Q2 2021 Village Farms International Inc Earnings Call
[music].
Good morning, ladies and gentlemen, welcome to village farms International sick from Cordage.
And each 1 of the 1 financial results Conference call. This morning village farms issued a news release reported its financial results for the second quarter ended June 30th 'twenty 'twenty 1.
That news release, along with the company's financial statements are available of the company's website at the village farms Dot com under the investors heading.
No. The todays call is being broadcast live over the engine and will be archived for replay both by telephone and via the Internet. The beginning approximately 1 hour following completion of the call details of how to access the replays are available in yesterday's news release.
The only begin let me remind you the forward looking statements may be made 2 day.
After the form of part of this conference call.
All assumptions what of light and providing the statements made.
The reach of beyond our control.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements.
A summary of these under the assumptions risks and uncertainties is contained in the company's various securities filings with the SEC and Canadian regulators.
Including its form 10-K M D N a for the year ended December 31st 2021, and form 10-Q for the quarter ended June 30th 2021 which are available on Edgar. These forward looking statements are made as of today's date and except as required by applicable Securities law, we undertake no.
Obligation to publicly update or revise any such statements I would now like to share the call over to Michael <unk>, Chief Executive Officer of village Farms International. Please go ahead and hit the Juliet.
Hey, Thanks, and good morning, everyone with me for today's call is village farms, Chief Financial Officer, Steve Ruffini and I'm very pleased to have with me pure of some farms president and CEO Mandy dose on true is that our corporate headquarters here in Orlando from management meetings and will join us for Q&A at the end of the call.
So I would encourage anyone who has some questions from man dish to ask them on this Q&A portion of the call.
The happy here, but today's call I'll spend a few minutes highlighting the key takeaways from the quarter. Most notably the continued strong sales momentum appears from farms as well as the benefit to our bottom line of operating at scale Steve.
Steve will then review the financial results and I'll return with some concluding thoughts about why as village farms largest shareholder I continue to be so confident of our ability to drive continued valid value of near term medium and long term and then we'll open the call to your questions.
So starting with pure some farms Q2 was a record quarter since entering the retail branded market for the fourth quarter.
In the fourth quarter of 2019, so almost 2 years ago.
The record retail branded sales were up 22% sequentially, our fourth consecutive quarter of 20 plus percent growth and.
135% up year over year record total sales net sales were up 38% sequentially of 70% year over year and the record adjusted EBITDA since launching our retail branded products in October 19 up 165% sequentially.
And 264% year over year to $9.1 million Canadian.
At the top line the same 2 drivers of that I have discussed on prior calls continue to propel our growth which continues to outpace the broader cannabis market. Each of these drivers are the result of conscious decisions as part of our go to market strategy under the leadership of the pure some farms management team, which.
<unk> continues to prove itself to be the best in the industry without any doubt the.
First is out of the decision to initially focus on the dried flower segment of the market in which we knew we would have a significant competitive advantage and could itself out of the gate to establish our everyday premium brand with consumers and generate near term cash flow and profit.
So using our carry as a proxy dry flower, including pre rolled products still account for more than 70% of all recreational sales on the dollar basis and that has been remarkably stable for the past several quarters, but what's even more compelling is the continued dollar growth in these categories combined dry flower and pre rolls.
The products grew $32 million just from Q1 of the Q2, that's 5 times of $6 million of growth from the 3 largest 2 point of categories combined.
Even on a percentage basis.
Dried flower and pre rolls meaningful means the leap outpace the major <unk> categories of top of this industry profit returns in this category of still sorting themselves out of.
All of this is not to diminish the importance of the size of the opportunity and the 2 point of all market, but these market trends support our calculated decision of focus first on flower of the biggest opportunity with the biggest return where we can believe we can dominate to bill.
Consumer and customer loyalty going forward.
And hit out of 20% goal.
The second driver of topline growth is the overwhelming consumer response of everyday premium products. The foundation of our market share leadership in the dry flower category for the second quarter of pure sell farms was once again, the top dried flower brand within the Ontario cannabis store.
And remained the top selling brand of dried flower from the 21 month period, beginning October of 2019 by both dollar and kilograms.
And I'm very pleased to report that in the month of June for the first time <unk> farms as the top selling licensed producer of dried flower in Ontario.
By both kilograms in dollar value of performance to repeat it in July as well I'd like to say that again pure of some farms as a single brand so more of dried flower in Ontario in June and July of this year than any other licensed producer.
We know.
There has been plenty of discussion about consolidation and owning multiple brands to achieve market share in Canada, but its the village from shareholder I liked the economics of growing market share organically, especially with these results and the valuations others are paying for the consolidations.
Im also pleased with the first time to comment publicly about the market share performance to a pure of sudden farms of about both Alberta, and British Columbia, Our second and third largest provincial markets.
We are comfortable sharing that particular data, which is from a group called food of cannabis retail solutions provider because it is compiled from actual sales data from abroad sampling of retail stores in each province, providing an accurate reflection of overall performance in each province.
It has the same data we use to manage the business in each of these provinces. The Buda data shows the purest wind farms is also the number 1 flower of brands by dollar sales in each of Alberta, and British Columbia, and not only for the second quarter of this year.
But in every month going back to October of last year, which is as far as back as we have the data not surprisingly our brand and product strategy, which has been so successful in Ontario.
As also successful in Alberta and BC.
Our Q2 results also benefit benefited from a good quarter for non branded sales as we took advantage of the number of strong margin generating sales opportunity in the quarter. As a reminder, our non branded sales must meet me the profitability threshold as well as make sense within the contents of our retail branded strategy and competitive.
The strategy as many Canadian cannabis businesses, so shifting strategies and trying to find their place in the ecosystem. We expect to continue to see more variability in our non branded sales from quarter to quarter, but we like how we're positioned and we like the returns from this business.
Perhaps most importantly, Q2 was also a quarter that clearly demonstrated the earnings power of pure of some farms as we benefited from the Delta 3 facility operating at full capacity throughout the quarter and a quarter that I will remind you benefited from the longer spring and summer days from birth.
