Q4 2021 Village Farms International Inc Earnings Call
Okay.
[music].
Good morning, ladies and gentlemen, welcome to village farms International fourth quarter and year end 2021 financial results conference call.
This morning village farms issued a news release reporting its financial results for the fourth quarter and year ended December 31st 2021 .
That 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 will be archived for replay both by telephone and via the Internet beginning approximately one hour following completion of the call details of how Jackson's the replays are available in today's news release before we begin let me remind you that forward looking statements made may be made today.
After the formal part of this conference call certain materials 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 then certainties is contained in the company's various securities filings with the FCC and Canadian regulators, including its Form 10-K M. D. N. A for the year ended December 31st 2021 what she's available Edgar. These forward looking statements are made as of today's date and except as required by applicable Securities law, we undertake no.
<unk> to publicly update or revise any such statements.
I would now like to turn the call over to Michael <unk>, Chief Executive Officer at village Farms International. Please go ahead Mr. Julia.
Thank you Alex and good morning, everyone with me for todays fourth quarter and year end call is village Farms', Chief Financial Officer, Steve Ruffini, and joining us as president and CEO of pure Sun farms, Mandy <unk>, who with the addition of rose Lifesciences now overseas, where we refer to as our Canadian cannabis.
Operations.
So I'm going to open up with a few points at the end of the third quarter Conference call I discussed how the future village farms is rapidly coming into focus as a result of our consistent execution on our strategy.
The fourth quarter and really the entire 2021 year, where further evidence of that Q.
Q4, like Q3 was another quarter of strong financial performance.
And from my viewpoint, the headline of the quarter was again profitability than growth.
Positive consolidated earnings per share of three cents.
Positive consolidated adjusted EBIT by $5 3 million for the quarter with each business contributing positive adjusted EBITDA.
And importantly, one can see the consistency emerging from the business consistency that underscores a rock solid foundation for our next phase of growth.
So I'd like to take a few minutes to lay out what I see as a longer term benefits of what we accomplished in 2021 together with some of the headwinds, which we successfully navigated that Steve will review our financial results in more detail and I'll have some closing remarks.
So 2021 and review, let's talk about that it.
It was a very successful year for village farms in terms of delivering on our growth strategy consolidated 2021 sales grew 58% over 2020, reaching a record $268 million and.
<unk> EBITDA grew 89% to $14 million.
121 was not only a year of significant growth, but also one in which we executed across the entire businesses to build for continued growth in 2022 and beyond.
So let me start with what went well.
Sell farms contributed and continued to maintain its profitable market share leadership in a direct cannabis category in Canada, especially impressive as we saw many of our peers lose market share some massively.
They drastically reduced prices to try to recapture market share or a minute mitigates share loss clearly not a sustainable practice, if they ever hope to become profitable.
Some of you been mothballed Canadian rack to focus on other strategies.
We launched 23 additional skus in the fourth and four categories just in for Q4 alone.
That is to more than 50, new skus in the back half of the year alone building on our momentum throughout the year, notably we introduced several high THC strains followed on the success of Pink Kush, which still remains a top selling strained in the country.
And we significantly ramped up <unk> business, which continues to be the second most popular category consumers after flower with outstanding market share gains for example, in Ontario, we more than quadrupled our market share from January through December and.
And we saw a more than 200% year over year increase in sales of branded derivative products.
If you have a sudden farms remains the top selling brand of dried flower in Ontario, and British Columbia, and Alberta for the fourth quarter.
As it did for the entire 2021 year.
And as it has for as long as we've been tracking data in each of those provinces more than two years now in Ontario, and well over a year in BC and Alberta.
And in every province, we grew share in almost every product category.
We are especially proud that the team achieved what it did in 2021, while still absent from the Quebec market for most of the year.
And if you allow me to stay with come back for just a moment the third largest provincial market in Canada, we follow through on our commitment to enter that market with the acquisition of Quebec based Rose life science midway through the fourth quarter.
And we're pleased to welcome the Roes family to the village farms family Rose provides a substantial presence in Quebec, not only as a supplier and cultivator, but also has the largest third party distributor in the province with some of the largest brands in the country, which is unique to Quebec and unique within Quebec.
It provides experience, Quebec based industry leaders with deep CPG cannabis and local and regional expertise with two of the co founders, including as Chief Executive Officer remaining with the team.
And it adds a Quebec based 55000 square foot indoor cultivation and processing facility.
In addition to arose as own brands, which our Tam Tam de lease pure lane and elect I am pleased that the team has already expanded our Quebec portfolio with the recent launch of the Promenade brand, which will feature pure some firms genetics. The early read is strong consumer acceptance and market share here.
Another area of strategic importance here in 2021 was the expansion of our BC cultivation facilities after receiving health, Canada approved approval for our second one 1 million square foot production facility called Delta too.
Which is adjacent to our $1 1 million square foot Delta three facility, we began planting in the first half of <unk> in the fall. This springs with the addition of grows our total cultivation footprint of nearly two 3 million square feet. When <unk> is fully planted.
So half of Delta two is now fully in production and we are now selling product grown in that facility.
We still get questions about why at a time when so many of our peers have shuttered capacity we are expanding.
But be assured that we have always taken a measured approach to match capacity with anticipated demand and we continue to see great opportunities in the current four plus billion dollar and growing Canadian recreational market and export markets to support this investment matching capacity to demand as part of our long term DNA.
Of our agricultural routes.
