Q2 2020 Village Farms International Inc Earnings Call
Ladies and gentlemen, this is the operator your lines were made on musicals until the call begin the call. We begin momentarily. We thank you for your patience.
[music].
Good morning, ladies and gentlemen, welcome to village farms Internationals second quarter 2020 financial results Conference call.
Yesterday village farms issued a news release reporting its financial results for the second quarter ended June Thirtyth 2020 that news release, along with the Companys financial statements are available on the company's website at <unk> village farms Dot com under the investors heading.
Please note today's call is being broadcast live over the Internet and will be archived for replay both by telephone and via the Internet beginning approximately one hour following the completion of today's call.
Details of how to access to replace our available in Yesterdays news release.
Before we begin now let me remind you that forward looking statements may be made today during or after the formal part of this conference call.
Certain material assumptions worth fighting in providing these statements many of which are beyond our control.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements.
Summary of the underlying assumptions risks and uncertainties is contained in the companys various securities filings with the FCC and Canadian regulators, including its form 10-K Mdna for the year ended December 31st 29 team and the 10-Q for the quarter ended.
June Thirtyth 2020, which are available on Edgar.
These forward looking statements are made as of today's date.
<unk>, except as required by applicable Securities law, we undertake no obligation to publicly update or revise any such statements.
I'd now like turn the conference over to Michael Digilio.
Chief Executive Officer, a village farms International. Please go ahead Mr. Julio.
Thank you Jack and thank you everyone for joining us today with me on today's call is really Troms Chief Financial Officer.
Stepping repeating today's call I'll begin with a review of the highlights for the quarter, most notably the sixth consecutive quarter of profitability for pure some farms.
As well as positive EBITDA now powders business.
Steve will then review our financial results and I, We turn briefly discuss why we remain so confident in the future about company and what I did well, but it got excuse me.
Before I begin with respect to cobot 19, <unk> I am again pleased to report that all our village farms and curious on bond facilities in Canada, and the U.S. have continued to operate uninterrupted.
They have since the start of the pandemic.
We have experienced extremely small number of cobot 19 illnesses.
To about four.
Quotas facilities in Texas, only however, appropriate protocols will follow didnt have been no material disruptions to our operations.
Our success to date in managing the challenges of the pandemic is a testament to out here in to the recommendations of health authorities at all levels of government, which are over and above the already high.
Standards on hiring practices and safety protocols are already in place, it's a highly regulated fresh food producer.
Other than the slowing of the build out of provincial retail candidates infrastructure and its effect on industry sales.
Cobot 19 has had no material negative impact on our operations today and at this time, we don't foresee any lasting effects going forward.
So before I started my scripted remarks, I just want to say how important this most recent quarter West Ross and how pleased I am with result.
We proved clearly that purest wind farms can lead to Canadian candidates market.
The highest quality products and aggressive pricing and deliver profitability. It is clear evidence of the long term durability about this.
Now onto the highlights for the quarter, starting with pure some form of which I remind you we own just under 59% as of the beginning of the second quarter.
Second quarter continued to demonstrate the earnings capability of pure some forms.
Direct result of transitioning existing low cost large scale technologically advanced growing operations to kind of its production.
30, plus years of experience and vertically integrated intensive agriculture, the best management team in the industry at garrison farms approval approached it S. DNA, a pragmatic well thought out approach to brand and product positioning.
In an overriding focus on cash flow generation.
And a clear understanding of what is required to compete in the Canadian market.
In Q2, we generated out six consecutive quarter of positive net income and how seventh consecutive quarter positive EBITDA. That's every quarter. Since we started shipping kind of beset scale, which was back in queue Q4 2018.
And we achieved this while transitioning from selling entirely into the wholesale market to now predominately branded retail sector.
All in cost of production program for Q2, and I will once again emphasize that this includes depreciation and also includes packaging logistics. It's all in cost, it's 84 cents Canadian dollars for growth.
This brings to us in farms average falling cost program for the last four quarters to 80 cents Canadian why we obviously pleased to continue to lead all Canadian public greenhouse an indoor producers in this important metric.
Most by a fairly wide margin.
We're also confident that we can still bring this number down further as we continue to refine and enhance our operations and especially as we bring our own extraction operations online grow new strange and for the whole now growing techniques.
Ability to grow high quality candidates at an industry, leading cost is cleared competitive advantage for pure some forms of providing significant pricing power, while still generating profitability.
One of matching here that we're currently evaluating if we're going to continue to product provide cost of goods sold on a per gram basis going forward.
He has never been to advantage competitively to have this number into public domain, we do not provided for up coatings business. It is very reason.
Yes that would show says, it's a low cost leader and would have proven track record. We arrived in mind that gross margin net income and EBITDA figure is going forward should suffice as a measure of our operational performance.
At the top line retail brand itself. The Q2 was slightly up on a dollar basis from the first score. This year, however, sales volume increased 89% from Q1.
As we ramped up the introduction about large format value products, which I will discuss more in a moment.
It's important to note that we still generated 833% gross margin in Q2, even without aggressive pricing strategy and the shift in sales mix to a high proportion of large format product. This is a very very important take away in this quarter.
And we also demonstrated.
With this aggressive pricing again, because we must compete with the illicit trade we can impact the market.
We are seeing this momentum continue with a solid start to Q3 I will note that July was a record month for sales up your son fonts products by the Ontario.
Berta and British Columbia provincial boards to bear retailers and through their own websites.
Wholesale sales as expected with down sequentially from the outside levels.
Outsize levels in Q1, which included some large nonmonetary cells to extract it was in which we exchanged flower for discipline.
We are seeing an up tick in sales activity. The other license producers. We believe this to be a result of the continuing challenges at some about other producers are having around growing quality candidates at scale and had a viable cost of production.
We mentioned previously that one about corporate goals is to attain 20% market you have the Canadian market, while providing 35% of the candidate supply.
And I'll note again that when comparing Pearson farms Q2, we sell to those of last year. The entirely of Q2 2019 sales while wholesale sales no retail.
To the receipt about license to sell directly to prevent should boards and entered the retail market.
