Q4 2020 Village Farms International Inc Earnings Call
[music].
Good morning, ladies and gentlemen, welcome to village farms International's fourth quarter, 2020 financial results Conference call. This morning village farms issued a news release reporting its financial results for the fourth quarter and for year ended December 31st 2020 that news.
Release, along with the company's financial statements are available on the company's website at village farms Dot com under the investors heading. Please note that today's call is being broadcast live over the Internet and will be archived for replay both by telephone and they had the internet beginning approximately one hour following the completion of the call.
He tells us how to access the replays are available and Yesterdays news release.
For I begin let me, let me remind you that forward looking statements may be not the day during or after the formal part of this conference call certain material assumptions for applied and providing these statements many of which are beyond our control.
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 these underlying assumptions risks and uncertainties is contained and the cup each various security filings with the SEC and Canadian regulators, including its form 10-K and D&A for the year ended December 31st 2020, which are available on Edgar East forward looking statements are made as of today's day, except as required by applicable Securities law.
We undertake no obligation to publicly update or revise any such statements and.
And now I'd like to turn the call over to Michael The Julio Chief Executive Officer of village Farms International. Please go ahead Mr. Julio.
Sharon Hey, good morning, everyone with me on today's call is village farms, Chief Financial Officer, Steve Ruffini.
This morning, I'm going to spend a few minutes highlighting the key takeaways for the quarter. Steve will then review financial results and I'll return with some concluding thoughts before we open up the call to your questions.
So before I begin I want to note on the answer that Q4 was somewhat of a noisy quarter that to a degree masked the underlying strong performance of the purest on farms business.
I'm here of GAAP accounting upon the acquisition of the balance of pure and some farms, we were required to revalue of pure sudden farms inventory to which that relies on both value.
That meant writing up the portion of pure sales up farms inventory, we acquired from its exceptionally low cost of production.
What we expect it to sell it for.
The end result was that from an accounting perspective, the inventory was sold through with a cost of goods sold equal to the selling price or.
For a zero margin.
This resulted in a 3.3 million noncash impact on tourists on farms reported gross margin and net income for the fourth quarter.
So this is one of those accounting requirements and causes many of us non accounts like myself and I think even a lot of actual accounts of scratch our heads as the accounting who's clearly don't reflect the true underlying nature of actual transactions and there you go.
So for me it actually underscores the significant value of Crystal and farms is adding would've cultivation expertise, but I did want to call that out since it's unusual.
But on the positive side. However, we realized the $23 6 million dollar gain from pure southern farms acquisition net flow through of village farms income statement separately.
And also as a one time item and the fourth quarter. We believe this gain to a very large extent reflects the significant and sustainable value. We have created purists on farms since our original contribution and establishing the business now Steve who wanted the sands is much better than I will walk through all of this and <unk>.
On a few minutes, but I did want to highlight them for context before getting into the numbers. So.
So for the fourth quarter with what we feel was a very solid finish to a year of significant achievement for village farms. The highlight of the year was the acquisition of remaining the remaining shares of pure sell farms and welcoming that group and to village farms family.
Fully into it.
For 'twenty, and 'twenty was a year and which person farms clearly established itself as Canada's Premier cannabis company and importantly, validate three core principles of the business model.
The clear leader and cost of production and Canada consistently the top selling dried cannabis brand and Canada's largest provincial market.
And consistently profitable. This is the model that has not changed since day one.
Such a productive year, it's easy to forget that 2020 was very much a ramp up here as we transitioned our focus to branded products for the retail market from the wholesale market and I couldnt be more pleased without success.
As 2021 and 2020 two will also be ramp up years and for different reasons as we double our production to meet the growing demand for our retail branded products and.
As a reminder, we only began selling our branded retail products towards the very end of 2019 with the receipt of the distribution license and 97% of our sales in 2019, which the other cannabis producers joining a very during a period of very elevated pricing.
The fourth quart of continued the momentum and retail branded sales to provincial distributors that we drove throughout the year with those sales increasing 40% sequentially and that was on top of the 40% jump from just Q2 to Q3, the strong retail branded sales growth was driven by several factors.
And even amidst the pandemic. The overall market continues its very healthy pace of growth increasingly being driven by the transition from elicit sales to legal sales and the number of retail stores, providing greater access for Canadians, particularly and Canada's largest provincial market and Ontario.
The number of Ontario stores nearly doubled from Q3, the Q4 of last year for a total of 324 stores and appears to be on track for over 1000 and this year.
For some farms remains of top selling dried cannabis brand within the Ontario, Canada the store in Q4 and.
As it was for the entire year and as it's been since the launch in October 2019. This is really an incredible achievement theres an important data points, it's dried cannabis represents more than 57% of sales and Ontario, the largest provincial market.
Now as a reminder, Ontario continues to be the only prevents your market for which we receive definitive market share data and this is why you're here is the only discuss Ontario as opposed to the other provincial.
Markets.
I'll add here that recently publicly available market research shows pure southern farms leads all other brands and each of Ontario, Alberta, and British Columbia and dollar sales per individual SKU.
And we view this as yet another indication of success of our product strategy and another validation of our business model.
For was also the full quarter of sales from our Canadian to point out of rollout, which has been very well received by our customers, but it was early days and a rollout it still is and the only a limited number of products are still on the market that should elevate going forward.
So now turning to SG&A for a moment during Q4, we push for and our planned investment and near term growth initiatives at pure sudden farms and expansion, including the 'twenty 'twenty. One this year startup of the Delta two greenhouse.
Which Steve and I will come back to and importantly, the spend on these initiatives is completely consistent with V. F. S philosophy that we pay for growth.