Another highlight for 2021 was the purchase of one of the top companies in cannabinoid products in the United States balance helped Botanicals based in Denver, Colorado Botanical balanced.
Brings an accomplished management team with deep expertise in CBD products with both the founder and Chief Executive Officer remaining with the company.
Proven success in the E Commerce channel with one of the best digital platforms in the industry another potential pathway to participate in the high THC market when the legal landscape permits.
And it adds another profitable business through our Canada portfolio.
One of the few in the sector.
Internationally, we saw a meaningful steady progress against our strategic goal of participating in select markets as they legalize we are building out our European business and added senior leadership to head up business development and operations there.
We acquired irrevocably option to purchase majority ownership in one of the churn expected participants in the Netherlands for what is likely to be the first major European rec market to our knowledge, we will be the only north American company. We're a majority ownership position in the Netherlands, It's a market structure, which we have.
<unk> already proven our success.
And it represents a springboard to additional emerging European markets.
And we have deep ties in the Netherlands going back for decades, and great respect with a growing industry in the Netherlands, which makes our participation they are quite unique.
Additionally, the international in the International Arena <unk> continues to advance towards EU GMP certification.
With slower than expected and our Tim International, which we earned 12% added Taiwan into its commercial launches with CBD and launched in the Australia and high THC medical market exclusively with pure Sun farms grown prana.
Finally in our village farms' fresh produce business.
We saw a return to positive EBITDA in the back half of the year.
After the demand and supply imbalances that negatively impacted pricing early in the year.
Yeah, when I look back on 2021, there were a number of things that we have liked to have seen play out differently macro headwinds that held us back from doing even better than we did.
First Canadian cannabis.
I will first acknowledged that the Canadian government and health care and in particular for their foresight and being the first major country to legalize recreational cannabis and support development of a market that now has a run rate of four 6 billion.
And which grew a phenomenal 50% in 2021, let me repeat that the Canadian market grew 50% year over year with pure Sun farms growing its retail branded sales at nearly double that pace at 99% last year.
That's really quite an accomplishment.
There are very few sectors that have this kind of macro growth underpinning the growth of the top operators that said even at the projected size of this market of seven or $8 billion in more Canada has too many suppliers and too much supply.
This has led to the irrational behavior, which holds back the entire industry from developing into a more mature consumer and customer centric world.
There are other headwinds, which we hope will be addressed as the industry starts to mature and.
And excise tax that sits on top of an already high corporate tax rate strong restrictions on the marketing of brands and products restrictions on the use of common agricultural tools.
Even certain biologicals or non permissible and still a very active black market, which has none of the regulation taxation mandated government run distribution channels and no product safety standards to adhere to.
This is why having the right model the right cost structure and with a focus on profitability is so important and I think we have proven that.
If we can be successful in a tough Canadian market. We believe we can be successful anywhere and I've said in the past where we compete we are the competition.
Also in Canada, Despite progress on <unk> farms EU GMP certification it has taken much longer than expected due to COVID-19 related international travel disruptions initial plans with a sell into the European market by now yes. We are optimistic and are now working on a target of Q2 for receipt of our <unk>.
On vacation and are confident we can be exporting to Germany in the second half of this year.
And we are also progressing on plan to exports of Israel, which does not currently require GMP certification and expect sales to start there also in the second half of this year.
Amen headwinds in the United States, we have been very disappointed with the lack of regulatory progress the lack of clarity from the FDA on the use of CBD is holding back valuable development of plant based wellness products to benefit consumers in a regulated manner.
And in a high THC category, the lack of political leadership to push forward federal legalization. Despite bipartisan support has left this great country with a patchwork of state regulations, and frankly, we could should and hopefully soon we'll do better.
Finally, as I noted noted earlier.
<unk> business had a tough first year due to market dynamics, which did turnaround significantly in the back half with the normalization of pricing for those two quarters for the most part the headwinds in 2021, where external in nature.
It has been and will be our job to keep our focus on our long term growth strategy.
Some of these headwinds will persist in 2000 into 2022 of course for example, we believe the Canadian LP landscape will undergo further restructuring.
And the new year has started with another other macro challenges for all of us geopolitical unrest inflation supply chain holdups, it's a lot to manage through but the team at village farms is persistent through disruption before.
So now and that narrowed I'm going to turn it over to Steve to review, our financials and I'll return with some final closing thoughts Steve.
Thanks, Mike before I begin just a reminder, read the timing impact of our acquisitions over the past two years. Our Q4 2021 results reflect the full consolidation of Pearson farms of which we increased our ownership to 100% in November 2020.
For Q4 2020 here some funds with was consolidated for approximately half of that quarter Q4, 2021 reflects the full quarter consolidation of balance of Botanicals, which we acquired 100%.
In the third quarter of 2021 and in Q4 2021 reflects the full consolidation of approximately one half a quarter's contribution from rose life Science, which we acquired 70% in mid November .
Turning to results.
Consolidated sales Canadian and U S canvas and village Farms' fresh produce for the fourth quarter increased 55% year over year to $72 8 million from $47 4 million in Q4 2020.
The approximate $25 million increase was primarily the result of the consolidation of Pearson farms and this year's results for our fourth quarter.
Versus a partial quarter last year, which of course. This year of course includes the as Mike mentioned the year on year growth of Pearson farms as well as the addition of sales from rose.
And the first full quarter contribution from balance health Mechanicals.
