Q3 2020 Village Farms International Inc Earnings Call
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[music].
Welcome to village farms International's third quarter 2020, <unk> financial results Conference call.
Earlier this morning village farms issued a news release reporting its financial results for the third quarter ended September Thirtyth 2020.
The news release, the one with the company's financial statements.
For available on the company's pad site village farms dotcom under the investor or something.
Please note that today's call is being broadcast live over the Internet and will be archived for replay of both the telephone and via the Internet beginning approximately one hour following the completion of the call.
Details for kind of access to replace are available in today's news release.
Before we begin let me remind you the forward looking statements may be made today during or after the form of part of this conference call.
Certain material assumptions for applied in providing the statements many of which are beyond our control.
These statements are subject to a number of risks and uncertainties that could cause the actual results to differ materially from those expressed or implied in forward looking statements.
A summary of these underlying assumptions risks and uncertainties is contained in the company's very securities filings with the FCC and keeping regulators, including its form 10-K M's DNA for the year ended December 30 for 2019.
And the 10-Q for the quarter ended September Thirtyth, 2020, which are available on Edgar.
These forward looking statements are made of of today's date and except as required by applicable securities laws. We undertake no obligation to publicly to publicly update or revise any such statements.
I would now like to turn the call over to Michael the Julia.
Chief Executive Officer of village Farms International. Please go ahead Sir.
Thank you Carol a day. Thank you everyone for joining us today with me on today's call. It's really the Troms Chief financial officer step in of the Feeney.
This morning, I'm going to spend a few minutes highlighting the key takeaways for the quarter.
Steve will then review the financial results and I, we turned the some concluding thoughts and then we'll have some QNX the.
First highlight that I'd like to call out.
The profitability village farms once again achieved positive EBITDA contributions from each of our business segments cannabis and produce.
Current showed another slug of strong improvement year on year and growth quarter on quarter, as well and pure Sun farms posted its eighth consecutive quarter of.
Positive adjusted EBITDA and more importantly, its seventh consecutive quarter of net income.
That is an achievement that is unmatched by any of the Canadian kind of player pure Sun farms quarter on quarter growth was driven by increases across all key metrics.
From my seat this is harder and profitability of that demonstrates the underlying strength of our business model, coupled with the execution expertise, which doors on both the Pos on farms cannabis marketing experience and village farms 30, plus years of experience in large scale low cost and sense of agriculture.
As we welcome back this expertise and the one room with the closing of the pure some farms Zack true we look forward to even more opportunities ahead.
The last conference call like share you that Q2.
The go found quarter for pure some farms proving out that even with a very high proportion of sales derived from a large format lower price off range pure sun farms could be profitable the.
Third quarter now is evidence of the earnings power of Qs on farms, the sales growth and that Steve will discuss the composition of those sales in Q3, we swung back to the larger proportion of small format for.
A lot of sales.
An example would be of 3.5 gram offerings as a centerpiece.
Which currently drives our brand awareness of BC ground branded how strategy.
The second highlight I'd like to discuss is related to profitability in that it is a key driver about success and the matching a leading share of the branded retail more.
And growing out of wholesale channel sales and that is quality and cost of production.
It's a like.
Hi, curious circle build and operate the most efficient operations to produce quality candidates products to grow market share and drive profitability. The more brand strength, we build more of our markets profit pool, we should be able to claim.
All of these calls for shared with you can share data that is available and we hope that you will continue to benchmark ourselves as we have only been in a retail kind of the space for one year I am pleased that the sequential sales growth was a combination of underlying market growth new product launches Rand.
Performance and a more normalized sales mix.
In Ontario, which provides the market share data that we all are able to discuss the pure some farms brand again.
Led all individual brands in terms of both volume sales and dollar sales and the dried flower category of would just on the 13% share by volume that number jumped in excess of 15%.
In October.
We also remain the top selling brand by both volume and dollar it's not just for the year to date, but going all the way back to the launch of our retail products one year ago, It's a remarkable consistent performance unmatched.
As you know from the beginning we have the leaves and I, rather simple and straightforward business model for family will do the now scale and efficiency of cost of production the still the lowest among publicly traded greenhouse in indoor produces at significantly lower than the vast majority of our peers. This.
This is the key.
Two hour.
Honest circle of generating profitability and brand investment.
And here is how the standard this is translated into Q3 kind of this results.
Net sales increased 75% sequentially from the second quarter. The just under 23 million driven by strong increases in both the retail branded sales and sales in the wholesale channel.
And I will note that only a small percentage of less than 5% of Q3 revenue was generated by the launch of about 2.0 products, which was very late in the quarter.
That drove the sequential quarterly increase the net income of 200% the 3.2 million.
The third pad take away from the quarter was that the value of managing our business with prudence and discipline.
From day, one we have built in guided for a certain forms of profitability and return on invested capital. We have done the the advantage about decades of experience, we did not old the builds as many others have and as I will discuss more in a moment, we are actively managing of production levels to the ramp in.
Market demand, we continue to see increase active the you know wholesale channel.
Not the result of any shortage of supply in the market, but rather a strategic decision by some producers who have realize they can source high quality product, perhaps at a lower cost and they can growth. We are encouraged by this activity as it could mean better.
Better supply demand dynamics going forward. We believe this cost quality advantage combined with our long term capacity will be a significant could the competitive advantage for the foreseeable future and we will continue to believe that we could supply as much as 30% to 35% of the total Canadian cannabis flow.
