Q2 2023 Village Farms International Inc Earnings Call
Yeah.
Good morning, ladies and gentlemen, welcome to the village farms International second quarter 2023 financial results Conference call.
This morning village farms issued a news release reporting its financial results for the second quarter ended June 30 of 2023.
That news release, along with the company's financial statements are available on the company's website at <unk>.
Village farms Dot com under the investors heading.
Note that today's call is being broadcast live over the Internet and will be archived for replay both by telephone and via the Internet beginning approximately one hour following completion of the call.
Details of how to access the replay are available in today'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 are 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 S E C and Canadian regulators.
Including its Form 10-K M D N a for the year ending December 31, 2022, and 10-Q for the quarter ended June 30 of 2023, which will be available on Edgar.
These forward looking statements are made as of today's date and except as required by applicable securities laws. We undertake no obligation to publicly update or revise any such statements.
I would now like to turn the call over to Michael Julio.
Chief Executive Officer of village Farms International. Please go ahead Ms Digilio.
Thank you Lisa good.
Good morning, and thank you for joining us for today's call with me are.
Our village Farms', Chief Financial Officer, Steve Ruffini.
Village farms head of Canadian cannabis.
And Thats, a science and and given the fever village farms Executive Vice President of Corporate Affairs, and Patti Smith, Vice President corporate controller.
As per our usual format, Steve and I will review the operating highlights and financial results for the quarter and then open the call for questions.
Turning now to Q2's highlights we're very pleased with Q2 significantly improved financial results, which built on a very solid start to 2023 last quarter.
There are three noteworthy highlights <unk>.
First we delivered continued strong and consistent growth in our Canadian cannabis retail sales fully aligned with our strategic goal to be a leader for the long term and the largest federally legal cannabis market in the world.
Second we have stabilized our U S cannabis business and in fact returned it to sequential topline growth, while generating profitability and positive cash flow.
And our fresh produce business saw another quarter of significant year over year improvement.
Importantly, without fresh proud of the strength of our strategic decision to build upon our unmatched expertise and controlled environment agriculture to deliver leading revenue growth profitability and ultimately the cash flow in each of our businesses.
Did you do this we lean heavily on the breadth and depth of our multi talented team's capabilities and we leverage our wealth of experience to succeed even in difficult market and regulatory conditions and unfavorable economic cycles not to mention the artificial pricing environment and the Canadian County.
This industry due to the lack of enforcement of the illicit market.
Addressing each of these businesses in detail I'll begin with the continued improvement in fresh produce.
I guess, a still challenging macro environment, most notably high interest rate and high inflation.
We continue to see the benefit of the actions we have taken under our ongoing plan to return the business to sustainable long term profitability, including our significant progress in managing the brown regardless of virus.
While increasing our planting a virus resistant strains.
Fresh produce delivered its fourth consecutive quarter of sequential improvement and generated positive adjusted EBITDA of more than $1 billion.
This is an improvement of nearly $12 million from Q2 last year, which brings the improvement in adjusted EBITDA for the first half of 2023 close to $17 million and moved out year to date EBITDA into positive territory.
<unk> effort by our entire fresh team.
Execution on the multipart operational plan for fresh continues we are committed to long term continuous improvement to partner with our customers and win with consumers. We are strengthening our operations with investments in infrastructure and technology, including artificial challenges for crop management.
The initial results of which are very encouraging.
We are planning more virus resistant strains, which will continue over the next few years. We have also been able to turn our attention back to important growth initiatives like product innovation, where we have had great success in the past with development of exclusive varieties that command higher margins.
As an example.
One of our newest products sensation of Cerus, a novel tomato variety that has a perfect natural balance of Chevron asset and has been a hit with both retailers and consumers. It also marked the debut of our new sustainable packaging solution packaging solution for produce biodegradable and recyclable that also addresses safety and shell.
Flight with.
With the first half of 2023 and the books fresh produce continues to track towards our goal of achieving positive adjusted EBITDA for the full year.
Turning now to our Canadian cannabis business, which continued to deliver standout performance retail branded sales for Q2 grew 24% year over year and 8% sequentially. Both well ahead of underlying market growth, we delivered our 19th consecutive quarter of positive adjusted EBITDA and <unk>.
Importantly, we were profitable on a net income basis.
We have proven again that village farms Canadian cannabis business has the best organic growth story and the Canadian cannabis industry.
Our growth has been achieved at a fraction of the capital cost of most other large L peaks.
And we have done so faster apps at a first mover advantage the.
The majority of that growth has been generated internally and not purchased.
One of the only acquisition in Canada Rose Lifesciences, and Quebec has posted a 300% sales growth since acquisition more than tripling market share as it contributes meaningful way to the growth of the cannabis industry and the very important partners partner province of <unk>.
Back.
Relatives proven without any doubt in my mind to be the best acquisition ever done in the Canadian cannabis industry to date, bringing with it invaluable insight and capabilities around consumer trends product innovation and distribution as well as industry relevant management expertise.
Our Canadian cannabis results are very much the product of our deliberate strategy to realign our business to continue to win in an environment that as we accurately predicted would not see any relief from the challenging conditions I described earlier.