As well as the increased sales in Q4, those farms fresh produce this year versus last year, we generated consolidated net income for the quarter up $2 1 million or <unk> <unk> per share compared with a net income of 7 million or <unk> 12 per share in Q4 of 2020, when we benefited from a one.
<unk> $23 6 million noncash accounting gain from the full acquisition of Pearson farms in that quarter.
<unk> adjusted EBITDA for Q4 swung to a positive $5 $3 million from a negative 500000 in the same period last year.
Looking at our individual business segments, starting with canvas, our combined Canadian and U S. Cannabis operations saw a sales increase of 169% year over year.
With growth driven by the factors just mentioned our Q4 cannabis sales were 47% of our consolidated sales compared to 27% for the same period of 2020.
In all probability candidates will be in excess of 50% of our consolidated sales in 2022.
Canada, adjusted EBITDA increased 183% to $6 8 million from $2 4 million.
Canadian cannabis operations delivered another strong quarter driven predominantly by continued strong performance of Pearson farms and benefitting from a partial quarter contribution from rose.
As I noted on our last call any period to period comparisons of our Canadian canvas results in our reporting currency of U S dollars should take into account the fluctuations in the Canadian U S dollar exchange rate.
All such information is provided in our MD&A for Egypt comparison on this call I will review our Canadian camps.
Canadian cannabis results in Canadian dollars, which provides a more accurate gauge of period to period performance.
Our Canadian canvas business once again generated strong year over year growth net sales for Q4 increased 114% year over year to $34 5 million.
Which were up 53% year over year and down 2% sequentially.
Q4, net sales included $1 4 million of net sales from rose representing its contribution from our acquisition on November 15 through the end of the quarter.
Pearson farms retail branded sales for Q4 were 75% of its net sales of $32 4 million, which was up 56% from $15 6 million in Q4 of 2020.
Up 7% from $22 8 million in Q3 of 2021.
With three or four years of sales data. We are now beginning to see seasonality emerge in the Canadian retail branded sales as was the case in 2020, we saw a somewhat modest growth in orders from the provincial distributors from Q3 to Q4.
It appears that provincial buyers purchasing patterns are to stock up for the holiday season in Q3, and early Q4, and then scale back on orders in the later part of Q4 and early Q1 as they manage their own on hand inventories for their fiscal year ends at March 31.
I will also note that for each of the last two years approximately 40% of our annual sales were in the first half of the year and 60% in the back half of the year. We expect this trend to repeat in 2022.
And be even more skewed toward the back half as we expect a number of growth initiatives such as product launches export sales and expanded provincial distribution to ramp up throughout the year.
Retail branded sales comprised 85% of our.
It was comprised of 85%.
Dry flower and pre rolled products with derivative products comprising the balance of 15%.
Non branded our wholesale sales for Q4 were $8 5 million.
Paired with $70 million for Q4, and 2020 and $11 7 million for Q3 2021 as.
As I noted on our last call Q3 was particularly strong quarter for non branded sales and we continue to expect that this revenue stream will vary from quarter to quarter.
Our again take this opportunity to reiterate that we assess wholesale sales based upon product availability and always in the context of making economic and strategic sense for our retail branded business.
Gross margin for the Canadian cannabis.
Business for Q4 was a very healthy 42%, excluding the impact of the purchase price accounting and 48%, including the impact in the interest of time I'll refer anyone who needs.
Full explanation of the PPE PPE a impact too.
To read our MD&A.
Gross margin again came in above our stated target range of 30% to 40% as Q4 benefited from improved production efficiencies, which translated into lower cost of production and a higher proportion of high higher potency flower and trim, which benefits our selling price as noted last quarter, we expect our gross <unk>.
Margin to trend back to our 30% to 40% target range in 2022 as of our sales mix shifts to higher proportion of lower margin derivative products and pre rolls.
We have lowered our sales price slightly on some of our more mature flower strange, but continue to hold our selling price on our newer flower strains.
SG&A for the Canadian cannabis operations in Q4.
$9 2 million, representing a 57% year on year increase and a 37% sequential increase as a proportion of net sales SG&A was 27% for Q4 compared to 26% in Q4 of last year and 19% for Q3 of 2021.
Approximately 400000 or 16% of the increase in Q3 was attributable to the acquisition of Roes.
Our way through the quarter, otherwise the elevated SG&A to sales ratio.
Reflects our continued investment in our Canadian cannabis operations as we add people in sales and marketing brand spend to support our branded revenue and operations. We also have seasonality in our brand marketing spend.
In Q1, 2022, we will not be spending the incremental holiday brand spend so the market should expect a lower SG&A figure in Q1 2022 versus Q4 of 2021.
And with the all important $4 20 falling in Q2, we plan on incremental brand spend in Q2 as another example of the seasonality of our cannabis business.
As Mike mentioned, our Canadian cannabis operations delivered its 13th consecutive quarter of positive adjusted EBITDA at $6 1 million up 99% over Q4 of last year and down 44% from Q3 with a sequential decline due mainly to lower non branded sales and higher SG&A costs.
I will now review our U S cannabis operations and in doing so we will revert back to U S dollars.
Our U S cannabis operations, which are comprised of balance health Botanicals and some SG&A at the attempt continues to perform in line with our expectations during its first full quarter of contribution.
Sales were $7 5 million compared with $3 8 million for the half quarter's contribution in Q3 gross margin was relatively unchanged at 71% and adjusted EBITDA was $1 9 million compared with 700000 for Q3.