And future growth through our current cash flow.
The once again for the most important takeaway from the results for the quarter as the underlying strength of our model and its ability to consistently deliver profitability.
Revenue is important but it must come with profitability that goes without saying.
So parents on farms delivered its ninth consecutive quarter of positive EBITDA, we've been positive EBITDA since the first quarter, we started selling wholesale product and this is also our eighth consecutive quarter of net income. So after adjusting for GAAP requirements to write up the acquired inventory according to the account.
Set of artificially of which more than 3 million of gross margins for the quarter and I will note that excluding the noncash charge Q4 gross margin was a healthy very healthy actually 39% up from 34% and Q3.
And on past calls I have talked about the lumpiness of the non branded or wholesale sales, which comprises nearly which comprised of nearly half of Q3 total sales of $10 6 million and the somewhat active quarter for wholesale.
Q4 was clearly less active with the less act of quarter of just over 7 million of non branded sales and it appears despite the steady growth and the overall market. Other producers were lightening up on purchases ahead of SKU rationalization of provincial distributors.
We have heard of massive inventory levels and other L piece I think once that the the digested through the system written down or whatnot, we expect the wholesale market and realign.
Sometime this year and.
As an aside for a set of farms essentially unaffected by these rationalizations.
And again, a testament to our focused and well sort of product strategy, we really lost nothing in the SKU rationalization and at any provincial market.
And that's a real credit to the team. There. We are pleased to see the provincial government is taking action of streamlined the breadth of their offerings as we think it ultimately benefits those with the best selling products and as the Canadian market continues to develop we will continue on a pragmatic and disciplined approach to portfolio of Skus.
So to wrap up on pure of some farms from my viewpoint when I look at the performance of the business and 2020, 2021 and expectations of head I clearly see a profitable business with strong fundamentals of proven go to market strategy and multiple growth drivers our review those again and a few minutes.
2020 was also a year and which we took out first small but meaningful steps and the one international kind of the strategy consistent with our prudent capital efficient approach of our growth opportunities. We are targeting select emerging cannabis markets with significant medium and long term potential through investments with local.
Early movers in the respective regions.
Such was our investment with Australia base out of international which targets access to the massive Asia Pacific region 2020 was of great year for Ultimate has established itself as the leading supplier and CBD and Hong Kong and.
And the cross street platforms consumer brands commercial products and retail.
So we're excited about what 2021 has the store for Alto as it begins to build on the success and Hong Kong would expansion and the other key Pacific rim markets on.
On the heels of the success, we increased our stake once again and out of them in February.
2020 was also very good year for our produce business as we benefit from favorable pricing environment due to the elevated demand, resulting from the pandemic of significant process progress over the last few years and transitioning capacity designated for cannabis two to produce growing part of this both in Canada and Mexico.
Enabled us to take full advantage of the market dynamic.
The pricing environment began to normalize and the back half of Q4 dampening of the year over year of growth. We saw early in 2020 and profitability was impacted by production challenges and one of our U S facilities, which Steve will discuss in a minute sales for the year protest of live with more than a $16 million improvement and adjusted EBITDA.
From 2019, as most importantly, I've spoken to many times the organizational strength that underpins our protein business provides us with significant advantage as we pursue cannabis opportunities in the U S as well as the abroad.
And I'll turn it over to Steve now to talk about on finances and D. J C.
Thanks, Mike and the interest of time, we're going to restrict my comments primarily of the fourth quarter results, our full year financial results for Anvil, and our news release, and our regulatory filings, which will be available on Edgar and SEDAR, and et cetera, et cetera on as well as on our website.
Later today as a reminder, our reported results from the fourth quarter to reflect the consolidation Pearce on farms. Following our acquisition of the remaining interest on November 2nd.
Beginning in Q1, 2021 quarter, which we report on or before May 10th as we are now and accelerated filer for some farms will be full.
The fully consolidated for the entire quarter. So we will not have the noise of of one month of the JV and two months of consolidation.
To assist the reader and this quarter, we have shown the Pearson farms results and both Canadian and U S dollars as if it were a standalone company and our press release.
For comparative purposes, I will speak to the produce results and Peirce on farms canvass. The results independently and then summarize some comments on the consolidated company.
Starting with produce sales for Q4 increased one $5 million for about 5% to $34 6 million from $33 1 million and Q4 2019 drill.
Driven mainly by an 8% year over year increase and our average net selling price for the fourth quarter with the slight year on year decrease and pounds sold as Mike mentioned, we saw market pricing of Tomatoes, which has been elevated for much of the year right into the first part of Q4 as a result of the pandemic related lockdowns.
Recently, the price has retreated back to more normalized levels in Q1, partially driven by some recent weakness on a year on year basis and retailer demand we.
I presume as people and the U S. At least are starting to return to a more normal life.
Life from the Lockdown.
The higher year on year, selling price was offset by the acceleration of produce cost in Q4 caused by the impact of the brown recluse virus.
And that is impacting the global tomato industry at one of our Texas Screenhouse is to the tune of roughly $2 million and the quarter, we increased our cost per pound of production in the quarter above our historical cost per pound of this facility, which resulted and the acceleration of production costs and the quarter.
While the virus was not as detrimental to our 2020 results as the virus was to our 2019 results. It did cause the negative produce gross margin for the quarter gross margin for the year was $8 8 million of significant improvement as Mike mentioned to the negative gross margin of seven $3 million and 2019.
Turning now to candidates.
As Mike discussed retail branded sales to provincial distributors for Q4 grew 30% sequentially driven by a continued strong market share performance as well as the.