Recall that this was a wholesale market pricing, whose was at its peak shortage of product at that time in the neighborhood of three times current wholesale spot price I was just one year ago.
That said in the current environment, we are seeing the book.
Well okay.
For the right.
Yeah, Hi.
So I had notwithstanding any additional and ask them to covert pandemic that may have on the board a market. We expect this second half the year for sure.
What a number upward potential growth drivers.
Those drivers being first you know candidates market.
Continues to grow.
At a run rate above $2.8 billion more than.
They have times, where it was just the so.
This will be increase supplemented by conversion of the listen market consumers as price.
Quality safety product.
Selection and access to more retail stores in the legal market continues to improve.
It's worth noting here that the O C. S reported that in the fourth quarter of 2019 more than 80% of candidates consumed in Ontario, We're still purchase any elicit market that's more than 80% just months ago.
This is an excellent reference point for the size of the opportunity, especially for those who have a leading share in the legal market.
We have made it for one of 'em, we have made it for one about clear priority since launching retail to lead the conversion of traditional users into the legal market. We believe this is ultimately how the majority of traditional users want to purchase provided they can find easy access to quality products at an attractive.
Price point.
Secondly, we are seeing momentum in a number of bricks and mortar retail stores across Canada, especially in Ontario.
Obviously this will benefit many suppliers, but clearly grew at Sun pharma stands to benefit disproportionately given the strength of its market share again, especially in Ontario.
Third we continue to watch new products into dried flower category, which still by far is the largest market and probably for the foreseeable future.
And then rounding out it skews in terms of package size and adding two new strange two exciting new strange, including high THC strength. This quarter, we've entered the market would aggressive pricing and a large format value products have consistently ranked among the best selling dry counted as products with the Ontario, Canada store.
Since their launch at the end of.
Q1.
Fourth we expect us on Fox, who continue to add new provinces. It began shipping to Scott you want.
The end of Q2 and Manitoba.
Last month.
As well.
These two provinces added access to an additional 10%, but the Canadian market.
Our son fonts products are now available in five of the sixth largest provinces, which make up 70% of candidates population. The majority of the remaining 30% as Quebec. So clearly that market is a high priority for us moving forward.
Finally, and most importantly to us in fossil start shipping its first bottled oil and other 2.0 products for retail sales beginning with its three largest markets imminently.
And we will continue without aggressive pricing strategy.
Well continue to elevate quality and often products that consumers want it is a proven winning proposition.
It is also a necessity to capture share for me listen market. This is how to compete in the Canadian marketplace.
Importantly to us and fonts to enter these new categories on the back of its continued leading market share in dry flower.
Strategy was the first establish a commanding position in dried flower, which still dominates the market as I said.
Before entering new categories I am pleased to report that for Q2 QSR bonds was once again, the top selling dried flower brand by volume with the Ontario, Canada store.
Just shy of 14%.
That March three consecutive quarters in which QSR farms has been the top selling brand every quarter since purist on fonts absent the retail rather than market in late September last year, I'm smiling as they say that 'cause, it's incredible accomplishment, but your son phones drugs.
In fact, if we look at the data all the way back to October 1st of last year through the end of July of this year, a 10 month period pure sinful I'm still ranks number one I just want to pause on this from since October of last year I'm curious have purchased more pure sent bonds dried flow product than any other brands I was.
Like again to congratulate the team at garrison farm since a tremendous achievement.
So I misread rapidly evolving market with a continuous stream of new product introductions Gerson Francaise consistently had products in a number one number two and number three spots for dry flower well I've been having multiple products among the five that's selling products, it's worth noting that pure.
Some farms has achieved this with no major promotional expenditures no celebrity partnerships or endorsements no media hype just great brand positioning executed by second to none management team.
One of the reasons S. DNA remains slow as I've discussed many times this is Rick.
Direct result of course and fund strategy high quality products that consumers want.
On an attractive price and I will add that we weren't all surprise when a recent survey found that more Canadians believed the best cannabis is grown in British Columbia than any other place in Canada and in fact is world renowned.
It isn't folklore as grow as we know that BC his hands down the best location to grow kind of western Canada and that matters to the quality of the product selecting the best growing region is critically important like Bordeaux in France, Enap in California geographic geographical location for growing matters its not about the location you habits.
About having the right location.
As I've discussed on past calls, we don't get the same level of sales detail for the other provinces in which we sell but based on the data. We do have we continuously strong brand and product performance in Alberta NBC.
Which we've just recently started shipping to both provinces.
The biggest challenge right now for Pearson farms as it is for all suppliers is that there are simply too many producers in the market for the size of the legal market upwards of 50 in some provinces and there appears to be an interest on the part of the provincial boards at least in a short term to spread there, but just a rough.
That said the market is steadily growing under supply and landscape will shake out. It has to there are too many producers that simply don't have a durable business model too. Many producers that are not able to grow quality or grow at a viable costs and too. Many producers are consuming their balance sheets quarter after quarter year after year.
In the interim we have temporarily scaled back production.
I felt it read a better align our output with sales for the next term.
Ah with 16 grow rooms, and Delta three we have the flexibility to easily and quickly adjust product volumes as well as products we are growing.
We are focused on cash flow generation and therefore, how much we can sell not how much we can grow.
Recall that person funds goal is to capture at least 20% of the dry flat market encountered over long term a level was achieved that we actually achieved in the month of April in Ontario, and we remain confident that as a Canadian industry moves beyond its startup phase it operates as a mature fishing market. This go.
This is well within reach a industry, leading greenhouse cultivation cost will continue to be signal a significant advantage in support of further market share growth in the legal market and the critical importance capturing meaningful share from the listen market.
Competing directly with the lifted market is what will truly drive sales. It is the key near term strategy for Pearson farms and the tactics to achieve this are in place working and validated again this positions us very well for the launch of a bottled oil and 2.0 products in a very near term.
So quickly about out produce business turning a village Rob just had a strong second quarter, delivering nearly 6 million year over year turnarounds adjusted EBITDA to generate positive 1.2 million dollar EBITDA. The increase was a belt result of a number of factors first we continue to make steady progress.
