Q2 2012 Village Farms International Inc Earnings Conference Call
Aug 17, 2012 AM EDT
VFF.TO - Village Farms International Inc
Q2 2012 Village Farms International Inc Earnings Conference Call
Aug 17, 2012 / 05:00PM GMT
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Corporate Participants
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* Stephen Ruffini
Village Farms International Inc - CFO
* Mike DeGiglio
Village Farms International Inc - CEO
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Conference Call Participants
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* Andy Krystal
Royal Capital Management - Analyst
* Hugh Cooper
RBC Dominion Securities - Analyst
* Peter Wong
Raymond James - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Matthew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Village Farms International 2012 second-quarter results 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)
Stephen Ruffini, you may begin your conference.
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Stephen Ruffini, Village Farms International Inc - CFO [2]
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Thanks. We appreciate everyone's interest in Village Farms and your time today.
It was a tough quarter with challenging pricing and the hail storm, both of which had a severe negative impact on our revenues. Revenues decreased 26% to $39.5 million for the second quarter of 2012, from $53.6 million in the second quarter of 2011. The decrease is primarily driven by a 24% decrease in tomato pricing, coupled with a 5% decrease in the Company's production, which was directly attributable to the lost production at our Marfa facilities of approximately 5.5 million pounds. Tomato pricing continues to remain challenging, as it has since the fourth quarter of last year, due to the continued influx of supply from Mexico as well as US field crops having a good year, as they have not been impacted by mother nature events as they have in prior years.
Our cost of sales for the second quarter were $45.7 million, which is almost exactly even with the last year's figure. Although the second quarter of 2012 does include an inventory write down of $3.9 million, which relates to the book value of the crops lost in the hail storm, which would have been sold in June and July; but unfortunately, due to the glass damage we were not able to sell them and had to throw the plants and the crops on them out. We are very focused on reducing our cost per pound and expect to report improved results on our costs going forward.
Since the hail storm, we have been working with our insurance adjustors and our carrier to get our claims resolved as quickly as possible. Since June, we have received $18.7 million in net insurance proceeds. This allowed us to commence in June the repairs on 40 acres of our damaged 82 acres, but they were not sufficient for us to commence repairs and replacement on the remaining severely damaged 42 acres. We did not want to commence any work on the other 42 acres or make any decisions until we have settled our insurance claims, as we do not want to get ahead of ourselves and ahead of any forthcoming additional insurance proceeds. With the receipt of the last $9 million, since it wasn't sufficient to begin work on the 42 acres, we reached an agreement with our financial institutions to pay down part of our term debt to reduce our ongoing interest expense while we await the initial findings from our carrier. With respect to the repaired 40 acres, one-third of the facility is fully operational with plants, and the remaining two-thirds is in the final stages of repair and will be replanted in stages over the next few weeks.
Our second-quarter results also include an asset write off of $2.8 million. This is the book value of the damaged part of the 82 acres, most of which relates to glass, structural parts, and screens. Due to the age of the large facilities comprising 80 acres of the 82 acres, most of the original costs have been fully depreciated over the last 15 to 16 years. The replacement cost of the facilities is substantially higher, which is why the insurance proceeds received to date are substantially higher than our asset write off. Our biological asset value on June 30, 2012 was $5.3 million, which is lower than the June 30, 2011 figure of $6.8 million. This is primarily due to lower pricing in July 2012 versus July 2011 and higher finishing costs in 2012 than in 2011 due to the cost of our Monahans crop.
Our SG&A costs for the quarter were up versus the prior-year quarter by $265,000, or 8%. The increase is primarily due to the addition of headcount for our Monahans facility as well as some new product marketing costs incurred in the second quarter of 2012. We are focusing all our efforts on the remainder of this year into reducing our overhead costs and have already started making changes to show better results in that aspect of the Company's operations. Income from operations increased by $3.6 million to $4.9 million from $1.3 million, primarily due to the income impact of the net insurance proceeds exceeding the reduction in our revenues for the quarter. Interest expense is up year on year due to the higher leverage in 2012 versus 2011, due to the additional borrowings we took on to build our Monahans facility, which began in earnest in the third quarter of last year.
