Q4 2019 Earnings Call
[music].
Our available on SEDAR and on the company's website at <unk> village farms Dot com under the investors heading. Please note that today's call is being broadcast live over the internet it'll be archive for replay both by telephone and via the Internet beginning approximately one hour following completion of the call. He tells us how to access to replace our available and yes.
It was really before we begin let me remind you that forward looking statements may be made today during or after the formal part of the conference call certain merit material assumption for applied and providing these statements many of which are beyond our control such statements are subject to a number of risks and uncertainties that could cause actual results could differ materially from those expressed or implied in forward looking.
These risks and uncertainties include among other things the factors contained in the company's filings with securities regulators, including annual report on form 10-K for the year ended December 31st 2019. These forward looking statements are made as of today's date, except as required by applicable securities laws. The company undertakes no obligation to publicly update or.
Revise any such statements.
I'd now like turn the call over to Michael.
Chief Executive Officer bombs International. Please go ahead Mr. Julio.
I think Sharon.
You to everyone joining us today by telephone and Internet with me for today's calls, we'll try and Chief Financial Officer, Steve Phoenix.
The agenda for today's call I'll start with a high level, we view of the highlights most notably the generation of net income in excess of $36 million like curious informed in its first full year about operation.
Absolutely thrilled at the performance of the management team in this first year Pearson forms.
Keep an eye, Steve will then review how financial results and I, we turned to discuss why remain so confident the future of our company and be happy to take questions about.
Before I begin clearly a few words with respect to lobby. These unprecedented challenges, we're facing and thoughts and prayers are with those affected by the carbon 19 pandemic, including to put money in health care works across the entire country village farms.
Highest priorities to health and safety about employees customers and vendors and partners and their families. As we continue to fulfill our obligations to customers and ensure that we are meeting the demands of the consumer at this critical time as a highly regulated operation facilities already adhere to the highest health and safety stand.
And he has put.
That was put in place has heightened currently I know hygiene practice and safety protocols across all disciplines in our company.
And is taking appropriate caution as per the recommendations of health authorities.
We'll continue to win happened about such practices and protocols have to situation warrants, but at this time all of electronics impressed from falling through filter through lane open and operational that normal production levels.
Consumers need fresh produce and kind of the stores in Ontario, and elsewhere have been deemed the central services and we'll continue to fulfill our commitments as long as safe and committed to do so.
So with that starting with pure Sun farms, beginning with the majority young Canadian cannabis joint venture, which I remind you we now long just over 57%.
And as per our news release. This morning, we expect a very shortly increase that brought the just shy of 59%.
2019 was an outstanding year for Pearson forms a year, which could emerge as a best in class vertically integrated kind of a supplier one of the largest and most efficient high quality producers would I talk Brad and one up just a very small number of counted as companies that are profitable even at this very early stage in the end.
History and wouldn't nearly all of the first year sales to the wholesale market its operational financial performance in 2019, clearly stands out amongst the Canadian kind of this industry.
Proving out value Oh out the value of decades of large scale growing at an operational experience contributed by village farms low cost production.
Fishing capital investment.
Disciplined cost management, and smart highly talented and experienced leadership team.
It validates everything we said would be critical to success in the industry.
All of this contributed to a business that was highly profitable interest as first do you have operations generated net income of 36.5 million and EBITDA of 54.1 billion I'd, just shy of 83 million themselves.
Gross margins for the year, we're a very healthy 76%.
With all in cultivation costs, including depreciation for the year of 78 cents a ground, but more importantly for the last three quarters average down to 65 cents per Gram, which continues to be the lowest cost bicuar he industry to our knowledge.
This is clearly stand out performance in the Canadian industry, but the performance of Pearson farms is evident and what it hasn't done no loss crops no bloated corporate cost structure no asset write downs no return provisions no facility closures will lay off no restructurings no leadership departure from.
Changes [noise].
It is something that we're incredibly proud of and a testament.
To not only the best management team up your son fonts, but the right management team.
To the value of the 30 plus years of cultivation and operation experts at village runs brings to the table.
Now turning to the fourth quarter, the Canadian industry continued to be challenged by oversupply as well as a smaller than expected retail store in that work, especially in Ontario, which has nearly 40% of catalyst population and continued to significantly limit the true underlying legal demand, that's just really limit because.
Version of the elicit market.
Against this backdrop pure sunflower modest Q4 sales reflect its pivot from 100% restricted that we work to the wholesale market.
Right through the ended the third quarter.
To nearly 100% of sales in the fourth quarter to the branded retail Mark.
This is the foundation of sales going forward.
Leading brands position, we are selling more dried canvas product in Ontario than any other brands.
