Q3 2021 Village Farms International Inc Earnings Call
[music].
Okay.
And gentlemen, and welcome to the village farms International third quarter 2021.
This conference call.
This morning village farms issued a news release reporting its financial results for the third quarter ended September 32021.
At news release, along with the company's financial statements are available on the company's website at village farms Dot com under the investors heading.
Please note that today's call is being broadcast live over the Internet and will be achieved for a replay by telephone and online beginning approximately one hour following the completion of the call.
Tales of how to access the replays are available in this morning'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 this conference call.
Certain material assumptions were applied in providing these statements.
Many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements.
A summary of these underlying assumptions risks and uncertainties is contained in the company's various securities filings with the SEC and Canadian break regularity.
Including its Form 10-K, and D&A for the year ended December 31st 2020, and Form 10-Q for the quarter ended September 32021.
Which are available on Edgar. These forward looking statements are made as of today's date, except as required by applicable security laws. We undertake no obligation to the publicity update or revise any such statements.
I would now like to turn the call over to Michael <unk>, Chief Executive Officer of village farms International.
Please go ahead, Mr did UBS.
Thanks, Kelcey and good morning, everyone with me today is our Chief Financial Officer village farms, Steve Ruffini and also joining US again this quarter as president and CEO of the Canadian cannabis business person firms man dish. So Sanjay who will also join us for the Q&A at the end of the call just wanted to.
Say congratulations mandate yesterday morning, he had his third child, a son and he did manage to take a half a day off back to work wanting so we're really proud of you.
That's our commitment.
And I will say that we it's baby season here at village has a number of folks that are pregnant maternity leave my daughter had a son two weeks ago. So it's.
It's great to see as humans and I think the greatest the greatest thing we do is produce osprey. So congratulations again Mandy so.
Okay. So for today's call I'll begin with an overview of highlights of the financial and operational highlights.
The business, Steve will review the financial results I'll return with some concluding thoughts about how the future village farms is rapidly coming into focus.
And then well open the call to your questions so with that the.
Third quarter.
From my perspective as CEO. There are four key takeaways for me this quarter number one profitability, we generated consolidated earnings per share of <unk>, 50%.
Year over year growth.
Consolidated adjusted EBITDA.
With positive contributions from each of the key businesses.
The key to the continued operational financial performance of <unk> with the market leading brand in the largest and most profitable market segment dried flower all of which to date has been generated organically and internally with our vertically integrated operation three significant addition.
Additional opportunity in the United States provided by balanced sales botanical and accretive acquisition, which is already raising its growth profile on the village farms platform and.
And for our progress on emerging international cannabis opportunities.
So first takeaway profitability third quarter was highlighted by strong financial results with overall positive earnings per share and 49% year over year growth in consolidated adjusted EBITDA with positive contributions from each of your son farms balance helped Botanicals and village Farms' fresh fresh.
Produce.
<unk> delivered yet another record quarter since its entry into the retail branded market late in 2019 that may remind everybody that we were last in.
Pretty much so that's pretty impressive when you look at that.
Timing and.
They were able to record net sales that were 53% year over year.
Adjusted EBITDA for pure <unk> farms up 93% year over year to $10 2 million Canadian dollars in a very healthy gross margin blended branded and non branded a 44% for the quarter.
I want to pause for a moment on our gross margin, which was driven by continued gains in production efficiencies and quality improvements. This is a crucial lever of our business model indeed for any sustainable business.
These efficiencies self fund ample opportunities to invest in future growth organically and our gross margin performance of 39% for the first nine months of this year clearly validates our ability to deliver on our 30% to 40% stated target range gross margin long term.
Especially as we increasingly capitalize on additional opportunities in important areas like new strain development genetics growing protocols and increasing knowledge and understanding of the plant itself both in cultivating it and what consumers really care about.
Balanced sales also contributed positively to adjusted EBITDA for the just six weeks post acquisition EBITDA of 700000 in line with our expectations.
And village Farms' fresh produce also generated positive EBITDA in the amount of $1 4 million.
Second takeaway pure sell farms and the Canadian market.
During this quarter pure sudden farms remained the top selling brand of dried flower in each of our key markets, Ontario, Alberta, and British Columbia, and we repeated again in October.
In terms of Canadian cannabis market recently, we have seen some irrational, but for US I think unsurprising dynamics re emerge.
During the third quarter, we saw aggressive very aggressive.
Pricing may be desperate negative pricing tactics, probably tied to trying to buy market share or to clear out inventory to avoid write downs or maybe even generated much needed cash even if that means doing so on profitably now we do know in CPG markets that buying market share is something thats normally.
But I think it is a different case here, while these companies haven't shown profitability.
And in emerging industry, that's still developing brand loyalty to pure sell farms team makes every strategic decision to balance market share and profitability and most important being best in class.
This is not an aspirational goal, we have organically driven 12 consecutive quarters of positive EBITDA with leading market share even as market share is being bought by competitors through pricing or acquisitions.
And many would argue ill-conceived drove a value to a hastily transacted acquisitions.
On farms branding position everyday premium coupled with deliberate investment in new product launches production strains and customer and consumer insights were designed to create a growth business for the long term.
Two years of market share data prove our strategy is clearly working.
But we are not resting on our laurels, we are continuing to invest and innovate for future market share expansion.
During the third quarter, we added more than 30, new Skus and four product categories led by the launch of several new strains, including Black Cherry parts inkjet for gelato.
Both different and both high THC offerings, and Q4 will be a similarly active quarter for new launches and we continue to learn and enhanced processes. A great example of which is the work we're now doing with hang drawing on a large scale.
Our initial trials went well the conversion process has started and hanging dry product will start making its way to market in Q4 with increasing scale coming all next year.
Speaking of which in anticipation of continued growth in demand we have commercial commenced production in the FERC half of Delta two facility.
<unk> farm second one 1 million square foot greenhouse, which is adjacent to delta three.
As previously reported we started planting in September with the entirety of the first half of the facility to be fully planted out this month and initial harvesting also begin this month and put a plan I've discussed.