The first full quarter of sales for our cannabis to point out of products. Following the launch of our first of oils and <unk> partway through Q3.
And this was offset by non branded sales most of which are to other producers that were down 30% from Q3 as it appears the overall wholesale market activity slowed during the quarter for the reasons Mike discussed earlier.
While highly impacted by supply needs.
Vs availability, especially as it pertains to potency on a quarter on quarter wholesale price actually increased in Q4 versus Q3.
All of flowers not created equal.
As we have discussed we expect quarter to quarter variability and wholesale sales volume and prices as the overall Canadian cannabis market and produce producer of landscape continues to evolve and mature.
These are profitable sales that on the short term drive additional cash flows as we continued to ramp up of our retail branded sales.
And of course is our primary focus.
The sequential increase and retail branded sales and decrease and non branded sales essentially netted out to a flat quarter.
For total sales at $22 5 million on a proportionate basis branded retail sales represented 69% of total sales up from 49% and Q3.
And the early stages of the rollout of our first 2.0 product contributed about 12% to the Q4.
Total dollar sales up from four 5% and Q3.
Wholesale made up the remaining 31 per cent drilling down a little further on the retail branded sales sequential growth was driven by of 52% increase and large format dry flower and a 30% increase and pre rolls and 179% increase in the oil and canvas to point out of products <unk>.
Small format sales were flat quarter on quarter.
Our average flower selling price per Gram and Q4 was down 2% from Q3, which is solely due to the higher percentage of large format flower sales in Q.
Q3, our canvas to Plano Skus saw a slight increase on it.
On a quarter on quarter basis.
Reported gross margin in Q4 was 20% that's our statutory percentage, which includes the impact of the noncash write up of flower inventory sold during the fourth quarter that was on hand on the acquisition date of November 2nd just to be clear U S. GAAP acquisition accounting requires us to implement and what's called the purchase.
Price accounting for essentially a buyer of adjust.
The acquired company's assets and liabilities to the acquisition day.
On the acquisition day to the fair value of.
This resulted in and a write up and the value of our flower inventory on hand on November 2nd to its fair value.
Which should not come as the big surprise since inception, and we have consistently sold of flower at market prices well above our cost of production.
And and easy way of trying to explain it as essentially as a greenhouse full of cannabis is worth more than the greenhouse that is empty.
And the accounting rules require us to recognize that the greenhouse has canvas and as such we had to values. The canvas that was in the greenhouse on the acquisition day.
So from a pure accounting perspective, the flower inventory that existed on November 2nd that was sold during the quarter result, and a zero statutory gross margin.
This is an accounting impact and not reflective of the true cash flows from operations. The offsetting loss of on our statutory gross margin on the flower inventory that was written up due to the acquisition is essentially part of the gain on acquisition that we recognized of $23 6 million on.
On the consolidate and village farms books, essentially that $23 six represents the difference between the fair market value that we paid and the book basis of our investment interest on farms on November one.
Excluding the impact of the flower inventory write up the gross margin was the very healthy 39% and compares to a gross margin of 40% and Q3 as pricing was close to flat quarter on quarter. This indicates the cost program were relatively flat as well on a go forward note. There is still some flower of inventory that was written up.
On our books.
On December 31.
The existed on November 2nd, which we expect to sell and Q1 and potentially and there may be some trickling into Q2. So our stature of gross margin will be impacted but we will break that out as we've done for Q4.
The 83% gross margin in Q4, 2019 and benefited from the $8 1 million Canadian revenue and we recognized and the settlement of the 2019 supply agreement between the Emerald and pure Sun farms.
Which had no corresponding cost of sales and 2019, if one removes the settlement revenue and corresponding of 100% margin on net revenue from the purest on farms 2019, Q4 results. The actual gross margin would've been 48% versus the 39% and 2020, which is primarily driven by the <unk>.
Lower year on year pricing.
Turning to SG&A expenses as Mike noted it was the somewhat outsized quarter for SG&A, which was up two 6 million of 79% from the third quarter.
Most of the increase was related to strategic growth and expansion and the initiatives, including fees associated with the EU GMP certification process, which is well underway the implement implementation of an ERP system as weather and other it consulting with respect to security.
And some sales plans, which.
And we're all necessary as we continue to expand our sales and reach.
And for some farms.
We also had planned investment and head count of ahead of the start of the Delta. Two later this year, which will be effectively double our cannabis production by late 2021.
And we also experienced the first and only which represented roughly 30 per cent of the SG&A a single bad debt expense from and L. P. The filed for bankruptcy most of our sales for the L. P were paid for by the as a result of their financial condition of the final installment was not made.
Since inception, and this has been our only bad debt. We've experienced we continue access the credit worthiness of all of our wholesale customers and factor that into our sales terms.
Turning to the balance sheet, both village farms, and Pearson and farms continue to be on solid position and support our ongoing business with the integral.
Internal growth objectives as.
And as well as positive cash flow from operations of $5 7 million for the year of nice $20 million improvement from 2019.
Our cash balance at year end was $25 6 million and both village farms and Pierce on farms had borrowing capacity on the existing bank loans available to them at yearend and.
As noted in our news release today and <unk>.
And on farms has extended its existing credit agreement with its bank syndicate for sure.
It was set to expire in February of 2022 to February 20 <unk>.
<unk> 24, and village farms and the process for new and it's the ABL facility was being out of which.
With bema, which should be completed by months and.
Subsequent to year end in January we completed a registered direct offering with certain institutional investors under which we raised USD 135 million through the issuance of approximately $10 9 million common shares at the price of U S $12 40.