Let me remind everyone that pure sort of bonds is not able to sell to the retail market until the very end of the third quarter last year.
In wholesale as expected Ambled did not take any of the 40% of production, which you that contracted for.
And although this was a continuation from the third quarter two at Southern Florida was unable to redirect such a large quantity to other buyers in the short amount of time, especially given I'm more or less.
It's a non existent wholesale market in the fourth quarter.
In branded retail the timing of shipments, which is when sales are recognized with such that the first large initial shipments, Ontario fell in the last week of Q3 and I'll go orders for Alberta, what secured in Q4.
Shipments were delayed on to Q1.
The most important take away for us from Q4 is that the financials clearly underscored the validity and the strength of the pure a sponsor gilson forms business model.
Even in an unusual quarter with modest sales gross margins were very strong and both net income in EBITDA were positive and I will note that this was the fourth consecutive quarter of positive net income and the fifth consecutive quarter, a positive EBITDA for two or some form.
And I'm pleased to report the that's expected sales to the provinces had wrapped up very nicely in Q1.
What our initial shipments to Alberta and regular replenishment orders with all three provinces. We've also started to see a renewed activity in the wholesale market Q1 of this year.
Before I mentioned, a three provinces in which grew up some foreign products have been launch has been outstanding during the fourth quarter up your sort of bonds was a top selling dried candidates brand by both dollars and kilograms sold within the Ontario, Canada store, what a 13% market share.
Its flagship product was the number one selling dried kind of this product and two at the top five products within the O C S. What pure some forms products.
That performance was repeated in the first few months of 2020 with market share now increasing the 13.5% and pure Sun farms, having two of the for best selling dried kind of its products.
As I mentioned earlier in February.
Some forms and to the Alberta market, which has at least double the per capita consumption across each of the other three largest Canadian provinces.
This is directly attributable to the size of the retail store network would around 430 outlets and still expanding.
The first shipment took longer than expected that's up wear to work through existing inventories from other producers.
But the province, ultimately increase the size of its initial order.
The products are getting great initial feedback from retailers and consumers alike.
Really bricks and mortar retail stores matter to driving sales volumes and that's why it's very encouraging the finally see momentum in the retail store openings in both British Columbia in Ontario.
British Columbia recently increased to store count considerably now more than 175 stores and posted the highest rate of sales growth in January and Ontario is now around 50 stores with major expansion expected this year and next.
Yes, that's wants is actively looking to expand into additional provinces as well.
Yes, and farms brand performance gives us great confidence in the prospects with snacks products pre roles oils and new product formats. Undercounted was 2.0 watch of the first kind of is 2.0 products.
As expected, but curious on funds later this year.
As it did would like dried counted this launch management is approaching development introduction of new products in a measured the strategic and prudent manner clearly has proven out but your thoughts on strike flower retail launch you do not need to be first to market to be number one in the mark.
From day, one we have said that being a low cost producer would be critical to long term success in the Canadian kind of this industry. We didn't anticipate it would be as important as it has become in the very short term not only for success in profitability.
But for many other survival dressing bombs industry, leading cost of production has enabled it to strategically differentiate itself as the quote affordable luxury unquote brand quality products that people want at the right price its value proposition that is clearly resonating with consumers while John.
Rating profitability.
All in cultivation cost for Q4 was 66 cents per gram against that includes depreciation.
And 78 cents for the year and again that was achieved as operations weren't wrap up mode throughout much of last year. This is a significant advantage. It provides tremendous pricing power to not only capture additional market share in the legal market, but to start to take meaningful share from the elicit mark to this and <unk>.
Sounds recently larger large format 28, Gram one ounce value package.
Which will feature at the same level quality products consumes have come to know and expect when pure since launch pad b cells. The $99 retailer just over $3 at 50 cents per Gram. It read a it's a price at which grew at seven farms gets still generate a very healthy gross margin.
Since launch will be on yielding has pursued a further lowering production costs and further enhancing quality recently person upon receipt health Canada approval.
To bring it snows Daisy art 65000 square foot processing center within the Delta three facility have to full operation the process incentive significantly up your son farms game in a number of ways.
Yes influence qualities are ready unmatched, what the current price point, and the new crashes and including new drying rooms, using advanced technology and processes as well as old world check Zigs and dry wont able PEO sent wants to take quality and consumer experience to hold another level.
This new processing area will also generate efficiency suffered a little production costs importantly, the new areas have been designated to satisfy full.
European Union GMP compliance it certification, which Pearson farms is currently pursuing with a significant expected growth in the kind of this market over the next several years, leading market share performance, but international opportunities. We are working towards having the addition of 1.1 million square foot of the Delta to facility after.