The decision to expand production is a reflection not only of our confidence in the continued growth in demand for our products in Canada, including planned expansion of our market presence geographically.
But also our plans for export markets.
We expect the second half of Delta two to be ready to go in the second half of next year with some important enhancements to support the continued ramp up in the scale of the business as we prudently build for future demand all of which I will remind you is being funded internally.
On that subject during Q3, Paris in France completed its first ever export shipment a variety of high THC products to our investor partner Ultimate International for the rapidly growing Australian medicinal market.
Additionally, during the quarter inspection of the Delta three facility for EU GMP certification was completed.
Which as <unk>.
Delayed about which was delayed about 15 months due to the pandemic travel restrictions.
This is a critical step towards future potential sales in the European medicinal market.
One certification awarded we could begin shipping product to following quarter to that region and we will aggressively pursue these markets with the same tenacity and everyday premium strategy that has been so successful in Canada.
I will note that we are not just targeting EU. We're also pursuing other international markets as well first and foremost Israel, which is at the top of Atlas.
All in all Q3 was yet another excellent quarter for pure some farms not only for its continued leading operational financial and market share performance, but also for the significant additional groundwork we have laid to build on this performance for many quarters to come and I would like to say kudos to mandate and his great team.
Sure.
The third takeaway is our U S opportunity and how balanced out botanicals significantly strengthens that.
Our U S kind of a strategy, we took a major step forward during the quarter with the acquisition of 100% of Colorado based balanced out Botanicals, which as I noted earlier is already contributing positively to lead to adjusted EBITDA.
With the acquisition of balance House Q3, cannabis sales represented 43% of total very strong sales and that was just a month and a half of contribution from balanced health balanced.
Balanced health is a leader in the U S cannabinoid market with a diverse portfolio of CBD and other products distributed both online and in retail stores.
It provides village farms with immediate access to the U S retail CBD market expected to more than triple in size to $16 billion by 2025.
From current currently.
Its e-commerce platform CBD distilleries of top five CBD brand in the U S and top ranked website in the CBD category with more than 30000 orders monthly insignificant repeat a significant repeat customer base.
<unk> team is one of the most experienced knowledgeable and successful in the industry with a passion to continue to grow their current platform as part of the village farms family, we welcome them aboard.
And also balanced sales has already taken an exciting next step in their product strategy with the recent launch of their unique synergy collection, which takes the benefits of the entourage effect in their flagship flagship CBD rich full spectrum hemp extracts to a new level.
This is truly innovative in the CBD space and I expect to have much more to share in terms of product innovation in the quarters to come.
So it's a familiar playbook for those of you who have been following village farms transformation balance held product categories are adjacent to our existing U S products portfolio and we strongly believe that when there was additional regulatory clarity around CBD our existing.
And relationships and experience with major grocers in large format retailers will be a major advantage in capitalizing on that opportunity.
To summarize balanced sales is a great fit for village farms portfolio. It is a leader and innovator in hydro and this high growth category with a very strong committed management team.
And a leading established online platform of profitability together.
Together with our unmatched, Texas assets, nearly 6 million square feet. It provides optionality as federal legalized high THC regulations come to develop in the U S. And of course, we are very encouraged by this past Friday reported a new Republican Red Congressional high THC cannabis legislation may be in the works.
So fourth and final takeaway steady progress on our prudent international expansion Q3 saw us take some meaningful additional steps forward in our international Canada strategy.
Leveraging our strengths to build brands and emerging legal regulated cannabis markets with existing consumer demand. We took a major step forward towards participating in what we expect to be the first legal recreational cannabis market in Europe.
This past September we signed an option agreement, which gives us the irrevocably right to acquire 80% ownership interest in Netherlands space Lely Holland lately is one of the 10 applicants selected by lottery to see receive a license.
Subject to customary government approvals.
Legally cultivate and distribute cannabis as part of the Dutch governments cannot just cannabis supply chain pilot program.
This investment will leverage <unk> local expertise along with our own experience and facility design and construction and efficient large scale operations.
<unk> product development.
<unk> and strategy, both branding and marketing we view this as another prudent and efficient deployment of capital with the potential for outsized long term returns, including a springboard to possible other legal European rec markets as they fully open.
Finally, with respect to emerging international markets earlier, I mentioned, our gyms and merit launch into the rapidly growing Australian medicinal cannabis market.
This launch will Mark our first sales of high THC cannabis products and a third Asia Pacific market in which it has commercial operations. In addition to Hong Kong and Taiwan.
To conclude on Q3, we stress we saw strong financial performance and strategic execution across each of these core areas.
Now I'll turn the call over to Steve to walk through our financial results in more detail and then.
Return with some closing thoughts Steve.
Thanks, Mike before I begin a reminder, our third quarter 2021 results reflect the full consolidation of <unk> pharmacy business was not wholly owned until November 2020.
As we've been doing we have provided segment reporting historical 2020 and current.
121 for Q3.
When looking at the Q3 2020, Standalone I'm curious some funds financial results. Please remember we could not consolidated some funds in our statutory Q3 2020 financial statements. We include them in the press release for comparative purposes, only as we believe it is helpful context, as we discuss current business trends throughout.
This call.
Turning to results.
Consolidated sales for the third quarter were $72 4 million compared to $43 million for the same period last year. The nearly $30 million increase was primarily primarily the result of the consolidation I'm curious on farms and this year's results as well as the partial quarter contribution through balanced health.
We generated consolidated net income for the quarter of 700000 or a penny per share, which was essentially unchanged from the same period last year.
Consolidated adjusted EBITDA grew 49% year over year to $6 8 million from $4 6 million.
This was primarily the result of a 270% year on year increase in adjusted EBITDA from cannabis operations.
Which was partially offset by the decrease in fresh produce adjusted EBITDA, Although positive was down from the outsized number in Q3 last year when we were.
Benefiting from a very favorable demand and pricing environment as a result of the U S. Lockdowns.