We are managing our business for the realities of the market that we have today, which is a long way from a normalized CPG playing field.
We expect that filling up both competitors and excess capacity has been slow and protracted and there has been no tax relief and very little enforcement illicit trade and I predict we will never see any real enforcement in Canada.
To be clear I'm, not complaining is simply what it is and we must manage accordingly.
So on the production side of our mandate Dr.
Set a mandate has been to manage output levels to match supply with expected demand.
We have placed an emulated elevated importance on our production protocols building on our industry lead aimed at consistently generating efficiencies.
Steve will speak more to this in a few moments.
We are actively prudently and continue to see managing our cost structure for our growth forecast.
And we have successfully increased our market presence and coverage transitioning from a branded house.
The brands as consumer preferences evolve.
At the start of 2022, we have launched seven new brands to address consumer trends and preferences building on our original <unk> farms brands domination in the core price segment of the flower category and added more than 300, new Skus.
Also our brand launched less than a year ago quickly became the top selling premium brand in the flower category in Ontario, meaning we now have two number one flower brands in their respective price segments in Canada's largest provincial market.
And Fraser Valley, which was launched just a year ago.
It's not only the third best selling flower brand in its in the value category in Ontario, but also continues to be the fastest growing.
Adding to this brand triple threat last month, we launched Super Toast, which is uniquely focused on convenience and ready to go products and which is off to a great start and further in just a short period of time promenade has become the second largest selling brand in Quebec.
At the top line of the Canadian share rankings with a number of the large early leaders havent given way to smaller up and comers, we stand out as consistent performer, maintaining a top three position nationally in Q2.
In Quebec Rose became the top selling produced by market share in dollars in Q2 and was the fastest growing producer.
We achieved this in what has been in an increasingly competitive environment, there and notably with the addition of hexose distribution in Quebec Roes now touches approximately one third of every dollar Canada sales in that province.
Soon we will start preparing a portion of our world class indoor facility in Quebec for supply to our growing export business for 2024 and beyond.
There is clearly a lot going on very well and a lot to be proud of our Canadian cannabis business, but there is also a number of areas that we are working on to deliver future growth and I'd like to share those as they always do.
Our data shows that in some markets more than 70% of Skus and products on the shelf today were not in existence a year earlier, we are seeing some dampening of our overall market shares we under indexed on newness in the core price segment.
We have plans to return to be to being a meaningful contributor to the innovation and growth of the core segment, which is important for our retail partners.
Q. So Q2 saw a marked increase in the number of our new product launches in our core price segment.
With four new strains in flour and they're all new high THC, one Gram base with high performance hardware.
These are formulated to maximize potency and flavor with seven flavors rolled out initially.
We've added even more new strains in July with a very active launch calendar throughout the remainder of this year that includes more new strains more new flavors and new infused pre wells across our brand portfolio and Quebec, Quebec, We launched 15, new Skus under the first protocol this year and targets.
Another healthy number of launches later this year.
As we innovate we are continually.
Continuing to elevate quality delivering bigger better bugs through harvesting and trimming enhanced but sorting and hand packing achieving better moisture levels throughout dry process in.
And offering humidity packs in store in Paris on farms flower and we are delivering quality on more consistent basis with enhanced Q&A controls.
Again this is part of our commitment to continuous continuous improvement in every part of our organization, even those in which we are selling.
This is our DNA.
We are also dealt with some material supply issues for our market, leading flower strain pink Kush as it exhibited longevity with consumers that is uncharacteristic of most products in the Canadian market. The good news here is that our pink Kush has proven that Canadian consumers will stick with great products and we have the ability.
To offer those great products, we have addressed those supply issues and expect <unk> sales to respond accordingly.
Importantly, we do not believe that <unk>.
This increases we took on certain high velocity skus had any meaningful impact on share in Q2, we've worked closely with provincial partners on the implementation and are encouraged by markup changes that the Ocs is planning for the second half of 2023 it.
It would make sense, rather lps to take opportunity opportunistic price increases as well.
Village farms has a 30 year old company, which is executing access successful organic growth strategy in two complementary and international businesses.
Produce in cannabis, we have learned a lot about our capabilities, which we are consistently pushing the team to continue to exploit for future growth. We continue to pursue opportunities in those international cannabis markets, where the rules are known and clear through both our rapidly growing export business from Canada and in country Mark.
Opportunities to come.
Q2 was another strong quarter for export sales, which were up more than 200% year over year, and we expect future growth as we continue to monitor medicinal recreational regulatory developments, particularly in Europe .
Turning now to our U S cannabis business balanced helped botanicals sales for the second quarter increased sequentially, while generating positive net income positive adjusted EBITDA and positive cash flow to success about innovative new products and prudent cost management have stabilized this business as the overall CBD.
Industry is contracted.
We continue to believe however that the U S market CBD and other cannabinoids will be a high growth multibillion dollar opportunity with the benefits of regulatory oversight to open mass market opportunities we.
We remain encouraged by what appears to now be progress on the U S CBD regulatory and political front.
We are compliant with current FDA rules for other food and drink ingredients and good manufacturing practice standards under the NSF organization, a track record of safety and stand ready to work with regulators to realize this industry's full potential and we have been underwriting multiple studies that support the efficacy of our <unk>.