Also on the financing front last week on March 10th of the first day of our September 2019, and warrants could be exercised we had three warrant holders all part of one family fun exercise of warrants, resulting in the receipt of an additional $10 3 million U S and the issuance of approximately $1 8 million additional common shares.
We have approximately $2 9 million September warrants outstanding with an excess price of exercise price of U S 580.
We cannot foresee exercise these warrants until March 2022, but expect more would be exercise in the coming weeks and months based on our current share price the warrants our pay per warrants and they do not trade and February we announced we repaid the full Canadian and $19 $9 million of U S $15 6 million promissory note plus accrued interest.
And that those farms issued to our former JV partner and that is the final portion of the consideration.
Paid for the acquisition of the remainder of Pierce on farms.
Moving to the consolidated results for the quarter net income was $7 million compared to a net loss of $7 2 million and Q4 of last year, primarily driven by the year on year improvement and our produce results.
I noted earlier, we recognized the $23 6 million dollar gain on acquisition for the pure some farms acquisition under GAAP purchase price accounting, which is partially offset by $3 eight and $9 write off of a portion of the loan to the attempt resulting for the write down of hemp inventory and as mentioned earlier, our net income was impacted by.
And the inflated cost of goods sold due to the write up of the pure some farms for inventory under the purchase price accounting adjusted.
Adjusted EBITDA for Q4 improved.
To a small loss of 500000 from a loss of $7 4 million in Q4 of 2019, we are on the strongest financial position, we have been and my tenure with the company and continue to execute and build our market share and adult use cannabis on maintaining our produce business and greenhouse assets as we await developments.
In the United States legalization of canvas with that I will turn it over to Mike.
Well, thank you, Steve I actually thought being catapulted off of the aircraft carrier is exciting, but I never understood purchase accounting under GAAP and right up there that's awesome.
Thank you alright, so moving on.
So 2020 and set a new baseline for village farms to build and grow from as we leverage out 30 years, plus experience and the vertically integrated controlled environment agriculture business for cannabis opportunities internationally our.
And our strategy is one of them on multiple opportunities for sustainable value creation over the near term medium term and long term and.
And Canada, we have proven out the pure some farms model excellence and cultivation highly efficient low cost operations, a proven product strategy based on high quality products that customers want and an attractive price and the ability of deliberate consistent profitability.
All of which positions purists on farms for continued growth based on steady overall market growth candidates now and an annualized run rate of three 6 billion and that's more than double where it was at the end of the 19th so thats very favorable.
The increase access to our products through growth and a number of retail outlets, especially in Ontario expansion and enhancement of product offerings and continuous improvement is a fundamental tenant of our product strategy and our team is heads down continuing to elevate quality and innovate with a particular focus on those ads.
Its most valued by customers and finally expansion of our market share.
The capture more of the industry's profitability pool going forward through 2022 and 2023.
With this very favorable outlook as Steve noted, we plan to start growing and half of our second $1 1 million square foot greenhouse Delta two and the back half of this year to meet our forecast of the demand for our products. Our goal is the startup the balance of the second half of Delta two and early to mid 2022 such debt.
Mid by mid next year, we will have doubled our current production levels.
Each successive quarter of achievement of profitability for our Canadian cannabis business gives us great confidence and our ability to capitalize on the U S. Cannabis opportunity. We are very encouraged by the evolution of the regulatory environment and the U S. We have developed and are refining and adjusting and real time multiple strategies, which.
<unk> legal participation for us and the high THC market and leverage I'll keep the experience there.
And our organizational strength and a large greenhouse existing footprint.
As Steve discussed, we have significantly strengthened our balance sheet to execute.
There is little doubt that in the coming years, we will see significant progressive change and the regulatory and the regulations of low and high THC for both medicinal and recreational use and various countries around the world.
We continue to be very active and pursuing additional targeted large market opportunities.
So and I can say looking at the future village farms, just personally not just of the CEO of the company is found and still largest shareholder our people our capabilities our opportunities continue to give me great confidence and the ability of our company to deliver growth.
And a return on invested capital that is second to none and our industry and that will drive sustainable value creation for our shareholders.
So before I open the call the questions I just want to highlight for those that may have missed on news release yesterday or Monday that village farms will be added to the S&P <unk> composite index before the market opened on.
March 'twenty.
It's a proud moment for us and we believe validation of not just how for the cannabis industry has come in the very short period of time, and especially a significant value. We have village farms have been able to create for our shareholders and will take a moment and thank all members of village farms and pure on farms leadership and team who have contributed to the many accomplishments of success.
And 2020.
It is an unprecedented situation the wall rows of the challenge to our onshore of two essential businesses. During this pandemic, we are continuing to live with the customers and consumers throughout the year, but also continue to move forward the strategies for each business to position them for future growth and success you. Each deserve this recognition and I. Thank you.
So with that Shannon well open up for questions.
If you'd like to ask the question happens time. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key please note the.
Questions will only be taken from analysts.
<unk> comes from the Russells Hurricane and start with Raymond James.
The only magazine for months.
We'll take them up on it.
Congratulations on the terrific year.
Really so like you said the this quarter's numbers were a little bit money, but of course, you know that's our job to try and sort that out.
So it'd be like kind of like the look forward given that the.
The rapid growth in here of some farms market share.
Through.
Through 2020, now looking forward into 2021.
We've seen that the first quarter and more broadly has been.
Somewhat.
The weak and general.
And and in our channel checks and show that for some farms.
The well relative to its rapid acceleration for 2020. So how should we thinking about here is on farms market share.
The growth in 'twenty, one, particularly given your goal of 20% market share overtime.
Yeah. Good morning, ROE I think the 20% market share you know that is a longer term goal and I think.
<unk> net market share just to come is the combination of what we can execute without products.