<unk> of yield and lower energy costs, but it's not just about economies of scale with each quarter, we continue to get better and more efficient to continue to strengthen our everyday premium experience for consumers.
And cultivation, we are engaging and enhancing both sides flower.
<unk> through improved cultivation and processing techniques.
And we continue to learn refine and leverage our improvements and around processes. We are doing proprietary work in key areas such as drawing at scale as well as enhancing controls and consistency of execution.
And we are extending our competitive advantage through.
Through innovation, we recently made technology advancements and pre roll production, enabling us to significantly increase output, which contributed to a 3 fold increase in our pre roll of sales within the Ontario cannabis store from Q1 to Q2.
And then we had a record month in July as well and I will note with expanded margin due to production efficiencies. We have developed the new proprietary of <unk> formulation through extensive sensory evaluation of where to specifically address consumer wants and we are consistently focused on strain development through fino her thing and 1 wants it to the $2.2.
Millions of square foot of greenhouse area with a particular focus on high THC strain some of which the launch in the coming months.
All in Q2 was an outstanding quarter from pure some farms not only for its continued strong operational financial and market share performance, but for the investment groundwork that this performance means for the quarters to come.
So before I turn to our produce results I want to take a moment to be clear about the importance and value of those operations to the future of village farms, especially in light of the variation in the Proteus financials over the past 18 months our U S. Protas operations include for Hy Tech.
Control the environmental greenhouse has more than 5.5 million square feet, where the replacement value of greater than $300 million U S and exceptional experienced growing team in labor force in years of operational experience with the specific facilities that the similar to our Canadian assets. They are located in 1 of the best.
Growing climates for cannabis in the continental United States, They can and I firmly believe will become 1 of the largest and lowest cost cannabis production facilities. When we are permitted to operate in the high THC cannabis market.
In the U S.
This is right out of the strategic playbook.
And you can see how we are executing the strategy in Canada with the benefit of our Canadian experience.
Turn of modeling forecast that these 4 U S facilities are capable of generating at least $1 billion in annual revenue for village farms and the high THC product category strategically we like the underlying value of this option and manage the produce business targeting breakeven EBITDA to preserve this optionality.
The <unk>.
Turning to produce performance Q2 was another strong quarter operationally and we continue to see the benefits of improvements we have made in the past year and a half or so.
We are also benefiting benefiting from our experienced some learnings we of gains also so important in agriculture and managing the brown reversal of virus that has impacted the tomato crops worldwide, which has negatively impacted our production of the last 2 years.
And multiple breeding.
Programs are underway by multiple seed companies to build and resistance in the short term ahead still.
So we are we continue to see with some of those.
Weakest tomato pricing for certain key categories in the past decade of grocery store traffic the windows and the reopening of the away from home dining industry wide demand dropped off while supply reflect the planning decisions made during the lockdown period.
The science, however, the tomato pricing is trending back towards normalized per.
<unk> levels and with our operational improvements.
In addition of leadership I remain confident that the produce business will achieve its targeted breakeven EBITDA contribution and maintain optionality to leverage this business for higher returns and cannabis in the future.
Recently, we had of new leadership in our produce business appointing industry veteran Eric Janky as executive Vice President of sales and marketing Eric will be responsible for overall productivity and effectiveness of the protos sales and marketing team with a particular focus on driving overall sales performance and will also support the corporate team and capitalizing of emerging opportunities in the broader.
Control the environmental agricultural sector, Eric brings to us more than 4 decades of experience of fresh produce in grocery industry, including more than 20 years of executive will position I'm thrilled to have Eric on board. The I'd now like to turn the call over to Stephen to talk through financial results of some steep.
Thank you Mike before I begin discussing results I would like to remind everyone that our Q2.2021 results reflect the full consolidation of the pure some farms business, which we fully acquired in November 2020, as we did in Q1, we have provided segment reporting historical 2020 and.
<unk> 2021 to <unk>.
Minder debt as we've done in prior quarters, we have provided the pure some farms results on the Standalone basis, which is helpful context, as we discuss current business trends throughout this call.
Turning to results consolidated sales for the quarter were U S $70.4 million, which compare to the U S 47, 6 million in the year ago period.
The 48% increase in sales was primarily driven by the addition of <unk> farms revenues offset by a slight decrease in produce sales.
Net loss for the quarter was $4.5 million as the positive contribution from Pearson farms was more than offset by ongoing pricing pressures in the <unk> business as well as a $1.4 million onetime incremental electricity charge, resulting from the tax ice storm in February which I will discuss in more detail shortly.
Adjusted EBITDA of $1.6 million was driven.
By a close to 2.1% sequential increase in adjusted EBITDA per Pearson farms to U S..7 4 million for the quarter, our adjusted EBITDA loss of $3.9 million in the produce business fell short of our breakeven EBITDA target and masks are more positive trends in cannabis turning to business segment results.
As Mike as previewed Pearson farms had an excellent quarter Q2 sales were $24.7 million of U S or Canadian $30.4 million, which were off of 136% from Q2, 2020 and up 38% versus Q1.2021, using Pearson farms functional currency.
Nadine.
For the fourth consecutive quarter of Pearson farms retail branded sales grew more than 20% actually 22% sequentially.
So when 1 year retail branded sales more than quadrupled to the U S $18.3 million or Canadian $22.5 million for this quarter.
The increase in retail branded sales between sequential periods was largely attributable.
Demand for our everyday premium products.
Additionally, many provinces began their COVID-19, reopening plans and capacity restrictions decreased particularly in Ontario, which helped spur demand in the later part of Q2.2021 large format comprise roughly 52% of our flower sales in Q2 versus large format of 48% SM.
<unk> the inverse percentages of Q1, which in part is the reason for our improved quarter on quarter gross margin of small format has a higher gross profit and large format.
Wholesale of our non branded sales also increased this quarter to $6.4 million U S or $7.9 million Canadian of 121% sequential increase versus Q1.2021.
As we have noted before as Mike has mentioned wholesale sales are opportunistic and must make economic and strategic cent per our branded business. So they will vary from quarter to quarter, depending on available supply and demand from other Lps.