In other words, we are ready to go.
At this point I will turn it over to Steve for a more detailed review of our finances.
Thanks, Mike this quarter I want to begin by reviewing our significantly improved profitability that Mike discussed earlier consolidated net loss for the quarter improved too.
$1 $4 million loss or a loss of one time, one penny per share compared with a net loss of $36 6 million or <unk> 41 per share in Q2 of last year. Our consolidated operating loss was close to breakeven just negative $42000 again, a significant improvement from Q2 last of last year.
Operating loss of $43 8 million, which included a $30 million goodwill impairment.
For Q2 this year was driven predominantly by the improved operating performance from fresh produce consolidated sales for the second quarter were $77 2 million a decrease of 7% from last year with the decrease primarily due to lower volumes from our third party growers in fresh produce.
And lower non branded sales from our Canadian cannabis businesses.
Which were dampened somewhat.
By our reporting currency of U S dollars due to the weaker Canadian dollar in 2023 versus 2022.
<unk> adjusted EBITDA for Q2 came in at $4 5 million, our second consecutive quarter in positive territory and nearly a $15 million improvement from the negative $10 3 million in Q2 last year again. This was driven mainly by the improvement in fresh produce but also higher EBITDA from our Canadian cannabis.
Business as well as lower corporate costs, excluding stock compensation, which fell to just under $2 million.
I will now review, our Canadian canvas results, which as usual I will discuss in Canadian dollars to provide more accurate comparative without exchange rate fluctuations retail branded sales, which represent the vast majority of our Canadian <unk>.
Canvas sales increased 24% year over year once again outpacing the overall Canadian market growth by a wide margin.
International exports from Canada of nearly $1 9 million from 600000 in Q last year.
Is nearly a three fold year on year increase non branded our wholesale sales of Q2 were $3 9 million, which compares with $10 3 million in Q2 from last year, and especially outsized quarter for non branded sales. We are seeing renewed inquiries recently for non branded sales and we will continue to <unk>.
Operate our non branded channel optimistic opportunistically.
Being selective around our participation in the current market environment always with profitability in mind.
These channels netted out to total Canadian cannabis sales of $37 7 million compared with $38 million in Q2 of last year.
Gross margin for Canadian cannabis of Q2 was 38% compared with a reported 39% for Q2 last year, which included a purchase price inventory adjustment in that period, excluding last year's purchase price adjustment to our cost of sales. Our Q2 2022 gross margin was.
Really 33%.
The year on year increase was primarily related to the higher proportion of retail branded products sold in Q2 of this year versus last year earlier, Mike mentioned, our redoubled focus on realizing production efficiencies generating more output per dollar spent we are realizing improved efficiencies.
Through the optimization of growing space during the best growing seasons and continued refinement of our cultivation practices as well as strategic pruning pun intended of input costs. We're also we've also realized a two five times improvement in the overall and our overall pre roll production per hour as we move manufacturing.
Entirely in house, which we expect to have completed this fall.
Selling general and administrative expenses for Canadian cannabis for Q2 were $10 5 million or 28% of sales down slightly from $10 9 million or 29% of sales in Q2 last year.
As Mike highlighted our Canadian cannabis operations deliver their 19th consecutive quarter of positive adjusted EBITDA of $6 7 million, which is up 97% from $3 4 million for Q2 last year and up 26% sequentially from.
$5 3 million in Q1 of this year, notably our adjusted EBITDA margin doubled from Q2 last year. Canadian canvas also delivered positive net income which came in at $1 7 million as well as positive cash flow after capital expenditures and all debt service payments.
I will now turn to our U S canvas business and revert to U S dollars.
To reiterate Mike's comments earlier, we have stabilized this business from both a sales and profitability perspective U S. Canada sales for Q2 generated entirely by balance health Botanicals were $5 3 million compared with $5 8 million in Q2 last year and $5 million in Q1 of this year I will note here that this year's Q2 sales were damped.
By two factors specific to the quarter first we were out of stock in two of our best selling gummy skus due to the bankruptcy of our supplier. We have begun shipping these specific skus from our own manufacturing facilities. This week.
Second Q there was a change by a major online search provider and an algorithm, which affected our affiliate partner sales.
U S cannabis gross margin for Q2 was 67% up slightly from 66% from same period last year adjusted EBITDA for U S. Canada was positive 400000, compared with negative 600000 last year of $1 million improvement in U S. Canvas generated net income of 200.
As well as positive cash flow in the quarter.
Turning now to.
Fresh produce we delivered our fourth consecutive quarter of sequential improvement and a second consecutive quarter of significant year over year improvement.
<unk> sales were $43 8 million, which was down 7% from $47 2 million last year. The decrease was primarily due to lower volumes from third party growers as we lost two of our larger supply partners at the end of 2022, one of which left us produce fresh produce space, but are picking up new growers in the.
Fourth coming crop cycle and expect to fully recover to our former level of third party sales by the end of 2023.
Sales from our own facilities are up year over year due to higher prices and a better market environment more than offsetting our reduced production footprint in 2023 versus 2022 as I noted in our last call our average selling prices benefiting from our focus on more profitable customers with a higher percentage of protos sales going.