But it's also dependent upon what happens with the competitive landscape and as I said.
It seems like profitability is just not that important in the marketplace, especially one of many other mlps and companies can continue to access capital regardless of the.
And their cost of production and so on so I think you have to take that out of the account when and when will the music stop start to slow down.
So there is a lot of competition out there and I think that was also.
We saw that with the provincial government is trying to get SKU rationalization and some of the provincial governments had.
<unk> 6000 for 1800, Skus and 60 different Lps that they were buying from and that's something we don't control at the end of the day, there's just a limited amount of customers. So there's a lot of dynamics, playing and I think overall, we have achieved close to a 20% market.
Share on flower for a given month, and Ontario and that validation, even though it was just one month and the past says that we can get there.
And if today of all product categories in Canada, where and a 3% to 4% range I think looking long term, 20% is possible and as I said earlier, we feel confident on that as we ramp up Delta two I don't know many other LP is ramping up production, but we are and.
And it's really not a question of wholesale sales. So I mean I've heard numbers were one point to north of $1 2 billion Graham join and inventory and other Lps.
And if that is low potency that product's not going to be sold.
And as we continue to deliver new skus with higher potency I think that will drive greater market share. So, but overall you know quarter on quarter, it's hard to like achieve.
Continuing to achieve high percentage of quarter of sequential quarterly growth.
We just can't be measured that way and I think.
We're excited about starting to look at our results measured by year on year by quarter and by a year as opposed to every single quarter, where there could be a lot of lumpiness and the market and so on and so I hope that helps answer the question.
Great.
You are absolutely present acquire when you're talking about appreciating and sort of bottom line EBITDA or revenue.
That said.
The market continues to be the thousands of companies and the space on and even to revenue basis.
And given that for some farms such of those funds will be consolidating share some farms revenue completely starting Q1, how do you anticipate.
That playing out more broadly for the company given that you will have some fully consolidated revenue and it hasn't cheaply add one additional question, which is now that you have 100, and a nice healthy cash balance balance sheet.
What are some of your plans in terms of deploying that cash given the historical record.
And the good allocators of capital.
Yeah, well for the first question I mean, we're 100.
Your set of farms today, we are so pleased with the results of the company I mean to us cash positive cash flow profitability and that's what it's all about I mean, I just don't understand a company that can operate year on year for year.
Going through billions of dollars of shareholder wealth and never get to a point of profitability or not even see a path to profitability, let's just say on the Canadian market based on the fact that the real driver is taking market share from the illicit trades and illegal trade and being competitive and that price.
Missing.
So we just on farms man they are uncovered unleashed and they are going at it themselves have a fantastic management team great organization, we have enough assets on the one footprint and if we converted the final greenhouse to do north of 35 per cent of the entire and Canadian requirement from a capacity perspective.
And.
They're going to just keep building that market share also they know we're going through of GMP certification that was the big cost for us and the fourth quarter SG&A north of half a million dollars and.
And they are gearing up for export.
Of the.
Products coming out of Canada, So from our perspective, there and they're ready to go they're fully solo and on leashed and let them do their thing so for US here everything we do is the process of systematic and get them positive help them, where we can let them free and they are and now we've come back the core.
And we're focused on not just our entry point to the U S which is priority.
Is one of our top priorities, but as we're watching everything on fold and it changes week to week and month to month.
And we look at Texas, the way, we view, Texas by the way talking about the cap the balance sheet. We have how we deploy that we are ready to go and Texas, we have a plan to duplicate exactly and leverage up what we did and Canada by converting the first or second of massive greenhouses and Texas, We view, Texas as the country, we don't consider it.
Part of the 49 other states because it is the Republic of Texas population equal the Canada second largest populated state no. One has an advantage in Texas today so when.
When the race starts we plan to be very aggressive within that marketplace, but that doesn't mean, that's the only way we're going to enter the U S market. We have other plants and then equally we're very focused on the EU. We've been working there for a year and a half but everything we do has to come with very deep research.
Our process on.
Understanding how we get a return on capital of understanding how we invest our dollars and companies or acquire them, we will get us cash flow positive. So it may not seem like we're moving as aggressive as others, but I can assure you.
Once we get into it and Thats right on the horizon that will do well.
Next question comes from Doug Cooper with Beacon Securities.
Hi, good morning, guys.
A couple of things Steve.
Couple of nuts, and bolts things I just wanted to confirm so G&A was five point and I'm, just talking and G&A for peers on firms $5 9 million in the quarter and.
You said bad debts was 30 per cent of that sort of one 7 million is that right.
A little bit of little bit less of that.
All of a million of and a half kind of thing.
Yes.
Okay, and Mike and I think you just said cgmp certification costs, you a half a million bucks in the quarter I guess I'm just trying to get out what is the sort of baseline G&A going forward and the quarter of used on.
And the current head count.
Well, we've approved that they will ramp up their SG&A to get ahead of the Delta two because remember delta two is doubling our capacity and they're going to be doing that through their positive cash flow by the way, but it's going to be like the reverse bell curve. The SG&A is going to ramp up for the next two to four quarters.
Or at least till we start generating revenue from that asset we need to continue to build our team our innovation our product our products and.
And the ramp the facility up and you know we've been ramping up greenhouses for the north of three decades, it's not an easy feat and we want to get ahead of it. So once we start delivering revenue from Delta two I think youll see.
And that you will see the SG&A as a percentage of sales come back down to what we consider normal for us.
<unk> is still.
Within the normal percentage of what a CPG company should be operating at.
So I think.
You see that higher over the next four quarters okay.