The <unk> farms gross margin was the strong 40% in the quarter at the top end of our target range.
Benefiting from an increase in retail branded sales at higher margins due to a percentage increase of small format. The.
The Delta 3 greenhouse facility operating at full capacity for the entire quarter, which reduced our cost per gram produced and a nice gross profit on a non branded revenues in Q2 as compared to Q1.
Since completing the acquisition of the entirety of Pearson farms, we have been required to record a large inventory non cash write up in cost of sales procure some farms in our statutory results in order to comply with acquisition related fair value of accounting rules.
The impact was meaningful has meaningfully decreased in this quarter to 133000 versus $2.8 million in Q1.2021.
Essentially as as we've worked through all of the flower.
Inventory that existed on the acquisition date in November 2020.
As we stated in prior quarters. This is the noncash charge that should be adjusted for when analyzing the actual operational results of Pearson farms.
Adjusted EBITDA of $7.4 million or $9, 1 the Canadian was the 11th consecutive quarter of positive EBITDA.
And also was a record since the launch of retail branded sales in late 2019, I commend <unk> and the Pearson farms team as they drove this record profitability from the combination of higher net sales of stronger gross margin and good cost control management as they say in hockey Thats a hat trick.
Going forward as our retail partners returned to more normalized selling environments I would expect SG&A to trend higher in order to support our point of purchase sales and to continue our increasing market share, especially in flower.
Turning to produce Mike as mentioned the difficult pricing environment for Tomatoes, which certainly impacted results. In addition in late May we were presented with an extraordinary of electricity bill related to the unprecedented Texas storm the.
Remember that in February of these storms caused major problems with the electricity grid, leading the the Texas regulator ERCOT to declare an emergency alert level during the 5 day emergency period, the real time pricing for electricity was more than 100 times higher than normalized February of pricing.
Our Texas operations use of small amount of power to run our operational systems, but the maximum pricing of $9000 per kilowatt hour resulted in incremental electricity expense of $1.4 million.
Over our normal electricity rates for this period.
The original invoice, which received in late May was for a considerably higher amount, but after a complete audit and negotiations with our power provider was settled and paid in late July of late June.
We were we've included more background about the extraordinary expense, including our plans to mitigate future price instability in the MD&A filed today.
As Mike mentioned, our Texas based operations of our strategically important to us and we want to commend the team for maintaining and operating facilities. During those 5 days, which was no small feat.
During the quarter produced sales decreased 4% year over year with higher production volumes offset by lower pricing at the tomato industry experienced 1 of the lowest pricing environments in the past 10 years.
While pricing is driving lower sales and profitability of this quarter, we are seeing.
Higher production volumes as the result of ongoing efforts to improve growing efficiencies.
There are also indications that pricing is moving back to historical levels. However year over year comparisons remain challenging through Q3.2021 as Q3.2020 per.
Pricing benefited from the 2020 COVID-19 impact on tomato demand with retailers that said, we are expecting to be back to breakeven produce EBITDA for the back half of 2021 per.
<unk> adjusted EBITDA was a loss of $3.9 million, which excludes the $1.4 million incremental electricity expense in Texas.
While this is a wider margin and we target the team continues to work on efficiencies, including increasing partner grown produce which sets us up from the strategic redeployment of the Texas greenhouses when appropriate.
I want to underscore Mike's comments relating to the significant cannabis optionality in our Texas operations.
These are assets of the team is managing with the ongoing target of breakeven EBITDA some periods by 2020, when demand and pricing were favorable.
Better than breakeven other periods by Q2.2021 on pricing is at 10 year lows the more challenging to hit the EBITDA target.
That said the team manages for production efficiencies every day, which continues to position both our growing capabilities in our Texas operations as 1 of the best options for us to enter high THC in the U S. When legally allowed.
The only a few other highlights in May we experienced we exercised the remaining option to increase our equity investment in ultimate to just under 12% the investment and also 1 of Asia Pacific's, leading CBD platforms represents an efficient means for village farms to participate in opportunities in this region.
During the quarter, we purchased 428000 common share average price of $9.30 U S.
Under our normal course, issuer bid, which we announced in May as a reminder, our decision to purchase shares under this program is opportunistic and consistent with our broader capital allocation strategy as.
As of June 32021, we had $155 million of working capital on the balance sheet of which of $114 million is readily available cash.
We've also extended the duration of our operating line of credit.
And filed a universal shelf registration to take advantage of benefits only available to well known seasoned issuers when strategically prudent the combination of our strong balance sheet continued growth operational efficiencies and a very committed workforce and management team puts village farms and positioned for a strong and prosperous future and now I will.
Turn call back over to Mike.
Thank you Steve.
The village farms remains firmly on track to continue the successful execution of our strategies for near term medium and long term growth and value creation always on the concepts of prudent capital allocation decisions and a focus on return on investment.
In the near term <unk> farms business, clearly has momentum sales profitability market share and has quickly established so as the leader in the Canadian retail cannabis market, but pure some farms is really just getting started and importantly, our growth over the past year has been achieved without adding any new provincial markets add.
The Quebec, the second largest provincial market remains our top priority.
And let me just say that we would not have added that till we turned on delta 2 because we need to satisfy our customers day in and day out and with all of our products moving to the other provincial governments, we really need the delta 2 to come on which it is next month.
This has only been achieved with very modest contribution from 2 point of old products as well in that category is still very small, but with exciting long term growth and profitability in which we are and we'll participate.
It has been achieved in a very congested market in which marketing and advertising is not permitted and we have achieved our results against the backdrop of the most difficult retail environment in our lifetimes. All of this is what continues to give us great confidence in our decision to expand production to this end during the quarter. We received approval from health kind of begin cultivation of of <unk>.
To the.
The license increases our capacity of nearly $1.7 million square feet from the $1.1 million. When we continue now with the second half of Delta.
Is completed we will increase our capacity to $2.2 million square feet. We will begin planning the first half of Delta 2 next month with our first harvest targeted for November.
