this meeting, the text will have be taken as -- having been read in full at this meeting. The full text of the resolution to be voted on as Appendix C of the proxy statement. This approval will be effective for 3 years from the date of this meeting. I'll now entertain a motion respecting the amendments and the renewal of the company's equity plan.

I move that the ordinary resolution in the form attached as Appendix C of the proxy statement and receipt of the approval of the renewal of the company's compensation plan be approved.

I second the motion.

The motion is carried. If there is no further business to be brought before the meeting, I shall ask for a motion to terminate.

I move that the meeting terminate.

I second the motion.

Carried. Thank you all for -- very much to everyone for joining us today. I now declare the official portion of the meeting terminated. I'll now turn it over to management to provide a business update, which you can view on your screen. You can ask questions during today's presentation. However due time constraints, management will answer certain questions during today's presentation and may address some questions directly to shareholders after today's present. Mike's it's over to you.

Thank you, John. Good afternoon. For my presentation today, I want to take a step back and provide a somewhat higher-level perspective on the evolution of the company. How we view our markets and our vision for the future and the continued creation of long-term shareholder value. At our very core of Village Farms is about leveraging our deep experience and expertise in vertically integrated controlled environmental agriculture, intensive, large scale, low-cost greenhouse growing specifically. And our state of-the-art assets, one of the largest footprints in North America, to grow high-value crops as well as our fulfillment, distribution and sales capability, including our relationships with North America's national grocers, big-box retailers and our branding strategy. Over the years, that has been a variety of plants that we have grown from cut flowers and herbs, but the goal was always to find the highest and best use of our capabilities and assets. How we best use those capabilities and assets is our decision, we choose to plan. Hence, our decision to enter the cannabis industry in the world's first legal recreational cannabis market. The cannabis opportunity has also been the emphasis of our evolution to a plant-based consumer packaged goods company. Last year, I described 2019 as a very important year in the transformation of Village Farms from one of North America's largest and longest operating and most successfully vertically integrated greenhouse product supplier to this vision. And 2020 was equally important. Pure Sunfarms solidified its position as the premier cannabis company in Canada, and I'll speak more to this specifically in a moment. We were able to acquire the remainder of Pure Sunfarms at a very favorable valuation. We developed a multipronged strategy to enter the U.S. cannabis market when legally permissible to do so, and we continue to enhance our produce business for future opportunities. All of this moves us closer to our vision and positions us to continue to deliver shareholder value over the near term -- medium-term as we focus on these 4 fundamental principles: Achieving leading market share to drive revenue growth; leveraging our efficient, low-cost operational know-how and experience to generate profitability; prudently and efficiently deploying capital with a focus on return on investment, and I want to note specifically here that with existing operations, we don't need to raise huge amounts of capital and spend huge amounts of capital for our production capacity. We can instead invest prudently, strategically and surgically to add to the downstream components of the business. And doing all of this in the context of our underyielding commitment to environmental, sustainability and governance matters as we do have done so for decades. By virtue of being an established large-scale greenhouse grower, we were able to pursue a motto that is quite different to the vast majority of our peers, leveraging existing operations, cultivation know-how, trained labor and historical climatological data to excel in cost of production, yield and quality. This enabled us to approach the market in a differentiated way, launching premium quality products at an everyday price that competed with the existing legacy market, which at the time was roughly 20% to 30% below the prevailing market price. We have not changed our pricing since. Our dried flower products have led in market share since launch. And Pure Sunfarms has delivered positive adjusted EBITDA in every quarter since commercial launch, which is now 10 quarters in a row. The market is still very new, evolving and most importantly, growing. Recent scan can data puts the Canadian current legal retail sales market at a run rate of $3.6 billion per year. That's up nearly 65% from the same point last year, 65% from last year amidst the headwinds of the pandemic restrictions across Canada. That number nearly doubles when the illicit market is added. The legal market is steadily taking share from the illicit market. And with the BC Solicitor General's recent report, I believe yesterday on contaminants found in illicit product samples, we think that can even accelerate further. I also think it sometimes gets lost among the discussions of industry challenges, including COVID, just how fast this market has grown and how much runway there still is. Certainly, many companies would like you to believe that COVID had a major impact on sales, but the data doesn't quite support that. Pure Sunfarms is clearly well positioned to grow within the market, but we firmly believe positioned to continue to benefit from that growth disproportionately. Just as important, the Canadian market is evolving, which we believe will very much play through our