Q1 2021 Village Farms International Inc Earnings Call
Ladies and gentlemen, please standby for today's conference is scheduled to begin momentarily until that time. Your lines will begin placed on the music hold thank you for your patience.
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Turning the corner.
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Good morning, ladies and gentlemen, welcome to the village farms International's first quarter 2021 financial results Conference call.
This morning village farms issued a news release reporting its financial results for the first quarter ended March 31st 2021.
That news release, along with the company's financial statements are available on the company's website.
Village farms Dot com under the investors heading please.
Please note that today's call is being broadcast live over the Internet and will be archived for replay.
The replay by telephone and via the Internet at the beginning approximately one hour following completion of the call.
Details of how to access the replays are available in yesterday's news release.
Before we begin let me remind you that forward looking statements may be made today during or after the formal part of the conference call certain material assumptions were applied in providing the statement.
Many of which are beyond our control.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward looking statements.
A summary of these underlying assumptions risks and uncertainties is contained in the company's various securities filings with the SEC and Canadian regulators, including its form 10-K, and the DNA for the year ended March 31, 2021, which are available on SEDAR and Edgar.
These forward looking statements are made as of today's date.
And except as required by applicable security law Securities Law, we undertake no obligation to publicly update or revise any such statements.
I'd now like to turn the call over to Michael the Julio Chief.
Chief Financial Officer of village Farms International. Please go ahead, Mr. The Giulia.
Okay.
Thank you James Good morning, everyone with me for today's call is village farms, Chief Financial Officer, Steve Ruffini.
This morning, I'll spend a few minutes highlighting the key takeaways for the quarter and then Steve will review the financial results and I'll return with some concluding thoughts and then we'll open the call to.
Questions.
Onto the quarter. So Q1 was the solid start for 2021 for pure of some farms, most notably retail branded sales, which is the core focus of the business increased 20% sequentially.
The marks our third consecutive quarter of 20% or greater sequential growth.
That's the 115% increase in our retail brand net sales over the last three quarters and.
And one of the factor in a few of the numbers of selling days in Q1 as compared to Q4 out.
The sequential retail branded sales growth of what's actually 23 per cent.
We would have been pleased with the Q1 of the growth in a normal market environment, but we view. This performance is especially encouraging given the softness in the Canadian retail sales in Q1 due to the impact of the pandemic related lockdowns across much of Canada.
Clearly you had some farms has excellent momentum momentum that's being driven by the right marketing strategy.
The successful execution of that strategy, specifically high quality premium products that customers want and in everyday price and I want to know about that.
That includes a large format offerings, which includes our highest quality strains in.
In the large format.
Secondly, innovation and continued enhancement of our product offerings, such as our new and unique blueberry could strain, which has been of great performer right out of the gate.
Next is expansion into new categories building on the success of all dried flower products.
And the reputation for proactive SKU managed to meet the demands of the prevention of the contributors. This isn't that just the balancing capacity the right strains and the right inventory levels.
If you have a sudden farms was again the top selling dried flower brand with the Ontario, Terrio cannabis store in Q1 as it actually was for the month of April which is of great start to the second.
And by the way it has been since our retail launch in October 2019, that's the period now of 17 months in duration, almost a year and a half I will again remind you that Ontario continues to be the only prevention of distributor from which we directly received market share data.
The other third party data is available however, we prefer to share publicly only that which we know to be 100% reliable and accurate.
We wish we were able to get that same data from the other provinces and can share with the audience.
Sales of our candidates to point out products, which we launched in the second half of last year were relatively flat in Q1.
So more in line with the board of Canadian market performance, Although that's still very early days for us out of two point out products are off to a slower start than we would like the two point out of market is a fair bit different from the dry flower market.
It's a congested space with more producers that are specializing in that segment of the market the.
To your point, it's pure.
Your son farms team has a specific focus on this part of the business and I'll go remains to be the number one and number two brand in every category that we're in the including 2.0 categories and I have every confidence in the team to get us there.
Let me Mike Let me remind you that we are now in the categories that comprise 90% of the sales in Canada.
That said dried flower is still by far and away the largest product category in Canada and it still is in more mature markets such as Colorado.
That are several years more of developed in Canada.