Already and we will put there was so they have to full production as market demand warrants.
Earlier this month, we announced a settlement of village forms of course imports dispute without joint venture partner animal health and we're pleased to be able to settle the matter in a timely manner. All of the details on the news release announcing the settlement do want to highlight that as part of the settlement Qs and fonts supply agreement would ammo help with 2020 to 2022.
Is mutually terminated we use this as a huge positive as it will allow purists on forms a focused predominantly on the retail market building on that success to date.
It also resulted in pure Sun and village fondly, increasing its ownership of Qs up off the 57.3 and soon to be almost 59%.
Now turning to U.S. CBD and HAMP program 2019, initially so a great progress and starting to build the foundation to capitalize in this transformation of long term opportunity with a number of important achievements formation of village fields have for outdoor cultivation of extraction a successful inaugural.
Outdoor growing season, the start of conversion of a portion about Permian basin greenhouse gas production and continuing advancement on our consumer package goods strategy working with meeting CPG consultants to identify and prioritize the right products in China was granted the space.
However at this time the industry is significantly challenge by the lack of regulatory clarity and visibility that we clearly thought would be hefce have been sorted out by now a year ago.
The FDA has refused to provide a decision around the use of CBD compounds for food drinks and health care supplements and other potential large market applications, nor has it provided a timeline for such a decision.
And the initial regulatory framework for how cultivation from the U.S. dee.
And some states add departments, including taxes are highly restricted.
And confusing to the point that we believe that this time prohibits profitable have production for large scale growers. Accordingly, we have taken a pause in our capital spending around have cultivation and extraction as we await regulatory clarity that means the suspension of the conversion of part about Permian Basin, Texas facility for Huh.
And at this time has not yet committed to have cultivation 2020, and deferring capital expenditures for the plan extraction operations in Georgia.
It's the prudent decision for the company in our shareholders. We don't believes this change is the magnitude of the opportunity in any way it just pushes the timeframe out.
And I want to be clear that does not meet not does not mean that we have stopped working out CBD strategy, we remain committed to the industry and continue to work currently on opportunities.
Moving forward.
We are not alone here the f. the age resistance to providing a regulatory path forward just preventing lawful companies.
Including some of the U.S. largest and most respected CPG companies and retailers from pursuing the CBD strategies, we need the FDA to act as a collaborative partner.
Within in the industry to develop a regulatory pathway for CBD. This will enable waffle companies like village wanted us to pursue happens GP strategies with the associated broad base economic benefits and alleviate the significant with the public health that exist today, and an unregulated Grace CBD market.
For produce.
I've discussed on prior calls out Protess businesses transition as we execute on our strategy, which we currently move 65 acres of our own production of our own assets that was displaced by conversions for cannabis and have to partner growers in Mexico and Canada.
Based on annual crop cycles is building new relationships. This process. This is a process and it takes time as expected 2019 quotas results continued to be impacted by pricing pressure from our U.S. and Canadian retail customers. Although we have seen a sizable change in the first quarter of this year as the man has site due to the.
Correct.
Jewish but the virus.
We've also isolated production challenges at one of our facilities with put further pressure on volumes ahead of the addition of 120 acres of growing part of the capacity coming Onstream. In 2020. This will allow us to drive revenue tie woman Cheney cost and mitigating the agriculture lift that could negatively impact the pros results as we work towards I'll go to return.
The pros business habit positive EBITDA generation, we'll keep our talent and other resources in place.
And strong for the future opportunities in CBD and kind of this in the U.S. now I'd like to turn the call over to Steve to walk through financials at a high level. Thanks.
Thanks, Mike first obviously the company was disappointed me in particular for hopping getting our full 10-K filed yesterday, we made a value efforts, Iran and figure out of time due to the aggregation XBRL nature of of coating all our financials, a we were very close.
But we're not going to make the 500 deadline yesterday. So we expect to file that on Wednesday of this week.
Hi, thank everyone for their their efforts obviously between ourselves our attorneys are accountants and everyone else working from home. He just was not a very efficient process as as well as the printers not working closely so I appreciate all those that.
Worked throughout the last week into the Wee hours in the weekend and we didn't quite get there but.
The whole world can lead all 550 page on on Wednesday.
I'll give some.
People to do and then a crazy are the primary differences as I've said before between U.S. gap in Iraq.
Biological assets.
The the Pearson farms financials will be included.
In our.
Big 10-K filing and Pearson farms is a Canadian company will have to bile acid and it.
Village farm excludes bile acid that which has no impact on Pearson farms revenue our EBITDA.