Our strategy to transition our own growing capacity that we displaced with cannabis to partner growers in both Mexico and Canada.
Second we continue to focus on cost management and third we benefited from higher pricing to the elevated consumer demand, resulting from more consumers now eating at home.
Vast majority of the pros business is to grocery stores and not foodservice.
Pricing has remained strong in Q3.
This is especially encouraging given that the organization that underlies our protess business is the engine that is driving our next phase opportunities as we continue to position village farms.
Evolution of kind of this in CBD, both domestically and internationally I want to note here that since entering the kinda space back in June of 2017 village front is not hard one additional person to pursue these opportunities we have leverage the breadth and depth of capacity about existing organization without protess business paying the overhead.
To pursue this outsize potential.
It really underscores who village farms is that at its core a vertically integrated cup and that continues to produce high return agricultural based products.
So going on quickly to the U.S. CBD and cannabis any U.S., we continually closely watch and are active in the regulatory developments around CBD.
We are somewhat encouraged but he at the age recent comments about providing a clearer regulatory framework around the use of CBD in products as well as the suppress prospects for federal legalize high THC candidates.
In the USA one of the largest greenhouse footprints in North America, we can move instantly on either of these markets and are ready, having a head start up on a conversion of the Permian basin facility, we intend to be a major force in the U.S. market.
We recognize the F.D.A. is other priorities at the moment. However, we also believe the agency recognizes the importance of providing a clear path forward that will allow companies large and small to make prudent well informed risk mitigated decisions.
To enable the industry to flourish and prosper to its full potential let me be clear we are currently in a holding pattern.
But we are fully committed to the CBD market. We have just seen too many companies struggle with vague regulations and broader industry.
That is significantly hamstrung by the resulting wesco, we're simply being prudent we don't need to be in the market now and we won't put out shareholders at risk.
On an international side to us and farms is clearly a consistently executing on plan in Canada, and we believe is well positioned for growth for years to calm.
As one up just a few large industry supply is that will dominate the market. This has enabled us as a management team at village wants to turn our attention to existing to extending our international reach always with a focus on prudent capital allocation for well research opportunities with outside potential returns.
Both short and long term.
We took out first step in July when acquisition of just under 60% or the Netherlands based business called touch can grow.
Such can grow it was a consortium of partners with various expertise to that's applied for license become.
One of no more than 10 license supply is somewhere around 80 cannabis shops down there as coffee shops in the 10 cities Somebody's experimental government program.
He is 10 cities will comprise the first legal recreational cannabis market in Europe.
The intention of the program being to improve the safety of candidates products in the Netherlands, and curb the criminal involvement resulting from the current.
The legal climate of growing at supplying products to the Netherlands. There are many companies wanting for just a few license, but we are optimistic about our prospects based not only on the outstanding group. Upon is that at touch can grow but the specific kind of his experience in Canada that we bring to the table.
While the long term possibility.
That's a program could be nationalize to more than 500 coffee shops. This opportunities meaningful in of itself, but you also viewed as a potential springboard to other legal cannabis opportunities, especially in the European markets.
And you know obviously, we realize these these are long term decisions and we're excited about that some of these markets may take years.
She has developed but it's important that we stick a flag in the ground now and that's what we're doing.
And then also we recently acquired 6.6 to set of Australian base, LTM International which is one of Asia Pacific Fleeting young new CBD platforms with high THC cannabis opportunities in Australia, and New Zealand with the option to increase their ownership.
Im is pursuing the Asia Pacific market via three channels proprietary consumer brands commercial CBD ingredients were foods beverages cosmetics and other consumer package goods and educational experiment of the retail stores for both Lpms owned and partner products.
They are already off to a great started Hong Kong, which has one of the most aggressive regulatory environments for CBD and are building out their presence. Another large dark markets. We are actively exploring other international opportunities that will leverage our Canadian success to date.
And I do want to take this afternoon remind you that our international that our village from the International Bond 2.6 million square for Delta one facility adjacent to the Pearson farms greenhouse facilities available to injection, the CBD or high THC candidates for export should Pearson farms choose not to exercise.
Its option that facility prior to the expiration in September 2021.
I'd like to turn the call over to Steve and he'll take us through the results are fine. After we focus on me Steve Thanks, Mike.
I will review some headline figures from our Q2 results by business line first probably lose one off the business line that most want to talk about is our historical business and base business as we move into a new agricultural based CPG business line.
Our topline Q2, probably sales increased year on year by 15%.
In U.S. dollars to 47.6 million from 1.3 million with cost of goods sold relatively flat year on year, resulting in an improvement.
In our gross margin of 6.5 million from 29 team.
[noise], providing a gross margin percentage up 7.4% and the second quarter 2020 versus a negative gross margin quarter of 2019, a 7.2%.
Historically QQ has been a tough quarter for our produce business due to the dynamics of the North American tomato supply.
Business as all U.S. Canadian Mexican greenhouse producers are producing in the three month period basic economics preside higher supply in a relatively.
Flat year round demand business, resulting historical challenging market pricing in the spring in early summer months yearend in Europe, but historical dynamics like many things in 2020 have been turned on or ahead in our case to the positive.
Experiencing increased demand consumption from our retail customers.
As Mike mentioned, our big box gross store national grocery chains as most people.
Our staying at home and eating at home, while tomato supply around the world has its own issue with its own virus, which is resulting in lower tomato supplies. So basic economic one or one is occurring increased pricing.
Sure on year, our Q2 2020 averaged made a pricing increased 39%.
From our average price in 2019, the increase in pricing was even more prevalent our large.
Commodity Tomatoes, these taking TV as we have seen increasing consumption in larger tomatoes.
Outbreak of chronic virus, a reversal of the consumer trend over the last few years, two smaller higher priced more favorable summit Tomatoes.
Were for casting a continuation of strong year on year pricing, resulting in positive EBITDA and cash flow from our previous business.
I wish there is bearing all the cost public company cost ability farms for the remainder of 2020.
Now to the headline cannabis business for the new investors are candidates business today or the for the new investors today, our Canada.