Retail accounts.
I am pleased to report with the continued improvement in our operations fresh produce achieved positive adjusted EBITDA of $1 3 million, that's an $11 6 million improvement over Q2 of last year and a $2 3 million improvement from Q1 of this year.
Adjusted EBITDA for the first half of this year into positive territory.
With the stabilization of the macro environment, our ongoing improvements in managing the brown rugose virus and our focus on customer profitability. We continue to be confident in our substantially improved financial performance for this business in 2023.
Our net loss from Purdue.
Produce improved too.
A negative 700000 quarter, turning now to cash in the balance sheet.
At the end of Q2, we had cash of $31 7 million compared with $34 9 million at the end of Q1 of this year.
And $84 9 million and working capital up from $80 3 million at the end of Q1, both are significant improvements from $21 7 million and $60 8 million at the end of last year.
Total debt at the end of Q2 was $51 million down slightly from $53 million at the end of Q1 on a stronger Canadian dollar versus U S. Dollar in Q2 versus Q1.
The sales process for our mountaineer facility in Texas continues to advance with expressions of interest expected during this quarter.
Finally, I am pleased report that we are forecasting not only continued positive cash flow from our cannabis division.
But also positive consolidated cash flow from all operations for the third quarter of 2023.
That I will turn the call back to Mike.
Well, thank you Steve.
I want to reiterate one point about what we're building at village farms, which I think gets lost with all the headwinds of 2022 2023, some of which we got caught in as well the village Farms' models have proven decades long so.
Survivor.
The intersection of a cyclical agriculture industry in a branded consumer products business, we understand both.
And we are very focused on deploying our considerable expertise in each for industry, leading returns in cannabis and produce.
We are not distracted by noncore businesses, we are not dealing with the legacy of poorly thought through investments made when capital was cheap and abundant we've not gambled on a diversification strategy as the only path forward. We are equally focused on delivering profitable growth with a prudent capital.
Mindset investing where there is regulatory clarity.
I keep hammering in the organization on focus because we believe it is the most important factor to drive organic top line growth and taken outside percentage of category profitability.
We are already doing this we believe organic growth leaning on partnerships alliances and collaboration with very selective high quality investments at this point of the industry lifecycle is the right path to creating shareholder value.
That is our ultimate focus.
I'll now turn things over to the operator for analyst questions.
And while the operator queues up for questions I will comment on one question, we've received regarding our NASDAQ status.
So we received quite a few questions regarding that and I'll address that here. We are currently on extension with NASDAQ and we are extremely.
Extremely confident that we will be able to get another extension come the fall that will take us well into 2024.
Equally although we are very confident that we will remain on NASDAQ and want to we are also investigating with some other msos in the U S.
Have structured on the PSX.
And some Canadian Lps are even working with the NASDAQ to find a structure that will allow them to compete in the U S market.
And that that will necessarily go down that path, but we are investigating.
Just as a reminder, coming out of 2022 2023 post COVID-19.
Around 25% of all NASDAQ companies are trading under a dollar currently just a sign of the times. So we're very confident that our share price will be increasing and if not our search and will go through into 2024 with that operator turn it over to you for analyst questions.
Thank you.
Like to ask a question. Please press star one on your telephone you will then hear an automated message advising your hands. It's been raised if you would like to remove yourself from the queue Press Star. One again, we also ask that you limit yourself to two questions. If you would like to ask a follow up question. Please reenter the queue one moment for our first question.
And our first question today is coming from Aaron Grey of Alliance Global Partners. Your line is open.
Hi, Good morning, Thank you for the questions and congrats on a strong quarter across the board.
First question I have is on <unk>.
Canada, and the price increases specifically around that and share performance you.
You mentioned, Mike that you don't believe the price increases had an impact on share.
That's great to hear your sales outperformed the Pos data fully understand.
You are cautioned that a number of times youll be careful reading the Pos data versus your sales because your sales are to provincial boards, but.
Can you speak to.
The Delta that we're seeing there because there was some share softness in the Pos data that seem to somewhat in line with the price increases, but youre not seeing it on year end. So maybe you can kind of speak to the Pos.
And kind of what's giving you that confidence that those price increases are not having an impact that would be helpful. Thank you.
Yes, as I said, we're not seeing it but im going to give more color to your Ireland from mandate go ahead mandates.
Thanks, Mike and thanks for the question.
So Mike touched on a lot of the topics, but what we're seeing in the quarter.
We're very consumer driven insights driven looking at our profit generation strategy and we know this drives a lot of that.
Growth and maintenance of sharing and growth of share we did have quite a bit of newness in this quarter and more coming we did see some of that newness come late in the quarter specifically around our <unk> are all new branches are performing ahead of our expectations and work and you're going to continue to push on that.
With some of our flower strains some of our high performance high potency strange seeing really good uptake couple of 'em index kind of medium to lower end on the potency skill and we know that right now in the industry.
Theres, just really hyper competitive factors at play the never ending changes for potency.
We're seeing really core dynamics in terms of how people are pricing their products to try and gain share. We don't believe it's profitable share.
We think that the <unk>.
Time in the road will run out the runway will run out for those folks on how they are trying to come to market and gain share in the short term. So we see that competitiveness around the potency price equation.