But for those that wants to try to compare Pearson farms to the other Canadian Canada something to do report a bio asset our you'll be able to do that.
The other difference between U.S. GAAP and I have for Ras as it reflects on village farms.
Is as most people know at Anvil had asked some shares outstanding for most of 19 and 17 and part of 18 under US GAAP escrow shares are not sound.
Allocating income so for 2017 and 18 pardon.
This is less GAAP results.
Your life or asked took a larger share of the early I'm curious on farms expenses. They didnt have revenue in 17, and having ready to the fourth quarter of 18.
And then for 2019, we took a larger share of the profits a in the early part of the year.
So again simply due to the U.S. GAAP treatment, which allocates more of their profit and loss to us based on the paid for shares versus the true economic interest. So we have adjusted our EBITDA as you will see in our press release for to adjust for EBITDA down.
And to what we believe is the.
Correct way of looking at it essentially is with our economic interests.
We also in April will be we'll be filing an 8-K for every one of our 2019 quarters. So we will be restating the the U.S. GAAP quarters.
From the.
My first quarters, which were filed earlier this year.
Oh, so stay tuned for that.
As Mike said Theres, some front outstanding year, 83, nine and sales to 4 million EBITDA a I will note in the gross margin the gross margin for the full year, 76% is a better comparable or rather than trying to compare the gross margin between Q3 in Q4.
Due to the settlement of the animal dispute the.
The kilograms at that pertains Super charged.
Against the earnings of pure some farms and the gross margin in the third quarter, but due to the dispute. The revenues were settled in the fourth quarter. So on it it does skew the two quarterly gross margins. So at the readers should pay attention to the full gross margin for the year of 76% as we've noted in the pro.
Absolutely.
The cost of cultivation for the full year was 78 cents, obviously, there's other cost of goods sold and packaging handling transportation's being the primary reasons.
We've broken out the cost cultivation.
Really for the first three quarters that wasn't a lot of other significant costs that went into our cost of goods other than the cultivation.
When you're selling it and not in 100 grams big bag assets, there's not a lot of packaging costs, obviously with the launch of the retail adult use.
Channel of those costs will increase.
Increase with respect to packaging and transportation, but with respect to.
The quarter to quarter comparisons why we've broken up cost of of cultivation I as Mike mentioned last three quarters were significantly below 78 cents. A as you may recall first quarter was about 40, obviously the full facility was not in our full cultivation. So are the market should expect this.
Yes, again decrease in Q1 of 2020 compared to Q1 of 2019 in because cultivation.
With respect to produce is as Mike mentioned, a tough year in particular, the corner of from an accounting perspective, we allocate our cost on a full year expected yield and full year expected cost.
Due to seasonal delta to earlier than expected than we had budgeted are there was a charge related to that as well as.
Some disease pressures that we've had in the Texas greenhouses. So we took a wheel rather aggressive with some of our cost of production in the fourth quarter of this year.
And with that I will turn it back up.
Thanks, Steve.
Once again, thanks, everybody for joining we look forward to speaking with you.
And I'm going to take some questions, but before I do I just have some by closing remarks.
Now before.
So I want to be very clear about why we as a management team and I personally as a luxury or how the company continue to be so confident future village Crohns first village project remains one of the large slugs operating green escrow improves business in North America serve in virtually every major growth in big box retail in the U.S. in Canada.
And we're making steady progress on churn in that business and transitioning is a free a change oh assets into the Canada Mark in the meantime.
But the pros business does give us a solid foundation and a big sought to institutional knowledge capabilities infrastructure amassed over decades, as we produce account [laughter] opportunities.
Secondly, the long term opportunity a U.S. happened CBD strategy, maybe even larger than our Canadian kind of this opportunity once we get clarity.
From the FDIC U.S. The are you in a month ahead.
We're off to a great start Encana, we continue to believe that village clubs well position to capitalize for the long term and we are continuing to work on near term maturities as well in Canada.
So finally, we continue to believe that there was no company better position for success in their Canadian cannabis industry that person's box.
The sponsors proving out the validity of the strength of the business model profitable for the last four consecutive quarters. This rapidly established itself as the Premier brand consistency of number one and drive cannabis granted Ontario.
Its ability to produce quality products with an industry, leading cost reduction is a significant advantages and continuing.
And it's continuing to grow its market share in the legal market as well as taking share from these listen mark new product launches or eminent to extend the value of the ground to capture more market share additives worked very well capitalized.
Even conservative revised forecast have have addressed the Canadian market and lots of 11 billion by 2025, we we believe this many do that the industry will be dominated by just a handful vertically integrated producers in the of course on forms one of those producers.