I want to take the opportunity here to touch on the consistent brand performance of <unk> farms, a day. This well there exists a perception that due to the inability to market and advertise it is not possible to build the brand in Canada, but we clearly disagree and we think of track record of market share performance proves this out.
As you know of brand is more than the name of logo. It's how the customer perceives that name of the logo for what the customer associates with the name of our logo, it's what drives repeat purchases of existing products and the types of purchases of new products based on pre the experience with that brand.
And we believe our track record of bleeding market share performance over the long term, it's a reflection of the real brand the pure sub farms brand the brand debt equates to a premium quality product at an everyday price.
Still we are not resting on our laurels of the market is evolving customer preferences are evolving and the pure some farms team remains laser focused on continuing to elevate its already premium level quality develop new processes to enhance our products and new products that will continue to resonate with our customers.
Case in point of high THC, Pink Kush strain, which was a follow on offering after our initial product launch was the best selling dried cannabis strength within the ocs in the first quarter of this year we.
We believe 2021 as the year of high potency and we look forward to building on the success with new offerings.
I noted a moment ago. He has been from day, one our overriding focus of pure sudden farms to drive retail branded strategy sales I'll go remains to capture the full 20% or more of the retail market.
Non branded of wholesale sales of something that we look at from both the strategic and opportunistic perspective.
It is by no means our objective to sell as much host sales we can each quarter. In fact, we have done in previous quarters. During Q1, we made the decision of tearing down a number of potential non branded sales to other Lps.
Any wholesale sales need to be more than just profitable needs to meet a profit profitability threshold and the needs to make sense within the contents of our retail branded strategy.
Retail brand and our retail customers will always take priority still of the wholesale market as I indicated on the last call I had continued to be sluggish of Miss what appears to be an inventory glut with too many players in the industry.
With too much low potency low grade and old inventory and many dealing with the impact of the provincial SKU rationalizations as the result and per our expectations non branded sales for Q1 declined from Q4.
But 84% about Q1 sales for retail branded sales up from 69% in Q4.
But this is by design for more than it is the reflection of the weakness in the wholesale market.
Again this quarter pure of cellphones generated positive adjusted EBITDA of $3 1 billion Canadian dollars, our 10th consecutive quarter 10th consecutive quarter of positive adjusted EBITDA.
Renewal of our track record of positive adjusted EBITDA in every quarter since we commenced sales.
And that goes way back to before we even received a retail license we were selling only to the wholesale market its quite an accomplishment for two of some farms.
We continue to be prudent and manage out of inventories, which continues to be at healthy levels and were essentially unchanged from the end of Q4 as I noted on our past calls we proactively scaled back production during the summer of last year two of line output with the Canadian market environment.
It's our objective for this only what we can sell and then as I mentioned earlier the sales much of that as we can through our retail branded channel.
So the Delta three as operating in full production and we continue to prepare for the startup of cultivation at Delta two in the third quarter, which will increase our production capability.
The 250 per cent from coming to the.
The current levels by the end of this year with plans to double capacity from current levels in the second half of it.
And that is not a decision made in isolation, we have done so in consultation with the prevention of distributors based on their forecast and buying plans.
As many of you know in Cherry has been rapidly opening new stores and now has more than 600 locations, which now makes it the largest retail network in the country, while still small on the per capita basis. These new outlets are clearly contributing to sales as evidenced by Ontario market expanding slightly from January to February.
While the three other largest provincial markets contracted for.
9% to 10% lower.
There is a target of more than 1000 stores by year end and is well on track and we are poised the benefit accordingly.
I would like to again publicly now it's the best in class management team and operations teams, the purest and farms led by Mandy So say on their outstanding accomplishments.
So two of our produce business Q1 was the strong quarter operationally, we saw a 14% year over year increase in production of buyers combined with a decrease in production cost at village farms on Texas facility and improve the utilization of our transportation and handling costs.
However, the pricing environment of the tomato market has swung from one extreme to the other has elevated prices of last year due to the high at home demand. During the quarantine has given way tomorrow of the lowest price in periods with Tomatoes are specifically the commodity tomatoes like tomatoes on the buying of beef steak varieties that we.
You've seen in the past 10 years.