And then what we're also seeing is because there is still this abundance of supply people are really taking premium product and throwing it into value pricing so that creates some.
Unstable dynamics in the industry and I think everybody was impacted a little bit by that.
So hopefully it gives you the right color around kind of what we're seeing in the industry and then Youre talking about your question was around what gives us confidence and again, Mike alluded to something very important is that specifically around <unk>.
Longer term strains.
Interesting the first focus and then Fraser valley being an entire brand in the value space.
See great resilience and performance.
Diamond market myself and with the team and we talk to stores and consumers They love our products.
There's a lot of noise right now Theres one units every quarter every month and we just got to keep fighting that battle and keep doing what we're doing which is launching great products, great strains, bringing amazing brands to market not just in the Tucson firms ports.
Portfolio, but also in the <unk> portfolio and picking our spots to win and then improving our margins as you saw what we did this quarter with continued cost reduction.
Our execution focus.
For us it's about profitable share so we.
We took it a little bit on the churn here and there.
But we like where we're positioned and we like our positioning for growth in the upcoming quarters.
Thanks, Mandy if that was really helpful color I appreciate that.
Question for me I don't want to shift gears a bit we don't always talk a ton about CBD, but you mentioned some things in your prepared remarks, Mike. So wanted to get your perspective on line of sight of how the farm bill might potentially drive change at the regulatory level for CBD.
And other minor cannabinoid <unk> I think you have a unique perspective at village farms, because you've obviously had a lot of interaction with the farm outs from the legacy.
Business over the years and I'm sure. So anything you might anticipate in terms of changes for regulations and the 'twenty one thing Farmville and then what impact it might have a minor cannabinoid such as Delta eight states have taken various actions some banning some putting regulations and age limit on it. So any implications you might have for the farm bill and how that might change the dynamics in.
The impact of business. Thank you.
Well.
The past farm Bill was so profound that really kicked off the whole CBD industry.
As a start so.
There's not a lot of leakage coming out of the USDA and what they're looking for we don't expect to see some tangible color on that until probably October November but we are bullish that there will be some changes like on Delta right I don't believe delta eight's going away.
I don't necessarily believe in it but.
But I think it's here to stay but.
I just don't think.
There's going to be tremendous change, but on the CBD side I mean, we're encouraged at the farm Bill May help us, but we're also encouraged that we're starting to see.
Congress.
A number of congressmen that are now putting pressure on the FDA and I think that's even more important.
Development, because really the FDA controls.
The Paris, Thanks, so to speak they are the ones that are.
Being.
Being sort of negative towards any movement forward.
And that's what we as a group.
Industry are working towards.
So I think that's the bigger the bigger win is whats the FDA going to do in 2024, so, but we'll probably have some better color. When we talk to you in November on that area.
Okay, Great I appreciate the color I'll jump back in the queue.
Thank you one moment for our next question.
And our next question will be coming from Frederico Gomez of HDTV capital markets. Your line is open.
Hi, good morning.
Thank you for taking my questions congrats on the corner.
Just first on your Mike on your comment about.
Yes.
And that's also up listings.
How you look at that I'm just curious.
If you have any update on the Texas medical cannabis application.
And when you look at the U S market is it really about taxes for you or would you consider or are there other potential markets as well. Thank you.
Well I think overall for the U S.
It remains.
A huge market for us and we've done tremendous amount of hallmark internally and we don't think we're disadvantaged to enter the U S market upon decriminalisation or legalization, because we believe that there are some great.
Great companies out there that are executing very well today. However, I think the game is going to change really coupled to.
Interstate commerce.
Whether that's going to go and I think Thats, where we will shine.
Our Texas assets again are we believe are probably the best assets in best location for high quality low cost cannabis that can be delivered throughout the United States.
And.
That will make US compete we believe at any point in the future, but we're not going to sit here and just waste time waiting for that to occur.
<unk> heard so many promises on the U S front is really kind of ridiculous. When you think about 35 or 36 states that are legal for cannabis.
Medicinal recreational.
Just be in New York is 1400 illegal dispense cease operating in cannabis on every corner, but yet the federal government is really not moving forward.
So before I answer about Texas.
That's why we are very focus on international, especially Europe , where it's the clarity is there.
The Decriminalisation is occurring we believe it's going to be a huge potential market and we believe we can leverage everything we've done in Canada, and Europe and win there.
Long with collaborations and alliances as I mentioned regarding Texas, It's just.
It just blows our mind here with all the effort we put forward in Texas, how it really comes down to one individual that controls north of 30 million people the size of the Canadian market in Texas to not move the medicinal program forward that was a real disappointment.
During this last legislative session ending in late.
Late may.
The next round is two years away. However, Texas is granting additional medicinal licenses we've applied for one.
So we'll probably move that forward, we're hoping we'll know if we've been allotted one in the fall.
And that will help position us step forward to the future. So.
Hope that gives you some color Puerto Rico.
Yes. Thanks.
Thanks for that and then just on international you mentioned how.
How should we think about growth in that segment I know that you had a good increase there this quarter, but.
In terms of the ramp and how volatile does international sales can be.