Of 2021, we recently launched a new synergy line, which has gone really well and from there.
Early brand recognition feedback, we expect future product launches under the synergy line.
Due to the ongoing in decisiveness of the FDA, which Mike mentioned, we have no plans of growing hemp in calendar year 2022.
Turning now to village Farms' fresh produce Q4 saw a continuation of the positive trend we repeated in Q3 with the normalization of market pricing.
Fresh produce sales for Q4 increased 11% year over year to $38 4 million, primarily due to higher volumes for the second consecutive quarter. We achieved positive adjusted EBITDA of $1 1 million. This division's EBITDA is primarily driven by market pricing.
As Mike mentioned, there is increasing pressure on input costs that need to be passed onto our customers in order to maintain a positive EBITDA rest division. These conversations are underway.
Finally, some comments on our balance sheet and cash flow for the quarter at December 31, we had approximately $58 million in cash and equivalents compared to $84 million at the end of Q3, and we had 52 million and working capital excluding cash compared to $40 million at the end of Q3.
During the quarter, we used $16 million to fund the cash portion of our purchase.
Price of the 7% interest in rows and approximately $6 million in capital Capex expenditures in our production facilities, primarily expansion Delta two in Canada, and an incremental lighting project at one of our Texas facilities.
The balance of our cash is related to increases in our working capital primarily in canvas and tomato inventory.
Operating cash flow from our business operations for the quarter, excluding working capital for Q4 was $5 million.
Our capital position and ongoing operating cash flow have us in an excellent position to self fund our ongoing operations and budgeted 2022 growth initiatives at.
As shareholders ourselves, we are prudent and strategic about capital raises dilution of investment and the health of our balance sheet reflects this.
Although we remain very optimistic about the growth of the cannabis industry, we recognize the value of prudent and patient investing during periods of capital market dislocations like we are in currently.
We thank you for your patience as we work hard to continue to differentiate those farms as a profitable leader in the global cannabis industry.
And now I'll turn the call back over to Mike.
Steve.
Closing village farms has built a rock solid foundation for long term sustainable profitable growth. This has been our focus for the last several years <unk> farmed rose Lifesciences balanced sales Botanicals lately Holland, our term in village Farms' fresh recent.
Recently senior leaders across our organization met.
We evolve and refine the next phase of our growth strategy with the recent additions of balance helped botanical rose Lifesciences soon lately Holland that will take village farms to the next level.
While I won't go into specifics for obvious reasons here is what I am willing to share. We are building a best in class International leader in plant based consumer products, we will leverage our 30 plus year DNA to seize opportunities in selected markets around the world, We will not chase every country, but we will hold certain principles.
A focus on legal adult use recreational markets where.
Where we enter the medicinal market it will be as an entry point to future recreational markets long term, we believe the rec market will dominate in size growth and consumer innovation.
Producing and marketing value added products that are consistently consumer and customer preferred.
Prudent capital deployment with a focus on return on invested capital and.
And that makes strategic sense to capture growth in the global.
Benoit market.
And as an Investor I know I would ask why should I have confidence that village farms can be successful the answer to that question lies on our track record over three decades, but especially in the past several years, we founded and built a premier cannabis business in Canada, we established multiple footholds in selected international.
Canada markets, most notably planting a flag in Europe , now and we entered the U S cannabinoid market with our leading brand and platform and we did all of this adhering to our core principle of minimal dilution and raising capital for growth related investments that meet our return objectives, while steering clear of finance.
Methods, such as Atms and convertible debt that we view as less and shareholder friendly. The result, since 2018, we have grown sales, 80% driving a fivefold increase in adjusted EBITDA, we have more growth potential before us than at any time.
Growth and expansion in our existing Canadian markets is number one, including Quebec and growth in exports and don't forget that we still have.
Two 6 million square foot facility called Delta one in adjacent footprint in Canada.
Secondly, the Netherlands, rec market and expansion in Europe , and elsewhere growth in the CBD market in the U S and the potential to be a leader in high THC cannabis in the U S or Texas or both were up nearly 6 million square foot a controlled environment of production capacity provides us with an undeniable advantage.
Plan to stay in these lines is there is plenty of opportunity.
With that.
I will start taking questions.
<unk>, Steve and mandates and myself, we hope to add to that so operator, let's turn it over to you.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one or you touched on film.
Youll hear three Tom Brown in Colombia, and your a question. Your question will be bold in there that they received so.
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One moment. Please for your first question.
First question comes from Tami, Chen with BMO capital markets. Please go ahead.
Thanks, Good morning, everyone.
The housekeeping question.
Was wondering if you could.
Possibly give talk about breakdown of your.
Retail flower sales.
Quarter like how much of that was new.
Flower strains licensed jet fuel gelato versus your legacy strength like the pink Kush.
Sure Tammy mandate would you like to take that question.
Okay.
Absolutely and thanks, Mike.
Jamie we have not specifically broken out our overall sales into key segments for you guys publicly.
Right now when I look at our overall branded sales for the year, obviously flower continues to dominate that.
Q4.
Okay, we're definitely kind of north of that 60% to 70% range of our total flower sales specifically I think the heart of your question is how are the new strains performing Jeff mutual auto blockchain punch and some other limited time available strains were only relatively launching in Q4, so the percentage of those sales.
Still relatively small in the Q4 number what we're seeing right now in Q1 I know, we don't give for guidance is that jet fuel gelato is in some markets starting to see some of the official format Skus in Ontario, we've even seen it.