As a result, although our volumes were up driving of 9% year over year increase in Proto sales gross adjusted EBITDA was down 50% year on year with the opening of the U S restaurant and travel in the history of amidst the lifting of the pandemic restrictions foot traffic at U S grocery stores had decreased significantly while at the same time overall industry.
Yourself.
I'm very encouraged by the operational performance in Q1, which bodes well when pricing environment eventually normalizes.
So all in all of Q1 was a solid start to this year two of some farms continues to execute on plans with strong momentum in retail branded sales positioning itself very nicely for sustainable long term growth.
The Canadian market is still in the early rounds for 15 round boxing match on its way to becoming an 8 billion dollar for.
8 billion plus style of market at retail and we think outperformance of day positions us very well to capture size of a portion of that market and to do so profitably.
I will talk about this more of a few minutes, but now I'd like to turn the call over to Steve to walk through our financial results.
Thanks, Mike just to reiterate our 2021 Q1 results reflect the full quarter of pure sometimes the results.
Whereas when comparing our consolidated results to Q1 2020 share. Some farms was not consolidated as such sales cost of sales and SG&A have changed significantly year on year.
So the simplified the comparison of the pure some farms of results as we've done in the past.
We showed the <unk> results for Q1 2021 in Q4, 2020 and Q1 2020.
On a standalone basis in our press release.
With the addition of a full quarter of pure some farms. We have begun segment reported in 2021 of our segment.
Our operating segments of our produce canvas clean energy and corporate.
Most of which are related to being a public company and have historically been included inside for the Proteus Division.
I also want to note again as I did last quarter that our results for Pearson farms reflect the noncash impact of the write up of inventory to its net realizable value upon the acquisition of.
Of all of the peers on farms last November.
That impact.
Was a $2 8 million.
U S dollar or $3 5 million Canadian dollar of increasing our cost of sales.
In Q1 2021.
Third two of $3 3 million U S dollar and the $4 2 million Canadian write up in our cost of goods sold.
In Q4 2020.
This effectively meant that from accounting perspective of portion of our Q1 sales and our Q4 sales had a zero gross margin as they were written up to the fair market value on the acquisition day.
But I also need to remind the audience debt.
Offsetting this was a two point of $23 $6 million stature of gain we realized upon the acquisition of share since launch in Q4 2020 on the books of the village farms.
With respect to what's remaining.
There is a little less than $1 million U S of.
The increase in the fair market value of left on our left on a pure soft from inventory. So we're about we're about through with with the inventory write up.
Consolidated sales were $52 4 million, which was compared to $34 9 million of which was comprised of $34 9 million of protein sales and $17 4 million in U S. R $22 1 million Canadian and net sales at Pearson farms. This compares to $32 1 million of consolidated sales in Q1 2020.
<unk>, which was essentially all produce sales.
While our year on year increase in sales of 63% was driven by the addition of Pearson farms courtesy of.
Sales year on year increased 9% due to the increased production from our Texas greenhouse facilities as well as additional third party.
Partner supply of Tomatoes, cucumbers and peppers.
All of our products volume was up and our actual as Mike mentioned, our actual year on year cost of production were down the pricing environment is much different in 2021, which was not totally unexpected.
Mike has already given you the.
The reasons for that.
Turning to pure some farms.
Q1 sales were 17, one from them in the last $22 1 million Canadian dollars, which were up 23 per cent from Q1, 2020 and were essentially flat to Q4 2020 sales.
The year on year increase was driven by our continued growth from branded sales from <unk>.
2021, being the third consecutive quarter of over 20% growth in this sales channel.
Our success in branded sales continues to be our focus.
And execution on flower.
In Q1, 2021 of our large format skus, especially our single strain of large format Skus outperformed our expectations.
All of Q1 had some headwinds such as the out of stocks.
And fewer delivery windows due to operational issues at the provincial boards, we were able to increase our market share in dry flower in Q1 2021.
<unk> also saw a nice increase in April of this year.
With respect of non branded or is some call. It wholesale sales as we have stated in the past this sales channel activity is lumpy.
Non branded sales no surprise for us.
Were impacted as.
As Mike mentioned in his comments with respect the SKU rationalization.
Okay.
The decrease in our gross margin.
In Q1 2021, our gross margin.
Percentage.
2021 of 29% was the decrease.
From a gross margin of 39% in Q4 2020.