So I'm just trying to get out of that $5 nine call. It I'll call. It one time, you got that you've got bad debts of of many of the Hep C. U E. G piece of location of half a million Bucks and then the ERP was something in there too right.
Doug.
And it's 30% of the increase of its 30% of $2 6 million.
And 30% of two points of search.
Okay.
Okay, Yeah, and you know.
You talked about ERP and on to a degree we didnt start out by putting a multimillion dollar ERP system. The way the two we can be profitable and use.
Of the lies and the village farms, the ERP system, which didn't handle the health kind of requirement and thats controls and et.
Et cetera et cetera. So we're really excited about it now it's time, where they can use their cash flow to start upgrading their systems for future growth and I think that's the way they are doing exactly the way we would do it.
Okay.
Just on the getting back to the rules question on market share.
The target, 20% by my calculations.
And we're give or take you and obviously increased market share I think the Canadian market grew 12%.
Sequentially and you guys were up 29% sequentially on the retail sales. So obviously gained some share there.
In the large format.
Vacate and can you give us the breakdown of your 15 and a half million of sales.
How much was Ontario of how much was <unk> and how much of his Alberta.
I don't know.
And I don't have that data on.
And we will say on tariffs our biggest customer.
The in Alberta, and kind of go neck, and neck and between depending on the months.
And as Mike said, it's hard to measure this quarter on quarter on the ordering pattern for the provincial buyers.
First sporadic.
So.
Not what I would call of normal for.
And then.
Bye bye and like we see and the proteins business on replenishment and some incidents that we've run out of Skus that are that are the sellers.
Prevention, which is frustrating us obviously yeah.
And when Rado stock at the La Salle, but as Mike said, we're not in control of the buying patterns of the provincial governments, but Ontario is by far and away from the customer is there and update on the I guess entry and through other provinces, and particularly I'm thinking of Quebec.
The biggest province between Ontario, Quebec, BC, and Alberta is pretty much the.
Did you Wanna be there and update on the call I mean honestly, Quebec remains a challenge for us.
No.
I already but it remains a challenge of all I can say at this point, we're looking at of many different.
And finally, I understand it and the work go any deeper than that but it's a large market and we haven't been able to penetrate that but the good news is we're looking at the Yukon.
As an expansion this year.
Sure.
No but seriously.
Okay.
Yeah.
And I mean, BC and starting to roll out more stores and God knows that's per.
For capital, that's the highest consumption, but the.
The illicit trade is still pretty big on the West coast and.
I think that's the growth opportunity for us as well.
Next question comes from Aaron Grey with Alliance Global partners.
Hey, good morning, and thanks for the questions and the nice trends on the adult use side.
So quick question for me and it's going to be on some of the habits and youre seeing from the potential buyers and kind of and how they look and kind of maintain their own inventory levels, what you've kind of seen.
And the kind of refine the inventories out to keep on shelf and the replenishment and then secondly.
Given how youre expecting to see more and more stores open up for and Ontario of just was curious as to how you look to align yourself with the essentially the new retail stores and kind of making sure you're on the right place on the terms of shelf space and these new store for opening up so that you can kind of maintain if not gain market share and you know throughout the year.
Well first of all let me just say that I really have a lot of incredible amount of respect for the provincial opt.
Operations and the management from the Jeremy This is a whole new brand new industry and you have to give them. So much credit along with health, Canada to being able to gear up and the industry and such a short amount of time.
With a product that is very personal and its usage as the CPG products. So the.
Fact that there's lumpiness and sure.
<unk> of supply.
No one should comment on what they're doing and how they're doing it I think you have to give them the breadth and the year two three to get it going because it's a whole new industry that said.
That is the case and our team is working directly with the buyers there.
You know in today's world up and Canada all of it it's over the phone and zoom you don't have that interaction, but I think.
One of the reasons without deep into this we feel very confident and ramping up doubling our capacity for delta two we wouldn't be doing that if we didn't feel that the input from the provincial governments wasn't solid giving us the confidence to go forward. So.
That's why we're gearing up for production in anticipation of the as I said on the phone, Ontario is going to triple the amount of stores virtually this year.
No.
If you have.
SKU, that's been going well and our pricing is tied to the illicit market and we believe that's a winning formula and actually I think it's proven out to be so.
Okay, great. Thanks for that and then just a quick second question for me.
You guys know of a couple of quarters and what you point out of sales you guys are now selling gummies as well.
Flower still remains dominant for the market as well for you guys.
In terms of what are your expectations in terms of.
Part of Cormac mix over the next 12 to 18 months for the.
Canadian market and how you're continuing to position yourselves.
Well you know Theres a lot of competition the two point on market like a flower we werent firsthand.
And it's just been really gearing up at the end of this year I think the team has done a great job of rolling out a number of derivative products, including gummies and I think they are unmatchable the product we have.
And so but there is competition and others have been there and it may not have the swiftness of a flower.
The penetration but.
We keep refining and honing.
That was coming it almost all in house on on.
Being able to make those products all in house for job cross sell margins going into the mid.
2021 so.
You know I think we're on track for.
The comment what percentage that would be I think it's too early on and I don't have that data at this point.
Next question comes from Andrew or parts of the new Stifel GMP.
Okay.
Alright, thanks for taking my questions and and.
And congrats on the great success, and your kind of of this business.
Maybe just tying back to.
The new wave of.
Questions on production and.
And your Delta two expansion.
And.
Could you give an indication of.
Where are you guys are at right now in terms of your production with Delta three and on your sales.
Guys you guys mentioned that you are running out of.
Some skus at certain points I mean are you guys capacity constrained and.
And this is one of the reasons why you guys are thinking about expanding the doubling your production we felt the two or is it really more driven by.