Turning to business segment results, starting with canvas, which now reflect our combined Canadian cannabis operations Pearson farms, and our U S. Kansas operations balance held <unk>, which was acquired on August 16th Accordingly.
Q3, 2021 results reflect only about half of a quarter's contribution from balanced out with was still accretive to our consolidated results.
Our total cannabis operations comprised 43% of total village farms Q3 revenues at $31 2 million versus now in Q3.
Last year for the reasons I mentioned earlier candidates suggested EBITDA was $9 3 million a nearly threefold increase from last year's Q3.
U S $2 5 million to eight our investors and analysts in assessing the performance of peers on farms, we have continued to break it out separately.
Quarter and year to date.
As we move forward with our cannabis operations, we will report our cannabis operations by territory.
They're then legal business entity, we've already begun to integrate our Canadian and U S canvas businesses and look forward to the collaboration between the teams.
As Mike discussed Pearson farms delivered yet another strong quarter when comparing Pearson promised result year over year or even sequentially using village farms statutory reporting currency, which is U S dollars can be a bit tricky due to FX swings for instance, the U S dollar strengthened versus the Canadian dollar in Q3 2021.
Versus Q2, 2021 by two 5% the relative weakening of the Canadian dollar Dampens appear some farms U S dollar contribution.
When comparing U S. Dollar Q3 dollars 21 per cent farms to U S. Dollar Q3, 2020 performance the Canadian exchange rate swung the other way as the Canadian dollar was five 4% stronger in 2020 as such when comparing Pearson farms year on year or quarter on quarter results.
To compare using its trading currency Canadian dollars versus our statutory reporting U S dollar currency and my comments today, all the period comparisons to be using Canadian dollar to Canadian dollar for the respective periods for Pearson farms.
Total net sales.
Was $27 4 million U S or $34 5 million Canadian dollars, which were up 53% year over year and up 13% sequentially.
Pearson farm retail branded sales, which comprised 66% of total Q3 sales increased 91% year over year to $18 1 million U S. R 20 289 Canadian.
It's up slightly from our Q2 of this year.
As I noted on our Q2 2021 earnings call. Our retail business has returned to a more normalized pace with the worst of the pandemic in the rearview mirror, but it is subject to win provincial buyers execute <unk> and when they receive the corresponding shipment. We did ship several large branded orders in early October.
Of this year that we had hoped would occur on or before September 30.
This timing difference.
It means our retail branded sales in Q3 were a bit lower than our internal expectations. However, we have commenced with our strong start to Q4 and have resumed our strong growth trajectory in this channel.
Our branded sales consisted of 89% flower and pre rolls skus with canvas derivatives, comprising the balance of our branded sales.
Small format comprise roughly 50% versus our large firm, which was also 50%.
With very similar margins or large format sales are almost entirely.
Entirely consists now a single strain the single strain format, which command similar margins to our small format flower skus.
Our pre Ro sales grew over 24% sequentially.
And we improved our gross margin on this format during the quarter as we've taken on the manufacturing in house.
Pre rolls carry a lower margin than our flower skus.
As of today Q3 was a particularly good quarter for non branded sales are wholesale sales, which was $9 3 million.
S or $11 7 million.
Up from $8.
8 million U S or $10 6 million Canadian.
Year end up from $6 4 million U S $7 9 million Canadian dollars in Q2 this year.
And our highest quarter since we received our retail sales license from health Canada.
Prior to the receipt of our retail sales license in September of 2019, obviously, all our sales by default where non branded are.
Our high quality flower and trim, especially high potency strength continues to be in high demand from other Lps.
We assess wholesale sales based upon product availability and always in the context of making economic and strategic sense for our retail branded business we can.
Continue to expect wholesale sales will vary quarter to quarter, depending on available supply in other lp's demand as you may recall, we do not assign any cultivation costs through our trim since we deem it to be a byproduct of our flower as such trim sales effectively have a high gross profit margin.
Joseph farms gross margin for Q3 was a very healthy 48%.
Or 44%, if one excludes the purchase price accounting, which I'll address in a moment.
Up from 34% in Q3 last year and up from 40% in Q2 of this year.
This was above our stated target range of 30% to 40% as the quarter benefited from improved production efficiencies led by an increase in yield as well as potency and consistency, resulting in not only a lower cost of production, but also higher quantities of higher potency flower and trim, which increases our selling prices which are.
By both potency and consistency.
This is especially impressive as we rollout new strains.
As we have stated in the past our cultivation will continue to evolve and we will continue to improve that.
That said, our Q4 gross margin percent will likely fall back into our target range of 30% to 40% as we expect an increased mix of our sales to be.
Form of lower margin cannabis derivatives derivative formats as well as pre rolls as we launched new Skus in these formats and increase our market share in these form factors.
Also our non branded margin can be impacted quarter to quarter by the movement in some quarters of lower potency flower and distillate.
As stated potency does impact price.
As a reminder, rinder due to the acquisition of pure some farms in November 2020, we were required to adjust pitiful farms inventory values to fair value due to acquisition accounting.
Which impacts our statutory reported gross margin while the overall net purchase price adjustment to inventory was close to now in November of 2020 on the acquisition.
As we wrote up flower and wrote down distillate NOL inventory on hand at that time.
As such we've adjusted our EBITDA for these noncash fair market.
<unk> adjustments and <unk>.
Noncash impact in Q3 was a reduction in our reported adjusted EBITDA of $1 2 million as we sold off and or use some of the distillate in oil inventory. We had on hand in November of 2020 in Q3 2021.
As of September 30, we have roughly $6 5 million Canadian left on a purchase price adjustment.
Balance, which will gradually work itself off over in the following quarters.
Sure. Some farms SG&A for Q3 was $5 3 million U S of $6 7 million Canadian dollars, which equates to 19% of total sales. This compares to $4 4 million or $5 4 million Canadian or 18% of sales for the second quarter. The expected sequential increase is primarily due to an increase in brand and commercial activities.