This was driven by a higher percentage of large format versus small format dry flower as well as high margin gross margin non branded sales. We had in Q4 of 2020 in particular with some high CBD strains that did not reoccur in the first quarter of <unk>.
2021.
So the market should not presume that all non branded sales are not at <unk>.
Good.
Strong margins in some instances, they're absolutely very strong.
Just as non branded sales of our lumpy. So so where is the gross margin driven by the market dynamics with respect.
Two of those sales.
SG&A for Q1 2021 for peer of some farms was $4 million 5 million Tonight 519, Adv was down from $4 5 million.
The U S $5 919, 82 for 2020.
Due to the fact of.
Not incurring any bad debt write offs in 2021, we had one the only one of the pad historically in Q4 2020.
As well as we had some incremental of one off Q4 costs with respect of our ERP system.
Our SG&A costs in Q1 2021 were up 56 per cent from Q1 2020 due to higher year on year addition of new staff and sales and marketing costs related to our branded <unk>.
Sales.
Share compensation expense of $1 1 million for fear of some farms is due to the achievement of certain performance criteria of Pops here of some pharmacy management in Q1.
As well as the issuance of the village farms stock Hopkins. He was the key management team key management members of pure some farms in recognition of their success to date.
Jumping to our balance sheet, we ended the quarter with $136 million of cash and.
And it had bank debt of 66 million for a net cash balance of $70 million.
Over the last few quarters, we have renewed all of our bank facilities, both in Proteus and canvas on a very on very attractive terms. So we're in a very comfortable we are very comfortable with our capital position today.
Our produce business historically has negative cash flow in Q1, as we ramp up of our Delta.
Delta one facility and share some farms in the Q1 was also ramping up the Delta three facility to full scale production as Mike mentioned in his comments.
So with respect to.
Ongoing cash flow from operations, we expect that to improve in the following quarters throughout 2021, and we are well positioned to fund our operations our Capex for 2021 and 2022 as long as we're actually looking at M&A opportunities as well as the alternatives to further enhance our results in operating with.
That I will turn it back over to Mike Hey, Thanks, Steve So a concluding here on my closing comments before we take some questions. As we look ahead of the 'twenty 'twenty. One we believe it's shaping up to be another year of steady progress and execution of now strategy based on large scale high growth opportunities for the near term medium and long term.
As we have been through out of 30 year plus history, we will be prudently optimistic it is a opportunistic I'm sorry, I'm optimistic as well it is the year of building on the tremendous success of pure sunflowers of day, taking two of some farms for the next level of success revenue growth of profitability.
And we do expect to continue to capture more of our proportionate share of the growth in the Canadian market as I mentioned, our model for consistent sustainable profitability has been moving.
And now significantly for the scale over the next year will propel us to new low as we capture more of the streets profit pool.
Medium term, we will continue to be optimistic about the evolution of the regulatory environment any let's say we are being patient.
Patient prudent and strategic to ensure responsible investment.
In the right way at the right time.
The U S is clearly a massive opportunity, but it's also of long term opportunity.
Using my boxing metaphor from early of the Bell just start the matches badly wrong in the USA, we are aggressively working behind the scenes continuing to evaluate the breadth of opportunities from our seat here in the United States stupid per pad, regardless of how this plays out.
I want to remind you that in Canada pure of some farms entered the branded retail margin at least two year at any of the other large players.
Later entrant to allowed us to create a winning business plan and the most profitable business model of pure some farms and we think that same dynamic of setting up in the U S market as well because in fact, we think it is likely that the U S market will look very different than it does today upon for legalization and that will give new entrance.
To market a significant advantage because of how the regulatory environment unfolds. We are preparing with multiple parallel strategies that will bring us to bear of deep experience, including now of success in Canada, our organizational strength and one of the largest greenhouse footprints in the USA.
Again over $6 6 million square feet in the some of the best growing areas in the Continental U S for the longer term, we are planning to see to leverage out of Canada success of leadership beyond North America to strategically targeted markets, where there's high growth opportunities.
In these international markets again through efficient capital investment and we believe that foundation of Canada, especially cultivation expertise positions us well for success.
As I noted on our last call we increased our investment in our Asia Pacific part and the out of earlier this year of 12%, which is indicative of both the progress in all of increased confidence in the opportunity here.