Guidance from provincial governments, and and the expansion on the stores that you touched on earlier, just a little bit more color there would be helpful and and.
In light of maybe overproduction of the market.
It's all of the above agile because.
You know we curtailed the.
Just going back to December of 2020, I mean, we took a very conservative approach in 2020 and cut back on our production and that's the beauty of how we designed our assets we can go from.
The 16 major grow rooms down to eight down to four down to zero and ramp it back up very quickly with due in five and a half cycles per year. So as you know.
And now ramping up of facility as I said on the call is a huge.
Undertaking and.
And I think it's fair to say that.
Many have come to realize.
Just how hard that is so you really have to get ahead of it. So we have to project the capacity, we're going to need in 2022.
And then for 2023 and that is a combination of looking at the market dynamics looking at how historically.
The penetration rate out of market share.
Looking at the movement from the illicit trade as I mentioned to three 6 billion and Thats way up from the end of the 19th so we anticipate there'll be more cannibalization of the illicit trade the input from the provincial governments plus.
Asian, and Skus, we have coming on and we're very focused on some incredible new skus coming out of potency rules at the end of the day and Thats what were shooting for and so if we waited too.
We are just about at full if you look at out of inventories versus our competition I would venture to say, we're at the very low end of inventory levels compared to everybody else, which means it's working.
So.
Yes, so we believe coming into the second second half of this year, we're going to need more capacity and even though we've allocated half the greenhouse now half of 2022, we can move that forward a month back a month once we get the cultivation license out or the expanded cultivation license. So that's what we need.
And then we have a lot of flexibility how we prepare but at the end of the day, we do not we do not want to we do not want to not deliver to our customers when they want our products. So we have to be ready and taken that approach.
Thanks for the additional color and just touching on your.
The recent financings could you give maybe on order of priority on on what you are looking at and in order for you know.
The use of proceeds.
You mentioned you know the U S is a huge focus or are you looking at the CBD or maybe the THC market.
And any more color there on on international expansion of our use of proceeds would be useful.
Yeah, I'm not going to give too much color on the U S.
And the regulatory climate changes daily it's very political.
<unk> sighed federal side again being on NASDAQ and TFS ex gives us the greatest restrictions of all.
Steve has worked very close with the exchanges to what they can and what they are.
<unk> Thai tied to any federal legislation be it a modification of the state sacs and <unk> and whatnot.
Obviously under the cannabis umbrella there is CBD there is normal THC as we say.
And we just want to be very clear on the move we make.
Debt again outside of Texas, Texas goes we go so keeping that in mind, we're looking at probably deploying some capital to international markets, where we think we can leverage up all we've accomplished and Canada and about 30% of experience.
And be ready for those markets open up and I think more to come on that.
Okay.
Next question comes from Scott Fortune with Roth Capital Partners.
Good morning, and thanks for the questions.
Real quick just kind of on get a sense for the wholesale opportunity and kind of longer term as you look at it and then wholesale affected a little bit by the outdoor growth.
Framed it as you look at the wholesale opportunity are you and discussions with other.
The other Lps looking to offset some of the high cost production for you guys longer term just kind of step us through I know it can be very very variable from that standpoint, but kind of the.
It's hard to really its hard to comment on that Scott. So don't really want to talk about that per se.
With respect to our customers because.
We're selling somebody under a non branded or wholesale side, there of customer and we want to respect. The fact that they are a customer whether a competitor or not.
The decisions go deeper and how we do things.
One example, I can tell you as well.
We're focused on the operational side and gearing up I think it gets underplayed and the industry.
As a vertically integrated company and the cultivation side gets sort of under the plate of just how hard that is to ramp up.
And to the extent that we don't want to be growing anything we can't sell.
That's a mutual benefit for us.
So.
But we don't control of the wholesale market per say, we have some companies that are doing very very innovative things that we consider part of our non branded strategy and we want to support those companies as the light asset model and then you have other Lps, but if another LP wants to work with US we're not opposed to doing.
That and.
And Scott, Steve we have we've seen no competition from from outdoor growth.
Growth.
Haven't had any hiccups.
I appreciate the color and then can you call out of a little bit more on the provinces and the strength.
Obviously, the Ontario has come on board with more stores, you see D C a little bit.
And you look and 2021.
Kind of the provinces can come on and add to growth for you from that standpoint.
Not really I think you know as soon as the lot that I think we probably want to reserve that for when things ease up as far as the pandemic Lockdown and Ontario, I've been told is probably going to have another tightening up.
And although we said on our comments that we're pretty happy with the flow and 2020 it has to be.
Affecting people purchases in store and going out so.
We don't control of that and of course of approaching the summer of things open up across Canada, and I think that's only going to improve things and.
And I think youll see some.
Concern and Lumpiness and the first second quarter for companies in Canada.
And that certainly contributes to it not opinion.
Next question comes from Eric <unk> with Craig Hallum Capital.
Great. Thanks for taking my questions and congrats on the strong year and strong quarter.
And so at this point I think your leadership and the Canadian market is undisputed and whether it's cost brand market share of profitability.
And you guys have clear Optionality and the U S with nearly 6 million square feet of greenhouses and Texas.
Net.
Probably obvious to everyone on this call you somewhat inexplicably traded at a steep discount to peers.
I'd imagine that at this point of any of your competitors would love to acquire or merge with you, but I also definitely respect that you guys don't want or need to take on anyone else's issues.
Can you talk a little bit about the M&A environment in Canada, and and your appetite for M&A, whether as an acquirer or target.
Well I think that's pretty clear and.
And thank you for the opening remarks are certainly really appreciate it.