Such as media and trade spend as well as a larger workforce to support the increase in point of purchase sales and market share growth, especially in flower.
Here's some farms delivered its 12 sequential quarter of positive adjusted EBITDA of $8 6 million U S or $10 9 million Canadian which is nearly double that of $4 3 million U S or $5 6 million Canadian into Q3 last year and up 19% sequentially.
From the second quarter of this year.
Recently acquired U S canvas operations bounce off Botanicals performed in line with our expectations contributing $3 $8 million in revenue during the approximately six week post acquisition period with a positive EBITDA of 700000 as some of you have seen and commented online we have filed our form eight with the historical financials for <unk>.
<unk>.
Last week, Yes, 2020 was a rough year for valence health in the entire U S. CBD industry, but as you can see from both the post acquisition results and the first six months of 'twenty, one, which we're also by the form 8-K last week balanced balance health management team has done a terrific job riding the ship and returning the business to profit.
Ability while continuing.
We're very excited about his new synergy line and some other products that will be launched in early 2022.
Turning to village Farms' fresh produce I am pleased to report we continue to see the recovery of tomato pricing that I alluded to you on our Q2 call. After one of the most challenging periods in the last decade pricing is being helped as retailers and consumers return to normalized demand, which creep Cove Covid was.
Was higher for our higher priced specialty Tomatoes, then it was post COVID-19 as well as supply issues being driven as the entire industry continues to struggle with the brown reduce bias.
Great.
For Q3 were $41 2 million a decrease of just 4% from Q3 last year and you will recall, we were benefiting from significantly elevated pricing as the rest of it.
With regards to demand driven by restaurant closures, we continue to utilize this new methods and procedures to manage the virus and I believe we will see improved results from our test facility. During this crop cycle, which is just now kicking in and will last through the second quarter of 2022.
I mentioned on the Q2 call, we expected to get back to breakeven for our fresh produce adjusted EBITDA in the second half of 2021, I am pleased to reiterate mikes earlier statement, our crashed Proteus business generated positive adjusted EBITDA of $1 4 million in Q3.
Right.
Although down from the outsized level of Q3 last year during a period of elevated <unk>.
It is very positive turnaround from a loss of nearly $4 million in Q2. This year, our fresh produce EBITDA is very dependent on pricing, but so far in early Q4, we continue to see better pricing and forecasting another quarter of positive EBITDA from this line of business.
Finally, some comments on our balance sheet and cash flow for the quarter.
At September at September 30, we had over $80 million in cash to close to $40 million of working capital excluding cash on our consolidated balance sheet.
We did use over 30 million in cash for the balance health acquisition, plus transaction costs and spent approximately 4 million on capital expenditures on our production facilities during the quarter.
Our operating cash flows from our business operations, excluding working capital generated close to $5 million for the quarter, while our working capital due to the ongoing expansion of our Canadian cannabis business did increased.
$10 million for the quarter.
Additionally, we paid down our approach in cannabis that to the tune of $1 7 million during the during the quarter and we purchased just under 108000 shares for $2 1 million.
During the quarter under our normal course issuer bid as a reminder, our decision to purchase shares under this program is opportunistic and tied into our broader capital and M&A strategies.
Most of the $75 million acquisition price per balance health shows up on our balance sheet as goodwill currently we are estimating the goodwill to be approximately 68% to $69 million as balanced up balanced health as an asset light business.
There are not a lot of tangible assets to allocate the purchase price to including inventory, which is being well managed and has a low days on hand as such we will not have the fair market value adjustments, we experienced with the full acquisition of here's some farms in 2020 corporate expenses skewed higher in this quarter due to approximately one.
$6 million of incremental transaction and legal costs associated with the acquisition of balanced house in August.
Which account for the $1 8 million quarter on quarter increase in corporate expenses in Q3, and now I will turn the call back to Mike.
Thanks, Steve.
So concluding thoughts over the past several years of future village farms has really come to focus we're vertically integrated plant based consumer products company.
Target is high growth large market opportunities in North America and around the world with a specific focus on cannabinoid, both high and low THC and related health products as.
As such it was the right time for us to unveil our new corporate branding that reflects a significant transformation of village farms is expanding its cabinets candidates four five years ago.
So today, we are a branded consumer products company that is leveraging of deep institutional knowledge and extensive capabilities gained over.
Three decades, we have unmatched CE assets to build on our proud heritage in our produce business through significant new opportunities in cannabis and CBD and related products.
We are United by a new mantra good for all.
Check out our new website, which is an expression of our unrelenting commitment to responsibility we.
Resourceful Ness and integrity as.
As well as to continued leadership and innovation and sustainable agricultural practices and the use of alternative renewable sources of energy. It's good for our customers good for our consumers good for our partners and good for employees and it's good for you our shareholders.
In closing, let me reiterate my overriding objective not just as villa shrunk CEO, but its largest shareholders sustained creation of real value over the near medium and long term.
I missed what continues to be a flurry of changes in leadership strategic direction and business models and repeated moving of the profitability goalposts, our Canadian cannabis operations have been able with the benefit of decades of operational experience and deep knowledge of the sector via the best leadership team in the industry not just <unk>.
Operationally, but in terms of consumer packaged goods knowhow to focus on one singular item the execution of our plan.
This quarter is further evidence of this execution.
Our dominant brand leadership has been built organically and profitably of disciplined approach means that strategic investments either acquisitions or capital expenditures are poised to grow as part of village farms platform and contribute positively to returns from day one.
We do this by building on our heritage of 30, plus years, leading with sustainable business practices and preparing for multi year growth opportunities across numerous cannabinoid categories. Ahead. This is the power of village farms execution of our plan building the right platform executing on profit and market.
Sure and what.
That's what really matters.
So thank you and with that we'll open it up some calls questions.
Operator.
Thank you ladies and gentlemen, we will now begin the question and answer session for the analysts please limit the questions to queue.
And if you did have a question. Please press the star followed by the one on your Touchtone phone you have any with retail and prompt acknowledging your request and your question is will be pulled in the order that they are received.