As we ramped Delta 2 production up as always we will be prudent in our production decisions growing what we can sell to continue to effectively manage inventories.
And I will take this opportunity to remind you that as we look longer term. We have an addition of 2.4 million square feet of production area on the same side of sell Delta Delta, 1 greenhouse, which we can rapidly convert to grow cannabis to meet future demand as the cannabis legal market continues to grow and Thats International.
<unk> continued to develop the importantly for our future cannabis endeavors Purion farms business has performed very much as we planned and expected it to the results of our decades of experience in control of the environmental agricultural growing leveraging our existing high performance operations and approaching the retail market in a prudent thoughtful and strategic manner.
Our unmatched performance in Canada provides us with an undeniable advantage as we pursue our opportunities and strategically targeted markets around the world in the United States. We are encouraged by the federal accountable spill recently brought forward by the Senate leadership.
We view it as an integral.
Step in the process of regulatory change that will allow village farms from participating in the high THC cannabis market in the U S.
<unk> discussed on prior calls we have identified potential pathways to participate in the high THC market in the U S and we continue to refine multiple strategies that will enable us to move swiftly and aggressively to leverage our success in Canada for the largest cannabis market in the world.
These include specific strategies that will enable us to participate in the catalyst market ahead of any conversion of our Texas assets as I mentioned earlier out of Texas greenhouse operations represent at least $1 billion.
The cannabis sales to village farms, when we can enter that market. We are optimistic that we can continue to see this progress in the months to come and are planning accordingly.
Also internationally, we believe our capabilities and experience in Canada. The first federally legal recreational cannabis market in the world.
We will be invaluable as we strategically target selected emerging high growth potential markets for investment again with a focus on return on investment.
The Asia Pacific focus part of alternate international which recently.
Increased out of investment continues to build its initial market in Hong Kong of expects to move into new markets in the near term Europe of course continues to be a major focus area for us and to support the pursuit of that opportunity, we recently added or.
Bhavan chain to lead our European cannabis business in the newly created position of Vice President of the European business development operations.
Bob will join village farms business development operations team with specific responsibility for new business and operational activities in Europe, and the kind of the sector.
1 of those originally from the Netherlands has deep cannabis experience, including operational expertise honed in Canada.
True a large part of the pure some farms team.
And he has extensive relationships in the sector in Europe as well as very early days for the European market returns is still challenging for the early players, but we do think this market of significant opportunity and we expect to be a meaningful participant in that market.
I'm also pleased to welcome <unk> to our corporate team of the newly created.
The position of corporate legal counsel.
Cynthia is of critical role as we continue to grow and expand our business, especially as we pursue of U S and International Cannabis Act.
Opportunities. She is brings public experienced both on New York stock <unk> excellence of companies, having overseen legal responsibilities for M&A public financing transactions and joint venture agreements among items before I open the call the questions I'd like to take an opportunity to properly introduce Mandy.
As many of you know mandates joint village farms, if they're working for the Antero Lick of board, where he played a key role in establishing a carrier accountable store, which as you know manage the distribution of cannabis from the retail market in Canada's largest province.
I suspect he may have had many opportunities when you decided to join village farms, which speaks to our mutual collaboration we are of great deal of the success of pure set of farms of mandate <unk> as an <unk>.
Exceptional team the allowance of the Canadian consumer the market the competitive landscape of what we have enabled us to translate to the best growing operations in the country into the best brand in the country I live by the creative that results matter and Magnesia and his team have delivered those results.
So operator, we can turn it over to questions though.
Thank you, ladies and gentlemen, who we now begin the question and answer session should you have any questions. Please press star followed by 1 on you touched on so you'll have 3 of them.
Brian the commodity the request of your question people. The other day of receipt should do we should decline from the bowling prices. Please press star followed by 2 if you use of the speaker phone, please lift johan and sort of before Brexit.
1 moment for your first question. Your first question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good morning, and congrats on the very nice quarter and mandates great to have you on and congrats to you of success over up here of some farms.
So first question from me.
So nice job with market share.
And increasing that with flower, especially with the growing flower segment that we had been seeing.
Now, we're starting to hear the number of peers looking to increase their offerings of high THC strain specific products. So through that lens I wanted to get your input in terms of where you see the plan of the flower category of evolving over the next 6 to 12 months.
And how you see your guidance positioned as other people look to see of success in trying to replicate some of those things. Thank you.
Okay I'll handle the mandate to answer that call go ahead manage thanks, Mike I appreciate it thanks for the question of the error.
So where do I see the flower industry going I think the trends youre seeing today will carry on and those are high THC for sure.
<unk> is still going to be an important factor and consumers like newness and the like variety. So I think.
Whats important for us is to keep doing what we're doing.
Calling out on over the <unk> answer, but it's just staying the course consistently executing making sure our products are readily available and we're getting national distribution and just continuing to work with our retail partners to make sure of our product is on shelf and available and so to give customers high THC everyday pricing.
And then what do I continue to see is you got to be in stock and you've got to have the product available and we got to follow that up with new strains of new availabilities and we've been doing that.
We've launched a few new strain specific products. The last couple of quarters, just launched some things of this past week and we're going to continue to do that so it's going to be of mix for us of being in stock every day with some of our leading skus of the look of pink push being the number 1 product in Canada. We've got to continue to make sure that's available but the.
Following that up with the great strength of customers want so it's still going to be price and potency and all of the factors that go into making a great product from European levels. The moisture content of Bud size and density making sure you are really giving the bag of appeal to the customers. So those of the trends, we're seeing that's where customers are valuing and we're going to continue to be there. So hopefully the.
The answers your question.
No that's great that's really helpful. Thanks for that.
The second question from me then just kind of continue on that particularly for Ontario market, where you guys are doing really well and we are.
A couple of weeks ago that apparently they're pushing out the orange allaying, some where the uptake of new products for some time, given your skus seem to be performing very well with your market share can you speak to how the microchip.
Vantage position here in the near term.
Passenger some farms continue to have.
The products outperforming there might be limited opportunities for either introducing the rescues.