There is a significant difference between the second quarter of 2012 and 2011 with respect to our taxes, which is related to the hail storm. For tax purposes, insurance proceeds are only taxable to the extent they exceed one's tax basis plus replacement or repair costs of the damaged assets. At this time, the insurance proceeds received to date are less than our tax basis plus the cost to replace, so there is no tax income with respect to the net proceeds. As such, we recognized a tax recovery of $3.7 million versus a small tax expense last year in the second quarter of $200,000. Results of higher operating income and a tax recovery versus tax expense is higher net income for the quarter ended June 30, 2012, versus June 30, 2011 of $7.7 million, versus $500,000, respectively, resulting in an earnings per share for the second quarter in June 2012 of $0.20 per share versus $0.01 per share for the quarter ended June 30, 2011.
We are very focused on improving our operating results with improving our pricing, customer mix, a reduction in our costs and are very focused on improving our leverage ratios going forward. With that, I will turn it over to Mike DeGiglio.
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Mike DeGiglio, Village Farms International Inc - CEO [3]
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Good afternoon.
Steve has done a very good job (technical difficulty) since the hail storm on May 31. Overall, (technical difficulty) production, and we should be fully operational, as far as harvesting, by November. The rest, I think, has been replaced adequately, and we don't have more to report until we know where the insurance claim is (technical difficulty). It has been challenging, and it remains challenging, still pricing -- even pricing have not been (technical difficulty) even have them at list point recently with the Mexican imports. We had not seen any [pull-forwards] in the market, and (technical difficulty) it continues to be the economy affecting it as well as the (technical difficulty) around Mexico is ramping back up.
However, we are aggressively moving forward, working with the government and the industry to take an action. And, that process is very visible and public at this point with the Department of Commerce, but I have nothing more to report at this point. Hopefully in the next month or two, we'll know where it stands. It's moving slower than we thought, I think, because of the election year and Congress being in recess over the last month.
Crop mix, as we reported last time, we've continued to diversify, and we're having very favorable results on the launching of two new products. We have more and more retailers over the last quarter committing to it, and we should be ramping that up in the fall and into next year and hope to report on that with stronger results. And these products, a specific variety (technical difficulty) in Mexico. That, coupled with (technical difficulty) key customers, is moving in the right direction. We are expanding (technical difficulty) one quarter into 2013.
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Stephen Ruffini, Village Farms International Inc - CFO [4]
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Mike, I think we've lost you.
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Operator [5]
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Pardon the interruption, sir, I'm showing that his line has disconnected from the call.
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Stephen Ruffini, Village Farms International Inc - CFO [6]
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Okay. Matt, while he's dialing back in, are there any questions?
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Andy Krystal, Royal Capital Management.
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Andy Krystal, Royal Capital Management - Analyst [2]
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I just have a few questions in terms of the insurance proceeds and your efforts to rebuild.
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Stephen Ruffini, Village Farms International Inc - CFO [3]
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Okay.
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Andy Krystal, Royal Capital Management - Analyst [4]
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It looks like, if I'm looking at the amounts that you spent, this would have been on page 16 of your financial statements and on your note nine property, plant and equipment. Am I correct to say it looks like you spent about $5.45 million in the quarter on additions to property, plant and equipment?
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Stephen Ruffini, Village Farms International Inc - CFO [5]
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Yes. Again, some of that will relate to Monahans, though.
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Andy Krystal, Royal Capital Management - Analyst [6]
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Okay. It looks like you've also rebuilt, I guess you've mentioned 5 hectares, or it is going to be 15 hectares by August 31?
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Stephen Ruffini, Village Farms International Inc - CFO [7]
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Yes, that's the 40 acres we -- 15 hectares is roughly 40 acres.
