Q3 2011 Village Farms International Inc Earnings Conference Call

Nov 14, 2011 AM EST
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

VFF.TO - Village Farms International Inc
Q3 2011 Village Farms International Inc Earnings Conference Call
Nov 14, 2011 / 06:30PM GMT 

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Corporate Participants
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   *  Stephen Ruffini
      Village Farms International  Inc - CFO
   *  Michael DeGiglio
      Village Farms International  Inc - CEO

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Conference Call Participants
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   *  Andy Crystal
      Unidentified Company - Analyst

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Presentation
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Operator   [1]
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 Good afternoon, my name is Melissa, and I will be your conference operator today. At this time I would like to welcome everyone to Village Farms International announces nine months ended and third quarter ended September 30, 2011, conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session.

 (Operator Instructions)

 Thank you. Mr. Stephen Ruffini, Chief Financial Officer, you may begin your conference.

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 Stephen Ruffini,  Village Farms International  Inc - CFO   [2]
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 Thank you, welcome everyone. Before we begin today, I need to read the forward-looking statement. At the outset of today's call the company notes that our discussion today may contain certain statements that include forward-looking information.

 Accordingly, we refer you to the company's most recently filed MD&A under the heading forward-looking statements which, amongst other things, identifies material factors that could cause actual results to differ materially from any forward-looking information.

 Moreover, any forward-looking information may be based upon certain material factors or assumptions. Please refer to the company's most recently filed MD&A under the heading Forward-looking Statements for further details. With that, I will turn it over to Michael DeGiglio, our CEO.

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [3]
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 Good morning. Thanks for joining the call. Let me just start by saying I tried to highlight in my remarks in the press release key initiatives that we had taken on this year. And, those include the launching of our new GATES greenhouse in Monahans, Texas. I'm pleased to say we are on track and meeting -- and we're meeting our construction time line.

 So, we're slated to plant 50% of this new facility in early December and the balance in January. It was a very aggressive timeline, so, we're pleased with the result there. In addition, I didn't mention, but, we've continued to invest in our current assets to improve the efficiency across the board through technology.

 That included state-of-the-art sorting and grading machine upgrades to reduce a dependence on labor and our costs across the board, as well as more efficient boilers and a number of other investments we've made. That coupled with the first state-of-the-art packing share that we put in the Dominican Republic, that is for peppers grown in greenhouses that we are under exclusive contract with and making sure that it meets our spec.

 All the peppers will be packed in the DR and then shipped to the US through our distribution centers and on to our customers. We found that was a key items for us to increase our pepper capacity as we need to until we can develop more of our own technology and the greenhouses going forward.

 We initiated a pretty aggressive partnering program with a number of seed companies, both nationally and internationally, to work with them on looking at unique and exclusive varieties that we can have the exclusive for. And, we are happy to say that we've initiated the launch, or are currently launching, one of those varieties which again I mentioned in the press release.

 So, that is in line with the direction we want to go to bring unique and new products to our customers as well. On our sales and our marketing front, we continued to increase our contractual obligations with a number of our customers. Mostly, the big-box chains across-the-board, which involves pricing that is contracted up to one year along.

 It was -- we initiated that back in 2009, and today, I am happy to say, that we are currently selling all of the major big-box guys in the United States. We are pretty -- we are on track with our internal financial expectations for the year. We feel pleased -- we're pleased with the third quarter results. We seem some softening on pricing.

 Again, from my perspective, we're still hovering on a basic recession. And, that, coupled with some continued growth out of Mexico in certain of our product lines, as I had mentioned, have softened the market for the fourth quarter. But, our annual expectations are on track. So, that being said, I'll turn it over to Steve to review some financial data and then we'll open it up to Q&A. Thank you.

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 Stephen Ruffini,  Village Farms International  Inc - CFO   [4]
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 Thank you, Mike. Our third quarter 2011 results were the best third quarter results in the company's history on a revenue in EBITDA basis. Our strong results were driven by a 23% increase in revenues during the quarter as compared to that 2010 third quarter.

 This was a result of higher production as well as higher pricing. And, in addition to, we had higher supply partner revenues due to the same factors, production and pricing. The average selling price for tomatoes during the third quarter of 2011 was 8% higher than the same period in 2010.

 The increase was primarily driven by improved customer mix, which Mike just mentioned, with the big-box retailers. Our own production volume was 13% higher in the third quarter of 2011 versus the third quarter of 2010. This was a result of a slightly different crop cycle in our Texas greenhouses in 2011 versus 2010.

 Year-to-date, we have produced roughly 5% more pounds from our Village Farms owned greenhouses in 2011 than we did year-to-date 2010. Due to higher Village Farms production volumes, as well as higher supply partner revenues, our cost of sales increased 11% for the quarter ended September 30, 2011, versus the same quarter in 2010. Due to the higher volumes, as you might expect, our freight costs were higher on a year-on-year basis.

 Part of that is also due to higher fuel charges in the third quarter of 2011 versus 2010 simply due to higher fuel cost. As a result, our freight costs are running roughly 10% higher per pound than a year-on-year basis. If one disregards freight costs, our Village Farms only produced pounds costs increased 2.3% over the prior year.

 If one factors in the higher production volume in 2011, our Village Farm's net margin, excluding freight, increased to 23% in 2011 from the 10% in 2010 which is the primary driver of why our EBITDA was significantly higher in 2011 versus 2010. Our SG&A costs increased 17% on a year-on-year basis, although much of the increase was due to -- was attributable to the 2011 bank and professional fees incurred of $475,000 on our new credit facility.