And just tied to that any updates on the Netherlands. Thank you.
Yes, I think I think the international side I mean, you could see it will be lumpy at times is it because it's very nascent and we will get going so I wouldn't have an expectation that the growth curve is going to be.
So at a steady and steadily increasing.
But it will.
Year over year increase.
We are very bullish on that.
Maybe see some compression at times like Israel due to some political issues going on there and others, but really the EU as the market we're focused on.
Germany's leading the way, but France, Italy, Poland. All of these other countries are looking at the chairman.
Regulatory process that they went through.
And it's happening so.
There's a number of competitors looking at that market somewhere in Sandoz spent just E. Some money.
Without declare a path we've been prudent with that as we've reported to wait till the clarity was there is there were going forward.
Increasing our sales.
Ill effort going forward.
And this is all <unk> and we anticipate that the majority of the European market will just operate on a medicinal platform for at least the next three to five years with the exception of certain countries, such as <unk> and specifically the Netherlands, where we're one of the 10 license. So as you know we have secured to our license with two location.
<unk>.
There were some slight change in the government recently don't think its going to impact our ability to move forward, which we hope that will commence in the fourth quarter of this year.
But we are always prudent before we push the final button to make sure that the political situation is solid.
So I think we'll be able to update you clearly by November on our progress there.
Great. Thank you and congrats again on the quarter.
Thanks Robert.
Thank you for your question one moment. Please for the next question.
And our next question will be coming from Eric.
There's.
<unk> from Craig Hallum Capital Group Your line is open.
Alright, great. Thank you for taking my questions.
I apologize if this was addressed already on drug in another call, but I was wondering first if you could.
Expand on the guide for positive consolidated cash flow in Q3, just wondering if you could just expand on that a bit and help us understand the primary drivers of that thank you.
Primary drivers of that are the management of our current assets. Some of those current assets are going to flip from receivables to cash so it's going to be a very strong.
Cash collection quarter across all our all our business lines, so it's pretty pretty straightforward.
We're obviously, we're a good bit in six weeks into the quarter. So with the confidence that we're very confident that that.
That is occurring in real time.
Simple as that.
Alright, great. Thank you I appreciate that.
And then my next question is just on the.
Investments in produce and your overall infrastructure.
Technology et cetera, I'm just.
Wondering if you can help us sort of frame the.
Either expected.
Capex involved or expected.
Timing of this.
You characterized it is continuous improvement.
I'm, assuming it's not necessarily just like.
There is a certain set.
If that date, where everything will be completed but just if you can help us kind of frame that in terms of either timing or dollar amount that would be very helpful. Thank you.
Yes, So Texas operates predominantly not on a calendar year, but on a crop cycle, which commences.
<unk> starts the beginning of that crop cycle, depending on which asset we are talking about commences.
In June and sort of is in full class out mode by September and then runs through the following summer.
So we have.
<unk> done two years of experiments with the investment in AI and one of our facilities over the last two years and have rolled it out completely now in all Texas facilities and in fact, we're rolling it out.
In our Canadian Delta facility and plan to roll it out next year as well in cannabis, it's proven to be a great partner to our growing operations.
Secondly, this year alone.
Already spent in the last four or five months.
$3 5 million and capital improvements and <unk>.
Packing technology sorting and grading for efficiency cutting labor cost as well as shading systems and new technology.
Across the board from irrigation COPD captured whatnot.
So.
Yes, so we.
All of it is about continuing continuous improvement to cut our cost and increase our quality and yield going forward.
We already have plans for 2020 for Capex improvement in all of our facilities as well so.
Is that enough or.
Yes.
So you spent the.
$3 5 million in Capex, thus far.
Do you have a figure for us either.
The second half or into 'twenty, four that you're willing to share now.
Not for 'twenty for it because we haven't finalized that but possibly in November .
Alright, great. Thanks.
Thank you one moment our next question.
And our next question will be coming from Douglas Cooper.
Of Beacon Securities. Your line is open.
Douglas Cooper of Beacon Securities. Your line is open.
Sorry, Brian .
I was on mute.
You got me now.
Yes, we have you Doug.
Okay, perfect, Thanks, guys and terrific work in the quarter.
A couple of things I, just looking to get your comments on.
Let's start with the Canadian industry as a whole.
You talked about obviously the competitive nature of it and continues to be competitive out there Barbara players.
Think how do you think this will play out over the next 12 to 24 months.
It just seems to me that.
A lot of the smaller guys are not going to be able to get capital to survive.
B.
Some of your major or historically major companies have sort of left.
The adult use space, either a per the medicinal market or be pursuing an alcohol strategy.
How do you think this will play out to me it seems to me that ultimately this will end with three or four companies and obviously you've been the biggest biggest of those.
Yes ill answer part of that and I'm going to turn vantage because he is in a trench every day fighting those battles.
Frontline so to speak but from a macro perspective.
Im not going to comment on other Lp's strategy I think what's.
What makes the industry unique and in certain cases.
Being this nascent legal cannabis industry is that every LP in Canada seems to be looking for what that magic path forward is whether it's a diversified strategy a focused strategy as opposed to the U S. Even though it's not federally legal when we look at the U S. Msos are at.