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Andy Krystal, Royal Capital Management - Analyst [8]
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Okay. Does that amount, is it the 5-point whatever amount it was, would that be covering mostly the 5 hectares or would that be for the 15 hectares?
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Stephen Ruffini, Village Farms International Inc - CFO [9]
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Again, some of the repairs were on the entire facility. It's the facility is -- that particular facility that 5 hectares and 10 hectares are side by side, so it's essentially not broken down. As of June most of those costs, the work had begun most of those costs had not been paid for yet, so with respect to that you'll see most of those in the second quarter -- I mean, in the third quarter.
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Andy Krystal, Royal Capital Management - Analyst [10]
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Okay. I guess my question is, do you think the insurance proceeds will be, assuming you get the additional proceeds that you're expecting, would that be enough to cover the replacement costs?
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Stephen Ruffini, Village Farms International Inc - CFO [11]
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With -- the insurance proceeds that we have received to date, are sufficient for us to take on the repairs on the 40 acres. They are not sufficient for us to tackle the 42 acres because the other 42 acres are more damaged than the 40 acres that we've repaired are. And, we simply did not want to get into a position of starting to repair them, and essentially getting ahead of insurance proceeds, and essentially getting stuck in the middle of the stream.
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Andy Krystal, Royal Capital Management - Analyst [12]
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Yes, that makes sense. What would be your strategy going forward, assuming let's say you do receive -- it looks like it's about $13.9 million that's still receivable?
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Stephen Ruffini, Village Farms International Inc - CFO [13]
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We have received that.
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Andy Krystal, Royal Capital Management - Analyst [14]
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Oh, that you have received.
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Stephen Ruffini, Village Farms International Inc - CFO [15]
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We have received that. And of that, $9 million has been, is not sufficient proceeds to fix 42 acres; so in the interim period, we have chosen to pay down some of our term debt simply to reduce our interest expense going forward.
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Andy Krystal, Royal Capital Management - Analyst [16]
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Okay. Because I'm just reading here the note for hail damage. There was a $19.5 million figure?
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Stephen Ruffini, Village Farms International Inc - CFO [17]
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Yes.
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Andy Krystal, Royal Capital Management - Analyst [18]
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It looks like you've received that?
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Stephen Ruffini, Village Farms International Inc - CFO [19]
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Yes.
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Andy Krystal, Royal Capital Management - Analyst [20]
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Then, you have also said that there is $13.9 million, which you've also subsequently received?
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Stephen Ruffini, Village Farms International Inc - CFO [21]
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No.
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Andy Krystal, Royal Capital Management - Analyst [22]
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No --
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Stephen Ruffini, Village Farms International Inc - CFO [23]
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From an income basis, the $13 million is inside the $19 million, so as of June 30 we had not received the $13 million yet.
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Andy Krystal, Royal Capital Management - Analyst [24]
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Oh, so you so far have received about $6 million?
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Stephen Ruffini, Village Farms International Inc - CFO [25]
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No, we've actually now received the entire $19 million.
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Andy Krystal, Royal Capital Management - Analyst [26]
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Okay. And, is there a -- and so what would be --?
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Stephen Ruffini, Village Farms International Inc - CFO [27]
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On June 30, we still had not received $13 million.
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Andy Krystal, Royal Capital Management - Analyst [28]
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Okay. As of today, you've received, give or take, $19 million, roughly?
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Stephen Ruffini, Village Farms International Inc - CFO [29]
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Correct, yes.
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Andy Krystal, Royal Capital Management - Analyst [30]
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Is there another amount that you are currently expecting to receive or are negotiating for?
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Stephen Ruffini, Village Farms International Inc - CFO [31]
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Yes.
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Andy Krystal, Royal Capital Management - Analyst [32]
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How much would that be for?
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Stephen Ruffini, Village Farms International Inc - CFO [33]
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I would not -- we need to have discussions with our carrier. We've made claims, substantially, for more than that.