Candidates business is solely through our Canadian joint venture pure some farms, while those farms owns 58.7% of pure some problems we cannot consolidated.
As we do not control it as such it appears on parts financial results only show up in that though its arms statutory results as a one line item in our income statement and a one line item on our balance sheet.
We do show the full Pearson farms balance sheet and income statement for the quarter in the six months ended June thirtyth in us dollars in our financial footnotes, which are available in our 10-Q, which was filed last night, which was published as of this morning.
Pearson farm saw substantial decrease in sales margin EBITDA in Q2, 2020, when compared to Q2 2019, the market conditions, the Canadian market and demand and supply aspects of clearly changed materially in the last 12 months.
Oh and not due to current viruses somehow have have linked as such comparing our Q2 2019. In Q2 2020 results is not indicative of the progress Kerr sung farms have has made into Q2 2019, the marketplace was 100 per.
On wholesale everything Pearson farms, producing essentially was was being purchased by other LP in anticipation of Canada is 2.0, a as well as of the expectations by the Canadian marketplace of continued and a quick rollout of provincial retail outlets, which.
I did not occur.
Jumping jumping to like a year later, Oh, we have a total different marketplace dynamics, we clearly have too much supply and as Mike mentioned too many suppliers, hence the average retail channel price in Q2, 2020 is less than half of the Q2 2019 wholesale price.
Odd that we've received.
Resulting in a material change when you look at our results on a year on year basis, a better comparison is comparing Pearson from sales in Q2 to Q1 to 2020, but that you did experience a substantive change due to the.
Most of the compression of demand as the results of store closures and stayed home orders in Canada, but primarily driven by the demand for the large format product versus the small format product, which historically have or at least historically for six months had been on the driver of our business.
As Mike mentioned prevent quarter on quarter, the provincial retail sales volume increased 89%. This was driven by the large format lower priced skews, which were a predominant product sold in Q2, which was 80.
Percent of our sales in Q2.
Provincial or large format.
But as a result show still a very profitable business for us on which is reflected in our in our gross margin.
As Mike mentioned with respect to our cost for a grand metric, which is not an industry standard by any forming imagination.
We did provide that this quarter, but as Mike mentioned are probably will stop.
Providing that as it's not a great comparison, when one compared Q2 2019 to 2018.
The 2020 cost of goods program with 84 cents Canadian versus last year's 65 cents.
Per gram.
Last year was 100% wholesale for doesn't involve any packaging or logistics costs in 2020 with predominately most of our volume going to retail, which will probably be the case from now going forward.
The our cost of goods sold will reflect packaging logistics as well as increased post harvest labor involved with handling in treating the.
Post harvest, a flower and trim.
Which will become more product.
Prevalent as we entered Canada 2.0 in the third quarter.
Uh huh.
[noise] just one other quick note on our balance sheet and cash flow, which tend to get overlooked by the headline that cannabis business.
Our for that six months ended June 32020.
Village farms had positive cash flow from operations of $2 million versus a 9 million dollar cash outflow for the six months ended 2019 and impressive $11 million turnaround.
As always fun sustaining itself from its produce business or were not diluting our shareholders Oh, raising cash just for the sake of supporting ourself.
We were able to fund the two acquisitions and we're not to investments as Mike mentioned in Holland, and Asia from our progress cash flow on and we look forward to continued strong.
Final six months of year with that I'll turn it back over to Mike.
Thanks, Steve.
[noise]. So we're now at a place where we can really see the future village funds coming into focus we are realizing our vision to become a highly profitable plant based consumer packaged goods company, leveraging our decades of experience and large scale LOE costs intensive agriculture.
And our vast organizational capabilities as a vertically integrated supplier to the North American major grosses and big box retailers for emerging.
For new and high value opportunities.
At Qs and finds out plan has not changed from day, one lead the industry as a low cost producer of quality product, establishing growing leading market share and drive cannabis leverage that brand performance for other large product categories and do it with consistent profitability, we look forward to watching pure some funds bill.
Honest success with the eminent launch of its cannabis 2.0 products and the Canadian industry still continues to grow.
We are at the leading edge of the global cannabis Canada's frontier and this is a massive opportunity and we are proud to already be one of the most successful companies in the world in this new industry, but also we're excited about how many future opportunities at home and abroad in CBD, and then cannabis and that will drive shareholder value.
In the near term.
Mid term and longer term.
And I just want to reiterate my opening comments about how pleased I am with the Q2 results. They clearly show the earnings power of course on farms and how this part about business will continue to deliver value for our shareholders.
We pushed the envelope on pricing in the second quarter demonstrate that we can compete with the illicit trade day in and day out and be profitable.
That is a huge demonstration.
And with that we will take any questions that you may have.
Certainly.
At this time, if you'd like to ask a question. Please press star one.
Aaron grain with Alliance go partners. Your line is open.
Hi, good morning, and thanks for the questions. I guess, you know first one for me and also congrats on another quarter of profitability for pure some foreign spot first one for me as we look at the top line on the retail side, specifically, you mentioned Standalone, Ontario, with 14% market share.
Still in the early days of Alberta, M.B.C., but specifically with those two provinces. You mentioned you know a lot of competition in competitors. There. So just wondering if you'd give some color in terms of how much that's kind of impacted the repurchased rates there and if it's kinda I'm going to take some of the shake out before you see more meaningful contribution from those two provinces are just any color. There in terms of how we should expect kind of ramp up.
And also from Cisco Thanks.
Well you know you can't forget that the second quarter was an interesting quarter because it a pandemic what happened towards the end of the first quarter February and clearly March.
There was a huge.
Purchase at the provincial level, so a lot of pantry hoarding, what's going on and that's had an impact sort of at the beginning of the second quarter, especially April so.
You know that so when we look at the second quarter.
There were a lot of things that are that were impacted due to the corona virus and that started to smoothed out you know halfway through the.
Second quarter, but remember that we didn't really you know in March is when we launched in BC without Oh, a large format and we actually launched in.
And the Lcs on for 20 in April so tied to that date, and then Alberta, followed so a lot of this.