strengths. Provincial buyers are narrowing the SKUs to better selling products, the market is demanding higher THC and higher premium products, where we believe we have a strong advantage, and legacy users are steadily transitioning to the legal market, looking for premium quality at an everyday price. With these strong prospects, we will expand our production capacity beginning this year with the goal to double our capacity by mid next year. Moving on, there is little doubt that the U.S. will continue to be the largest near-term cannabis opportunity in the world. As large it is now, it's in its infancy. We are at our core U.S. company. We were founded in the U.S., the vast majority of our greenhouse projects are in the U.S. The majority of our greenhouse assets are in the U.S. Our head office and management and other personnel are in the U.S. and the vast majority of our produce customers, the large national grocers, big-box food retailers are in the U.S. We have proven in Canada that we do not need to be first in the cannabis industry to be a leader. This may be even more so in the U.S. where we believe the industry and the market structure is likely to change dramatically upon federal permitted cannabis commerce. We have a 3-pronged strategy to capitalize on the U.S. market. Developed in consultation with leading consumers, packaged goods, consultants and experts and designed to enable us to be nimble as the regulatory landscape evolves. First, with the largest greenhouse footprint of any company in the U.S., certainly among the largest of any Canadian license producer. With all 4 of these facilities located in West Texas, we are naturally and well positioned in the state of nearly 30 million people, not much smaller than Canada. There are two general paths of legalization in Texas. The first is due to state some legislative process, which is progressing, but depending on scheduling of legislative sessions. The other path is federal legalization. The Texas Constitution mandates that the state automatically adopt any federal legislation. With our existing operations there, we can rapidly convert production to cannabis as we've done so in Canada, and we believe quickly capture significant share of the market. The second component of our strategy targets the other 49 states. Fundamental to this is our belief that in a federally legalized environment, interstate commerce will prevail as it has time and time again in similar circumstances, even with semi or highly regulated products, despite efforts to the contrary of states who want to protect their leads in certain industries. As a result, the current interstate vertically integrated model will become uneconomical for current players and create opportunities for companies like Village Farms with massive existing production capacity, improving large scale, low-cost growing capabilities. Thirdly, we are also exploring entry to the high-THC cannabis market via the health and wellness market within the U.S. The potential applications and benefits of cannabis for the human endocannabinoid system are massive and will drive a broad and diverse health and wellness market, for which we believe we are well positioned, especially with our extensive relationships with the types of customers that we believe will be the biggest retailers of these types of cannabis based products in the future. Moreover, we believe entry into the health and wellness market could provide a significant foothold for success in the expanding high-THC cannabis market upon legalization. It remains to be seen how the U.S. market will play out. However, we remain confident that we will participate in a meaningful and profitable way. As large U.S. market can be longer term, the size of the international opportunity is likely to be as large, potentially even larger. Note that I use the term international, not global. We are targeting selected, nascent, legal cannabis and CBD opportunities with significant long-term potential. Our first investment is with Australian-based Altum International, which has already established itself as one of the leading CBD suppliers in Hong Kong. Altum is in a process of expanding into other Asia Pacific markets this year, including medical cannabis markets. Stay tuned for what I expect to be some exciting developments on that front in the months to come. In Europe, we are actively looking for the right entry point into this large and growing medicinal market, which continues to be undersupplied as a result of the challenges on the part of many producers to meet the stringent regulatory standards. Again, here, we have deliberately chosen not to be first, but to be thoughtful and understand the development of the market. Hundreds of millions of dollars have been spent by early moves in Europe with no return to date. And we are being more prudent. We are currently engaged in the European Union GMP certification process for the Pure Sunfarms facilities and believe that based on our proven operational excellence and high standards, we can become a major supplier to the European market. Success in the European medicinal market will no doubt serve as a springboard for what we believe will eventually transition to a legal recreational cannabis market. Europe having roughly twice the population of the United States. Produce, so we are positioned for a renaissance. With all of the opportunity potential cannabis, we are often asked, why not divest your produce business. Quite simply, the broad and deep know-how and capabilities, unmatched assets and overall organizational strength, underlying our produce business is what has enabled us and what will continue to enable us to be successful as we are to have rapidly built Pure Sunfarms into the premier cannabis company in Canada. Beyond a significant competitive advantage that our Produce business affords us for cannabis opportunities, including the U.S., as we look forward, I believe we are seeing the start of a renaissance in