 If we exclude these costs, are SG&A costs were 3% higher in the third quarter of 2011 versus 2010. Our net -- our income from operations of $306,000 was significantly affected by the differing impact of the change in biological assets which was a charge of $2.2 million for the period ended September 30, 2011 versus $1.1 million of income for the period ending June 30, 2010.

 The driver of the significant difference of $3.3 million was due to the higher June 30, 2011 value over the June 30, 2010 value as compared to the value of our biological assets on our balance sheet on the respective reporting dates of September 30, of each year. If one compares the value of our biological asset on September 30, 2011 of $5.6 million it was only $400,000 lower than the value on September 30, 2010, due to lower October 2011 prices versus October 2010.

 Due to the significant impact of the difference of the change in biological asset, as well as the one-time receipt in 2010 of a prior-year Canadian government subsidy of $1.1 million, our third quarter 2011 net income was a small off and $218,000 versus the prior year third quarter net income of $131,000. Due to these two factors, we believe our EBITDA of $4 million for the quarter ended September 30, 2011 versus the prior-year quarterly EBITDA of $1.1 million is a better indicator of our strong operating results for the period.

 As Mike mentioned, our Monahan's project is going well. Through September 30, 2011, we incurred construction costs of $20.1 million. We expect to incur a total of $38.6 million on this stage of the project with some of those costs slipping into 2012. Of the $20.8 million spent, we utilized $8.9 million of our $28 million construction term loan with a balance coming from our operating cash flows.

 We will finance the remaining balance of $18 million in construction costs from our construction term loan. So, we are in excellent position to fully fund our capital expenditure for this project. As a reminder, as we mentioned in the past, we are planning to incur an additional $4 million in the summer of 2012 to install lights in the Monahans greenhouse once the local utility has upgraded the power lines. The $4 million will be paid from ongoing operating cash flows.

 For our Canadian investors who may not be fully aware of US tax laws, the 2010 Tax Relief Act provided for the full reduction of 2011 capital expenditures in 2011. As such, with the successful completion of the Monahans greenhouse project in 2011, we will generate a significant US net tax operating loss carry forward, which we project will offset all of our US federal taxes through 2014. The significant savings in cash taxes will provide additional capital for our expansion, or to pay down debt going forward. With that, we will open up the session for Q&A.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Your first question comes from the line of Andy Crystal.

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 Andy Crystal,  Unidentified Company - Analyst   [2]
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 Hi, guys, good afternoon.

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [3]
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 Good afternoon.

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 Andy Crystal,  Unidentified Company - Analyst   [4]
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 I was just wondering if you could talk a little bit more about the Dominican Republic deal that you entered into. Because, I guess this is the first time we've had a chance to talk to you guys about it since you have announced a little bit earlier. So, I guess, just the structure of the deal, whether you own it or it's just third parties? If there have been any revenues included in this quarter from the operation?

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [5]
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 Well, no, we don't own it. We contracted a -- with a contractor in the DR to build a building and signed a long-term lease. He built into our specifications including making it state-of-the-art for food hygiene. And, we installed all of the equipment ourselves other than the cooler that was part of the lease. But, the sorting and packing, grading, and other equipment is ours. We started on that -- looking at that about 1 year ago. The DR has very high altitude -- actually mountains, they are up to 8,000 feet. So, up at about 2,000 feet to 4000 feet there are a number of greenhouse growers who grow peppers. They grow a very high quality pepper.

 That was really the catalyst behind picking the DR because our demand for peppers is increasing significantly and needs to be balanced with our other product lines. We are still limited -- actually we don't grow any and we need to. However, we also need to grow more cucumbers and more varieties of tomatoes. And, that's our primary focus on our assets, though, that is why we looked for increasing the partner assets. In this case, we did make the investment for the pack and ship so we could be sure that we could control the product from the greenhouse all the way to the customer. And, no revenues were realized in the quarter we just reported. We've started -- commenced shipments this month coming to the US, now.

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 Andy Crystal,  Unidentified Company - Analyst   [6]
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 Okay, so, I guess it is the partner that owns the asset? And, you guys lease it or are you guys just buy all of the --?

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [7]
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 Correct, we lease it. We lease the facility just like our other 4 distribution centers are leased. And, the equipment is ours and it is our own employees. So, we have a -- we incorporated an organization the DR, we lease the building, but our own equipment in there and so that's what we did.

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 Andy Crystal,  Unidentified Company - Analyst   [8]
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 It's just the distribution center not the actual greenhouses themselves?

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [9]
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 Correct, it is not the actual greenhouses but it is all the sorting, grading, packaging, and distribution. So, it is the fulfillment side but no investment whatsoever in the greenhouse operations.

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 Andy Crystal,  Unidentified Company - Analyst   [10]
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 Okay, and will there be room to increase capacity at that fulfillment center?

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [11]
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 Yes, we're looking at increasing pretty significantly over the next 2 to 3 years. We have a number of technical advisers there. So, we are working very close with the growers in bringing them higher and higher technical expertise in order to better meet our specification. So, we have financial people and -- as well as laborers that do all of the packing and grading technical people as well.

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 Andy Crystal,  Unidentified Company - Analyst   [12]
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 And, what city it is it located in the Dominican?

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [13]
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 It is in Santiago.

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 Andy Crystal,  Unidentified Company - Analyst   [14]
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 Santiago, okay. Perfect. Thank you, very much.

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [15]
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 You're welcome.

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Operator   [16]
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 (Operator Instructions) There are no further questions at this time.

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [17]
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 Okay, well, thank you very much for joining the call. And, we look forward to talking to you in the near future.

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Operator   [18]
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 Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.

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 Michael DeGiglio,  Village Farms International  Inc - CEO   [19]
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 Thank you.




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