If you wish to decline from the polling process. Please press the star followed by the Q and.
And if you are using a speaker phone please lift the handset before pressing any keys.
One moment. Please for your first question.
Your first question does come from Jamie Shen from BMO capital markets. Please go ahead.
Hi, Thank you good morning, guys.
Morning.
Good morning first question for me is I'm, just curious on the unbranded sales this quarter.
Why not sell that availability of high potency flower retail.
Hey.
The other Lps like aren't you enable your competitors.
Well that's a good question, we talk about that all the time and.
There's a couple of reasons as we gear up for Delta to from an operational perspective, we've always communicated that even without experience when you're starting up.
Even with a change of crop there's a lot of buildup in that operational efficiency you need. So we want to be able to continue to grow as quick as we can we don't produce what we can sell no matter what the channel.
And once we get that penetration out there and continue to gain market share throughout Canada.
Obviously, the priority will be the retail market as opposed to a non branded market. So it's a balance because keep in mind, while others are closing assets, we're continuing to build and we want to make sure that that operational excellence continues. So we have to move the product wherever we can.
Okay and my second question is.
Talk a little bit more about how you.
Regarding this current Canadian market in the sense that there is this increasing.
Fragmentation worsening you called out.
Very aggressive pricing, especially in this quarter. So can you talk a bit about how you see this unfolding over let's say the near term do you think the sort of pricing environment by our competitors is going to continue to be the case.
Well I'm going to turn it over to Mandy for that answer because I might have a different point of view on how they operate from my vantage point.
It's much closer to it on a quarterly basis, so mandates first step.
Yeah. Thanks, Mike I appreciate the question Tammy.
So to answer the part about what's happening in the market and Mike alluded to it in the comments, we're seeing some really kind of interesting pieces of our competitors in terms of dropping price to the point, where they're not making any money and we see this through the activity on the wholesale side of the business.
The accretive margins, we see on selling product and <unk> turned it around and sell it for a loss.
We don't think that's sustainable and we're already starting to see kind of cracks in the foundation and the.
Tide is turning.
Most recently, we've seen products that we're doing well in Ontario price increases to the customer as high as 12% in the law.
Last few weeks, so I think youre starting to see the requirement for Lps to have to start to turn margins around.
And either take price increases or change their product strategy.
So I think we're kind of pleased with Tami is in our performance.
And the growth in our gross margins is that one we are built for the long term and two if we want to start to invest in pricing.
Just trying to combat that and win market share. We can we haven't needed to do that to date, but we really like the levers we can pull and the position that we're in.
And then as we continue to see our growth and pre rolls and vape on the 2.0 side.
Competing more head on becoming now a top five in those in those in those customer segments. We have a lot of tools at our disposal to start to kind of combat whats happening in the market, but make no mistake I think what youre seeing today is.
It's not good for the long term of the industry and we believe that those practices will start to cease or cause people to go under.
And it's kind of the long awaited consolidation that we've all been talking about Mike Steve I'm not sure. If there's anything else you want to add there.
On kind of the market side, but those are my viewpoint.
Yeah that covers it and also Tammy on your first question.
We're still.
Distribution channels through the provincial governments and I think to a degree they're still ramping up so we can always get to penetration we want but you can see I mean, we've had in the last year, we've had sequential increases up at north of 40% on retail and that variation is a lot of variation still quarter to quarter.
But clearly as we ramp up our focus is 100% retail brand its just going to take time.
Thanks.
Thank you.
Your next question comes from Aaron Grey from Allianz Global Partners. Please go ahead.
Hi, Good morning, Thank you for the questions and congrats <unk>.
So first question for me I, just love the double back on what Tammy to SaaS.
Some of your peers have been talking about kind of the return to brick and mortar and offering opportunity for some of the lp's two bigger Lps to regain market share. They have loss in recent months just from your perspective are there any initiatives that you guys currently have in place as potentially get more brick and mortar shopping versus online.
As you guys continue to outperform some of the other bigger Lps and.
Continue to gain share going forward as people return to in store shopping. Thank you.
Matt if you want to take that.
Absolutely Mike Good question Aaron.
<unk> alluded to it in the past quarter about.
What the opportunity is ahead for some firms and we're executing on that which is.
Great brand presence really good recognition with Bud tenders and consumers and we're seeing that brand growth in that brand residents than last quarter I mentioned, it Steve even talked about it in the SG&A growing the team continuing that presence on the ground in each of our markets key markets continuing with our trade marketing activations on the digital front as well as in <unk>.
Store and really starting to continue to bring the brand to life at Pos.
Collaborative partnerships with our retail partners to ensure by tenders.
<unk> know about all of our new Skus new launches there.
At least talked about 31, new skus that we launched in the quarter continuing that aggressiveness in growth into Q4.
And making sure the product education is really known with the Bud tenders.
And we're seeing that pull through we've seen really good progress towards that in terms of.
Sell through sell in.
We're pleased with the talent that we're attracting and every time, we go to market for roles across the country. The amount of people that want to join our organization because of the strengthen our brand and the strength of our sales people who are in the cannabis industry continue to want to come to work at Pearson firms. So we're pleased with everything we're doing on the build side the team.
Is executing really well really strong digital programs as well as trade programs.
It reached to consumers to continue to build that awareness and a lot of collaborative partnerships with our retailers and boards to bring that forth. So people know about the great Skus, we're bringing to market and continuing the momentum on our sales.
Alright, great. Thanks for that color Mandy and then second question for me on International markets.
It seems like a lot of opportunity there for you guys can kind of execute second mortgage bandwidth advantage similar to what you did for the Canadian one point off our market.
As you kind of get that final GMP certification, you talked about Israel being a big market.
Can you help us many.
Many quantify the opportunity there and how youre going to look to allocate flower between the Canadian market between both retail and wholesale opportunities as well as international markets, especially if those offer potentially higher margin. Thank you.
Well I think first and foremost.