Before I open the call the questions I wanted to touch on one important topic that has long been a part of the DNA here at village farms for one that a nice heating days of early days of cannabis industry. We haven't spent much time talking about and that is sustainable agricultural practices controlled environment of greenhouse growing is by far the most sustainable for.
All of them of agriculture period.
We are now the oldest operating greenhouse.
The produce company in the United States with over 30 years behind us.
And in this.
Responsible way of growing just to reiterate we don't use soil. So theres no soil erosion depletion of nutrients. We can grow 30 to 40 times more yield per acre than the field grower, we re circulate water, meaning 86% less water usage and outdoor growing and no leaching into the groundwater whatsoever, we capture out of C. O two for my boy.
Let's just put it back into our greenhouses, which the plants convert the oxygen meeting not just the neutral carbon footprint, but the negative carbon footprint. All of this has long been a foundational principle of the protests operations.
Which now has enabled us to lead the cannabis industry in this regard.
Where the cultivation practices are identical.
We're quite proud of not only because of the positive environmental and social implications, but also because we know it makes us better more profitable operators.
With that we'll turn it all of US any questions that anyone has operated games.
And we will now take questions from analysts only if you're an analyst in the we'd like to ask a question. Please press star and then one on your telephone keypad, we do ask that you limit yourself to one question and one follow up question only if you have any additional questions. We invite you to reenter the Q&A queue.
We'll pause while we compile the Q&A roster.
Yeah.
And our first question comes from the line of Doug Cooper with Beacon Securities Go ahead. Please your line is open.
Hi, Good morning, guys. Just a couple of things for me of just first of all let's start with the on.
On the gross margin I, just want to make sure I'm clear Steve So the report.
For the gross margin of 29 per cent is that inclusive of the the inventory write up of you talked about.
We back we back that out so that's the that's the true gross margin.
Okay. That's true gross margin is left.
Okay and that includes some.
The cost of sales of their correct.
So if I take the.
The $22 one times <unk> 2 million of G&A was $5 million and the <unk>.
Order.
Sure Sanjay.
So.
Excluding cost of sales that are that are included in the gross margin.
The euro upwards of 30% of theories of Windows.
The other literally.
No.
29%.
We've added back the inventory net of adjusting the inventory, but not the there's still there's the depreciation of the fixed assets in that number correct. Yes, yes, we always we've always both in produce in Kansas. We always include depreciation as part of of.
Cost of sales.
The capital.
Yeah, and can you give us an idea of sort of what the pricing environment is like and maybe just to what percentage of large format was of your flowers sales for the quarter.
Yeah, I mean with respect to the pricing environment. There was no change in our pricing I mean pricing does vary based on the strain and the end.
Obviously based on our format.
But quarter on quarter sequentially, there was zero zero change in our for I can't speak to the overall marketplace of what other people are experiencing but with respect to us.
It was interesting.
The Skus that I did look at it.
Exactly the same with respect to the.
The breakdown for the quarter.
Between large format and small format for the large format was roughly let's say, 60% of our flower sales in small format was 40 per cent.
Yeah.
Okay.
And part of an idea of what the Yep can you give us an idea of what the pricing differential between those two is on a program basis.
Yes.
Again, it's based on the it's based on the spring.
If there is.
Okay.
Longer term when you get more production and get more economies of scale of what would your long term AR.
EBITDA gross margin targets be it like what the what should we be thinking about longer term perspective.
Assuming pricing remains where it is.
Yeah.
Well I mean, there's a lot of variables dog I mean, who's going to be in the marketplace. That's one thing it's still too. Many players. So I think long term we have to look at who are the survivors.
That's going to be a big impact as well.
So.
I think.
We think it'll get better, but you know we're forecasting low to stay pretty steady because again, our pricing is based on.
What's the pricing for the grain market is regardless of anyone else and as that changes than maybe the pricing will increase going forward.
Our next question comes from the line of Aaron Grey with Alliance go ahead. Please your line is open.
One of the thanks for the questions no great to see the continue the growth.
Both on the flower side quarter over quarter. So one specifically kind of speak to Ontario, where you guys continue to outperform.
Just because I didn't see more stores the rollout in the province, particularly after things normalize from COVID-19 hopefully.