Market would be see growing product in addition to being a leading brand with in excess of 20% of the retail channel.
I Didnt I do want to remind everyone that with the acquisition of the entirety of course, then farms of village farms is now free.
To use of 2.6 million square foot Delta one facility for cannabis production anytime we deemed that it makes sense to proceed.
As a reminder, delta one is located on the same site as Delta two and three which provides significant advantages over geographically dispersed operations is highly scalable and it's about 20% larger than the delta two and three facilities combined.
We are now back at full production at Delta three of the scaling back during the summer as we actively aligned output and inventory with near term demand, which afforded US. The addition of benefit of doing a complete cleaning of sterilization.
In addition half of the 1.1 million square foot system facility to Delta three Delta two is completed no.
No other capital requirements with kind of bring the had entered production and the.
Next year.
The most important operational highlight of pure Suncor loans. During Q3 was the launch of of first 2.0 products and by the of oil and very late September as we expected the value proposition for our drivers out flow of products that has resonated so well the consumers high quality products that people want.
At the end approachable price is similarly, resonating with consumers about vapours annoying.
These products and body out on comprising approach the quality and our commitment to a pure of cannabis experience a full spectrum 510 basis of made with 100% Pure Act cannabis extract no flavoring agents added terpenes thinning agents and of our best strains.
Both elevate the law of products have had excellent traction out of the gate and have been very well received by consumers consistent with the pricing strategy for our dried flower products, we launched that while they products at a price and quality of that we believe lot of tiesto still purchasing kind of this from a list of sources to transition.
To the legal market.
As a reminder of the live market is estimated to still represent anywhere from around half the three quarters of the total and you kind of the sales depending on market and geography.
These continued to be the power users of kind of this and will be a major driver of growth in the legal market. We believe that these consumers ultimately want to purchase the kind of is from illegal source and are happy to pay a fair tax and the process. The do so with confidence and the consistency quality and safety of the product at the right.
Price it.
The increasingly they will have access the such product as legal kind of just resale.
Net worth stores network rapidly expands and again, we are uniquely able to take this market approach and be profitable.
And I would like the once again the publicly congratulate the entire pure some farms team Mandy share this whole group.
On their successful launch of about 2.0 products and yet another stiff competition for somebody just remarkable.
Q3.
Only further underscores the value and the importance of our completion of the acquisition of the remainder of pure sort of farms last week it.
It brings our vision to change the unmatched assets people and know how village farms to build the best kind of its business in Canada full circle.
So turning to our kind of this opportunity is in the U.S. with the election behind US we look forward to the regulatory clarity that may occur. We continue to be encouraged by the direction of the regulatory environment and have been hard at work developing multiple parallel strategies to expand the number of potential paths.
The capitalize on this opportunity.
[noise] internationally, we have invested in strategic partnerships like in Asia Pacific Company outside of the which is making steady progress on the execution of its strategy initially focused on the Hong Kong market.
Uh huh.
So turning now to approach the business for a moment as I noted in the onset village farms has had another good quarter. The continuing strong price performance for Tomatoes drove higher sales and our continued progress in the transition and growing capacity of displaced for kind of this two out of <unk>.
The growth was as well as out of continued focus on cost management.
Attributed to a $4.2 million EBITDA turned around to a positive 2.2 million.
While these numbers are important in and of themselves as you have heard me say many times. What is also critical important is the breadth and depth of the strength of the organization to the lives of pruritus business. It is the engine that is powering of outsize growth opportunities in kind of this other related opportunities both domestically and internationally.
I'd like to turn the call over to Steve and he'll talk through our financial results and.
Thanks, Mike I liked the span of mikes comments from providing more background on the financial results, which support the village farms strategy.
Our current business produced sales of 43 million for the quarter increased over 13 of over the 12% vs Q3 2019 on.
On the back of our average selling price of tomatoes, increasing 30% year on year.
On the lower tomato volumes as we had no production from the Delta two facility in 2020 has now been converted you can't of its production as Mike mentioned.
The increase in purpose.
Selling price is essentially rose directly into the gross margin as there is no impact on the cost of sales as such we saw a year on year improvements in our Q3 gross margin.
Of 6.2 million of 5.6 million from losses in the prior.
Third quarter of 2019 of 600000, our purpose business.
Pat and 13% growth margin for the quarter of the incremental increase in our gross margin was driven by the higher selling price and lower tomato volume again due to the conversion of the Delta two facility.
<unk> EBITDA increased by.
The 4.2 million year on year to the 2.2 million on the back of the improvement in our purpose gross margin, which was offset by a lower year on year add back the appreciation since the depth of two facility was not in production.
And the higher year on year EPS to unite in Q3 2020 vs. Q3, 2019 of 1.2 million, which was primarily the substance of expenses involved with the acquisition of the financing of the remaining for some farms shares I should note that the incremental EPS you net expenses are not true.
Truly related to the pro the business, but are more corporate in nature.
Supply shortages due to the increase in grocery store traffic.
Certainly helped the purpose of pricing in the late spring and throughout the summer of 2020.
I'd like to extend our sincere thanks to all the village farms employees, who have continued to work all out and growing distributing the supporting our village farms produce brands by getting our fresh probably some of the shows our strategic retail partners in both the U.S. in Canada. The commitment by the entire workforce has truly been amazing throughout the pandemic.
I mentioned last quarter GAAP, the strong year on year pricing would result in positive EBITDA and cash flow in the close of business and we expect this trend to continue for the balance of 2020.