So our priority was always be maximum penetration in Canada across the whole country, but that was part of the reason we brought on delta to that remember Delta two should.
Should yield even higher than delta three.
So we have a lot of capacity coming on board and outside of Canada, We've definitely earmark export both too.
Now in the EU is a priority of the margins are good we know who's competing there we know what the revenue numbers are in margin growth.
And.
It will be a key priority for us going forward next year.
Sure.
Okay, great. Thank you very much.
Your next question comes from Raul.
Zhang from Raymond James Please go ahead.
Good morning, Mike.
Congratulations on the.
Great quarter, and the equipment Thats in.
Particular, congratulations on your new arrival.
So thank you for taking my question and I don't wanted to double back again.
The Canadian market and wholesale so.
You referred to you Mike.
Sort of irrational selling.
Just wanted to dig a little deeper on your strategy there because previously when this happened.
We're able to sell into that market profitably and watch other essentially flounder.
Our strategy of course beyond Whitman desktops about in terms of the active selling.
Signs of being able to be defensive are you are you able to continue driving the same margins youre able to before in both your unbranded and branded are you waiting.
So are you looking to do something proactive.
Brand New states wildly.
It also will probably happen.
Well I'll take a first stab at that and then give you manages point of view, but look.
There's a lot of drivers we want to be best that's first and foremost and market share is important but profitability is important so we have to run the business as we see it in order to deliver on all of these metrics the market is being measured in many different ways today, not just in market share, but in profitability and growth.
On a quarter and annual basis. So we have to take that all into account coupled with the increasing capacity thats coming online over the next 12 months.
And make decisions that do the best but ultimately as I said I'll go why would all go not be to sell 10% of our product or we will never be 100, but let's just say, 70% or 80% of our product retail at some point in time I think any company would have that as a target you'll never be in this type of environment a 100%.
So, but keep in mind that all our brands.
Brands are not necessarily too competitive. So there is a lot of partnerships that we're trying to establish in Canada that have unique.
Our IP or a position and building those relationships are good and I'll, let mandate to provide some more color on that.
Sure.
Yeah. Thanks, Mike I appreciate the comments Rahul in the well wishes.
So I think Mike nailed. It there is that there are strategic relationships on our non branded side that will continue to develop and we've always said that there's going to be a portion that we sell into.
Under that side of the business to strengthen overall profitability margin structure and the ability to invest in our business our brands our offerings our people and so we will continue to do that.
The heart of what your part of your question is is given some of these things happening in the industry. What are we going to do but we always think about medium long term success.
Theres no doubt some interesting things playing out.
So at the macro level, we love our results profitability growth love it on the micro level, we see some interesting things happening at the provincial level does that mean, we will sharpen our pencil and jump in and wage some wars in bottles, we're not going to say no to that but it's going to be done with it kind of very strategic outlook on where we think we need to be and how we're going to.
Continue to win in the market in the long term so I think.
We will we will we will pivot around we will sharpen the pencil on some pieces, we love our growth and pre rolls and <unk> to prior mentioned categories that we were under indexed on for our size and our growth.
We think we have huge opportunity to continue to expand and scale that.
Again, Steve alluded to the growth we see in both those categories and absolutely I think the one thing that we've always been.
Asked about is our ability to pivot and move with an ever evolving landscape and I think we're the one producer in the space that are.
True to our story and it showed that no matter whats happening in the market. We can continue to remain profitable and see growth regardless of the headwind and I think <unk>.
Strong footing strong foundation, we're going to we're going to pivot as we need to and yeah. As these things unfold, we'll have some interesting viewpoints and do some creative things in market to win over consumers and continue that growth story.
Okay.
Okay. Thanks, <unk>, so just a follow up.
Turning to the international now recognizing a question move into Holland.
The program there.
What we saw for the lottery.
Lot of essentially unexperienced.
Groups Securities license are you able to or just one we saw one of your competitors recently as well now of course, the future rollout that will be dependent on how successful. The pilot program is of course, the electrons being one that's.
How do you forecast that the potential success of that given that they are likely going to be a lot of under experienced.
Players, but those licenses at the moment, even if some of them are acquired by your competitors.
And then how.
Do you see that playing out over the long term and then it was you on the second question in terms of international given that we've seen a strong margin in the U S. Do you expect that those margins to be durable and how do you. How do you expect to see that play out over time.
Well I'll answer the first part of the question and turn it over to Matt <unk> second part, but on the first part as far as Holland goes I think with the Dutch government is most helpful for SaaS the surviving.
Can they have enough capacity of the surviving members maybe all 10, maybe just six because what they're really concerned with since it is an exclusive experiment for 79 coffee shops since that there is enough capacity to provide the product to make commerce with those current.
79, coffee shops that now by from the.
Illicit trade.
<unk> to.
Europe point that some of them do not have experience is of concern.
But that may be an opportunity for us as well.
We're looking at this as a first step in.
There is a lot riding at stake for the Dutch government to be successful here and we may have other opportunities that present itself.
And we're going to do our part to make sure that it's successful because I think this will be a stepping stone for many other countries in Europe to come we're focused on the rec side. We believe the strong play for the medicinal market current medicinal market in Europe can be satisfied effectively efficiently and with.
The best quality product and right price out of pure sub farms, we totally loved for years at investing in the EU for Mckesson, we don't see it as a viable use of our capital when we can export. This is different on the rec side is where we want to be because there's a built in consumer.
That we just got to change the landscape like we have done in Canada and leverage up the current model, we have there and we have long deep ties in.
Leather ones as well so we're very excited about that as for the export side on margins. So on mandates you want to comment.
Everyone. You can you can you just clarify the last part of your question around to make sure I clearly understand your question on the margin.
Sure one was how do you see margins playing out in the Dutch market also we see relatively large margins out of the balance held in the U S. So I wanted to sort of ask about the ability of those that margin that youre seeing coming out of the U S going forward.
Not sure what you mean, okay.
Okay. The U S. It might give you sneaked up I think you might can Steve you should take the U S margin questions.