Pro forma so again to reiterate in Q4, the new strains were not a significant component of the Q4 numbers and we're starting to see them become a bigger share.
So far this part of the year.
Okay. Thanks, that's helpful.
And then I noticed in the Canadian cannabis segments.
Lower than the last few quarters and you talked about the SG&A. So was that primarily the.
The driving factor for the lower EBITDA that you've invested in your sales force or were there any other factors. Thank you.
Hey, Steven.
It's also the other factor is lower non branded sales I mean, we do make a nice margin on those sales so.
The lower topline non branded revenues also impacted our EBITDA on the quarter on quarter comparison.
Besides the SG&A.
Okay got it okay. Thank you Anthony.
Thanks, Tim.
Thank you. Your next question comes from Scott Fortune with Roth Capital. Please go ahead.
Good morning, I'd like to focus a little bit on the international markets I know the timing of the E&P coming onboard, but can you provide a little bit cover and the opportunity there.
From a production standpoint.
Are you guys ready for Delta to the G&P side of thing and then is there.
Focus on specific flower.
Or with a third THC level or derivative products to serve those export markets.
You mentioned, Germany, Israel going forward here.
Sure.
Do you want to take.
This regards our export.
Potential add up to us on farms correct.
Scott correct.
Okay, alright manage tonnage ticket.
Thanks, Mike I appreciate the question Scott So just to reiterate on our GMP certification that certification is occurring in our Delta three facility.
Obviously stated our total annualized capacity facilities conservatively 75000, kilos, and we don't have plans to extend the EU GMP certification deduct two at this time don't think Thats neutral will be focused on our delta three production capacity.
As Mike mentioned in the earlier comments, we're making great.
Traction towards that certification, so obviously, a little bit delayed with some of the COVID-19 delays and traveling and just getting the supply chain sorted out.
Feel really bullish on the timing of that and as soon as we get that certification. We do expect that shipping could commence as early as the quarter. After that certification. So we're definitely on track to see that later this year when you ask about specific product types.
GMP certification at this time is just limited to whole flower skus and working with our partners in Germany.
<unk> selected certain strains that are part of that certification process. However, getting in advance of that actual certification coming through we've expanded that offering.
Getting ready for certification of GMP.
It is focused on the process at the facility.
Also register the products that you intend to sell and typically that process starts kind of once you get the certification and you have to register those actual skus given flower strains with the specific potency ranges that youll be using to test against to make sure those products qualify we've actually in advance as we've seen the market mature here in Canada.
And looking at what's happening on the medical side in Germany. It's we've actually got it ahead of that and start to prepare other offerings and strange as well and that will predominantly be high THC offerings, but there are some moderate chi chi that we believe will be part of that kind of whole offering to the GMP market. So.
<unk> product strategy working with our partners in the German markets understand what consumer needs are on the medical side and making sure we can.
At the heart of the market and really generate strong sales as we open that up this year.
I appreciate that color. Thanks.
Pretty good opportunity for you guys.
Just coming back on the competitive landscape.
Canada as we've seen the larger Lps, losing market share and their response team.
Pricing for lower pricing.
<unk> kept your back market share how are we how should we look at kind of the pricing environment in Canada in the first quarter as these Lps logging, please look to to gain back market share.
Are you guys offering different.
<unk> would be great.
Sure.
Go ahead, you can answer them.
Thanks, Mike I know, it's a great question Scott.
And Mike again alluded to some of that in the opening comments looked at the end of the day person firms, we're going to continue to make decisions that balance market share and profitability and we look at the growth of our business on the topline and profitability perspective, and we're going to prioritize medium and long term success versus short term.
You hit the nail on the head is that.
Larger Lps are losing market share or.
A large part of that is the way that they have set up the operations how they haven't focused on the.
So great level of detail in terms of their brand and product awareness and creating the right brands and the right products and it's really kind of.
[noise] cannibalizing their business Peterson firms continues to grow and pick up market share. So Scott I think quarter over quarter month over month, Youre always youre going to see puts and takes in market share lp's are going to invest in pricing and try and be desperate we're going to play the medium and long term game, where we're going to look at what the right thing is for our shareholders and continue to grow profitably.
We definitely see areas of opportunity in certain regions, we loved the pickup that we're seeing in our other non flower or non whole flower skus pre rolls Veeps, we've launched milled flower.
And it started to ship in late December and sort of really hitting the market in January that was a segment that we werent in and when I look at margin right now and again I know, we don't break it out and Steve mentioned being north of that 40% target, we actually grow margin on our flower skus, given our productivity and our cultivation and manufacturing.
Facility.
So I mean that is in such contrast to what we're seeing in the market given that we've also invested in price in Q4, So I think the ability for us to compete on price. If we choose is there we have not weighed in heavily into that tactic. We don't feel that we have to but we're going to continue to sharpen our pencil. We've made some investments in pricing in the key market as Alberta.
And Steve mentioned in some of our what we refer to as our.
Medium life and end of life strange streams that we're maybe not growing as much we're going to start to exit the market, whereas if we come in with new streams like jet fuel gelato, we've kept that kind of higher pricing tier because it is a new strain of new offering and is getting great success. So we're continually evaluating kind of our price strategies, given where our products are in their lifecycle.
And then taking that intelligence and understanding when the right time is to launch.