A lot about impact really started as far as sales increases towards a at the middle to the end of the second quarter.
And now going forward.
This will be the first full quarter that Alberta, and so Scott you want her on.
A large format as in all those provinces and I think we'll start you know will demonstrate that attraction in the third quarter going forward.
Uh huh.
Okay, great. Thanks, that's Super helpful. And then if I could just ask one more on the gross margin side.
That makes sense, how we saw some some pressure sequentially is that you rolled out your value formats, no but couple of things here you know how should we think about you know more value offerings come online and then also potentially 2.0 products and then also always seems like you have some opportunity on the cost per Gram side, you know how to kind of.
Think about the puts and takes in terms of the gross margin evolution over the next couple of quarters. Thanks.
Well I think this would be the lowest.
I think the second quarter look we push the envelope and the second quarter and because at the end of the day, we've always said that for US it's about taking a cannibalizing the illicit trade that is the market as we see them, whether its stride flower base, which will soon be launching we have to go through the cards where dealt within.
Canada and the Canadian market is very different than any other market. All these international markets will have uniqueness to them. So Canada is very different from the U.S. The cards were dealt with in Canada, our that one.
As I've said many times before we have to pay a huge amount of taxes, our taxes route licenses, which is based on revenues will.
Slowly in the next six months be close to half a million dollars per month, we pay one dollar Grand excise tax.
There has to be a strong margin for the provincial boards to make and then we have to make alma margins and be profitable and the second quarter demonstrated that if were going to take the market share from the illicit trade, which is clearly as I mentioned 80, 90% the existing market we have to come.
Pete with that any you asked that's not the case.
So less and less the illicit trade is less and less of a.
Issue in the U.S. market, but it's clearly there in Canada, so regardless of so whatever the gross margin came out and we were very pleased that it came out north of 30%, which I think will be.
Very low end of the scale going forward, we demonstrated that we can survive the profitable be cash flow positive and take market share I mean, we were able if the market moved five or 10% from the first to second quarter, we were able to increase sell sales, 90% that really shows the power of all being.
[noise] aggressive and pricing and.
And I'm not even sure aggressive is the right term, it's a requirement to compete with the illicit trade. So as we introduce more single strains.
That have a drivers like a high T.H.C. that commands a greater price as we deliver our 2.0 products that have higher gross margins.
The those numbers should be increasing so I think this quarter.
As I said was a huge quarter demonstrate that we can be viable at these prices and be profitable. So then I think will show that going forward.
Yes.
Thanks, I call. It that's helpful and I'll jump back in the Q.
Okay.
Andrew preventing.
People JMP your line is open.
Thanks for taking my questions I wanted to touch on a little bit of the dynamic of the provincial boards.
Their purchasing and and the stock levels. I mean, you guys are obviously, you're doing exceptionally well with sell through.
So with the stock that you mentioned to yourself being the best branded Ontario.
But anecdotally I've seen a at times that your your product.
Is out of stock.
Could you maybe you touched a little bit on that provide a little bit of extra color.
With regards to you know inventory levels I'm wondering you know, it's it's a provinces kind of increase a their their repurchasing of your product covenants. So popular a that your sales could.
Credit, especially in this quarter has been significantly higher.
Yeah, I mean that Dick this is Steve it Ah. Thanks to the question Andrew that it's continuing issue obviously, we see that your son pharmacies that to some extent.
These provincial buyers or say not not similar behavior to what we deal with on Curtis business, a commercially driven TNL manager of a buyer who is driven by paying now are these prevention buyers, Ontario is an example have I think upwards of of over 50 suppliers.
The flower.
Which is an incredible number of vendors.
So to some extent and pure sometimes has been so told us that prevent you buyer has a certain dollar amounts that he can can buy.
And they have been told in certain instances when something's got to stock that essentially it can't be reordered at this time, because essentially the money for purchases that has been spent so on.
To a large extent, obviously an out of stock as a lot sales. That's how we look at it sounds Pearson fonts looks at it on to to some extent.
As Mike as mentioned in the Canadian system is a Canadian system. It is one of the the headwinds that all the Lps have to deal with.
You're dealing with prevention buyers not commercial buyers who are necessarily looking at.
In the case about produce firing of dollars per square foot.
That that's just not how these provincial buyers are currently offering that said they have change their behavior peers on farms is seeing more frequent purchases.
What occurred in early 2020 in late 2019, which was large purchases.
And we wouldn't see any reorders for a month now we're seeing in places like and carry a weekly order switches which is helpful.
To Pearson farms and allows it to restock those skews that are moving online and hopefully no avoid over shipping skews that don't this is a consumer branded goods business at the end of the day, so new skewed as the cases, which large format can negatively impact existing sales a small.
Format that did occur.
Yeah, and if I could add to that I mean, we have to understand and be patient that this is a whole new NASA industry and they're feeling our way too and I think they're doing a great job.
And just early days here, so Uh huh. So when you see skews that are selling well that are out of stock. It's just part of a.
Building, a new base business for them as well so.
Thanks for the additional color I could ask one more.
Just on you know the expansion of your geographic distribution and adding provinces.
Well you know you touched a little bit along that on your prepared remarks, but maybe if you could just to give a little bit more color on what exactly are you working on two to penetrate.
Additional markets, what's really the.
The obstacles that you guys kind of phase turned on that new contract and and when that shelf space.
Well I think.
The information where receiving for the provincial.
From the provincial markets that we are in is that were in a position of a one two and three in terms of quantity being sold. So you know, we're very pleased with that and as I mentioned in my remarks the final.
Final, Quebec is really the final final major market, we want to penetrate which then will reset represent 70% to 80% or more than 80% of the Canadian population and that's the only one left but I think Qs on farms has been very prudent and making sure. They can deliver to each provinces fulfill the orders understand why.
Their needs our before they take on another one because as we know you know you always want to deliver and so I think they've done that although prudently they've moved very quickly and put back is is on the radar screen for sure.
And I think.
I'd willing that'll happen pretty pretty soon and then we'll be where we want to be more or less.