And potentially on the Dutch side as well before it yes, that's right.
And we see we see the margins very strong in the Netherlands, because the Dutch government is controlling <unk>.
Price degradation.
They don't want to open up that market to current non users and they are very cognizant of that so I think there'll be very strong price controls that keep that margin very high initially at least during this experiment for us so I'm not going to elaborate but we've done a lot of homework.
We feel very solid.
That's why one of the reasons, we're making the investments that we believe we can get a return on our investments within the experiment. The four year experiment periods. So that's a pretty actually less than the four years so that.
That should tell a story about how strong the margins.
Margins are on pricing.
Great. Thank you very much I'll get back in queue.
Okay.
Your next question comes from Doug Cooper from Beacon Securities. Please go ahead.
Hi, Good morning, guys and a couple of things first of all on the on the retail side can you give us an indication maybe how many doors you expanded.
In the quarter and did you have with the aggressive pricing did you have did you have any degradation of your pricing.
Right.
Manish.
Yes, so no real degradation in the pricing.
Doug I think it's been commented that our overall pricing remains really strong and there was no major adjustments to price obviously, we're tweaking.
As we see fit.
On the door side, Doug I don't have that stat for you, but as retail doors continue to open up across the country. We continue to see our sell in and the teams are tracking that obviously selling into the boards.
So different relationship thing going direct.
So at my level and are tracking to knock on the doors apologies not how about that data for you.
But the team is seeing and knocking on doors as new stores open continuing to work with our key accounts and making sure our product offerings are continuing to roll out across the province.
Okay, just moving to the whole, yes can I just add to that one thing that might takeaway on that is like lash. The last couple of years.
It was really important.
Was reporting.
Revenues per se and cost of production and we've all stopped giving out cost reduction out as competitive advantage, but in the margins that we communicated a 44% blended.
To get to a blended margin of 44%.
You can interpolate what the retail margin may have been to get there. So that's a little towing and.
So to answer your question.
Okay, just moving to the wholesale side and can.
Can you give us an indication maybe of how many.
Different LPG sold during the quarter and how much was I'm, assuming when you talk to your strategic relationships.
This means private label can you give us an idea of how much private label business. It did in the quarter.
I think that's pretty confidential, Doug we'll have to talk to you offline on that.
Okay.
Okay.
Finally go back again.
You can ask another question.
Any update on go back and when you might get into Quebec, and I'll leave a bad thing.
Okay.
Operator.
Mike do you want to take the call that question.
Okay.
We couldnt hear it.
I was just wondering what the updated timing might be to move into Quebec.
Our plans.
With respect to <unk>, we're still <unk>.
Sure.
Let's leave it at that.
Okay. That's it thanks guys.
Your next question comes from.
Andrew <unk> from Stifel.
Please go ahead.
Hi, good morning, and I want to Echo my congrats both on the professional and personal side.
As my perennial question on Quebec has already been asked.
Maybe switch over to you.
Your branding.
You guys have done things, a little bit differently on many different aspects versus versus a.
The larger O P is one of them is putting the full force behind.
<unk> sure some farms.
But now.
<unk>.
Just wondering how youre thinking is around.
Around that that one brand if you're thinking about potentially.
Another brand as you guys.
Work on R&D with hanged dried.
Or any other activities that might warrant.
Kind of a separation and potentially.
Something new that could enter the market, that's your own and what that could do to pricing and maybe market share as well.
Thanks.
Well only a kind of a circuit and drum up that question, so I'll turn that over to Craig.
<unk>.
Yeah. Thanks, Mike I appreciate the comments Andrew she absolutely Bang on we started being a branded house for efficiency and making sure we could build.
Recognition loyalty across the consumer landscape and instill confidence and I think we've done that done that very extremely well.
And you're absolutely right. This is the year that coming up that we're exploring we're actively building and looking at brand extensions as well as new entry points and brands to start to look at the house of brands approach it'll all be done obviously very cost consciously and Mike alluded to it in his earlier com.
The expansion of hanging dry and so are continuing continued investment in our production operations basically translates to improved product quality. So it was at the heart of everything Pearson firms does and will continue to do so as we continue to make those investments and we actually think bill.
Improve our costs and quality.
Continuing to do them very streamlined and thinking about the long term, we will open up opportunities for us Andrew and we are actively looking at customer segmentation, we believe theres an opportunity for us to continue.
Our reach into stores.
With blood tenders in winning over consumers and through brand extensions and new brands. It's absolutely something I think the customers should start to expect from pure some firms actively exploring it we believe the time is ripe for it.
Our product expansion our strain offerings.
Our overall quality will continue to be a big focus for what you see in 2022 and that will absolutely to the potential for new brands as well as brand partnerships.
That were being approached with and.
Continue to look to expand that and win over shelf space in the stores.
And to.
To the extent that youre comfortable talking about it you mentioned brand partnerships.
<unk>.
Is there a certain type of customer.
Or a partner that would be more favorable to you than others.
Just to the extent that you are comfortable discussing of course.
Yes, I think I can take this one Mike.
On the brand partnerships, absolutely Andrew I mean.
What market and what we saw <unk>. Some of those are most of those are strategic obviously some of them are tactical and opportunistic and when you're talking about is.
Whether it's contract growing contract manufacturing working with brands that want to work with pure some firms and so for US It comes down to who we're just not going to work with anybody we get approach daily weekly monthly.
For brands in Canada as brands outside of Canada that want us to white label and contract growth for them and it's a long process, Andrew we want to make sure the value system. The way. These partners are looking at the market and thinking about long term success is aligned with peer some firms, we're not going to invest the time and energy just to <unk>.
Something to market to only see it fail and so for US it's about making sure we understand we're working with and what their outlook is and making sure. We have an aligned vision and so we're obviously talking to various companies and making sure we see that.
Obviously, if an organization of our brand has really good residents with consumers.
Always strong and attractive for us to work with them to continue to build out landscape both ways as we bring any new entrants to market, we want to make sure that theyre going to have the right residents with the consumer but also as we know that we will be.