The acknowledging that.
So really if it's you know and Canada and working with the leadership of pure sub farms I mean, our appetite would be tied to innovation.
IP.
Things that can really resonate and enhance.
Our brand and our company going forward to the degree that we get calls every day for production of assets and we're not interested.
We have built.
Many mega projects and 30 years, and we've learned a lot from that and we don't really need to be in multiple provincial areas to produce.
Large quantity very we have and one footprint we have the scale of as I mentioned that can do 30, north of 30% of the Canadian capacity for the whole country.
And managing one footprint of of high scale and the way you want to be in fact.
Probably we will see that model and other countries and the future without going further so if some production asset Thompson and the different jurisdiction different climate.
Current.
Labour philosophies.
Proximity to the market.
It doesn't necessarily it's not something we want so the look at any M&A activity on the on the production side.
It's not just resonating for us as far as brand goes one could question is it really of brand yet I mean, we are branded guys, we believe and Brian, but I think the U S. Smart the Canadian market is really still about market share and cannibalization of the illicit trade and brands will come but I don't see anyone out there leading that far on it.
Brand and that would be attractive to us so.
I think well the pure Sun farms loosen would they are loose keep going the way they are going and reserve our capital for M&A activities, probably in other countries.
Okay that makes sense and it's.
That's great color I appreciate that.
I'm going to try one more on the on the U S cannabis opportunity I know that you guys are.
Don't want to.
Tip your hand here much.
But as you look beyond Texas.
What are your thoughts on M&A versus sort of organic license applications within the U S. And are you guys more focused on.
As you look at markets beyond Texas and focus more on regulatory structure I E and sort of limited license versus the unlimited or are you more focused on the geographic locations sort of building out a regional footprint.
The additional color there would be helpful.
Well I could tell you this debt I'll use philosophy is more where it's gonna be where's the puck and the beach speak the Bobby your philosophy of ways of going to be and that's where we want to be and we don't necessarily believe that the current model.
Whether it's limited state limited license Singles' day, Multistate, any and we don't believe that having 42 production facilities of month 40 states as way to do it we believe that upon full federal legalization.
That there will be Interstate commerce, and the model of large scale low cost will prevail.
And you can't stop Interstate commerce, and the United States, regardless of what some governors believe yes, it'll be it'll take time it'll be a fight to always be pockets like there was alcohol, but ultimately that's the model. So we have to be careful when we look at an entry point on the valuations of these companies.
And he is because a lot of their investment we believe will be sunk cost with no return.
And so that's what we're evaluating and the valuations are pretty Sky high right now.
The CBD, but on.
And on normal GIC, so how does that for color.
And.
Question comes from Adam <unk> with Scotiabank.
Good morning, Mike and Steve and Thanks for taking my question.
Now there have been some comments in the market the Mexico is progression towards rec cannabis and how that might benefit the SaaS given its network and partnerships and the country are you able to provide any color on that market along with it and you see the company's interest on it.
Yes.
Yeah I mean.
So Mexico was sort of on our front burner went through a back burner and sort of back on the.
Second burner.
We have very solid contracts, we've been operating there and almost 30 years and and working without context, we wanted to sit back and take a back seat.
And never going to get emotionally cut up that we have to be first and.
And as opposed to having the right model.
Mexico, clearly needs, we need to see the separation and but this one of vs recreational and I'm not sure we want to be opening up a store and Acapulco.
And the medicinal side of interest Inc.
There are some companies that are interesting for us that may make their way and there that can utilize support and help so.
And I sort of back on the secondary burner were taken out of time.
Okay, great that's good color.
Then my second question and just more of the for modeling purposes I just wanted to touch on the produce business I think Steve alluded to a few issues that impacted margins in the quarter. We're now almost at the end of Q1.
Other headwinds so still there from a margin perspective, and then maybe at a high level can you walk us through how some of your partners of ours are providing a benefit to the margins for the business.
Yes.
Look.
In my tenure, which is pretty long.
And I up till this brand and reduce the virus that has become a global pandemic and the so.
Well, it's not funny.
When we have the.
Corona virus, we shook our heads and has said you know every day, we're battling of tomato virus that really started out of the Jordan and Israel. Some five years ago and it's all over the world today and everybody suffered from it within the tomato industry.
And.
We're battling that but there is no cure for it and the seed companies are working.
Aggressively to build and resistance and they will get there but in the meantime.
That's been and impact and probably the greatest impact for us and the most uncontrollable is dealing with.
For the virus.
More so than the market conditions because of pricing will get affected if the if one of our facilities is growing high value specialty products and they have a hit and more of our commodity products are surviving then.
<unk> on our average pricing so it's something we're battling.
And then partners and Mexico, and Canada, God, the viruses everywhere as well we have issues with the border for.
And its importation, so theres a lot going on a lot of noise there, but it will work it out I've seen it before but yes, the partners provide us with.
Consistent margins.
Because for the most part of the cost of production.
For high value produce crops, and Mexico and in Canada are lower than the United States and the way things are going and the United States, It's only going to get more costly and that is of concern. So I think our model of shifting certain U S assets, the cannabis and the future.
As a good opportunity for us and work closely with our partners and other countries.
And at this time and I will turn the call over to the presenters.
Well. Thank you again at the end of a great year 2020, we think it's a great year, we've made a lot of progress.
We're excited.
We've proven out.
The original model and Canada, and hope to leverage that up and other places in the firm.
We thank all of our shareholders.
Our institutional shareholders all of our village.
So thank you all and look forward to reporting our first quarter and may Thank you.
This concludes today's conference call you may now disconnect.
Yeah.
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