And with a successful growing business in Canada now the right type of course on farm should be pursuing opportunities abroad in the proper order of opera operations not the other way around.
So with that operator, we'll take any questions [noise].
If you like to ask a question at this time. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound keep your first question comes from Doug Cooper with Beacon Securities.
Hi, Good morning, guys and congratulations on a nice year for pure some firms just couple of questions on the you first quarters essentially I guess, it's over today.
You talked a little bit about the trends whether its NBC in Ontario.
How do you see the year shaping up in terms of your volumes can you talk a little bit about you noted market share and I'm stereo a is it too early to talk marketshare and in BC, and Alberta, and maybe just some comments on a on the new one ounce package and how you think that will be received by the American.
Yeah, I think it's little too early we just finishing today as you said, but the traction has been a we've been very pleased with the traction in first quarter because really it was a pivot. They said at the fourth quarter was the pivot for pure sudden farms or whether handcuffs came off from being restricted as a wholesale.
I'll provide a once they received the health, Canada lifestyles license, which was literally the last quarter <unk> last week of a third quarter.
That coupled with the end of the I'm all Hell therapeutics.
Supply agreement has now just uncovered and unleashed the company to pursue when it always wanted to do be vertically integrated retail market. So that fourth quarter was the pivot.
And now the focus is independently pursuing the retail market across all of Canada, a with the three of the four major provinces on board and increasing and of course with Alberta. They had some backup so really that order that was sort of placed in December didn't start didnt ship to February.
So I think you know there now seeing what the feedback is on those products and we understand its positive.
As we expected and I think we'll see greater traction and have a much clearer.
Viewpoint, when we report the first quarter, which is only about six weeks away at this point yeah. Doug. This is Steve on the Ontario is very good about supplying their vendors what they support if you're seeing farm out all the Pos data.
Alberta, and British Alberta will not a we were told yesterday and British Columbia, I don't think because of.
Reports the same type of level of data to Pearson farm. So they can't measure the market share.
Sure.
Right and the other thing I'll answer that it's just that you know where were probably now we've gone in and in a matter of basically a you know one to two months from a nearly 103 months from 100% wholesale to probably north of 90% retail and we're building on that so.
Yeah, you mentioned make that the the wholesale seems to have come back a little bit in Q1, how do you expect it to play out for the year.
We anticipate 90% of your your revenue will be retail in 2020.
Well I would say greater than 80% I mean, that's clearly the focus that's always been really that was your initial business model and we.
We look at.
The wholesale market is just another conduit that we've made up of different channels within the wholesale market. I think you know depending on where the market goes with Extractors that are sort of a pure play extraction company, which I think a has taken a lot of that wholesale demand back in 19, whereas.
That business model goes in the future.
But for US we're going to look at the wholesale market is sort of a secondary market.
And.
If it's a 75% retail 25%.
For lack of a better term wholesale even though it may go to different channels.
That's the focus of the company going forward and then with you know more derivative products entering in later this year and into next year.
I think that we'll just do sell opportunity who are increasing that retail side and then of course, a well enter delta to that wholesale market may be a.
An important part of doubling out capacity for some time, which is normal as we continue the great yeah, I'll make a new product introductions and greater penetration in existing markets.
Next question comes from a whole stargazer with Raymond James.
Hi, I'm wondering Mike good morning, making Steve Thanks for taking my thanks for taking my questions. So and congrats on the five consecutive quarters of positive EBITDA folks are some farms. So just a falling from does question.
Let's start with the shift from being an exclusive wholesale wholesaler to adult focused company.
Given that your comment was that you know wholesale was more or less on Q4, what proportion of the revenue once wholesale for satellite.
The average selling price and each of these channels.
You if a foot say Q1 going forward.
Ah So Q4, but also Q1.
Q O Q4 was 100% retail.
Yeah no wholesale.
And they have they were in Q1.
And as Mike said, the wholesale market is coming back so for the first three quarters of last year on there was clearly a rush by many LP for either the expectation of.
You know.
The big Big sales that provincial governments or something let's just say some of them maybe had growing cultivation issues.
And then I think they realize realization of all the LT all the LP in this summer and fall was while the the rollout of retail stores is way slower than everyone expected.
And sale totally backed off now we are as Mike said, we're seeing a return to the wholesale business, but the orders are not on huge they're 100 kilograms verses a million to 2 million to 3 million, which where some of our orders in the wholesale market in 2019. So.
It's coming back but people are being very prudent about their purchases.
And yes, sure sometimes is being very prudent about who they sell to that's obviously, we're well aware of the financial issues. That's that some are experiencing so no sense selling to someone who can't pay for it.