<unk> can speak to how you're working to ensure a peer of some farms has the appropriate shelf space.
To continue our maintained gaining share as these incremental stores come on line.
Yeah, I think well, we're well positioned for that I mean, the some of the besides of the lockdown of the consumer level and the stay at home orders, especially in Ontario.
That's affected Congress and such that the distribution centers, maybe not operating at full capacity for the same reasons store rollouts as well so as.
As I said in my remarks, we have been in contact and our future growth is based on the confidence we have in discussing that with the provincial distributors.
So are.
We feel very solid about are gaining more market share as the.
It gets back to normal whenever that may occur in Canada.
Okay.
Alright, great. Thanks for that color and then second question for me is the song of the two point of all products.
Michael You know you mentioned you know the flat quarter over quarter. You know you mentioned that youre, hoping they'd be a little bit for yourself and spoke to kind of a of different competitive environment with more of producers that are specializing in that part of the market I think of what you said so just curious because you've had such great efforts in terms of you know you won't one of flower products on the pair of some of our brands and how are you looking to kind of potentially.
The leverage that we're keeping all parts of what are your plans for hopefully.
The improvement improve your performance in the the category perform better for you would like to expect ex.
Yeah, well the team at pure of some farms as I said, they're very focused on if they're in a war room mode right now as they say and looking at those products, but again I want to remind everybody. You know we didn't roll of any of those out to the later part of line here. So.
We're not even approaching you know of.
Full year and again, we're at 90, 892% of the approved products from Health, Canada, just not in confectionery of average we think those markets still are quite small and it has to be proven out not that we won't be at some point, if we think theres going to be traction there, but within the other two point O of products.
Yeah, we're focused on increasing net market share, we think some clarity coming out of health, Canada will help that physician and I won't comment more on that but also are.
We think we've put like our gummies, we put that against anyone with all of fresh fruit and.
The taste and and I think potency you know we have a lot more strange coming on with higher potency. It seems to be what the market is really looking for so I think the combination of all of those attributes.
Because of the high potency will translate into some of the derivative products as well.
And we'll.
We'll just keep hammering away but.
That's the best part of I can give you at this point.
Alright, great. Thanks for that color I appreciate I'll get back in the queue.
Thank you.
Our next question comes from the line of Rahul Farmer Guisard with Raymond James Go ahead. Please your line is open.
Good morning, Michael.
I hope that's the one questions and congrats on the strong quarter.
Just wondering if both of you brought up the inventory write off I was wondering if you get a little more clarity here.
So it looks like that right up for the quarter was about.
Non cash write off was around $2 90 day.
So we we.
We add that back once I suspect of the correct slots on.
The reported EBITDA for millions.
That would actually be.
The golf around.
Keep hold true.
Is that right.
Clarify what what was that question again I wasn't right you broke up there.
I'll repeat that so given given the non cash write up of inventory.
On the consolidation.
Given the and also that the adjusted the.
The reported adjusted EBITDA was $4 million, if we correct for that.
The collective adjusted EBITDA number would be equal instead of $2 3 million is that right.
Now we've added it back.
Already.
You have out of Dubai, Okay, Great and then.
And in terms of the.
And in terms of the 2020 per cent quarter over quarter of growth.
The retail sales now we've seen many many of the peers, so declining quarter over quarter of growth. So can you give us a little more color like essentially all of how people sometimes need to drive that while much of the sector is showing a decline.
Well I mean, I kind of said in my remarks, where I like to think that one of the execution by pure of some farms and the quality of the products of the price point. We have is just driving that's been our model from day. One that's been our strategy was never wavered from when we entered the market.
We need to that price point.
You have the had you know I think it's.
Everything we produce as a premium quality in the I think people talk about premium and value I think value out of all high format.
The large format rather is made up of 100 per cent of our top selling strange it's not secondary product or anything so we just discount it because it's a it's of high volume sales. So you know if you go into Costco and buy you know for power.
Of all of you are going to go at better price and go into a regular gross or where you buy a can of ours and I think that sometimes gets misconstrued maybe some in the market want that to be misconstrued that it has to do with the premium versus non premium product is anything from Cook and I think that's resonated because even in today's pandemic times and.