Yes, Aaron I would like to turn it back over to me absolutely Ocs's adjusted their protocol, which we know.
At the end of the day, they're trying to run the business like a regular retailer in the regular CPG business I think the amount of product calls and how often they were looking at assortment and changing things in and out be honest it causes havoc causes havoc with their systems and their processes.
Listing things through the warehouse, even on the retailer sides of their buy sheets their order sheets understanding what's available what's not what's new.
It just creates a lot of havoc in the supply chain. So we fully expected and are aligned with what the ocs is doing and its how regular CPG and regular retail works I think looking at launching a bunch of new skus going into the holiday just never works for anybody it's just not the way regular retail and business is run. So we commend them we are working in lockstep with.
How does it impact us for sure I think you made a comment our skews the performed well there are going to remain performing well and we're going to keep them in stocks of our base businesses and affected by it.
Does it limit opportunities for new Skus to go in.
We always think 612 months out we're continually looking at the pipeline and communicating with all of our customers on all of the provinces about what's coming so for us. It's just keeping that communication and dialogue open Alberta, and BC have different in Saskatchewan, Manitoba, obviously of different protocols of how you list products so far.
US it's just planning.
<unk> and making sure we're in lockstep with how Ontario is doing their protocols and when those new dates are but we don't anticipate any impacts to our business and theres definitely some benefits in the <unk>.
Our.
The base Skus will continue to perform and sulfur.
Thank you.
Next question comes from Andrew <unk> with Stifel GMP. Please go ahead.
Yeah.
Hi, good morning, Congrats on the great quarter and thanks for taking my questions.
Good morning.
Maybe just to start off.
On the home province of Quebec here.
Could you talk a little bit of more about.
How that conversation is going.
To the extent that you can maybe provide some timing on when do you think that you could enter being at your top priority.
And lastly.
Assuming you do enter.
Could you talk a little bit about.
Your strategy, maybe bolt on products and pricing will you.
You see yourself doing anything differently in Quebec than you do in your other provinces.
I'll start out and then I'll ask.
For some color from mandates as well so.
The Quebec has been a top priority and clearly the only reason we haven't pursued it prior was that.
When we we want to sort of dominate the areas. We're in we want to provide our customers with all of the products they need and never be sure and what the Delta 3 of greenhouse you can see in the numbers that.
Across Canada.
Including Ontario, Alberta, British Columbia that really takes the.
The bulk of our capacity.
So to go into kind of Quebec, and not really have that horsepower behind us so to speak with delta to what it just been premature now the Delta 2 is up and running we start planning out next month that just doesn't make Quebec, a priority. It makes it a reality.
And I would just say.
We're going to coincide being in Quebec is our plan.
With the <unk>.
First cultivation of Delta 2 on a limited to that.
As you know Quebec is.
Our limited market compared to the other provincial governments as far as product about the products that can be sold the snow edibles and so on so flour really dominates in Quebec, and the dominates with US as we just discussed mandates you want to provide some color yes, I can answer the second part to your question which was around.
What would be our strategy and approach.
Our approach has been very national in some parts of it wont change for Quebec.
However, we also need to be very cognizant of Quebec is a different marketplace and before we do anything will work.
Obviously with the established the plan and what our plan is in Mike's given some color around that but whenever that time comes we will then work with our partners. The board whoever we decided to work with there in the province, and making sure that we're right sized on assortment on price on offering.
And branding of course, so lots to come but I would tell you not to expect something drastically different but we wanted to make sure that we connect with consumers and we do the right thing for the customer in this case the STC.
And have the right approach there.
Thanks for that great color and maybe just switching gears on the existing market that you guys have now.
We've heard recently from other producers that.
Theres been a trend towards more flower recently.
How do you see that going forward do you think that's sustainable.
You know, obviously, perhaps tying that back with with your with your production increase.
You mentioned that.
A big part of that strategy is with Quebec, but obviously, there's there's ongoing market expansion in Ontario, as well with the stores coming online.
Just a little bit of color there. Please.
Well, 1 with ramping up to another 1 so we're doubling our capacity by this time next year, we'll be at $2.2 million square feet from 1.1 so those saying that flowers selling more I don't understand that I mean, how has always been dominant these numbers of always been there. So I'm not sure what others are saying.
Those numbers of the north of 70% nationally all along so.
We are in we have an array of 2 point of our products as I mentioned on my remarks.
And we will end of our participating and we'd see some traction.
But regarding Ontario, specifically mandates you want to make some comments on the yeah and I also just want to make a comment on the statement about Florida.
Andrew weighted potentially going as we're seeing more people more competitors offer flower skus and.
You are asking us what are we view on that.
People are just realizing what we've always known that this game cannabis industry. It's all about flower in the cannabis flower and we've looked at mature markets across North America and seen that yes concentrates and these are the 2 point of our products. They make up some sizable amounts of the business, but flower will always be king of.
Queen However, you want to share.
Permits so I'm not surprised at other companies and people are moving into the flowers piece, because it's where the puck has always been and will be.
And so that's always been our strategy. So for me the press to see other people doing more things around flowers and its not surprising.
I think also proving the there's not enough money to be made in some of those other derivative based products and pricing will commoditize out on those as well.
Ontario, absolutely.
Seeing the store growth seeing the store count go up it's very promising continues to put give us good wind in our sales.
And at the same time, there so the huge opportunity, Ontario, most significant swaps of vertical.
The desert this is sagar on open stores bond marcum.
Millions of consumers still don't have access to stores in there and there are areas. So we're excited we're excited to continue to see what's happening, Ontario, and the ongoing store growth and we think that a lot of those stores will heat with flower and we will continue to see pull through and sell through of our products. So excited for what's ahead.
And mandate was smiling as he was making those remarks on flower because thats, providing validation to us that we always knew and others may I guess just didn't have their model right to begin with so thanks Ed.
Thank you. Your next question comes from Rahul <unk> with Raymond James. Please go ahead.
Good morning, Michael Freedman Dash.
Hi, good morning morning. So thanks, so much for taking my question. The that's great to have you on the call.