There are some discussions going on with the Maritimes as well, but qubec is the next big move for us.
Thanks for taking my questions.
Yes.
Adam bucket with Scotiabank Your line is open.
Good morning, Mike and Steve Thanks for taking my question.
I wanted to dig a little deeper on pricing to start but sounds like from your comments you expect to see overall pricing stabilize to an extent moving forward I P. S side. So I guess my question as well, where P.S. up now and the product portfolio is now do you believe that there's any need a in the near term for pricing.
Restaurants to maintain or grow share or do you see the set up a the current set up that's hard to matched by the market.
Yeah, I think yes to both I think.
We we don't spend a lot of time really looking at the competition. We just are driving our business model forward.
And again, we see competing with the illicit trade in understanding that's the industry. That's the market that we have to understand and compete against now if others can compete at that level that you know that's that's fair issue not ours, but that's where we're going in this as I said this was a demo.
Constraints.
That we can compete day in day out against the illicit trade.
While we have all these other costs, we have to deal with in terms of the Dol excise tax and.
And.
The ability we don't have any ability to use the tools that the illicit trade may in terms of biologicals or the or pesticides and so on.
And that's almost like growing as I've mentioned in the past with one on them they tied behind your back.
But those are the cards with dealt with that as the market in Canada, and we have to learn to compete and I think they're doing it very well so with pricing yeah. They they kind of went to the Matt here and that's why I'm really excited about it because going to imagine generating north of 30%, which.
30% to 50% for traditional mature CPG business I mean.
That's probably a sweet spot and this is sort of the low end of that but I don't see that we have to deliver pricing any lower to compete we demonstrated that the 90% increase and volume sold supported that were at that sweet spots. So I think now.
Introductions, the introductions of single strains and age.
Two other products help kind of the debate pens and everything else, we're delivering will be at higher margins and now average margin will come up. So I think this is sort of the bottom of bad range.
And not to be redundant got a it shows where we compete and that gives us a lot of confidence and the sustainability and durability of our business model.
Those are great comments, thanks, So secondly.
I guess that at high levels can you provide some color on just how the cost profile is different between you know your wholesale sales the large format and your other news.
Probably not too much.
You know that would probably get what I want to give too much out to the competition, but you know I large format is high quality and it's very good product. So.
It's just a we found a way we can do it I think.
I'm, not saying maybe with the first introduce it but clearly we have been the most successful in that introduction and is resonating very well with consumers and that sort of our.
Little bit of our IP so to speak.
And but where you know were going you know were looking at producing a we're doing a lot of things around new processing center, a hand drying and you know coming up with the creation of products that others may be more of a craft side and so we have a full array to meet all consumer needs going forward, but.
The ball I think the bulk of the mark to market still remains flower and the value added pack is still going to rule going forward.
Okay. That's great I will just squeeze one last one more on the produce side. So I think Steve made my about it might have mentioned the supply demand dynamics and that's made a market and how it was a tailwind for pricing can you maybe provide some detail on what you're seeing in the market currently and then when you might expect.
Supply to catch up to where demand is.
Yeah, well like I've always said with the Protess challenges. The Truthers challenges are caused by the master agreement that change the dynamics and it would be similar that if the Canadian government opens up importation of cannabis from a.
South America as an example, it's going to change the dynamic and that's what happened to produce industry, we compete with Mexico, and I've said and we grow in Mexico. You know it came to the point, where we can't be joining them because.
It's a labor intensive industry and were paying 20 Bucks an hour all in whether it's our Canadian or U.S.
Assets and that includes of course benefits at all and Mexico is still more or less at $6 per day.
Per day for agriculture waves. So you know a so I think with the pandemic. What's happened is obviously people aren't eating out as I said in my remarks.
90, plus percent about sales are two retail food chains, not foodservice, which has taken a huge hit due to know what eating out. So we were fortunate there.
And people are eating at home more it's driving greater fresh food sales.
And I think we're actually seeing a and then much more of a stronger interest in U.S. product as well, but some of our customers. So I think thats driving it and I think it's we feel it's pretty sustainable I think there's going to be a lot to changes in the behavior or how people operating people are getting comfortable eating at home.
And so we feel good about that and we continue to work on our relationships as part of the result was replacing volume that we lost and conversion about greenhouses and.
So I think we'll continue on.
I think I hope that answers your question.
No. It certainly does thanks, that's it for me.
Eric to Laurie with Craig Hallum. Your line is open.
Okay, great. Thanks, taking my questions guys.
So I wanted to focus on wholesale market. It's good to hear a lease on the retail side that you think there's this price level is sort of the bottom here. You mentioned are you seeing better revival in the wholesale market would love to just your your commentary on if you think this is sustainable or should we still think about these.
As a sort of opportunistic lumpy sales.
Yes. Good question I mean, it's hard to predict longer term. We you know if we look a year ago, where we weren't wholesale not just in terms of volume in the second quarter of last year, but in pricing that's dropped off a third of what it was so that was probably not predictable a year ago so to sit here.
And now say would have looked like long term, it's a unknown I mean part about wholesale conduit is extractors, we have good relationships with those folks and hopefully that continues on but I think at some point you know other we're working with other Lps and let's face it enough produce business we've.
Work with competitors for years, we have good relationships with competitors, we supply competitors.
And to a degree.
No I think that we'll get some traction going forward. So I don't necessarily see it growing exponentially, but I think it's going to come back from where it was in a.
The fourth quarter that was pretty nonexistent.
Okay. That's good color and then last one from me that's one of the touched on the 2.0 products, we've seen kind of.
<unk> mis results in the market.
It's maybe doing better than oils are soft Jones for example, I'm just kind of wondering what your guys take way has been see competitors in the market and then if you can what kinds of product mix do you think.
Is reasonable going forward, you know should we think of it sort of as a 75% flowers for you guys and 25% 2.0 products or.
That kind of off the Mark just any color would be helpful. Yeah, I mean, a flower rules and if you look even in the U.S. I mean, the major markets, California, Colorado, I mean flowers still rules and I think it well for a long long time I think the management team the leadership.
Men dash.