Canada, where people want a good deal on the large format you can see that drove the 50, 60% of our sales in the first quarter.
If it wasn't a premium product that wouldn't be there and I can't speak for what others are doing but you know we saw the data where there was a plane with everybody and we just think it has to do without quality.
Strange our execution, that's driving and we're that's why I said, the very proud of that execution.
Of the team and.
We think we've got it for you right so for debt.
Rose, 75% of our large format sales one of the single strength.
So that's that's what's moving the needle.
Because of our quality of we're able to do that.
And of course, no no of course about plus the production as well I just wanted to make that clear we couldn't do it and be profitable for you didn't have the low cost production, we did in the scale.
And our next question comes from the line of Eric The Loria with Craig Hallum Capital Go ahead. Please your line is open.
Okay, great. Thanks for taking my questions guys and congrats again on the steady execution here I.
I Wonder if you could talk a bit more about the dynamic between retail and wholesale channels.
Especially as the provincial buyers are becoming more prudent with their inventory purchases.
Presumably that would benefit you guys with the number one retail brand, but I'm wondering if you could talk a bit more about how that's impacting your wholesale buyers you mentioned the profitability threshold. Just wondering if you can sort of elaborate a bit on how these changing purchasing dynamics at the provincial level are impacting.
Your wholesale customers. Thanks.
You know I can't speak for others that we sell but if I was to put myself in and in that environment.
And I do I look at it that in order to compete at the retail level.
And if you are not being able to cultivate your own product that meets the quality that that and what the market wants lets just say in terms of freshness quality and potency.
<unk> had a profit you know then you have to go out and buy product from competitors so to speak however.
If you have to compete with the price points that are out there not just pure of some farms, but as I said the price points for set by the gray market and are two of large degree that you have to be able to purchase at a low enough price to then be a purchase bulk of the low enough price of then package it labor.
To all of the things you need to do sell it and make a profit and the competitive and I think that's you.
You know Thats, a hard road to hoe up in Canada for so to speak so.
That's why we're really not focused on it but we're not going to just sell it at a price it doesn't make sense of the other thing is that as the market is demanding higher potency.
First and foremost for us and of course, others would want that higher potency and you know theres a theres a limit to what that is and was never going to lower out of inventory levels for the future quarters beyond what we think is prudent to meet our retail customers' demand. So there's a lots of that goes into it and that's why we say.
It's very strategic in.
You know we're much more of that we call. It unbranded sales because there is a portion of that those sales that are going to maybe light asset model of players that are strategic and are willing to pay us a higher price because they have a brand that situation as opposed to maybe other Lps.
I won't elaborate more but I hope that helps.
And our next question comes from the line of Scott Fortune with Roth Capital Partners Go ahead. Please your line is open.
Yeah, good morning, and thanks for taking the questions.
One call out some of the other provinces and just with respect of you bring in all of them more production starting in third quarter from from the Delta two facility.
How much of this is driven from Ontario or kind of.
Some of the new provinces, I know, you're not in Quebec or some of the other provinces.
Opportunities going forward here for the guidance.
Yeah, well in our plants. We didn't this year include Quebec of course, we're working hard on it and we would love to be in Quebec, but we want to be realistic with the timing of that but you know of.
I think one of the drivers for Ontario was just the aggressive rollout now they're really on a fast track of rolling out of the stores, we didn't see that much in the other provincial areas. So I think post lockdown.
The lockdown that those provincial areas will continue to add retail stores, which will help but but I would say outside of Quebec.
You know, Ontario is the big driver, but so is b C and so the south BARDA and keep in mind that you know all Delta two facility like of Delta three has 16 grow rooms. So as we bring on eight by the end of the year, we could vary that down to seven increase of Tonight to 12 till we get the full capacity.
And that's something that we're doing every month as we rationalize the increase in capacity.
Again as I mentioned in my comments, we're not going to produce what we can sell and have huge inventory levels that just doesn't make sense, but we have complete flexibility.
And as I said, Scott last summer, we brought down production very low to align with what the market was and what our specific sales work. So I think that formula for managing that is is solid for us.
Okay I appreciate the color and just kind of follow up maybe Steve can help with the capex for the end of the.
Target for the year and then on that note what about the additional.
The international initiatives going into Europe the country.