Congrats on all of the gentlemen, terrific terrific quarter. So yes.
I'll start to take the opportunity there from index your question.
A few of my questions have already been asked but really not now.
With the with the 40% growth margin.
The flower that Youre talking about is when the dominating the market and as competition starts to really build.
Even though they are behind you they will sort of trying to nip at your yield.
How are you planning to really be defensive in the space. You know keep you out without defend you defend your market share, particularly given Mike you mentioned that many of your competitors of growing by acquisition, whereas you of Optus D. The.
More of.
Evaluable organic growth. So I guess my question really is how are you planning to really defend your state.
Particularly as the retail open.
Yes.
Thanks for the question rule I think it's a good question how do we how do we defend what's ours and how do we continue to grow I mean at the end of the.
We look at what the consumer wants and assets, we got to make sure we're continuing to execute on product quality.
So all of the things that Mike mentioned in his opening dialogue about things, we're doing around driving looking for new strains trailing those strange.
We are of great quarter, we're happy with the macro results, but we never stop pushing ourselves and looking at what's possible. So quality strains products. We have to continue to do those things and we will keep doing them and giving the consumer what they desire. So thats. The first part of his arm product and product quality, we will never.
Stop innovating and looking at what consumers want I think the the other pieces on the retail sell through so we love the position. We're in the brand is getting a ton more traction of the ever highest I've spent as much time as I kind of in stores and going into dispensaries in talking to Bud tenders.
Safety of some farms in their eyes light up in the smile, because they love the brand they love of the product.
I think we have some opportunities, making sure that brand awareness and product awareness is in more stores, but also making sure stores are taking advantage of our full product offerings I think we have opportunities to make sure.
The stores know whats coming whats available, but also just recommending some products and making sure they get more of our offering in stores.
And so our win.
Our next steps are more on the micro adjustments and making sure. We're following up with those stores really working with the board to make sure we're getting distribution.
And following up with the stores and make sure they're ordering the right inventory levels the.
And the product quality of the price Everything's there Steve talks about <unk> I think we are checking all the boxes in the eyes of the consumer and the customer because of our strength of supply chain and our strength in product quality. We just got to keep executing on that and following through so our build and path forward is much different than our competitors.
But it is just continued execution in our supply chain.
Thanks for that 1 day so.
So now the second question sort of panning out of looking sort of Canada U S.
Particularly in 1 thing we tried to do is really illustrate 2 of our clients how.
The the Canada kind of the business is really the growing business for.
For those less familiar with the story of the projects business can be a little confounding.
<unk> talked a lot about how those costs.
The quarter likelihood.
That will settle over the next.
Half of the year, So I guess, 1 important factor or inflection point will be when candidates sort of trends then kind of as revenue transcend.
<unk> revenue do you have an estimate of approximately when that will be and I'll squeeze in a part of that question given that you're proud of this business has really been strong retail connection in the USA trader Joe's Walmart's food.
Leveraging those relationships out of the when the U S open it up to be able to drive the private total channel.
Well, so as I mentioned we.
<unk> been working diligently on entering the U S market, which is not going to wait for the conversion of the Texas assets, we see that as a huge advantage for US. We don't think we're behind because unlike Canada. The U S market has established itself without being federally legal and we think that's going to drive.
The chain and change in the supply chain and when that happens.
Truly believe large scale low cost premium quality.
Shipping at Interstate.
We'll eventually rule of that market and that won't happen overnight, but we're patient about it not to mention as I said, Texas.
Is behind by far the other states, but it still represents the market as largest Canada in and of itself that said.
Ah.
Upon legalization there'll be other ways that the supply chain will work, including.
Online commerce.
The cannabis to us as much.
A segment of health and wellness, where we want to participate in as well as high THC all under the account of US umbrella. So for US we will be looking at how we get ready for that soon.
Sooner than later and I'll leave it at that.
Okay.
Thank you. Your next question comes from Scott Fortune with Roth Capital Partners. Please go ahead.
Good morning, and thank you for the for the questions Great to have you on the call Mcgee with Mike and Steve.
And maybe you can provide a little more color on the 2 point of the products and maybe the slowness of the rollout there and update by consumers in Canada and the uptake there is the more than the provincial board side of things or specific to point out categories that have non accelerates quickly thought.
We know that the flower, obviously high quality farms.
The tough to get up in Canada, but your thoughts on how 2 point of old products will allow and your initiatives.
And product categories moving forward for Pearson farm.
Sure.
Thanks for the question.
So specifically on 2 point of no.
The stock slightly our view has always been it's not about being first it's about doing something the best and the best way you can.
And so like all things, we werent the first of the party and we Werent. The first 1 to point out. So there is definitely some optimization work. So when we think about 2 point, obviously the apes tinctures.
As well as edibles those of our 3 main products.
And.
Some of our biggest work lately has been around and Mike commented earlier about some re formulation on our <unk> side of the business. So our first century was on the full spectrum sidestream specific full spectrum offerings really flavorful related to the product that proved to be of smaller segment of the vape market full spectrum is only about 15% or so.
The.
The bigger part of that beat market is on the distillate, which gives you a higher THC percentage and we launched.
1 of if not the highest of the product the <unk> 5 Gram distillate high THC close to 90%. So following that up with the larger format of 1 graph free simply did there and then we're looking at some re formulations of <unk> and <unk>.
On the distillate side to continue that momentum so for us on the vaping consumers are still looking at the same things that they look at the flower side, which is high THC best price.
We are launching 3 new formulations and those should get out to market in the coming months and so we'll see how those do.
It's it's nothing Super complicated, but just continuing to look at those formulations and seeing how we can start to win better on the <unk> side of the business are tinctures are performing well, we have always done well with our high CBD.
Tincture, we've launched the balanced product as well and we're happy with where those go.
On the edible side are all natural BC for choose of begin the gummies are doing really well for us and we're going to do some kind of adjustments there with the formulation of flavors in size and offering.
So listen Scott its not this huge endeavor that we're doing we're going to continue to right size of those product categories. We like how we're positioned there and we think there's some opportunity for us to grow in each of those segments. We don't have the same market share and tinctures and.