Great. Thank you and again the answer on pricing I mean, you have today, we still see pricing.
You know as.
Pricing has to be at a level.
That has to start to cannibalization of the country. That's just the bottom line. That's that's how market share is going to increase so.
You know that that's what we're looking at and where we position that price point based on different product categories.
So I think thats going to well have a better handle on that this year going forward.
Thanks, So a quick follow up and so given that the actual number kilograms sold in Q4 was relatively nominal can you give us an idea how inventories are looking to see the sense I used strategic asset for wholesale for satellites in the future and the particular.
Focus on the evolution of your kind of is 2.0 portfolio.
Well I mean, our inventories have increased in the Q4 up because when you look at the actual sales versus what was produced it's there and we realize that and again I'm going to reiterate that you know it was very difficult or I think it would be very difficult for any company. That's based on a 40% con.
Track and keep in mind with ammo for last year's production of what was producers and really for the first two months of this year too we have the settlement agreement, 25% underproduction. When a entity is focused on that and that this appears you can't just find a home for tomorrow, especially you know Steve was saying.
What we saw the wholesale market in the fourth quarter coming down so when we look at the fourth quarter. The take away for US is yeah. The sales were not grade in the fourth quarter and that was just the beginning of traction on the province is rolling out greatest stores. This is no you know everybody knew the fourth quarter was challenging wholesale and retail.
Ill.
And you know we looked at the positive coming into the fourth quarter.
And all else elsewhere retail so that pivot was great yeah would've been nice if the sales were much higher but that was that incredible accomplishment by that team out there I mean, I take my hand off to him and ER and that amount of time, so inventories have backed up but now as we go forward. You know we said were vertically integrated we have I first to me.
Machines that would be coming online this year on extraction and working on a whole number above a private so.
We feel pretty good whatever inventory level, our Oh, I think we'll start getting some greater.
You know, it's going to be very interesting and I think very positive in rubbery comp confident warehouse sales start ramping up through in Q2 in Q3.
Great. Thanks, I'll just leave it there.
Thank you. Thank you all.
Next question comes from Aaron Gray with Alliance Global partners.
Hi, good morning, and thanks for the questions.
First I'd just like to start off on emo continued to have strong share in Ontario, you went through on a pure some farms that retail, but you know you are seeing a lot of.
Competition, especially in the deep value space, and most 1 million <unk> thoughts on person bonds price points, you know given you on often at such low cost per Gram.
The only need to lower the price to capture more share are you comfortable with letting the market more unless you know five at the deep value priced on there and I know you rolled out the 28 Gram.
Nobody priced product as well or how are you going out your price positioning whether or not.
Wanna get a little bit more aggressive down in order to capture more shipment volume. Thank you.
Yeah, well you know the leadership Manish.
Leadership and Pearson farms are they doing a credible out of work they really have a phenomenal understanding of the market who is the market.
And.
Identify that market as the every day and casual user user that is that that price point on top of the attributes of the product. They all have to be there, but price point works and I think it's like you know advice I've, often said where you turning it slowly.
And then seeing what happens in turning it more and seeing what happens and I think.
That will determine as they build market share how they can.
Eventually find a sweet spot of that price point based on whether it's you know.
Hey award winning Afghan coach product, that's number one in the marketplace or it becomes a blended product.
Or it goes into derivatives, so I think.
I was just gonna be a work in progress Scott, but ultimately that was the whole reason for being the low cost producer is because you have to take away. The illicit trade. We look at the U.S. pricing U.S. pricing kind of business, so far superior to Canadian and I think one of the reasons as the U.S. as a number of federal agencies that content.
Due to arrest he listed any legal growers and distributors of cannabis and they are supporting the legal trade.
And the Encana, that's not the case so the cases, that's the producers and the marketers like Gerson farms that we'll have to find that price point, where they can have a consumer say rather than buying it from an illicit trade I like the fact that I can walk into a retail store.
I look at my selection I know the product has grown to very very tight regulations and standards, but that pesticides and the price differential whatever that you know split maybe 510, 15% is worth it to me and I think that's the goal going forward. So it's still a work in progress.
The fine you know the exact price point.
Okay. Great. Thanks appreciate the color there and then just one more in terms of you know I just think about the retail sales over the next couple of quarters. Obviously, one of things didn't looking at historically has been the number of stores, but just as we think about cobot 19 seems like there's only more uncertainty then we pass of store.
Clean so it looked like the most opportunity would be in Alberta, we have seen some delays. There you know from December to February shipments, so as to think about potential impact with covert 19, and specifically a lot in Alberta do you think that will have any impact on the reorder rate I know canvas was deemed essential and by province, but just.