At least I do they are very focused on cannabis theyre not diversifying their wanting to win and cannabis in the U S. So it's very different in Canada.
For the reasons, we have companies that are looking at different ways.
So I don't know, which is the winning formula, but we know that we want to focus on being number one not just in Canada, that's outgo being number one internationally as well.
Sounds bulb, but we.
We know the only way to get there is a total commitment and focus on the industries were in and not get.
Not not dilute our ability to operate so that's sort of the macro level as far as.
My comments were we've talked a lot of quarters about the industry in Canada.
That there is overcapacity, there still is overcapacity and thats from a number of Lps that continue to linger on.
The capital markets are closed interest rates are through the roof. So at some point I think there is an inflection point coming we thought it would be here by now.
I think once the dominoes really start to fall that will fall away and any and I do believe there'll be three to five companies.
That are leading the Canadian and the Canadian export industry going forward now for the for the online for the frontline Manish you want to add color on that.
Yes, Thanks, Mike and I think you hit most of the pieces and thanks for the question Doug.
We've been consistent on our business strategy and how we've deployed everything from.
Being a branded house and onto a house of brands and with the Rosa acquisition and kind of what they've been able to show and do when they are agile.
Ability to be agile and nimble.
And we still have a lot of opportunity in Canada, I think I know based on what we have in the pipeline and the work, we're doing with Roes and purion firms across the Canadian landscape.
And hopefully on our strategy, so we're not seeing or hoping waiting that other people will go by the wayside, Mike articulated it very well.
We believe that that's going to happen, but underneath that we just continue to operate and execute generate cash generate profitability create great products through innovation with a really strong assortment strategy.
<unk> market from different consumer profiles and segments.
And we think that's going to continue to allow us to be successful and if the industry breaks open and people do share. If you go by the wayside because on the trenches, we see it we see cracks in the foundation, we see products that are constantly hitting the market great one week not great.
Pull through of sell through in the following weeks.
We see the relationships, we have with stores in port tenders, we value those we have built a solid reputation across this country.
In Canada, and we continue to execute on that so we like how we're positioned we think things will evolve, but we're going to continue to find ways to win and outperformed where we can.
That's great so maybe.
<unk> any comments on the barren flower.
And what do you think you are going to happen there and the impact.
<unk> may have on the actual.
The retail sale of products.
Not really Doug I think we want to just be cautious about commenting on others. So.
Probably going to pass on that question, but if you wanted to ask another one will take it.
I guess the last one for me just from a balance sheet perspective, maybe Steve.
How do you feel that your balance sheet right now and any color on the potential sale of those assets in Texas I think you mentioned, Steve that you expected.
Depression debentures this quarter.
Do you expect something to play out before the end of the year is there a minimum threshold that which you.
Consider something below and I'll leave it there thanks.
Okay.
Yes, we feel good we feel.
Good about our liquidity and our balance sheet at this stage of the year.
Obviously mining hands is.
An active process.
Private taking a bit longer capital markets have tightened up and I think that has been.
It impacted the speed of which the process has taken but we have interested parties actively looking at it and we will.
We'll see how fast it plays out.
Like any other real estate transaction.
Capital.
Buyer will have to bring capital to the forefront and we.
Capital markets are tightening so we'll see how it plays out will happen by year end or not well.
Remains.
And yes, where we have some minimum yes, we will have a minimum price absolutely.
Okay, great. Thanks, very much Simon.
Thanks, Doug.
Thank you one moment for the next questions.
Okay.
And our next question will be coming from Scott Fortune.
Ross Your line is open.
Hey, Good morning. This is Nick on for Scott first question for me just on the new product side, you mentioned launching seven new brands in the last 18 months can you just give us a rough sense of what those are contributing now kind of in terms of mix.
Are there any specific product categories, you feel under indexed in that Youre looking to address in the future. Thank you.
Sure mandate should take that one please.
Yes, so we don't really break it out totally by by brands I mean pure some firms is still our main stay brand and contributes the most amount to towards share.
Some of the other brands have just started to launch and we think that they'll play a very positively in certain consumer spaces in index and with innovation behind it, but we don't really give out.
The components underneath your.
Your second part of your question was around where do we feel on our index infused pre rolls has been probably one of the hallmark probably has been the biggest story over the last eight to 12 months in the.
In the industry and we're significantly under index, there and then continuing to grow our pre roll sure just our base payroll share. So when you think about how strong we are in flower and how we have over indexed on the flower side, we believe through our great brands and products in our specific rich trains, we can use those as extensions to.
To play in spaces, where we're under indexed and Thats, what youre going to start to see so specifically and pre rolls and infuse pre rolls and then with the launch of our new base, we're starting to really regain some of the share we lost.
Think there's some upside there so banks pre rolls infused bureaus.
No I appreciate that color. Thank you and then second one for me just wanted to follow up on the international side, Germany, specifically, you launched products through <unk> and May just kind of any early puts and takes on that side and just wondering if you had any color on the competitive landscape and maybe the pricing environment there.
Any color would be helpful. Thank you.
Yes, I think the competitive environment, it's going to be.
I think it's going to be pretty solid going forward because for the Canadian Lps that are all dealing with sort of the macro issues in Canada tax and others, which.