Turning to Canada.
A reminder, for the quarter ended September Thirtyth 2020 of the pure some farms results have not been consolidated in the those farms Q3 results.
As we own 58.7% of the pure some farms business during the day.
But we did not control it until November 2nd.
Which time the young the 100% I will address the consolidation of perform of financial shortly as Mike noted sales for the for 75% sequentially and we continue to build on our strong brand position, which I view as a strong indicator for our future, especially given the uneven year ago dynamics and the Canadian candidate.
The market.
Sure for Pearson farms retail flower sales represented 48.5% of all of our sales dollars for the quarter. The late quarter launch of Pearson farms 2.0 product contributed 4.5 of sales profile for.
4.5 percentage of sales this quarter and wholesale sales made up the balance of for 47% of our sales.
With the retail channel totaling 53% of sales shearson farms quarter on quarter growth from retail sales of 30% was driven by a 160, 666% increase in its small format skews and the 30% increase in pre rolls, which were offset by a 43% decrease in free.
For some farms retail large format sales the large format sales in this quarter were as expected ongoing replacement sales as compared to the second quarter, which were driven by higher launch related sales.
Our quarter on quarter average selling price did result in the 13.3% increase.
Which was driven by the increase in the ratio of our small format sales versus our large format sales, which enhances our margin.
As well as an increase in the blended net wholesale pricing for the third quarter versus the second quarter for wholesale price driven by spot market dynamic.
We mentioned sequential sales growth looking ahead, the Q for while we continue expenses.
Continuing month in month year on year growth in our retail and wholesale businesses I want to remind investors. The queue for 2019 was marked by the pullback of retail buying by potential buyers, who are managing the conversion to kind of a 2.0 and they are you hearing the inventory to date, we have not seen any indication of this re occurring.
For some farms and our competitors still operate in relatively new distribution system and the remain many external economic factors not to mention pandemic that could slow our strong momentum.
In recognition of the overall supply situation in the market and our customer demand, we actively pared back our production during the third quarter, resulting in a decrease in our inventory both by volume of in value.
Overall Pearson farms inventory balance, including work in process decreased approximately 6% quarter on quarter, which for those that meet our financial footing as can be seen on the footnote seven.
Inside of the overall inventory totaled the decrease our finished goods.
The flower inventories by over 15% quarter on quarter, we continued to actively assess supply versus our demand presently the duct free facilities back in full production based on our sales forecast the ability to ramp up and down our supply is one of the beauties of this property is our historical fresh produce crops, which are paying the commitment.
We actively changed range to mirror of sales forecast and the work to maximize our cash flow, but more importantly to maintain fresh flower inventory.
Switching to Pierce from farms profitability gross margin for the quarter was 34.6% versus 33 point for.
Q2 versus 68.6 in Q3 of 2019, which had a totally different demand dynamic. This quarters cost of sales include the inventory write down of 1.4 million Canadian 1 million. The wrath of the distillate inventory purchased earlier for which the market value of his drops as our purchase without the write down.
Non Pearson farms. The adjusted gross margin was 40.7%, which is the true reflection of the actual growth margin achieved against this quarters.
The remaining just fill inventory has been assessed versus the market value and there is no need for any further distillate write down of the distillate will be used in Canada. The 2.0 products in Q4 in early 2021.
The receipt finally of the Pearson farms extraction of license from Canada in September will enhance our gross margin. The cannabis two point of products. They tend to book in the market today were manufactured by third party extractor as such the margin on the skews was lower than on our flower products in the third quarter we.
We expect our Canada went out of products to have a higher as we manufacture our own day pans and other kind of is 2.0 products in the coming quarters is it was important for Pearson farms of launched the faith and oil in advance of obtaining the distraction license due to the ongoing success of its low Rand.
From a gross margin perspective on the retail versus wholesale the margins were somewhat similar this quarter.
Our retail margin was pretty consistent by format. So as we sell more small format skews versus large format. Our margin is enhance has occurred this quarter as mentioned, we do expect an increase in our retail margin as we increase our cana, the 2.0 product sales and transition to our own manufactured of 2.0 products.
Wholesale margin are driven as mentioned by spot market dynamics, which are heavily impacted by available quality in potency versus the needs of other LP we.
We continue to actively excess are.
Our mix of sales by channel.
Asking expenses for the quarter procure some farms decreased approximately 13% year over year, which is the result of COVID-19 related waste subsidies without the subsidies SGN expenses were essentially flat year on year.
As Mike previewed during last quarter's call. We have made the decision not to provide detailed information on pure some farms kilograms sold or produce or provide our average selling price for cost of production.
As the market continues to become more sophisticated is not in our best interest to disclose.
As you can see from our Q3 gross margin percentage of 40.7% without the distillate inventory write down as compared to our Q2 gross margin of 33.4%. We continue our strong financial performance since the.
Distant with the.
Virtuous circle that Mike spoke of earlier.
It is simply not in our commercial interest to be telling our customers our cost of production. Our margins. We have demonstrated for low cost production and brand quality no need to give away proprietary information.
The village farms in Pearson farms balance sheet continued to be on solve the ground to support our ongoing businesses and the turn of growth objectives, both entities have borrowing capacity on the existing bank loans.
As an aside on September Thirtyth 2020 for the first half of my tenure with the always farms, we had a net cash position of $22 million the rest.
Of course, we just paid 60 million Canadian or 40 million you left to complete the acquisition of course on farms on November 2nd as well issued a 19.9 million Canadian the or.