You know given things probably won't be operating as efficiently and you are one of the newer people selling into the problem is do you think that will impact kind of the rollout and how that ramps up the province. Thanks.
And Steve actually we've seen the inverse we've seen very high demand for cannabis and.
And all three provinces that we've been in.
I was on the phone, yes take it with someone who's actually ordering product online and the post office to start delivering it but essentially they can go because they can now go pick it up direct so.
We have not we've seen the inverse on I can say I'd sales to our number one customer Ontario.
Started off January pretty well, we double that in February we doubled again in March in particular with with the one offs products. So we.
[noise] be it Tomatoes, as Mike mentioned in his remarks are far be it Canada on actually covered 19 as.
As.
Certainly.
Helped ourselves not not hurt them.
Okay, great. Thanks, and just one quick follow up just specifically on Alberta that'd be the same for that case to just because I know, that's a norwalk, where you're selling it so province, where you have more recurring sales with them on sale market.
Yeah, I mean, I I've seen the this stats there they're a in art I don't know if they're in our debt, but on I've seen the stats, so Alberta, even though I had a lot more stores.
For the whole province last year. So yes, it was give or take a few percentage points within what Ontario did so I appreciate as a lot more stores, but.
It has comparable sale.
So we have seen an increase in the number of stores in Ontario.
Obviously because of the success of the brand with the existing stores on the certainly the initial sell into each of the new stores.
As has been very good for Pearson farms, because they're all sharing the same Pos data so.
Doesn't.
It may slow down, but what covered Nike made you may slow down the new store openings.
I can't speak to that.
The existing stores are as Mike said are deemed to be essential and we've seen good demand.
Yeah, and I can dance I think the tax revenues the tax revenues are going to become very important.
Canada.
And the United States and I think.
This isn't very unfortunate.
Scenario bodes well.
You could help.
I know every governor United States is going to be clamoring for tax revenues and maybe they'll have some impact on the legalization the future the U.S. true.
Okay, great. Thank you.
Thank you like next question comes from Scott Fortune with Roth Capital Partners.
Good morning, Congrats good year, where are we as far as other provinces and potentially you don't Quebec.
Discussions there as far as products going into other provinces here.
Discussions are ongoing Scott, Quebec is a bit.
You May now we're not now that's a bit of a different market essentially you don't sell on to what you sell through the province.
Essential, but yes delivered each store. So there are some operational logistics that Pearson farms needs to get in flight, but they're close on that are there also very close to several all their problems, but obviously go back is the other big market.
On.
That obviously they want to get into so I would expect to see something hopefully in Q2 of this year seen announcement there I don't know when the initial shipment will be and again and initial shipments go back is different than initial shipment to Alberta, Ontario, because they're shipping to each each individual store.
Okay.
And then just a follow up.
As we roll out are you guys rollout do product offering free rules oil and 2.0 product offerings that kind of step me through on the it's kind of sales and marketing side.
And kind of clean that infrastructure in place or what the needs are there or we can expect higher costs to continue to build brand pure some foreign Fran through through Canada.
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No I don't think so I think they've done a phenomenal job managing that and when you look at you know.
The way they gave us the team there's a marketed the product to the number one brand on Ontario I think.
They they have that secret sauce pretty well down so I don't think will be hiring.
And he celebrities going forward. So I don't see that is increasing and I have the same time their efficiency on the growing side I think will bounce without them not to say that as delta to comes on we won't see increases for a while which would be normal on has DNA overall, but I I think they've managed assets.
Superbly and they're very focused on.
The color of the percent of sales and we need to be to drive profitability. So.
Good about better.
Next question comes from Eric and Lori with Craig Hallum Capital Group.
Alright, great. Thanks for taking my questions guys and congrats on the strong profitability in Pearson farms, even with a.
Lower sales.
A couple of questions just on a on on timing, Mike I think he said that you know you're going to take the D to ramp.
Sort of as market demand warrants, what specifically are you looking for and you have any expectation for timing of when Youre began and and ramping delta too.
Yeah, well dealt into is basically 70 half of it could go on production now so when we see though saw this downturn in the fourth quarter across the board.
Again, you know as you know by the time to beginning in the fourth quarter was coming on the activity was just kinda dwindling there with you know overcapacity discussions a wholesale drying up.
Even though the market is there okay.
So we just thought is more prudent at that point, you know just slow things down and come through the transition and again you know we had to go through this whole settlement agreement with them are both companies getting together to get through it and I can you know you have to be somewhat cognizant to that.
It wasn't a lot of a noise so to speak in one knowing that we had to come to a settlement with them secondly that the supply agreements would no longer being in place and how that affected the new strategy going forward and then implementing and executing on.