the produce industry. Significant amounts of capital being deployed by the so-called smart money to control the environmental agriculture for produce and is increasingly recognized for its huge sustainability advantages. People are usually very surprised when I tell them that the Netherlands, the country roughly half the size of South Carolina in area, is one of the largest food exporters in the world, how do they do it? Through controlled environmental growing. So they do it with this intensive agriculture. Greenhouse farming for high-value crops in many countries around the world, including the United States are following suit, as one of the largest and longest operating controlled environment of produce comes in the U.S., over 30 years now. We are positioned as well as anyone to capitalize in this evolution. Controlled environmental agricultures hands down the most sustainable type of farming that exists today. Village Farms has not only played an integral role in the evolution of CEA for food production. But it's been a leader in sustainable growing practices since the 1980s. We are guided by a sustainable agricultural policy, which is devoted to environmental health and social and economic equality. All of the ways in which Village Farm CEA contributes to sustainability are too detailed to cover here. You can see a number on the slide. It is something that we are working on continuously. The most recent example being our announcement last fall of a partnership between our subsidiary Village Farms Clean Energy and mass energy for a project that will convert landfill gas from a city of Vancouver landfill site to high demand renewable, clean natural gas, which will also generate food-grade liquid CO2, significantly reducing Village Farms' and Pure Sunfarms reliance on natural gas produced CO2 on our Delta operations. That project is expected to being operational next year, so we covered related travel restrictions relax, which they are doing so now. As an ECG matters and especially environmental sustainability, increasingly becoming a priority for customers, governments, investors and others, we are very well positioned to continue to lead in this respect and reap the additional awards that go along were doing the right thing. Because of our foundation history, the cannabis opportunity has afforded us excellent growth opportunities for the short, medium and long term, and they might even say very long term. In Canada, first major country in nationally legalized recreational cannabis, Pure Sunfarms is totally delivering profitable growth in an expanding market with significant amount of runway ahead. It has proven our ability to be successful, positioned us to capitalize on our unmatched assets and customer relationships for the U.S. cannabis opportunity. And developed countries around the world are steadily progressing towards legal CBD and medical cannabis markets. We plan to lead in each with a dominant brand and leading market share. We would do so in a capital-efficient manner, always with a focus on return on capital, and we will do so with the objective to achieve profitability in the near term. I am often asked about the potential for Village Farms to make acquisitions. Unlike many of our peers in the Canadian market, we don't see value in large cultivation acquisitions in the wrong geographical area with the wrong technology. We have scale to supply 1/3 of Canadian market, current scale, current assets, and we have a leading brand. And we have what I believe is the best management team, bar none in Canada in the business. And I'm not the only one who believes it. We have built it, and we don't need a reason to buy it. In the U.S. and internationally, as I mentioned earlier, we will look at acquisitions where they enhance our existing businesses, not duplicate what we already have. As the founder and single largest shareholder of Village Farms, I'm encouraged by our progress and confidence in the future. Before I open the meeting to your questions, I would like to take this opportunity to thank all of those that have contributed to our continuing success as a public company. First and foremost, our Board of Directors for their ongoing guidance and counsel as we pursue this vision for our company. Our staff at all levels across village Farms organization, including our executive management teams at Pure Sunfarms and Village Farms whose unwavering commitment and diligence are the foundation upon which we have and will continue to have success on a daily basis. And finally, you, our shareholders, for your continued belief and confidence in what we believe at Village Farms can uniquely achieve as a leader in the international cannabis market. So thank you, and we'll now take questions.

So first question is the space currently in active print to see is nothing growing, is half the space ready for license? Has license request been submitted? And are you currently carrying enough manpower to support Delta 2 or will additional labor be required? So yes, the -- we have converted the majority of the facility, 50% is ready to go as soon as we get our cultivation license, which we applied for quite a while ago, and we believe is on the horizon. Once we have that license, we will immediately move to plant out 50% of Delta 2 to be in production by the end of the third, beginning of fourth quarter, and our goal is to be in full production of the entire Delta 2 facility by the end of the second quarter next year, doubling our current capacity of Delta 3. And we -- I have all the manpower in place. So thank you, Wes, for that question. And being no other questions that I can see. On behalf of the Board of Directors, I'd like to thank you again for joining us today. And we look forward to keeping you apprised of our progress in all of the opportunities that we described today. Thank you. John?

Thank you. It's a -- we're bringing the morning afternoon to a close, and thank you all for joining us, and have a good day.