You asked balance of $50 million due on May 2nd 2021, the complete the acquisition. So we're back into our normal net debt position as of today, but we are on from financial ground with our ongoing positive cash flow from operations in both produce in Canada.
Speaking of as I mentioned earlier outperformer.
As we mentioned in our closing press release earlier this month pure some parts of the fully consolidated and goes farms results beginning of November 2nd as such our Q4 results and full year 2012 results will include roughly one month of JV accounting.
You have to overcome the Q4 and 10 months of JV, the JV accounting for the full year 2020, and two months of the consolidated pure some farms results in Q4 2020 and for the full year.
Since the acquisition of the remainder of Pearson farms is deemed to be material acquisition acquisition for village farms. We are required to file pro forma combined financial statements for the large and the so combining those farms and pure of some farms as if the transaction occurred retroactively to January Onest 2020.
The reported is due within 75 days of closing for Canadians on the call of this report you will know as a bar report meaning.
Meaning business acquisition reported in the interest of giving the market. The view of the income statement component of the pro form. The report we've provided within our press release this morning at.
Net caveat it in the press release.
This is for informational purposes, only and is based on the preliminary estimates and the accounting judgments.
Based on the early indication of performer for the nine months ended September 32020, our statutory reported income eight cents per share will be 13 cents per share if the businesses had been combined for the entire year.
And our 2020 year to date nine month, adjusted EBITDA would increase the 12.5 million for.
From our reported year for the adjusted EBITDA of 7.9 million, which I will note does include we do include inventory write offs in our adjusted EBITDA when we reported.
We do not add it back as such while.
It's still subject to the completion of the report we are confident when the restate. The acquisition was very accretive for those farms. We are actively working on the fair market value accounting of the transaction and look forward, the completing and filing the required us from Canadian imports as soon as possible and hopefully no later than early December I want to recognize and thank all of the accounting staff for all of the right.
Efforts, an increment of work this year in converting village farms and for your son's for farms from high for Us the U.S. GAAP.
As well as now the acquisition of consolidation of pure some farms individually farms.
With that I'll turn it back over the Mike Thanks, Steve So.
So going forward the outlook for the village farms I believe has never been so positive with strong momentum in the business and considerable opportunities still ahead. It was a very solid quarter of many accomplishments for the team has done a superb job.
And going forward each quarter is marked by steady meaningful progress in our trends for the transformation to a vertically integrated agricultural day CPG business as we aggressively pursue high growth opportunities in emerging legal cannabis and related markets in the United States and targeted markets internationally.
We are proving out the value of leveraging the expertise the people the institutional knowledge for new high growth high value markets.
Because of the farms is built entirely on the foundation of village farms of model out the facilities of people out of spirits, I'll know, how all of which set it up.
For success by allowing us the bringing the best management team of the industry and those of the pure set from folks who continue to perform brilliantly.
Owning the entirety of Pos on farms is not not only provides our company the our shareholders with the full contribution of its financial success, but as a as the sole owner. We are now in a position to work to capitalize on opportunities that were constrained by this particular joint venture we.
We expect continued steady strong sales momentum based on the number of very clearly visible factors growth of the Canadian kind of this market, which should the accelerated.
By the Swift opening of new retail stores, especially the Ontario, and British Columbia, the ramp up of sales about base oil products for the introduction of new 2.0 products and the natural shift in the market landscape. The fewer suppliers. This momentum combined with the unmatched north American assets totaling over the.
10.5 million square feet more than half of which is in the United States in which no other kind of this company in the United States of CAD of the has.
This is why we continue to be so confident in our prospects for the low and high THC kind of this market to the U.S. and internationally.
We have the considerable benefit of being able to pursue these opportunities funded by our produce business, which again is performing quite well all of this continues to position our company to deliver growth agenda rate of return on invested capital that leads our industry and drives value creation for our shareholders.
So with that we'll open up to any questions.
So most of that.
Carol.
Cash we invite institutional analysts ask questions to do so even need to press star one on your telephone.
Tourist draw your question please press the pound or hash key.
Your first question. This morning comes from Doug Cooper from Beacon Securities. Please go ahead.
Good morning, everybody in the congratulations on the great quarter.
He just [noise].
I want to start of the clarification on their revenue for Graham you said, it was up 13.3% sequentially and it.
Is that.
Just on the retail side or is that an average of pricing between retail and wholesale.
At the across all channels.
Okay.
And can you talk a little bit about the difference maybe between the retail price in the wholesale in terms of if you don't want to give exact numbers maybe just.
The the quantum difference between the true, but you are saying.
I guess the wholesale pricing of the range of wholesale pricing can is all over the place.
Whether we're selling price trend or selling high potency.
The grade one flower so the range is much broader of the retail pricing is been pretty consistent.
Quarter on quarter between Q2 than Q3 large format small format, but.
Sensibly, our average price was the enhancing our margin with enhancing the Q3 versus Q2, because we are.
As a percentage we sold more small format.
In Q3 as a percentage of retail sales since we did in Q2, which was predominantly as we mentioned on that call driven by large format.
Can you give us some of them idea of the break the on the retail side the breakdown of by region say, Ontario, BC, Alberta, and then did you have much sort of the loading the indices. Scott you want to think of came largely from the quarter from a mistake.
Well, Ontario, clearly continues to be our largest customer but.
And there are also impacting pricing is that there are pricing differences on the format of between the provincial buyers. So.