The LP of record and will get tagged along with that and that also inspires great.
Consumer confidence so it's about finding the right partner with the right vision the right belief the right understanding of the cannabis landscape, we believe that our brands and products out there that meet that potential.
And we're excited to see what happens in 2022, and how that unfolds hopefully that answers. Your question and gives you enough color about how we think about it.
We'll hope to see what 2020 to hold 2022 holds in.
Excited to see how that plays out.
Yes.
Fantastic color, Thanks, again, I'll get back in the queue.
Your next question.
Your next question comes from Eric This Loy Yang from Craig Hallum Group. Please go ahead.
Great. Thanks for taking my questions and offer my congrats as well.
Both professionally and personally here.
I'll be quick here first first question I, maybe just missed it.
Do you guys have an expected timing for.
When you might receive that GMP certification inspections done.
Yes, we're thinking probably towards the mid late first quarter, just due to delays.
And.
So that's kind of.
And the first quarter.
And if successful, which we're confident we will be we hope too.
Start getting very aggressive in the second quarter next year.
Okay, Great I appreciate that.
And then.
Just kind of looking at it.
At the pure some farms operations.
The impressive share gains that you guys.
<unk> continued to make here can.
Can you talk about some of the cultivation improvements that you guys have seen since you started those operations.
That's in THC potency yields efficiencies just anything you guys can point to.
I'm just wondering if this is kind of more of the same blocking and tackling and sort of the market moving towards you guys or if youre seeing some some bonafide cultivation improvements as well thanks.
Yes.
Yes, I may take that only because.
The secret sauce, so to speak I think we've tried to be vocal with why we.
Our strengths and I think it's accumulative clearly cumulative it's not just one item.
It's often said the cards, where sales within kind of a very restrictive on the cultivation side the use of really no tools. So.
Just being much more.
So active and decisions great grower team, it's a combination of strange working together.
Techniques and processes, so really probably not going to say, one or two specifically, but.
And that's what we do what we do good.
Not patting ourselves on the back it's just the duration of time.
To get here.
So.
Hope that answers that question for you here.
Okay.
Okay. Thanks, guys.
Your last question comes from Scott <unk> from Roth Capital. Please go ahead.
Thanks for the questions and congrats again real quick are there factors are keys to bring on the second half of Delta two here production <unk>, Quebec, or the international kind of supply agreements that turn on.
From that.
How are you looking at the second half.
Production for Delta two here.
We're confident.
We.
As I said, we want to complete our geographical presence within Canada and continued penetration into those retail markets.
We were delayed with the GE EU GMP certification due to travel restrictions, which is now complete the market is growing there the market in Australia. For example, which is not a requirement for EU GMP certification has doubled the minerals market last year to this year. So we feel very confident and just keep in <unk>.
Mind that the way we structured delta two like Delta three is this roughly 16 grow rooms eight are in full production this month.
So even if we turn on half of the second half and each month.
Our pulse of both the export market, how we're doing and domestic market. It's not like we have to turn on the whole half in one go.
So that's the flexibility we have last year in 2020, we kind of curtail delta three and the summer a little bit just to.
Give us a breadth and we can apply the same thing. So so we're very confident Scott by year end next year will be in full production and we're probably estimating close to 200000 kilos. Once we're fully ramped up from the two facilities.
Alright, thanks for that color.
And it really shifted focus here on the CBD kind of down sell side and the potential expansion into Canada, and EU and timing potentially there and an opportunity leveraging your texas assets or kind of using your retail relationships to expand into brick and mortar for them. I know there are a lot of online.
Great margins, but how do you look at those opportunities going into 2022, 4% for the electronics here.
Yes, well 2022, 2023, I mean, that's a 24 month period, if we took the two years so.
We have looked at are one of many entry points into the U S and probably coming one of those was obviously buying a top brand.
Cannabinoid company in.
In this case balance out Botanicals, we watch our competitors.
Probably in our opinion just spent a lot to get there and the timing wasn't right in timing is everything. So we think the entry point was right. We think the valuation was right for both companies.
And the location in Colorado also gives us.
A foothold to our high THC business that we're going to go forward with and.
We just feel that.
Even though the Msos have a first mover advantage in the consolidation plus the consolidation goes on in the U S market.
We already see ourselves of having the optionality in the U S, but our nearly 6 million square feet in Texas.
Even though the U S is a tremendously large potential for cabinets there'll be plenty of opportunities going forward and maybe think even upon legalization there'll be a lot of money thrown in there a lot of bad investments write off not unlike what we saw in Canada. The last four years. So you know our strategy will focus on the opportunities going forward in <unk>.
H B will play a significant role in that their online platform, assuming that cannabis will be sold online.
Second to none.
So one of our couple of entry points for the U S and we're being patient watching legislation very carefully.
And then applying our strategically sound acquisition.
Methodology going.
Going forward so.
So we're excited about it and.
Very happy about the BHP acquisition to start with.
And of course clarity, whether the FDA gets clarity from Congress.
<unk> CBD, we feel that's going to come maybe even part of cannabis.
Regulatory change and at that point there'll be game on the bricks and mortar side. So.
We're prepared for that.
Got it thanks for the color there Mike.
Yeah, and I think I, just want to say I mean, when we looked at village farms today, I think a lot of investors.
Still seeing us from one lens.
Because BHP omnicell and competes with some of the largest brands.
Solely in the pure CBD market, both publicly and private companies and.
They are just as good as anyone out there in my opinion those top tier companies.
It does start proving themselves more and more.
Both as part of the village farms family and on a standalone basis as well.
Yes.
Thanks.
Well.
Yes.
Okay operator.
There are no further questions at this time you may please proceed.
Okay, well, thanks, everyone I appreciate they're participating in third quarter, and we look forward to reporting our yearend and fourth quarter results at the next conference call in very early March.
Thank you Ron.
Ladies and gentlemen, this concludes your conference call for today, we thank you very much for participating and ask that you. Please.
Your lines.
Yeah.