He has a real clear understanding of seeing what's working with others before we jump in and so.
So while we've taken a very prudent approach to what products were going to launch from 2.0 invade pens. As an example, yes is one.
And see how that goes and as I said in my remarks. Once we enter a particular segment we want to work it as best we can make sure. Our price point is right. We can make money doing and to try to take a commanding lead and I think that's on the horizon and that in oil and probably not much more in the.
Well short term too we.
Make sure we can deliver those benefits and excel there, but I think.
When you look at the other markets confectionary beverage, they're still very you know very small markets and they still have to be proven out to see what the consumer preferences are going forward. So we're going to be prudent before we jump into those.
But as I said flower and.
We we still have a ways to go and trying to dominate and build our market share there and we're very focused on that priority.
[music].
Oh, sorry go ahead with Raymond James Your line is open.
Well you make it seems that thanks, so much dead wrong question and congrats again.
The dust region.
Thank you Amanda.
So I guess my first question a bit more of a macro question in a recent we're seeing the market.
As a whole growing and in terms of dollar amount.
But that that of course now we're also seeing incumbency, including yourselves.
With relatively flat.
Revenue quarter to quarter so.
Well just a comment on this dynamic what do you think is driving it do you think that it's something that will adjust overtime as the market matures.
I definitely think well I mean, the second quarter was a crazy corridor I mean, you know, it's almost like where forgetting the impact of the pandemic in in the consumers' minds in.
In March and April that was just you know 60 days ago 90 days ago. So.
If you remember when we reported and the other Lps reported there is a very.
Unstable time was hard to predict we weren't sure.
Infrastructure Rollouts by the provinces like I'm Cherry would slow.
People were staying at home. So it's really hard to look at what's happened. There. So I think when you know were already into the third quarter and I can tell you in the third quarter, we're seeing.
How much more stabilization.
And we're seeing growth. So I don't think the second quarters, probably indicative of where the market is going up and that's why I'm really pleased with it because you know we went through that and we got through it in a very strong away.
And I think we've actually said that we see growth in the third and fourth quarter continuing.
Not just because it or launch of new products.
And new strains.
Increasing market share and we've got further penetrating and cannibalizing illicit trade.
Yeah, great that on the macro level I think you know I feel very optimistic about it.
That's very helpful. And then just one follow up question you've done a flight to back as.
Sandguard.
Province to penetrate we recognize that so as you know quote unquote preferred supplier position in a market, whether artificial or not I mean, how do you plan on dealing with that particular dynamic back as a country.
Well that's classified.
[laughter].
I mean.
Let's just see what the results are going well.
Okay, Great and then just very quickly.
The speed and if the question about international So obviously there is definitely grow and then.
Deal in Asia, how do you see your broader international strategy, a rolling out then committing capital.
To this sort of outsized long term opportunity.
Yeah, well that's the key is long term I mean, you can break these segments out people can say well the CBD market. We thought we would have a lot greater traction today from December of 18 upon decriminalization, but of course, a monkey wrench of the FDIC thrown in there and you said, we're taking a prudent approach, but we're very committed and we see.
That is a huge very exciting market that we definitely want to be a major force and whether we build it by it or work with partners in that market, but we want to stay a little bit on the sidelines. So there's clarity from the FDIC. We just think it's prudent right now so that said.
There's you know, we've always said if and when on legalization of high Tha the equalization of candidates in the U.S., obviously, many folks are talking about it.
Even the tax.
Opportunities for the government for local municipalities are resonating elections coming up so it's anybody's guess what happens, but the opportunity is massive and comparing it to candidates you sell massive then.
We are ready to go I mean, I would be honest with you that every day that I I don't really focus too much on the Canadian market, because pure Sun farms is doing their job and penetrating the doing well, but I look at the U.S. opportunities and I wonder.
How long before.
Anyone not in that marketplace will will not have the same opportunities that as those who can compete.
In the U.S. market, where we can today, however that being said having.
Such a large footprint and what we consider the best growing region or one of the best growing regions.
Texas, where we are in southwest Texas.
It is probably the equivalent of what BC as to kind of in terms of.
Growing condition. So we have that footprint, we can we can pivot instantly.
And maybe we'll go that along maybe we'll do it in partnership with others down the road, but that's a massive opportunity but in the meantime, we're just not going to rest on our laws. So were looking at opportunities internationally and I tell you about the Dutch can grow what's so exciting about that is it just shows a movement of a specific European.
They should that has been very very myopic on legalization of cannabis for decades.
Starting to show the trends of loosening up on the old all mentality that cannabis cannot be legalize and that's exciting for us because that's one of many countries in the E. U. That's why we're excited to be there, but these opportunities.
We're also very long term.
You know we're not looking at.
Adding positive cash flow in the short term, but so the decisions. We make today are a combination of what we think can be a short term benefit medium term had long term, we want to be at all three levels because the opportunity is massive over the next decade.
Were pursuing pursuing that.
Great. Thanks, very much for taking my questions that ultimately today.
Okay.
Thank you.
Doug Cooper with Beacon Securities. Your line is open.
Hi, Good morning goes like just from a value pack you said it was 80% I think just Steve said it was 80% of revenue in the quarter.
How big do you think or the category can be.
Okay.
<unk>.
Receptive market.
A large format.
Yeah.
I think under the current I mean.
And like we saw in tomato business, we've seen that we didn't have a movement towards the lower price.
So I think for that.
Seeable future large format for dry power will be the predominant skewed.
Yeah, we've been looking down numbers like March when we just started the launch it not small format was greater than 50% and we were at about.
40% on large that jumped to 60 in April 76 in May 86 in June so in the second quarter.
It really went from almost nonexistent in the first quarter to 78% as compared and small being 20. So I think that can give you an indication now when we launch new skews. It may change, but I think a 70 30 60 40 80 20.
Is that clearly possible.
So the the large.
Value pack price.
Let me break it down 350 grams for retailers after that for a retail price.
Price point seems to be great pretty but consumer would you put that same price point in a smaller packages that part of the FCC new skews a commitment.
Not necessarily.
You know I think we have to be attractive there as well, but maybe not to the extent of the large format.