It's not like a national price. So it does it does vary so waiting of sales into one quarter into one province versus another quarter also will impact the average selling price for a particular quarter.
Yes, the going forward that the aggressive growth in retail stores that of carry I was talking about right now very aggressive out of the starting now over the next year coupled with the.
The c.
I think that of continue to drive.
The more penetration going forward in Ontario for second it might be seeing.
What do you think the optimal split of your businesses between retail and wholesale for Mike can you just comment maybe a little for there or maybe I missed the you talked about maybe the number of suppliers dropping the can you just expand the amount a little bit.
Well, that's a perception, but I guess I'll spend expand on it by saying there are many examples of premium.
Brands CPG companies that are very well know brands have huge penetration and market share, but have the wholesale strategy.
There's a lot of examples of that.
And it's still a very nasty of industry and we want to keep our options open where we're going for.
For us we've made the investment already the capital investment of Delta, two which could double the capacity right here would village farms and.
As I mentioned on my remarks, we have delta, one which is larger than those two cumulatively. So you know I'll I'll focus is as a branded house to continue to maximize our market share for the retail level.
But right.
Right now I think the wholesale venue for US works. There is a lot of smaller companies that have the unique niche in the marketplace are doing unique things that don't have cultivation and to the extent that those companies.
Our innovative and may be doing things, we won't do it can't do of May never do why not have a relationship with that and.
There are some companies you the we in out 30 year history and produce even though 80, 75% to 80% of our sales are direct to the retail trade. We've always had relationships that make sense on a portion of the business. So I think I'd, rather not say, there's not really a goal what that percentage will be done but.
See how it goes over the next two years it should be a lot of interesting changes of the Canadian landscape.
Correct.
Do you have the you know what the breakdown of maybe just talk about Ontario in particular breakdown between sales is at the retail level between flower in 2.0 products and I guess I'm just trying to you know if two point of products were 4.5 per cent of your sales of what do you think they could be.
You know six months a year from now.
We still believe flowers rules I mean, if you look at the U.S. or individual states.
It's still flower and there's no indication of the Thats changing I think we will see increase.
A cannibalization of the illicit trade with 2.0 products, taking more of it.
As as the stores rolled out of it as a retail presence and the Canadian government, maybe once the is adequate amount of retail stores will shut down more and more of legal trades, but as far as the split I think 2.0 products will continue to grow but the.
The grade of percentage of still.
Flower because you know as I mentioned on the call out of 3.5 Gram yeah.
Yeah pretty much.
Strains of doing very well and if we see that continuing to growth for the foreseeable future.
[noise] for our next question comes from Rahul circa from from Raymond James. Please go ahead.
Hi, good morning make the Steve.
Great that's kind of yes, correct congrats on the on the rock in the quarter well done guys.
So first.
First question is clearly the the clear dominance in the the value segment and flour.
Now with the emergence of the you know youre, putting out based on the market and noticing the pricing I guess, you guys are being pretty aggressive in pricing. So how do you see pricing going forward driving revenue relative to the competition, particularly as retailers.
The retail is opening up the you noticed them as you know there Mike.
Well I, just kind of reiterate ROE that our pricing strategy was always based on the fact that we saw the illicit trade.
And the the main consumer and Canada being the consumer has been there for decades, the everyday use of the casual we can use the and that's the target market is going after.
And in the one or two.
Abide in order to cannibalize that customer to us.
We have the order oil off for all of these key attributes in terms of quality potency safety, so on but at an affordable price and that was coined by the team at the pure some farms early on the affordable luxury and Thats the.
The focus of it so that's where we're positioning the price points and we're doing the adds more or less of all the products. The launch now if that price point of 30% under other competitors so be it.
It's a reset the live with that because that's setting the market. It's a five $6 billion list of trade market that needs to come here. So thats, how we position of the pricing going forward.
Okay, great. Thanks, so much and then in terms of the the wholesale clearly that was the relatively large portion of your total route. So number one do you see that from being durable.
Durability in that going forward and also maybe provide your current your comments in the context of the recent crop coke crop cover of outdoor grow and how do you see village farms product or the competing particularly in the wholesale market relative to all of that outdoor growth.
Well you know wholesale has the stigma attached to the terror. So maybe in other credit terms in wholesale as opposed to alternative channels from example would be.
Mean private private brands at the end of.
If the Costco in the Canada wants the eventually so kind of us under their corporate brand name I mean, that's that's an alternative channel. So I think wholesale tends to have this thing.
That it's non important and again I think it's too early to tell but we will look at those relationships that we think could be meaningful were profitable to use the term wholesale we are profitable at the wholesale level, we prove that all.
All along so.
Right now when we look at the fact that we've made our investment in Delta to but we were quick to put that in production. We're very prudent without decisions. We don't want to produce anything that we can sell and.
And we're going to be patient as we ramp that up but we can look at alternative channels and still remain true to a positive cash flow. So I look of the as a combination of wholesale private brand.
Other markets other channels that people are doing very innovative niche oriented.
Offerings and see how that flows for the next couple of years for us.
Your next question comes from Adam Bakken Scotiabank. Please go ahead.
Good morning, Thanks for taking my question.
Now understand the Canadian market as both the volatile and dynamic, but as we think about Q3 flower Max for says moving forward do you see this quarter as a more normal mix or do you think there could be further shifts in the small format in the near term.