Other products and in parallel vertical and even looking at brand extensions for 2022. So we think the price activity is going to continue and as Lps continue to get desperate we love our positioning our brand awareness, our adoption with tenders and our penetration in stores and continuing to see strong sell through numbers year over year.
Are all signs of success that we're doing the right thing and we believe that we're positioned for a really strong growth in 2022.
Okay.
Thanks, and I'll jump back in the queue.
Thanks, Scott Thank you.
Your next question comes <unk> <unk> with Raymond James. Please go ahead.
Good morning, Mike Steve Mendes first congratulations on a really strong 2021.
Done.
And of course, thank you for taking my questions. So following on to Scott's question.
In terms of the Canadian context, and looking forward into 2022.
Should we be looking for sort of a nine yield the most high torque gains would be continued markets.
Market, taking from your peers would it be Tibet.
It would be sort of new new skus, how should we really be thinking about sort of that next phase of growth into 2022 in Canada.
Sure I mean, I think all three but I am going to turn it over to Matt. If you could give you more color on that.
Okay.
Thanks, Mike Great question.
And just to reiterate what I said, it's definitely in all areas. So while we continue to hear that large Lps are losing share again, it doesn't sound like a broken record.
Continue to pick up in key regions and in key products formats. When I look at say the top 10.
With a market share that exist outside of the top 10, Theres still a healthy market share for us to penetrate and pick up.
And the flower segment, but in other product segments, and we've said in the last quarterly call and through last year and we will continue to say this year is we believe there's a tremendous opportunity for us in products like pre roll.
We tripled and quadrupled sure from the starting point of the year.
Believe that will come from some of the other top Lps as well as the non top LP. So we believe there is a lot of market share there in other regions, where we say underperforming Alberta as of Q1, we believe we can continue to pick up again.
Strategically looking at pricing looking at product offering and continuing the brand reach with our with our sales team and trade marketing tools.
And then there are still some other regions Atlantic Canada. Some of the territories, albeit smaller that we believe there is going to be some meaningful pick up and then again, referring back to make sure their comments in Quebec.
It's such a large market, that's untapped and really not reflective too much in our 2022 numbers.
It's really geared towards the flower consumer given the fact that there are no <unk> no child from the edibles.
<unk> life Sciences team has done a tremendous job and they only really received their sales license at the starting of 2021 should their business on their own cultivation platform was really accelerating through the course of last year.
And kind of talk now with the Purion farms team looking at their operations and how we can continue to grow leverages our team to expand the footprint in Quebec, We think there's tremendous opportunities for us in the Canadian landscape.
Perfect. Thank you and if I could.
Brian I'd, just add one thing on taking share from other Lps I mean, that's not been our.
Focus that market share is there a fair losing it it's going to be in the marketplace. The consumer will decide.
What brands you want to go with so I think we're staying pretty close to our original strategy and moving forward.
So next question.
That's helpful context for my next question sort of now switching to the U S recognizing of course well.
Recognizing the legislative uncertainty.
For candidates and however, we do have some clarity given the U S CBD business.
We've seen a few of your counterparts peers sputter in terms of the U S. CBD business. So how are you looking to insulate and continue to grow the U S CBD business.
Well I think.
The earliest.
The big growth in the CBD business in the U S is going to come from clarity from the FDA I mean, thats a central theme, we've talked about that over and over.
And the real key is the big box side of that Formula and until there is clarity in the FDA rules.
It's going to be difficult to have massive growth in big box. So we will continue to grow our online business.
That probably have acceptable low two digit growth year on year.
But we're going to be patient, we believe that clarity will come that was the reason for the acquisition.
Not to mention the platform.
The online platform that we think we can leverage up for higher THC. It as we go forward and as Steve mentioned, the introduction of a number of new products by BHP coming out.
But we took that acquisition on.
To position ourselves once the FDA rules and provide that clarity.
Sorry, if I can even indulge one last quick question in terms of the Netherlands opportunity and we know what we know it's a pilot program, we see an immense amount of potential.
They're potentially as they would roll it out across the country.
But how should we also be thinking about given you you rules and the potential to use the Netherlands as a launching point into Germany.
We are seeing in terms of potential opening up in Germany as well.
Well, our viewpoint is that medicinal as.
As usually a stepping stone for req, you've seen it in Canada certain states of the U S. So we like rack because it's a built in consumer that we can target I think with the medicinal aside when we look at Germany for US we think we're in a great position being able to procure some plants to export to Germany, we have a.
A solid partner there, but it's a very difficult market as a lot of moving parts on the <unk> side, each country will be different with rack. It just opens it up and if you look at the Netherlands with 579 coffee shops that have been there for 30 plus years, it's a built in consumer and we will be allowed to mark.
Market and brand within the Netherlands.
If that Netherlands platform does well we were convinced it will be.
Sort of a model for other company of the countries that go pure rack or we'll take the stepping stone of medicinal Iraq, so either way it is.
Two pronged approach export from pure sell farms to medicinal markets within the EU and the Netherlands being the.
The first country to open up rack and us being one of the 10 license holders and we're convinced that we will go to full legalization very very soon.
Within two to two five years from the commencement in the Netherlands.
We're already talking to other countries that are looking at the levels for what their model is going to be for rack. So we think we're in a great position as I mentioned in my remarks, the only North American company that has a majority interest in that first emerging rec market.
And.
We will be looking at generating revenues for our second quarter next year, So thats eminent and we feel really solid about our expansion into the EU.
Okay.
Great. Thanks, again for taking my questions and congratulations again will get back in the queue.