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Andy Krystal, Royal Capital Management - Analyst [34]
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Okay, fair enough.
Going forward, assuming let's say you do receive that money, what would be your strategy in terms of either going forward rebuilding the greenhouse? Not rebuilding it, and maybe rebuilding it at a later date with the GATES technology? Could you talk a bit about that?
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Mike DeGiglio, Village Farms International Inc - CEO [35]
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Well, this is Mike, and I apologize. I don't know if my phone line went dead, but I'm back on.
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Andy Krystal, Royal Capital Management - Analyst [36]
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No problem.
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Mike DeGiglio, Village Farms International Inc - CEO [37]
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If I could answer that question. That's -- while we're waiting to see what the insurance proceeds are, we are strategizing as to what we will do including crop mix and the timing of bringing that on. So, we haven't come to a conclusion on how much of that 40 acres we would rebuild, and how we would rebuild it. One option would be to rebuild the 40 acres with the current technology. One option would be combining the 20 acres into the 40 acres that's been built for 60 acres or 62 acres, and building that second block with the new technology. That is at -- both of those have a different cost structure to it. Then the timing of when that would come on board to coincide with the market, and also what products we would grow in there, as opposed to conventional. Those things are all being discussed, simultaneously, but we haven't come to any decision yet.
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Andy Krystal, Royal Capital Management - Analyst [38]
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Okay. Given current level of crop pricing, would it make sense to rebuild at these prices, or would it make sense to hold off?
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Mike DeGiglio, Village Farms International Inc - CEO [39]
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Well, it depends on the crop. If we continue the penetration of the new products that aren't under -- the problem is on the core products coming out of Mexico, right now, doesn't necessarily make sense, unless it's going to customers that are paying us a contract premium price, and we do have those customers. So, it would have to either go -- be earmarked on that conduit, or it would go to a product that's not under the pressure that you're seeing out of Mexico.
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Andy Krystal, Royal Capital Management - Analyst [40]
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Okay.
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Mike DeGiglio, Village Farms International Inc - CEO [41]
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Just like we've planted Monahans now with cucumbers that are being sold under a contract price for that diversification. We had talked, over the previous quarters, of moving with this diversification, and it is going. Unfortunately, it's just not a matter of going from 0 acres to 30 acres of the new varieties in one shot.
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Andy Krystal, Royal Capital Management - Analyst [42]
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Fair enough. Was there any mortgage debt on the facility that got damaged?
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Stephen Ruffini, Village Farms International Inc - CFO [43]
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Yes. All our facilities are collateral for our two term loans.
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Andy Krystal, Royal Capital Management - Analyst [44]
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Okay. My next question would be, had there not been the hail storm, would gross profits still had been negative during the quarter?
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Stephen Ruffini, Village Farms International Inc - CFO [45]
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Gross mean the -- you just talking about gross margin?
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Andy Krystal, Royal Capital Management - Analyst [46]
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Yes, gross margin.
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Stephen Ruffini, Village Farms International Inc - CFO [47]
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It would have been slightly negative, yes.
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Andy Krystal, Royal Capital Management - Analyst [48]
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Okay.
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Stephen Ruffini, Village Farms International Inc - CFO [49]
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That's based on, presumably, what pricing would have been for the month of June for the pounds that we sold.
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Andy Krystal, Royal Capital Management - Analyst [50]
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Okay. The heat's not affecting the Mexican market, like what they're talking about on the news in the US?
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Mike DeGiglio, Village Farms International Inc - CEO [51]
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No.
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Andy Krystal, Royal Capital Management - Analyst [52]
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No. Can you talk a bit about the line of credit?
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Stephen Ruffini, Village Farms International Inc - CFO [53]
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Yes. Obviously, we're accessing our line of credit on an as-needed basis.
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Andy Krystal, Royal Capital Management - Analyst [54]
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Okay. Does that have any terms in terms of when you need to pay that back, or --?