And vaping and edibles that we do on flower, but that doesn't mean, we're giving up on it we're continuing to dial those in with formulations and product offerings, but the stocking to become a massive part of our portfolio and but we're going to see what we can take it and it's the same things high THC, great price skewed offering of product and working with <unk>.
And consumers to make sure we get the pull through at source.
Great and I appreciate the color and then maybe just overall of circle back on the Ontario, or what are you seeing on the competitive front, especially after the kind of the provincial boards of countries.
Rationalizations here are we starting to see less skus less.
<unk> now on the.
The shelf and that's positioning pure some farm for 4 of obtaining a 20% market share over the longer term and then just maybe a little bit color on this quarter as far as Ontario, with the stores really ramping up the rollout of U.
Looking to maintain your share on the shelf space or even growing that from the market share standpoint.
Yes, so Scott and Michigan.
I'll take it in 2 parts like you asked are we seeing the impact not quite yet I mean, there is still over 100 Lps.
Thousands hundreds of thousands of Skus. There I think that is going to take some time for that to sort itself out.
Every week health, Canada continues to send out licenses because people are able to get more operations going and thats up to them. So I don't think we'll see an immediate reduction of Lps and skews the OS.
Yes, we will take their time on assortment in these protocols. So we're not quite seeing net impact yet definitely hopeful that it goes there because I think there's too many to begin with and it creates a lot of noise in the supply chain and how the ocs buyers need to manage it the warehouse even the stores like I mentioned before so not quite seeing that yet.
On the how do we continue to grow and win it and Ocs.
I had mentioned before 1 of the previous questions that for US, it's all about supply chain execution and pull throughout the stores. So we've continued to expand our Ontario sales team, we're still not crazy big like some of our competitors, we really calculated how much spend in how many heads we hire in the province, but we are expanding.
Our sales team that's on the ground is working with retailers day in and day out and like I said, it's about making sure they understand our full product offering.
Last quarter, we launched the Blue Dream, SKU, which everybody said, we were crazy to do because it's been in the market forever yet it was never done our way at our price point with our quality and now people are realizing that the blue Dream SKU that we offer is fantastic, but is a good example of some retailers didn't know that oh pure sometimes as the blue dream of everybody loves your pin.
Let me start ordering that so those of the type of conversations and dialogues that we continue to have with retailers to make sure. They know the what products. They can find from peers on firms. So it's execution on the ground to get that pull through and get that sell in because we know that once they are customers of tried our products. We continue to be of repeat purchase for them.
And then the other piece is just with some digital.
Paid media pieces that we've done we did the score op takeover, we saw some great traction to our website, great traction and support from our consumers. So it's little things like that as well Scott is on the digital side, but it's also still in the store, making making sure Bud tenders.
The people that are responsible for ordering know what's on the product sheets and that we get the pull through.
Yes.
Thank you. Your next question comes from Doug Cooper with Beacon Securities. Please go ahead.
Hi, good morning, guys.
The shortcoming.
A lot of stuff has obviously been covered but and I apologize I dropped off.
For a few minutes.
Premium pricing can you talk.
[laughter] premium pricing.
Day pricing excuse me everyday premium excuse me.
Or that category can you talk about.
How the whole industry is moving.
How that's impacting the industry and how much of the market is moving towards that.
Every day pricing or value price, however, you want to classify it.
Yes, so I'll start off and then Steve can chime in.
Every day premium that's what it's about.
Been banging the table with the board and my team about.
People think premium.
Just because you price something doesn't of higher doesn't mean, it's a premium product so what I'd like to call. This as this is the normalization of pricing cannabis pricing was way over inflated from the beginning and so everybody is talking about this price commoditization of I call. It price normalization and so I think people are really starting to wake up to the fact that if you want to give customers.
A product that you are calling premium it better be worth of you better have some defining attributes that are highly differentiated to substantiate and.
A price that's above normal pricing and cannabis has been around for decades centuries of people know what <unk> announced this should be costing the than buying it from the dealer illicitly instead of coming with pricing that was completely abnormal I think was the slap in the face from the consumers. So youre seeing this price normalization.
I think some people are getting a bit carried away in crazy with it and trying to buy market share and theyre doing it unprofitably. So.
We like how we're positioned we've always been leaders in kind of that price quality ratio that coin everyday premium.
And I think youll see more of it I think youll start seeing a lot less of people trying to push the boundaries north on pricing.
But we know it's coming we know that there is certain products that will always command the higher price per gram.
But we're starting to see this normalization and we're leading the charge and we love how our results are coming together as a result of it.
I would like to see.
No I think it started.
Sorry go ahead.
Okay. I was just wondering just kind of wonder if.
Maybe not for your pricing in particular, but if you are seeing the industry. What is the average price for the consumer from the consumer's perspective, what is the average price.
Per gram done over the past 6 months.
Yes, Doug I don't have the exact average, but I mean, when I look at our eighth talk of 3.5 grams per tonne of small format, which is a really important SKU for everybody. We've always been an ocs kind of in the mid twenties for an 8 we've done some small micro price adjustments.
And I think what you were seeing a year ago was everybody kind of being in the upper twenty's, if not in the <unk> and <unk> on the eighth pack on the.
On the $3.5 Gram pack and now Youre starting to see if you will move down into that mid twenties.
Upper Twenty's as opposed in the <unk> and <unk> and then on the owned side.
We have always been in the kind of $1.2119 to $130, depending on whether it was true specific or not and thats. Another price point that I think.
Lp's are reducing 2 kind of being south of $1.50 on the unannounced park, so whatever that works out to on a per Gram basis. That's what we're starting to see is kind of more people play in the 20 to 30.35 on the free.
<unk> 5 Gram and then everybody kind of be in the 120% of $1.50 on the 1 spot.
And then profitability is a big part of that Douglas can you be profitable growth.
Yes.
The other provinces, we've seen people get really aggressive Alberta is a great example, where youre seeing ounces kind of being the as low as 80% or $90 and I just blows me away when I see that because of Alberta is actually 1 of the least profitable provinces because they have additional provincial excise taxes, and so it's crazy that I see.