Thank you. Your next question comes from Pablo <unk> with Cantor. Please go ahead.
Hello, everyone. This is Matthew Baker on for Pablo for our first question. We were wondering if you could provide more color on which of your non North American markets, you expect to contribute to revenue in 2022 and how much. Thanks.
As Mike just mentioned, we expect the first revenue from the <unk> coffee shop business to be in early 2023.
So there won't be any contributions for candidates.
Other than what where we're going to export from peers on farms and we're not prepared to give any guidance on that yet.
Okay. Thank you for that and for a follow up question outside of Quebec. It seems your market share gains in flower have slowed is this so and if so why do you think that is the case.
Matt if you could answer that please.
Absolutely.
I would counter that a little bit and we've said that we feel we picked up share.
And it's definitely there when you look at the Ontario data, which is definitely the most fulsome in wholesome data and consistent data that's published within the industry.
And so when I look at where we started the year to where we ended we gained share with no question of Adobe on every key product segment.
When we look at the key product segments, we think about flower pre rolls and vape coming that constitutes close north of 80% of the total market in Ontario, We have said in some markets like Alberta, we've seen some loss due to some of the competitive nature in terms of pricing and we're sharpening our pencils.
The other piece there as we continue to look at how the market unfolds and making sure we're delivering.
Products and specifically flower strains that are on point with consumer preference.
And we definitely believe in 2022, we'll continue to see pickup.
In those segments, given how much innovation.
We're doing.
And just to take a little side satisfy everyone's understanding when we launched a new flour strain I think about jet fuel gelato, which is really only ramped.
Last year, and we're starting to see really good headway.
Open up 2022 with that strain.
Close to a year from the time you.
Innovate trial test go through sensory and really make sure thats, what youre going to be delivering to the consumer is going to resonate and so 2000 22021 was a big year of innovation for us around flower strains and we're confident of that.
Not just in addition to jet fuel dual auto and some of the other ones that we've launched but we're going to have a handful of offerings each quarter.
And things that have been in the pipeline.
So.
Necessarily that we've gotten anything wrong.
I think it's just been ensuring that we are acting and reacting to what's happening in the market and we know what we need to do and Thats continually innovating staying sharp on price getting strong sell through sell in and sell through with our amazing sales force out in the market doing great trade activation supporting Bud tenders and making them.
Sure we're top of mind consumers and we're doing all those things. So the macro numbers show that we're picking up share, but absolutely. There is areas that we need to improve on as it relates to the innovation and making sure we're.
Being as tight as we can in every region.
Thank you for taking our questions.
Thank you. Your next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good morning, congrats on the quarter and thanks for the question.
So first of all don't even want to dive back to Quebec, a little bit. So you guys have done a great job on the major provinces like Ontario.
Now <unk>, Quebec post the <unk> acquisition and as you are offering some color earlier, but just wanted to get some additional detail in a few months under the Hood now post closing can you speak to how you plan to leverage some of your key learnings in other provinces as you target, Quebec, maybe incremental color on the timing and how much contribution you see there I know you mentioned not too much baked into 'twenty.
Two but obviously last year towards affluent consumers.
Digital content with high electric targeted.
Potential branding as well it would be helpful. Thank you.
Sure.
Yes go ahead mandates, it's only been really two months.
But.
Yes.
Thanks, Ken happen that quickly if you can put some color on it.
Yes for sure Erinn I'll give some color around what we're seeing with the.
With the Quebec market and the Roche team and then I'll, let Steve jump in if there was any sort of.
Components, he wants to give around roll ups or how some of the numbers piece together.
So early days, but definitely a few months under the Hood. We obviously spent a long time assessing that business unit and just to reiterate what Mike said the Rosemary his science team led by <unk> Zaffino CEO founder, Brian another founder and a phenomenal management team that are there.
Have a really strong understanding of what makes the Quebec market Tech and have a handful of brands.
Thats really offer consumers different products at varying price points everything from their micro cultivation strategy with the <unk> brand to their in house cultivation on Tam Tam.
And then offering other brands such as pure land and are left to really think about what consumers need and part of their business model on their own brands has been sourcing product that they've been doing that from before.
The acquisition and rollout by village farms, and so now that they're part of the family we have really opened up.
The ability for them to source from Chris on farms, and we started to see that in Q4, and we continue to expect that to ramp.
The other piece that Mike mentioned in his earlier comments was the Roche team has launched a net new brand promenade.
Which will really offer that.
From a product.
Okay.
And that will leverage.
Got it.
So the opportunity now to take their deep understanding of the Quebec market powered by some purion farms horsepower I think will be very strategic and advantageous for us as an organization and making sure they deliver what consumers want while working collaboratively with that market.
I mean, they touch through their own business and their relationships almost a third of the market in terms of market share.
So their understanding of the consumer in Quebec is this about as deep as you can get and Theyre pickups in terms of how they've been performing while we don't give specific details in the Quebec market doesn't shares any data like Ontario are some of the other provinces. It's been impressive and so we think that we're the Roche team does a phenomenal.
<unk> job of building out that market and now backed by person firms and specifically you asked what are the learnings of what are the keys is worth sharing we're sharing what we're learning about reactions of consumers at varying price points, we're sharing technology on the back end of pre rolls packaging leveraging the synergies.
You've been sending them some of our genetics to trial and see how they perform in an indoor environment all of those learnings about what works what doesn't work, we're having deep conversations and really kind of cross pollinating, our strengths with each other and I think we've already starting to see some gains in terms.