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Stephen Ruffini, Village Farms International Inc - CFO [55]
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It's just a pure revolving line of credit with a percentage of our accounts receivable, which is the underlying collateral for that. So, we just have to essentially stay underneath the percentage of our accounts receivable versus the line.
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Andy Krystal, Royal Capital Management - Analyst [56]
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Okay. In terms of the strategy of getting the first 40 acres back on, that was because you had the contracts. You wanted to get that back up so you could fulfill the contracts, and that now you have enough acreage to fulfill all of the current contracts you have outstanding?
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Mike DeGiglio, Village Farms International Inc - CEO [57]
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Yes. If we break out our customer mix in, let's say ABC, and A and B-plus being core key customers, we were very swift to complete that first 40 acres because that gives us the production we need to maintain our key customer base. Or, at least be 90% there, and the other 10% is workable, as we have a strong procurement division in our Company. So, that was the priority, and that's why we executed it so fast, and that will not be in jeopardy.
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Andy Krystal, Royal Capital Management - Analyst [58]
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Okay, perfect. Last question is, when do you expect to have updates on the last amount of insurance that you are going to be receiving or expecting to receive?
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Stephen Ruffini, Village Farms International Inc - CFO [59]
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Hopefully, any day. We've had lots of assurances that the carrier is going to come forth with their initial report, but so far --
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Andy Krystal, Royal Capital Management - Analyst [60]
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Will a press release come with the findings, or will we have to wait until the quarter ends?
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Stephen Ruffini, Village Farms International Inc - CFO [61]
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Well, it really depends, to be honest with you. So far, while we have been very happy that we've got sufficient proceeds to rebuild 40 acres; as Mike said, it was extremely important for us to maintain our core customers. Thankfully, we have Monahans plus these 40 acres, so we have 70 acres going into winter months, which is very important for us for our Texas production. Unfortunately, we had hoped to have this all resolved by this phone call because we recognize it creates a lot of uncertainty about the Company, so -- afraid I'd be speculating. We will come forth as soon as we have it resolved because we understand it creates a lot of uncertainty.
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Andy Krystal, Royal Capital Management - Analyst [62]
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Perfect, thank you. Good luck getting it resolved, and good luck with your quarter.
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Mike DeGiglio, Village Farms International Inc - CEO [63]
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The only thing I'd add is, we probably would issue a press release immediately on the findings, depending on what those findings are, because I think the process will still continue for some weeks ahead.
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Andy Krystal, Royal Capital Management - Analyst [64]
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Okay, sure. Thank you.
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Operator [65]
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(Operator Instructions)
Hugh Cooper, RBC.
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Hugh Cooper, RBC Dominion Securities - Analyst [66]
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Just a question on the insurance proceeds on the balance sheet. The other receivables at $14.5 million, I presume that's the insurance in there?
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Stephen Ruffini, Village Farms International Inc - CFO [67]
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Yes.
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Hugh Cooper, RBC Dominion Securities - Analyst [68]
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Okay, so what you've done is you've taken $9 million of that and paid down the debt. So, your working capital will go from, say $17 million to $8 million, and your debt would go from $70 million to $62 million, is that about right?
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Stephen Ruffini, Village Farms International Inc - CFO [69]
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Yes.
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Hugh Cooper, RBC Dominion Securities - Analyst [70]
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Okay. Steve, is this a high point on a seasonal basis for your long-term debt? Does it come down, typically, from here? Like this quarter, is this the high point for, typically, for your --?
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Stephen Ruffini, Village Farms International Inc - CFO [71]
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Yes. This will be the high point because we made some additional borrowings -- the term debt, which is term debt two if you looked at our notes, relates to Monahans. We've made the final construction payments for Monahans and the final draw on that term debt for Monahans in April, which was in this quarter, so that is fully drawn.
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Hugh Cooper, RBC Dominion Securities - Analyst [72]
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Okay. Then seasonally, this is also a high point as you start bringing money in, your debt will come down on a seasonal basis, as well?