A number of companies are not able to get cash flow positive. They are looking at.
At the international markets of course, where there is no tax.
So, but I think to win in that market, it's going to take the same.
The vision, we had in Canada, that's going to be high quality low cost and there is price compression already happening that market just like we've seen in the U S very quickly price compression.
We predicted that early on even in Canada, and I think the same will happen in Europe .
But that being said, we think we can win there it's still much more lucrative.
From a gross margin perspective.
And.
We're bullish on it.
And I don't think everybody.
It's not as easy shipping internationally, especially China.
B under the EU GMP banner is a very difficult process and not everybody can do it there are some.
Greenwashing and there are some ways you can circumvent the system and ultimately that will play out.
But again for us we believe.
We stand the great chance of bleeding in Europe as well.
As regarding IU vial ESI view, we've made multiple shipments.
And then we have many other alliances that we're working on throughout the whole EU that we have it.
Put out yet, but probably give some more color towards the end of the year on that Scott. Thank you.
Okay.
Thanks for that I appreciate the color I'll pass it on.
One moment for our next question.
And our next question will be coming from Mike Wiggins.
Of <unk> equities your line.
Hi, Thanks, a lot and congrats on a great quarter hitting the produce turned around much faster than I think at least I expected real.
Real quick on the on the Canadian cannabis side can you sort of give us your perspective on how.
Ontario, reducing their distribution margin is sort of going to work from your perspective in terms of how they decided the and real tail pricing versus the wholesale price and they're paying you.
Sure.
Turn that over to mandate back, but before I do thanks for launching on village farms as we appreciate it man.
Yeah, Thanks for the questions.
So earlier this year the ocs.
Revise their markup.
Pricing kind of strategy, an approach where they were much more variable and they went to more of a fixed approach.
They were planning around with how they are marketing our products in the various segments and then kind of realigned everything to go to a fixed model.
So for in some categories.
Lower oxygen getting margin back to the producer and other cases, such as on concentrates where they introduced pre rolls come in theyre going to be taking a greater margin. So they're kind of they are kind of balancing everything else in Canada.
Certain percentage will be fixed for a producer will now know clearly like we do in other provinces when we submit a product.
How the market will play through the supply chain and how that will impact and.
And pricing so for from a producer standpoint, some real big wins better margins for us more visibility to end consumer pricing.
And given where <unk> sits on the Canadian cannabis side, those would be positive for us given where we play and how we play. We're also hearing in the industry is that there is stability now for.
Producers too.
Pass along that margin to consumers and reduce their pricing, but that's not what we're hearing.
Our GPI increase we took earlier this year, we were a leader in kind of maintaining price improving price and now we're hearing that the industry is going to follow us behind that so.
It's a good it's a good new story, we believe for the industry shows leadership in the Ontario market too.
Look at their margin structure, and making sure. They are doing the right thing when it comes to pricing.
And we think it's great for the industry and we're excited about it.
Sure.
I know that sounds great. So just if you can thread the needle of.
Wholesale price increases and end user prices flat down to drive even higher volumes.
And then quickly on the on the Protos side, I guess, you sort of guided to your goal of positive EBITDA for the year and produce and you've achieved that by June 30.
Is there any reason to think going forward that you wouldn't at least be.
Breakeven or because.
Because we keep having continue saying that.
Positive EBITDA in the prototype going forward.
Okay.
This is Steve so the produce will be quarter to quarter. So we would expect that in the third quarter. We will not have positive EBITDA and we will have strong positive EBITDA in the fourth quarter and thats due to the seasonality of demand and supply.
There is less supply of essentially.
The controlled environmental AG Tomatoes in the fourth quarter and demand is usually pretty steady.
We usually see improved pricing such that were profitable in Q4 and.
Struggle a bit with pricing in Q3 so.
But for the full year, we are expecting to.
The land in positive territory.
Okay.
That's great. Thanks, a lot for taking the question.
Thank you Mike.
Thank you one moment for the next questions.
And our next question will be coming from then.
Halberg.
Stifel. Your line is open.
Hey.
Good morning, I'm filling in for Andrew. Thank you for taking my question.
Just want to turn it back to international sales there was some news out of Israel. This week, where the health Ministry announced some reform that could provide patients with easier access to.
Medical Canada I'm wondering is this something that you are watching closely and if so how should we be thinking about future shipments to Israel going forward given that these changes are supposed to come into effect at the end of this year. Thank you.
Yes, we are watching it that in the political issues going on there that has sort of dampen some exports. There. So we are in touch with.
Partner, there and we're encouraged but that may not start back up until the fourth quarter or first quarter next year.
So I don't have much more color on that at this point.
Alright, thank you.
That's all for me.
Okay. Thank you.
Thank you. This concludes the Q&A session I will now turn the call back over to Mike Digilio for closing remarks. Please go ahead.
Just wanted to thank everybody for participating today, and we look forward to our next call in November .
Thank you for your continued belief village farms.
We are confident that we will lead the industry going forward. Thank you.
This concludes today's conference call. Thank you all for joining you may disconnect and everyone have a great day.
Okay.
[music].
Okay.
Yes.
Okay.
Good.
Yes.
Thank.