Of how their teams are learning from us and how we're learning from them and so we continue to see we expect that to continue to evolve and deliver really good performance for us in that market through the Roche branded products, Steve I'm not sure. If there's anything else you want to mention.
Yeah, just to top it off here and we are expecting by the end of 2022, Quebec to be our second largest power market.
There is tremendous growth and upside for us in Quebec remember, it's predominantly a flower market.
We've got very strong brands, both between peers can prompt and Roes in our forecast.
Our second largest market behind Ontario.
Really helpful color I appreciate that.
Second one for me real quickly.
A question earlier on SG&A and EBITDA. So can definitely appreciate me to invest in our sales force, particularly have consumers potentially get into more brick and mortar shopping someone have people kind of in front of the bus tenders I just want to know in terms of the big increase sequentially. You saw this quarter do you feel like you know have been infrastructure in place like not or do you expect to control.
<unk>.
More incremental investments going forward, maybe not the same degree just any incremental color there would be appreciated on the SMA side. Thank you.
Yes, there were obviously, we're ramping up head count in our sales force.
As we've mentioned, but as I alluded to in my comment there was there were some clearly seasonality in our point of sale brand spend so there is.
The holiday season as is and you can see from our POS data in December and January we've done really well.
And again part of that is driven by our branded what we're allowed to do with point of sale of brand marketing. So youll see that decrease and as I mentioned in Q1, and obviously before 'twenty falling in Q2, you will see us.
Investing some.
Some brands Pos spending.
Okay.
Okay, great. Thanks, I'll jump back in the queue.
Thanks.
Thank you. Your next question comes from Andrew <unk> with Stifel. Please go ahead.
Hi, Thanks for taking our questions. This is <unk> speaking on behalf of Andrew.
Congrats on the quarter just curious.
Floods that recently happened in BC did they have a significant effect on your business in Q4.
No no no.
Business.
Maybe some logistics, but that's about it.
Okay. Thank you I'll jump back in the queue.
Thank you.
Next question.
Thank you. Your next question comes from Eric <unk> with Craig Hallum. Please go ahead.
Great. Thanks, taking my question and congrats on another strong quarter guys.
So you guys have laid out.
Lots of your growth.
Growth plans here.
Hey, guys continued share gains, Quebec International I think the upside is pretty clear here.
One of the issues that we've kind of come across in the industry at large is just.
The outlook.
Look to sort of get ahead of itself. So I'm going to kind of ask you a question sort of.
From a different angle here.
So I'm just kind of wondering how you think about the Canadian market or I guess international starting in 'twenty, three but just the overall market the ability to absorb your production from.
From Delta two and I guess just kind of.
Asking pointedly.
Is there any potential for Delta two did not come to sort of full production capacity by the end of 'twenty two.
Just any kind of color.
Color on how to think of the overall ramp at Delta two and.
Its ability to get to full production would be very helpful. Thank you.
Okay. So as I said in my remarks, we're at about a $4 6 billion.
Dollar run rate in Canada. The estimates are $7 billion to $8 billion. So that's a huge potential going forward and I also mentioned we look at this year is a restructuring year for our competitiveness in Canada, which will have a big impact.
One of the questions relative asked us.
Do we see taking market share from our competitors, but I think the bigger a bigger way another way to look at it is.
It seems every time, there's an acquisition assets or shut it in those acquisitions and more and more we see closures and shutdowns and I think as the market continues to grow.
The capacity for us will increase at our cost of production and that's really where the differences at some point you just can't keep selling product in cutting costs and survive without being profitable. So we feel we've looked at that very deeply and coming on with the investment of Delta two as we mentioned so I think there is.
No doubt Delta two will come to full capacity, but the way. We've designed our facilities is to give us the ability to not plant them out.
To back off to match, our capacity with demand than Delta two well, there's a good chance, we'll get a slide that maybe into the first quarter of 2023, just to be sure, but ultimately we feel very strong that by mid 'twenty three it will be at a full run rate.
And as always the nuclear option two for Canada and that means putting delta one in production.
And taking a different viewpoint on.
Selling price versus out cost structure.
But I won't go further into that at that point, but I did want to mention.
And Eric just a little bit of color. Our 2022 budget is based on the the delta three and half of Delta two.
We can achieve that even without bringing the other half of delta two on in.
This years, we could accelerate delta too.
And increased our internal forecast, but.
We've mentioned both <unk>.
Efficiencies that we're seeing in Delta three and Delta two and we have ample capacity to achieve our 2022 numbers with our existing footprint, yes, and keep in mind the international export out of pure some farms is in our numbers for this year, we're already shipping to Australia as we both mentioned somewhere in the second part of this year two additional <unk>.
Countries with Israel in Germany.
How those ramp up we've assessed the competitive landscape there in terms of what their products or their margins. We think we can do very well in those markets.
And.
We mentioned some COVID-19 .
Later delays.
But they will come so I think somewhere between the last two quarters of this year in the first three quarters of next year with all of those things coming to fruition, we'll be fully ramped up and delta too.
That's very helpful color. Thank you guys.
Welcome.
Operator.
Thank you there are no further questions at this time Mr. The Julia you May proceed.
Thank you everyone and we look forward to reporting each quarter in two.
2023 year, we're excited about.
What lies ahead for us and we certainly appreciate and respect everyones contribution today. Thank you operator.
Sure.
Yes.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.