Your packaging caught up now that a handling cost on the smaller format.
Substantially higher than it is on a large format.
Sorry.
I mean, you can't do that and saying.
Value that you can't in a large format. That's the beauty of the large format for the consumer rights.
Yeah. So when you really look at where we are would be may because it.
A number of reasons, but in June at 86%.
Arch format versus small that really drove the margin down, but still north of 30%, which I think it's pretty incredible so as we introduce more products and our volume goes up even if the large format remains a very large percentage.
With increasing sales, we feel very confident our gross margins will increase even if we maintain that low margin lower aggressive pricing rather on the large format.
And speaking of frozen for that.
Doug why isn't going to retail NDC Act, the black market price of $99 per out. That's got was the focus it appears some farms management team. They wanted to go to market at the black market right.
[noise] you touched on that gross margin or you think potentially can move higher as we progress throughout the year into next year, Steve can you just doctors about the accounting.
For.
2.0 products, considering I think you're you've said in the past that one cents trimas garbage and implement a county perspective, so what would be the comps how does the terming working up probably.
Well for us it again as I said the cost per Gram and non industry standards. So I know you and others are trying to track that metric and I asked the question well does that include trim or not in the denominator of of production. We do not Pearson farms does not include trim because ultimately.
We're in the business of growing flour and using the flower by train is I used in utilized in Canada is 2.0 product being paid and et cetera, obviously, the cabinet content at trimas. The same if it is with a number one flower so for pure some funds I can't speak anyone else for pure setting.
Arms candidate to 2.0 I will will.
Be helpful and on gross margin, because we value the trim and zero on on our accounting books.
So that'll that'll improve the margin of cannabis viewpoint, so that input.
On the percentage of trim into Canada to fund a product zero cost.
Yes.
Yeah, and it also Doug I want to add to something I have some numbers you know just looking at.
Where we're headed in that sort of July is.
We had a large format was 80% of the volume in Q2, it sort of dropped to 60% in July.
And even down to 45 50.
Initially in August so.
No it's going to be interesting to see if a big driver of that was also tied to the pandemic as well.
And we'll get some more color on that over the next quarter or two to see how it averages out. So I think so it's still too early to say specifically what that split will be.
Okay, and then just two more quick ones from me, a the 12.9 million that but net sales in the quarter. How much was items was I'm sorry.
We don't we won I don't have that information to I wouldn't give and see if I haven't anyway.
Okay.
And capex requirements for the second half given you're pulling back I guess de three maybe just give an update where you are due to.
So that's yeah, so what's the topics.
No there's no real capex requirements for the rest of this year at Delta to has had most of the investment in there. It may only need a a few million dollars to kick it off.
And we're starting to look at you no longer term projections of capacity requirements into the third quarter next year.
Where we feel we may start turning that delta to on as well, but you know we're going to produce what we can settle and maintain our inventories levels as the level we want.
You've seen a lot of companies I think just producing producing producing can't sell for whatever reason, taking write downs and.
We're just going to manage that process, but as far as Capex goes we're in good shape.
Sorry, My final one just are you just mentioned, Minnesota just asked the question the reaching that a lot of inventory write downs and other Lps.
I'm farms inventory stood at 36 million you recipe ended the quarter.
Any comments or comfort around that inventory level.
Were you know we're comfortable that inventory level. Obviously, you know we tested for Recoverability. So we've gone to that exercise so very very confident with the inventory that we have.
This is a consumer goods industry gain to the day, so as as new skews launch.
It is.
It could impact in the future down the road.
Our inventory valuation that said the beauty of a candidate you can you can extract so if you have a strain that hasn't been a success or is negatively impacted by a new strain that we've launched and the reason large format is down to some extent July and August.
As a percentage of appears on farm sales is because they have launched in strain so thats the beauty of that.
And they take a strain back in answer to that didn't perform as well he was negatively impacted by the strong performance of others.
You can take it back and extract it use we can have not content in Canada to point out so.
Getting to Mikes point, managing your production and manage for what you can sell in use and utilized in the near term is the way to avoid inventory write offs Donald.
Yes, and we also feel like comfortable going forward when an inventory level of about 15 to 20.
Tons, so because as we roll out new products, we have that so.
Okay.
Just on Steve's point, we're comfortable were asking for sure.
Okay, Great and that's why we reflected in the call by the way we did curtail some of our production at the beginning of the summer.
Just to be able to catch up and.
And that's just managing the process that has nothing to do with coal that are part of a pandemic benches pitching the expectations.
Perfect. Thanks, guys.
Our final question comes from the line of Scott Fortune with Roth Capital Partners. Your line is open.
Hey, guys. This next stepping in for Scott I'm. Most my questions have already been answered, but I just wanted some color on the CBD branding side of things longer term. How are you guys thinking about building or CBD Grand plan brand sorry globally in the U.S. ahead of any sort of that'd be a movement you mentioned being on hold your but any color in terms of brand strategy would be.
Helpful. Thanks.
Yeah, I mean, it's a we just don't want to take any risks there, but we have oh, we have a program. We're looking at products that are not being scrutinized by the FDA and deciding if we want to develop are still sitting on very viable high quality biomass.
Uh Huh, so and we're looking at other opportunities what other other companies. So I think you know I can't say Scott at this point, we're going to move fourth because we just want to be clear what the FDA guidelines are gonna be.
And.
We felt a little more confident in recent weeks.
Hopefully after the election things get focused on it and so really looking at 2021 to.
Sort of.
Get back on course.
Great. That's it for me thanks, guys.
Thanks, Nick.
Okay I just wanted to thank everybody.
Now.
For joining us today.
I hope we provided clarity I personally I'm very very excited about where we stand today and what we've demonstrated a now I I've were clear that our foundation for our business model is solid and Oh, we can build upon that going forward and then start to look at other opportunities.
These are both domestically and internationally. So were excited we look forward to reporting in next quarter and we want to thank everyone for participating today and look forward to speaking to you again.
This concludes the village from Internationals second quarter 2020 financial results call.
For your participation you may now disconnect.
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