I think I would say you know a more normal certainly a much more normal quarter for the second quarter and certainly for US. If you remember last year, Adam I mean, we where we didn't have a sales license of basically almost into the fourth quarter of last year. So it's been one year. So we can't really look at.
How we performed last year as Steve said in his comments.
A it was a different market last year, and we were selling so the 100% wholesale from the first second third quarter. So for us getting some historical data going forward is what we need the second quarter of this year.
And to an extent the third was really impacted by covert, especially the second quarter, you've heard people other companies, saying you know pantry hoarding and sell one of that I think the fact that we launched the large format at that time was advantageous of was the right product at the right time.
But I think this third quarter has shown the where there's more normalization of between Oh offerings and it's early for US on the 2.0, we just launched at the very end of the last quarter, we're very pleased.
Where we are today, we didnt want to talk about any specific numbers at this point, but I can tell you we remain very confident in the direction were going from the early numbers, we're seeing so.
You know I think it's a great question and I think the fourth quarter will probably help reinforce what that balance will be.
Okay. That's great. Thanks, and I was just wondering if there's any updates on progress on signing some some new potential customers.
Well there is the progress I mean, we're still you know eyeballing, Quebec.
The team's doing a lot there its.
It's not an easy penetration but.
We feel confident that slowly will make a non try into that of that's clearly at the top of the pinnacle right now is Quebec.
But you know I think what's more interest thing for US is finally, the traction that the Ontario bunch Columbus showing of opening stores the mean ontarios talking about.
You know the realm of 40, 50, 30 to 53 to 60 stores per month or one of the month looking at 500 stores by April doubling that two of thousand by next September that is very very exciting for us we've.
We've had conversations and the odd with greater capacity and I think British Columbia as moving in that the or what not as aggressively and I'm excited about it because we've always talked about the fact that.
It's like the of the prohibition of the U.S., except that the government of the U.S. did nothing they shut down of the Kentucky moonshine or so at some point here when there's enough.
I left retail stores and a great channel for legal product than we hope that they.
There will be some pressure on the illegal trade and that will continue the increase greater penetration market share for us going forward.
Your next question comes from Aaron Grant from the line for a couple of partners. Please go ahead.
Hey, good morning, guys, congrats on the quarter and as well as the of the recent acquisition of pure some farms first question for me Mike You just mentioned that you're pretty encouraged by the two point of products. Thus far having just recently launched them in September just wondering if you could give any incremental color there.
In another kind of great. We are starting to see some some pricing pressure, even just looking at the Lcs website the.
Specific dedicated I'm kind of channel just for like under $5 or I'm, sorry, $7. So just curious towards what you're seeing in terms of low dynamics and how you think pure some farms has been position, especially kind of leveraging the brand equity you guys have right now from the flow of category. Thanks, Oh I didn't realize the price was that attractive items for the.
The stat, but anyway just [laughter].
Well you know we did put some now I mean, Steve alluded to in his comments that we.
We launched early.
And we work because we waited a long time as you know for our final extraction licenses is wearing the extraction mode. Now so we weren't that concerned with the margin we kind of knew what out margin could be at a given price and the we.
We knew we were going to go out probably somewhere in the round about 30% of under the existing.
Competitors again tied to the illicit trade and mimicking what we did on the flower side. So.
You know we think.
For the most part we were going to allude to that well leading vape.
Oh brands are kind of the leading today, but we did say that so much in the release, but we've seen some data where were sort of in the top three so far and that's very encouraging both on the quality of our offerings. There. So I think pricing wise, we think the margins are going to come in very similar.
Two of our margins on flower right now once we get traction and I think that all of that visibility will be there.
When we report the fourth quarter.
So where we think the yes.
Yes, I think there is going to be price compression, but that's something that we set for the day. One so were prepared for it now models based on that.
Okay, great thanks for that color.
The second half of the Ontario has been a great province for you guys don't really want in terms of market share, but the kind of after the point in terms of some of some traction with other provinces, specifically looking at Alberta, which is also the province for Canadian cannabis keep up all of you know some of the traction that you've had there and maybe how it might be different considering we're seeing in Ontario, because obviously.
Okay, great market shares in Ontario, sing and talk about the trends and maybe the difference is in terms of buying patterns for the potential buyers or what are the kind of seeing in Alberta, and when we might be we'll see some more traction from some of those markets too because you just don't so well with an Ontario. Thanks, Yes.
Yeah, I think the reason we talked about on carriers, because we have the data.
We don't have the day to any other provincial government. So we don't feel we don't feel like we should talk about it because we'd be speculating Submarket, where Ontario, you know were very pleased that we get that data.
So I.
I wouldn't want to talk about it other than.
The perception in my perception from the pure some farms feedback is we're doing pretty well in Alberta, and BC, except that BC needs to really increase the amount of stores that really needs to happen they've been pretty slow its still of.
The number one consumption in cash.
So the good news is there is a lot of a lot of growth there based.
Based on cannibalization of the list of trade Oh, and the second good news is that traction the starting to be recognized in the c., but it's going to take time like for an example of even though we're doing well and and the province of of the carrier, but if you look at what was just talking to with Mandy yesterday about it and like.
Yes, the sidewalk.
Suburb of Toronto that has a million people does not have one retail store yet so that city Council I guess is the sided they're not ready. So that's the huge potential down the road when and if that happens and so that's just an illustration of certain pockets that will take time to gear up on retail.
Well and we feel very encouraged about that so that's the best color I can give on the right now.