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Stephen Ruffini, Village Farms International Inc - CFO [73]
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Seasonally, from a cash-flow standpoint, typically the summer is actually stronger, as we have more volume. Typically, while our profits are higher, our cash flow lags those in the first quarter; so typically, we're paying for the dark Canadian facilities for the months of December, January, February and into March. The real cash pressure from our Company from working capital really comes in the first quarter.
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Hugh Cooper, RBC Dominion Securities - Analyst [74]
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Okay. What -- I guess, there's the range depending on how you do it, but what would the cost -- what, roughly, are you talking about the cost to put the other 40 acres back into production?
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Stephen Ruffini, Village Farms International Inc - CFO [75]
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Again, it really, as Mike alluded to, comes down to two things. One, what the claim ends up being resolved at; and then, what we end up doing with those proceeds. And, there are several options here.
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Mike DeGiglio, Village Farms International Inc - CEO [76]
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Yes, because in the past, without the hail storm damage we probably would not have converted one of the facilities with the new technology. However, now we are looking at that, since it has to be extensively repaired. There's two different cost factors. That, again, comes back into pricing, what crops would we grow, what customers would we target, and when would we come in, and would we be better off with conventional 40 acres or new technology 20 acres, as an example, just to illustrate it. That's what we have to make a decision on.
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Hugh Cooper, RBC Dominion Securities - Analyst [77]
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Okay. In terms of pricing, overall in terms of the cyclical part of the pricing, right now you've had a pretty crummy pricing year. You've had a perfect storm of good weather back east and Mexican production coming up. What do you see and what's the silver lining coming the other way? You can stop the Mexican production from coming up? Maybe the weather will be worse? Do you see this as a new permanent pricing, or is it just a cyclical bad time in the cycle?
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Mike DeGiglio, Village Farms International Inc - CEO [78]
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The business model, as we mentioned last time, the business model has to be based on differentiating ourselves with the core customers who value how we differentiate ourselves, tied to local regional production, where -- and the fact that many customers don't want Mexican product if you have local regional, and that value and pricing is separate.
That is the model going forward, so even when we look at a possible action on a dumping lawsuit, or the initial vote that we hope Congress will make in canceling the suspension agreement, and keep in mind that the suspension agreement is an agreement that was established in 1996, I believe, that suspended a US dumping lawsuit against Mexico, so that order, that dumping lawsuit back in '96 has just been suspended with an agreement. That would be the first. So if that happens, I think we'll see benefits from a benefit in price, but that doesn't necessarily mean long term, there won't be pressure from imports, like Mexico. That's why the business model to expand on a local regional is very important.
Hello?
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Hugh Cooper, RBC Dominion Securities - Analyst [79]
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Yes.
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Mike DeGiglio, Village Farms International Inc - CEO [80]
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Okay. Did that make sense?
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Hugh Cooper, RBC Dominion Securities - Analyst [81]
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Yes, I got it. Thank you.
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Operator [82]
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(Operator Instructions)
Peter Wong, Raymond James.
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Peter Wong, Raymond James - Analyst [83]
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I just joined the conference call a little bit late, so sorry of this question was covered. Maybe you could talk about the debt covenants with the bank, and just an update on that?
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Stephen Ruffini, Village Farms International Inc - CFO [84]
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Yes. We are in compliance as of June 30 with our debt covenants. We're very cognizant of those. We have been working with our banks throughout the second quarter with respect to those. We're in compliance and expect to remain in compliance. Ultimately, it comes down to executing with respect to improving our revenues, with respect to our pricing and our products.
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Peter Wong, Raymond James - Analyst [85]
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Great, thank you.
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Operator [86]
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We have no further questions at this time.
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Mike DeGiglio, Village Farms International Inc - CEO [87]
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Okay. Thank you very much for your participation, and we look forward to speaking to you in the near future.
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Operator [88]
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This concludes today's conference call. You may now disconnect.
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