I know you guys are looking at kind of game.
<unk> GMP certified per se from that standpoint.
The color on kind of the European timing the ore initiatives over there.
Well I'll answer the second part of that I'll turn it for Steve on the Capex. So we have been aggressively.
Working on.
The European Theater.
We are you know which of the pandemic has affected things, they're it's a highly regulated market.
We definitely want to be engaged in it but we don't feel pressured to move forward just for the sake of announcing it without the right strategy, which clearly are going to leverage up.
Our strengths that have proven ourselves from Canada, just like we are in the U S for the EU.
I see it very clearly.
What the penetration rates of the additional or are the other states. So we're being patient as well as far as the Netherlands, we're not out yet.
We've been working on that the coffee shop experiment there.
Can't say much more about that.
And then are.
You know in the Asia Pacific region, as we mentioned.
We're gearing up there in fact, we.
We should hopefully have our EU GMP certification by August September this year, we're ramping up now to start commence.
The high THC sales out of pure of some farms for the medicinal market in Australia.
We think we will be shipping product this year to start and ramping up our programs in Australia.
As well as supporting all of them and their continued.
Penetration into the Hong Kong and we're working on the Japan now and of course other markets for the future. So those of the two areas internationally.
Very focused on.
But I do want to say that number one is the U S. As I mentioned.
We just don't want to we want to be very clear on how the USA is going to go forward, we don't want to deploy capital debt would be some cost type of investments down the road as things changed in that environment. So.
And Scott with respect to Capex.
<unk> Capex for the rest of the year is between 22% and 25 million U S between produce and candidates for the rest of this year.
Much of much of Delta the west the west half of the Delta two is complete it's waiting for the health Canada.
The approval.
And the rest is.
Capex for the year as harsh partially the east half of Delta two as well as enhancements to our operations both of with canvas and with purpose.
Thank you for the color.
Our next question comes from the line of Rahul fire Gaza with Raymond James Go ahead. Please your line is open.
So I think it's just the one quick follow up question.
From quite a few movements in the text of the legislature and given the.
The significant assets that you have in Texas are there any thoughts you can share in terms of how the legislative changes that are all of potential legislative changes.
The impact how are you guys looking at the states or the U S.
Well, Steve we were.
We're hoping that the state would move more aggressively into medicinal yes of the house passed a bill.
But the definition of medicinal list the increase the THC debt.
Percent, which is still really low particularly for.
Patient.
So it.
It hasn't really necessarily assist a lot of the people that need higher THC, which is unfortunate.
That being said the Senate has.
Isn't even.
The essentially they've recognized the house bill, but haven't even assigned it to the committee yet and time is running out so at this stage, we don't the E C.
Ooh.
But you know things could change over the next two weeks ultimately what we believe may happen by Texas itself isn't going to move, but the Texas Constitution forces the to follow the federal law, so with the federal government will reschedule cannabis, which humor and others and the federal government of certain.
The been hinting towards.
The Texas will have the mood.
So which is fine.
So maybe Texas legislature the forest.
The catch up with the times and ultimately taxes, the very business friendly state as we've stated candidates, particularly where we're located in west, Texas the brake growing findings.
And we believe Texas.
We will get onboard kicking and screaming that he put the that'll get onboard with the rest of the rest of the United States.
Italy.
The next year at the latest.
I would just say, yes, we're a little bit disappointed you know we've been operating there for a quarter century of more than.
It was the slow start on the HAMP in Texas. So maybe this legislative session of happened.
Steve said the entry.
Be the federal but the.
The other side of that coin is nobody's there. So when it goes we will go aggressively either way, whether it's Texas for some of our government first.
And I think at some point you know when you really spoke of the northern country, Canada, the southern countries, Mexico All legalizing.
As well as the adjacent states of Texas at some point.
Just need to make a patient we hope for the right way, so that's part of being patient flow.
Indeed, the great. Thank you for taking the follow up question.
Thanks, Andrew.
There are no further questions in queue at this time I'd like to turn the call back over to the strategic Julio.
Okay. Thanks, James and thanks, everyone for joining us today. Thanks for your continued interest and support of village farms and we certainly look forward to speaking with you again on our next call.
Good day.
This concludes today's conference call you may now disconnect.
Okay.
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