Your next question comes from Scott for choose from Roth Capital Partners. Please go ahead.
Good morning, and thanks for taking the question of can.
Can you provide just a little color on kind of the cadence of the 2.0 products and the velocity there at the provinces. It seems there's still like you said too many.
The competitors in there too many brands some are moving and not are not all are moving at the inventory level for the provinces. The just kind of your sense for.
The velocity of a view of 2.0 products moving forward.
Well, we were so that pretty quickly on the launch so.
We were actually I was plus.
Pleasantly surprise the.
Ah so it's so that pretty quickly and.
The indications are we're going to gain that were gaining and we'll gain more traction.
Including at our price for a couple of what the fact that its pure cannabis, we using our best strains.
For the extraction of this is top of the line fell by products or any of that and we think thats going to resonate well, we feel really good what of 2.0 line. It's just that.
We don't have a even a full quarter under our belt and we want to kind of just be a little more conservative too we can talk specifics so.
But it is a growing it out of the 2.0 products. We have two of and we kept pretty myopic on where we were going with the products that have large market share.
No, we're not really focused on confectionary or beverage right now maybe that will come more in the future of those markets still are relatively small to us. So we want to get out of penetration higher as quick as we can and so for us so good from.
Tom and then follow up on the how many 2.0 skews you do you have out there and then kind of what's the sense for that the picking up or is there a trend to different products and skews the as of the kept the 2021.
Well I think the is about three but we're launching another they are as we speak.
And as I mentioned on the last call, we're ready to roll out out of both in the foreseeable future.
So that will probably put us initially at somewhere between five and seven.
And that's the for US that's a good start that's a good start good launch and once we get feedback the so you.
Consumer feedback, we'll see what else we plan to do.
Your next question comes from Act in the <unk> from Craig Hallum Capital Group. Please.
Please go ahead.
All right.
Non solid quarter, guys and thanks for taking my questions.
So you mentioned that you're at full production in Delta three and that's off the two could come online in 2021.
Can you just help us understand what you need to see in the market before bringing down the two online.
Well, we need to see you know of.
What weve done like over the summer, we sourced sort of things.
Things slowing down and we felt it would be prudent we always want to produce.
What we can sell in fact, the without giving any numbers that if you just look in the third quarter like in August we curtailed our production during the summer and if you remember Delta three was converted and we started the we got into it originally wholesale production, while we're still doing the conversion. So was the great time for us to.
You look at the market and say, we bet of slow things down move some of our inventory out and in fact in the in August the alone in the third quarter, we sold more than double what we produce so taking that prudent conservative approach on reducing our.
Capacity over the summer proved out very well for us out of our inventories right, where we want it to be the churn the solid.
And so.
So now we're back into full production on the Delta three.
It takes time as you know the ramp up now we've done the conversion of the capital of sunk into the Delta to it's just a matter of gearing it up and.
No our expertise for 30 years, the gearing up it's a it's a process you just don't get the excellence overnight so were going to start gearing delta to up to get out people.
Up to speed and we envision a.
That will start looking at increased capacity probably.
Third quarter, and then prudently ramping that up based on of supply demand.
Numbers were not in any rush to go to overcapacity. So we'll just be monitoring that every week as we go where.
For every month I should say.
And then you know keep in mind the way out the sodas the set up of 16 to 17 grow rooms, we have the capacity to bring on it in the slow ramp up as opposed to just thinking of.
Okay. That's helpful. I appreciate the color there and then maybe maybe turning to the U.S. you know since the election, there's been more talk of candidates legalization in Texas.
One law from projected Texas can produce billions of dollars in tax revenue and just this week we have seen.
Teen piece of the cannabis legislation filed in the state.
Can you comment on your readiness to serve the potential Texas cannabis market and how your existing agriculture business could position you for a successful license application.
Well I, you know I'm not going to front load any of our strategies, except to say that we are working and have been working all out on multiple strategies. So we're very excited about the U.S., but I don't want to put anything out.
At this point other to say that I think you know if you look at our play book of principles the results and our achievements of what we've done in Canada by the ways we will.
Nowhere near first second or third in the in Canada and the is now putting in today, we're leading in every major met metric from.
The number one brand to a low cost production the most profitable most consistently profitable and those are the results in the achievements I think.
We'll go a long way to us entering the U.S. market. So we're looking at the regulatory process.
And we have multiple strategies and the and I will say, we're you know we're very excited about the possibilities in the us for for village farms.
Your next question comes from Andrew part the new from the Stifel. GMP. Please go ahead.
[noise], Thanks for taking my questions and congrats on the great quarter guys. You continue to set yourself apart from your peers.
Right. Thank you.
Just the.
On the ordering dynamics from the principal boards.
Could you give us a little bit of color on on how that's going you know, we we we've already seen a little bit of shift for.
From Big initial book orders true.
Smaller orders, but more frequent would you say that that is.
Still the case and you.
You called out your initial launch from 2.0 products selling I'll quickly.
How how quickly.
Did you feel that.
Provincial orchards Reordered and are you satisfied with the inventories that you have at the retail level.
You know what it is as I mentioned I mean is this do still a very new distribution system on prevention for buyers are.
As as an earlier analysts mentioned have a lot of excess of of.
Certain skews or certain strains are they penza aren't moving.
So there's a little bit of guesswork I guess on their part.
We've been very happy with our sell through on.
When you know as Mike mentioned, we sold the out of the vape hands, which on one hand say well you know that the at a testament to the strong demand the flipside of that is for.