The bulk dropping price that low.
Can we make healthy margins at all of these price points I know our competitors do not so people are out there buying mark market share of an unprofitable in.
And the result of doing it.
That's why they have Atms.
Okay.
Thank you. Your next question comes from Eric <unk> with Craig Hallum Capital Group. Please go ahead.
Alright, great. Thanks for taking my questions. Congrats on the continued organic market share gains in Canada, and really impressive to see.
Incremental EBITDA margins exceeded 70% Macdonald III now at full capacity.
So as we look towards the coming quarters, you guys dealt the 2 coming online that those regulators delaying new product called <unk> that we've talked about.
You guys are still looking at to Quebec.
From my view.
The tailwind to sales and market share gains but.
Perhaps delta 2 and Quebec will cause some.
The margin volatility along the way. So I was wondering if you could help us understand how you see all of these factors impacting your profitability in the near term.
Okay.
The impact of Delta 2 in the near term.
We will have no impact as it as it gears up.
<unk>.
The efficiencies of of Delta 2 longer term will actually drive down our cost of production.
In the interim period, we don't expect to have any negative impact on our cost per Gram with the addition of delta to.
With respect to our gross margin profile going forward as we said 40% of the high end of our target range and we try to operate on farms between $30 and 40% of lot of that is driven we had a very nice gross profit on our non branded wholesale sales in this quarter.
The higher than in the first quarter. So that will also be a driver of the blended gross margin for any particular quarter. So we do expect to continue to operate in the 30% to 40%.
Gross profit percentage every single quarter.
Alright, great to hear I appreciate that color.
The drilling into your comments on the use of a bit more so I. Appreciate you guys, calling out the sales capacity of over $1 billion with the assets you already do have.
No need to buy your way into the market like your peers.
But you also mentioned that you are looking for additional ways to enter the U S. Beyond these impressive Texas assets.
Mike you kind of mentioned some online commerce.
But I guess first if we could kind of drill into that a bit more of which parts of the supply chain would you guys look to get into.
In the U S. Considering you do already have such significant assets in Texas.
Is it on this sort of infrastructure side, maybe something the ecommerce or would it be focusing on brands.
And then secondly.
Any investment there be in the form of some of these convertible notes or sort of triggering event deals that we've seen or are you guys looking at ways to perhaps get more aggressive than that.
Well I think you know.
Look mackey from whole foods is a great example of point of legalization he'll be selling cannabis with them the whole foods of the cash register so he's made that comment in every day the.
The online commerce of movement of cannabis is tremendous I mean here in Florida, what comes out of Colorado every day. So that's like that's going to be a huge component of the market.
I don't know if the current model of dispensaries will eventually be that'll.
That will be around for a while but in the end will that be the surviving supply chain and retail presence so for us.
We've often said if taxes based on the second largest most populated state when and if it goes 30 million consumers there.
Would we go the normal dispense reroute and tried to be vertically integrated within the state, yes, absolutely and Thats game on for everybody and nobody has an advantage. There today. So that's why we called the Republic of Texas, So Thats a unique situation for village farms.
But I think Interstate commerce as I mentioned earlier.
Being able to ship outside of the Texas at some point in the future is exciting to us that said.
We are looking for another way to enter the market right now wild.
While we are still restricted on the high THC.
And how we do that.
I don't want to elaborate on that yet but.
Standby on that.
Robert.
Okay.
Thank you. Your next question comes from Adam <unk> with Scotiabank. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions I'll try and be brief because I know, it's been a fairly long haul.
I wanted to touch on the wholesale market in Canada in particular with the focus on Q2 commencing sorry Delta 2 commencing production.
It sounds like your decision, making there in terms of.
Spot.
Sales and sales are more geared towards individual decisions right. Now are you sort of gain production in this market continues as the follow up you think youll slowly transition to more sort of take or pay sort of contracts with.
The less volatility or can maybe you can give us some color on that front.
I'll, let Mandy Chancellor Adam Alicia Thanks for the question.
We're always open to different forms of contracts whatever works, well and favorably for us as well as our customer in this case, we have done some take or pays in the past.
What we've seen on the wholesale side, Adam is that a lot of other Lps not really certain of what their path looks like and I think as we were talking earlier with Doug about pricing and where that's going I think as the market starts to stable out and stabilize a little bit on the flower side, how we view it.
Lp's are realizing that their current cost of production just won't meet.
The demands of where the customer wants to be on shelf and so we're actively we're always actively speaking to certain.
Customers about take or pay contracts or how we can support them through through sales.
So I think there are certain folks that would like consistency in their supply chain. So that is the launch of SKU and they go to the shelf that theyre not left without.
The supply and in those cases take or pay work really well. So we're not opposed to those type of contracts item and if they work out of it makes sense for everybody involved we will look at them.
Okay, Yeah, that's great color.
And then just if we think about where the market is sitting currently.
You noted that July was the record months of retail have you all.
It seems like it's also a strong market for wholesale currently.
The right sort of or what youre seeing at least.
Yeah.
It is the strong market right now and we knew that this would come as soon as Covid restrictions opened up in stores started selling I mean, there was a lot of stores in Ontario that we saw that got approved in license, but didn't want to quite open their door in the middle of the Covid kind of think about March April may and then desktop of retail all of the dollars into inventory and then.
I have to just be solely doing click and collect the not having an in store experience. So we knew that there was dozens upon dozens of retailers that were just waiting for restrictions to open up and so obviously that helped on the sell through side of our retail products, but we also knew that meant that there would be customers looking for product or product of source immediately. So yes, Q2 was strong for that.
And we continue to see kind of we expect some of that strength to remain in the market maybe not as strong but we continue to see will continue we expect to continue to see some real good.
Strength on the wholesale side moving forward.
Okay.
Thank you.
No further questions at this time you May proceed.
Okay. We just want to thank everybody for participating today and the support for village farms, we're working hard here and we look forward to.
The next conversation on the third quarter net of a great day. Thank you.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.