Which I think was done in a in a very swept manner and very with.
A lot of positives of it and you.
Even the fact that our fourth quarter numbers had.
Some of the sales that were tied to the supply agreement.
That really is legitimate sales because they should have been in a third quarter and how to just go through the settlement. So all that being said well all that was going on there were so many things happening that are now behind us, including the year end fourth quarter.
Now the stores are gaining momentum, but at that point, we just decided lets lets slow things down a delta to so to answer your question I think we'll start coming online later this year with part of Delta to and then wrapping it up we feel pretty confident wrapping it up a pretty pretty full going into the New York.
Alright, thanks for that.
And then on the 2.0 products can you remind us which product format. You guys are going for and which licenses are needed from health, Canada to get you guys. There.
I can't really comment on that other than I mean, where well hopefully get extraction here very shortly in the next month or two which will now.
Sorry, our oil extraction going forward.
But we haven't reveal anything yet as for the products were working on again as I said in my briefing. The team there has been very prudent and their decisions.
So far and watching maybe some of the areas other make and then capitalizing on that and that's still a work in progress so other than pre roles and just oil wells, but specific to other derivatives, that's yet to be.
Amounts.
Thanks, Eric.
Right and then last one for me I just regarding the further increased ownership of pure Sun farms to close to 59% I'm just given the history with enrolled Im just wondering if you.
I expect any potential dispute from that or if this was kind of or expected on their end after the after the previous settlement. Thanks.
Eric to Steve. This is all part of the settlement on this equity investment was.
Part of the settlement agreement, so there'll be no dispute with respect to it.
Fully approved and again it was in conjunction with an amendment and expansion of our existing credit facility. So.
We're very excited about it I think it's a shows third party support from I have a.
Large Canadian bank.
Who essentially finance many companies and they're essentially showing their support in particular for Pearson farms.
And I think that helps.
Over the market identify.
The the what will go on in 2020 Watson selection of horses. So.
No longer should everyone bad on all horses, you got to pick your horses now so.
Pearson farms will be there for the long run.
And we hope to see our our brand chairs and market share significantly increased from about 13%.
No.
It's great to hear I'm excited to see what's in store for Pearson fronts. Thanks, guys.
Thanks.
Once again, if you'd like to ask a question. Please press star one on your telephone keypad and they have a question from Andrew personnel with people GMP.
Hi, Thanks for taking my questions all my questions and answers and maybe if I can follow up or.
For America.
With the Pearson's farms are increasing ownership and.
With those harp, increasing ownership I'm curious on farms, So last press release [noise].
You know there's still a.
Some extra interest that you guys can.
Might be able to take in the future.
How much more of this can we expect and you know is there any kind of cadence that maybe you can provide with a potential future contributions.
We really can't comment on that.
Andrew.
This.
We're pretty happy where we are right now is all part of so kind of global settlement with them, including this piece.
Ah so.
What tomorrow brings a neither of US now at this point.
[noise] I was very fair and maybe another one relating to your processing center I fully expect that that could.
Increased the quality of your products.
Are you thinking about maybe segmenting your product portfolio and if so.
What can we see which relates to a the tribe kind of its products and.
Average pricing.
Well I think you know dry on the dried flower are we.
We think that we would like one of our goals right here on the dry flower side is to increase is it takes a lot about 13.5% current market share that we have in Ontario and increase that.
Along with the other provinces, where SAP selling and we'd like to get to a 20% market share.
And those provinces, but thats. The go we have and and if were successful we'd like to think we can get to 20% market share in Canada.
And then on the cultural side, we see that maybe we can get to 2025, maybe even north of that one day of.
So you know cultural side of kind of this in Canada, and so that's number one and then number two again on the pricing.
We have to take a step by step to see how much that that pricing is going to drive market share I mean, we just see it as an important part of market share because again, it's a cannibalization or the illicit trade and it's best to take that in steps not come down too much.
But we also think a as we go in that direction, it's positive because.
The sooner that's the field kind of thins out the better for to survivors.
So.
I think this year will provide greater clarity to answer that question better certainly after the second third quarter.
Okay. Thanks.
And at this time I'll turn the call over to the presenters.
Okay well.
Want to thank everyone. It's been about four and a half months since we spoke last time and it'll be about six weeks till the update on the first quarter, which were looking forward to and I. Thank you for the.
The supporting village farms that are less a few months has been what time of clarity for the company in the direction, we're going and thanks to participation. Please.
I'll go out some prayers are with everyone. During this current.
Crisis stack world suffering from thank you.
This concludes the deck you offerings.
This concludes today's conference call you may now disconnect.
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