From the CPG standpoint that the lost sales if if the consumer goes in asking for Pearson farms flower brand or for a bait and they're out of stock then the they're buying something else of their turnaround of walking out of the store. So that the loss sales for us. So you know as Mike mentioned, you know, we're continuing to get.
Get more data, we're continuing to actively work with the provincial buyers.
Again, a lot of of incremental sales path to do.
With.
You know actively working with the buyers to make sure that.
Store shelves, our stock with our product.
And putting time and effort and people and resources behind Mange your inventory at all levels are not just what we have on hand, but what in weak at the retail level and in the DC is imperative to drive your long term success of your brand.
Yes, and I think also you know pure some farms team has told us that they all want to grow very much so sort of the collaboration of more positive than ever and the orders are becoming more consistent than they have been so.
As Steve said and I think the teams notice.
They are getting better at their forecast and we.
We see the exceeding you know.
Starting to exceed.
Of the orders where pricing so they're placing so we think it's a it's definitely in the end of better okay.
Great. Thanks for that is very helpful.
Switching gears to.
Your your smaller product for my son, and how the that might tie into.
You know the new strains that you guys launched the constrained innovation is probably a key thing that you guys have under your belt and.
You know anecdotally I see on the front page of the Lcs.
You know you guys are adults with 20 grams of encouraged for $5 the grant.
So can.
Can you give a little bit of color on on what you guys are doing in terms of developing the strains launching the strains of.
And how they might have played a part.
And the good growth of the.
The small product format in this quarter.
Well that that proud of you just mentioned was for personally earmarked to Ana.
The analysts living and Montreal, the come down over the weekend.
And the low law.
[laughter].
Oh.
If the concert innovation process I mean, the air constantly obviously buyers of provincial buyers consumers are always looking for something new and innovative so if the constant profit and that's one of the reason that the delta for us.
Does the free facility and the deaf to facility were designed the way the our with multiple growth. So we can constantly.
Try new strain on both in the marketplace, but also on the cultivation standpoint, yes, there's a lot of strength of the pipeline and we now connection and.
Moving to our brand that's one of the things about British Columbia.
Where are we now in kind of this production is a huge difference the.
Net thread in the fiber of British Columbia cannabis is like no. Other encounter the you just not going to see that of Leamington.
So that DNA that history goes way back. So I can tell you. There is a lot of strains in the pipeline and the team there looks very strategically as they launch them, how when where and so I think you'll continue to see as Steve said a lot of innovation.
Coming forward with new strains and everyone is excited about it and I think thats one of the benefits of out of location in sort of the heart of kind of this territory in Canada the.
Your next question comes from Doug Coupe of from Beacon Securities. Please go ahead.
Hi, guys Everything's been answered thanks very much.
Just the other day.
Okay.
Oh, Okay. We're good.
I think we'll get off for it.
Thank you. Your next question comes from a travel center of concern from Raymond James. Please go ahead.
Sorry, Mike just one last question. So I know you said that you'd prefer to keep the U.S. strategy of yourself, but maybe you can just sort of elaborate more generally given the you know the recent changes in the U.S. of the federal level, how you see things playing out and how those farms would be would be able to.
Generally the relative to the Misos, which are quite in favor of at the moment.
Yeah I think.
Let me say this I mean, the M.S. those.
I have done a great job.
I think a lot of them you of their pure play kind of those companies that have focus on bricks and mortar and distribution.
But you know in time, we believe that the Interstate commerce flow happen and I think Thats one area that that's where we shine the best.
You just can't have 578 production facilities in the given the state.
Indoor 567 growers or one of grower going around if you're going to really try to have incredible strength and consistency. So one example, with them as those is as as successful as they are and they will be more successful, especially the national ones.
[laughter].
The big market caps, the pockets no doubt.
They're going to have the fine how they can be a cost effective because in the end like weve proven in Canada as things will get competitive and even if.
In the end the is a migration with technology less in flower to other deliverables I think we could play out apart from the Texas perspective.
If the Texas, Yeah, there's a lot of those out there we don't know yet Unfortunately, Texas meets every two years. So we have this one window between January and May whether it's the medicinal play there I think first rather than rack or nothing happens and its two years out.
Once we launch in Texas.
We'll be sort of first and what assets ready to go we've already have our conversion plans, we're ready to go in Texas and that's the size of say population nearly as kind of the way of Texas is going to the probably be very close in the next few years. So that in itself is like the Republic of Texas or a country.
But that doesn't mean, we won't work nationally and were prepared to look at you know if we have to do acquisitions or strategic partnerships and other locations.
Well, we can bring our strength to the table.
I think there's a lot of opportunity there, we're pretty well known as you know village for I'm just in principle U.S. company, that's where we are so it's like coming home and the we're excited about the an array of possibilities for us.
Great. That's all for me to day cheers. Thanks.
Okay. Thanks, Karen.
This does conclude the Q and a portion of our call.
I'd like to turn it back for any closing remarks.
Okay. Once again, thanks, everyone for joining us today, and we certainly look forward to speaking with you on non.
The next call it out of your very exciting one for the fourth quarter year end.
Full quarter of consolidation and the updates on how well we feel were doing I can just tell you I remain the largest unhappy share holder on this call today and I'm very excited about other opportunities going forward and I. Thank you for your participation today. Thanks operator.
Ladies and gentlemen, this does conclude today's conference call. Thank you once more for your participation you may now disconnect.
The more.
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