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spk09: Good morning, ladies and gentlemen, and welcome to the Village Farms International's third quarter 2021 financial results conference call. This morning, Village Farms issued a news release reporting its financial results for the third quarter ended September 30, 2021. That news release, along with the company's financial statements, are available on the company's website at villagefarms.com under the Investors heading. Please note that today's call is being broadcast live over the internet and will be achieved for a replay by both telephone and online beginning approximately one hour following the completion of the call. Details of how to access the replays are available in this morning's news release. Before we begin, let me remind you that forward-looking statements may be made today, during or after the formal part of this conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in the company's various securities filings with the SEC and Canadian Regulatory including its Form 10DK and DNA for the year ended December 31, 2020, and Form 10Q for the quarter ended September 30, 2021, which are available on EDGAR. These forward-looking statements are made as of today's date, except as required by applicable security law. We undertake no obligation to publicize, update, or revise any such statements. I would now like to turn the call over to Michael DiGiovio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DiGiovio.
spk13: Thanks, Kelsey. Good morning, everyone. With me today is Chief Financial Officer of Village Farms, Steve Ruffini, and also joining us again this quarter is President and CEO of Canadian Cannabis Business, Pure Stone Farms, Mandish Dosanji, who will also join us for the Q&A at the end of the call. I just want to say congratulations, Mandish. Yesterday morning, he had his third child, a son, and he did manage to take a half a day off back to work this morning, so we're really proud of you, that commitment. And I will say that it's baby season here at Village. There's a number of folks that are pregnant, maternity leave. My daughter had a son two weeks ago, so It's great to see as humans, I think the greatest of the greatest thing we do is produce offspring. So congratulations again, Mandish. Okay, so for today's call, I'll begin with an overview of highlights of the financial and operational highlights across the business. Steve will review the financial results. I'll return with some concluding thoughts about how the future village farms is rapidly coming into focus. And then we'll open the call to your questions.
spk02: So with that, the third quarter,
spk13: From my perspective as CEO, there are four key takeaways for me this quarter. Number one, profitability. We generated consolidated earnings per share of $0.01 with 50% year-over-year growth in the consolidated adjusted EBITDA with positive contributions from each of the key businesses. Two, the continued operational financial performance of Pure Sun Farms with the market-leading brand in the largest and most profitable market segment dried flower, all of which to date has been generated organically and internally with our vertically integrated operation. Three, the significant additional opportunity in the United States provided by Balance Health Botanicals and accretive acquisition, which is already raising its growth profile on the Village Farms platform. And four, our progress on emerging international cannabis opportunities. So first takeaway, profitability. Our third quarter was highlighted by strong financial results, with overall positive earnings per share and 49% year-over-year growth in consolidated adjusted EBITDA, with positive contributions from each of Pure Sun Farms, Balance Health Botanicals, and Village Farms Fresh Produce. Pure Sun Farms has lived yet another record quarter since Its entry into the retail branded market late in 2019 may remind everybody that we were last in pretty much. So that's pretty impressive when you look at that timing. And they were able to record net sales that were 53% year over year. Record adjusted EBITDA for Pure Sun Farms up 93% year over year to $10.2 million Canadian dollars and a very healthy gross margin. blended, branded, and non-branded of 44% for the quarter. I want to pause for a moment on the gross margin, which was driven by continued gains in production efficiencies and quality improvements. This is a crucial lever of our business model, indeed for any sustainable business. These efficiencies self-fund ample opportunities to invest in future growth organically. And our gross margin performance of 39% for the first nine months of this year clearly validates our ability to deliver on our 30% to 40% stated target range gross margin long term, especially as we increasingly capitalize on additional opportunities in important areas like new strain development, genetics, growing protocols, and increasing knowledge and understanding of the plant itself, both in cultivating it and what consumers really care about. Balance Health also contributed positively to adjusted EBITDA for the just six weeks post-acquisition. EBITDA of $700,000 in line with our expectations. And Village Farms Fresh Produce also generated positive EBITDA in the amount of $1.4 million. Second takeaway, Pure Sun Farms and the Canadian market. During this quarter, Pure Sun Farms remained the top-selling brand of dried flower in each of our key markets, Ontario, Alberta and British Columbia, an achievement we repeated again in October. In terms of Canadian cannabis market recently, we have seen some irrational, but for us, I think unsurprising dynamics reemerge. During the third quarter, we saw aggressive, very aggressive pricing, maybe desperate negative pricing tactics, probably tied to trying to buy market share or to clear out inventory to avoid write-downs and maybe even generated much needed cash, even if that means doing so unprofitably. Now, we do know in CPG markets that buying market share is something that's normally done, but I think it's a different case here, while these companies haven't shown profitability. In an emerging industry that is still developing brand loyalty, the Pure Sun Farms team makes every strategic decision to balance market share and profitability, and most important, being best in class. This is not an aspirational goal. We have organically driven 12 consecutive quarters of positive EBITDA with leading market share, even as market share is being bought by competitors through pricing or acquisitions, and many would argue ill-conceived or overvalued or hastily transacted acquisitions. Pure Sun Farms' branding position, everyday premium, coupled with deliberate investment in new product launches, production strains, and customer and consumer insights were designed to create a growth business for the long term. Two years of market share data prove our strategies clearly working. But we are not resting on our laurels. We are continuing to invest and innovate for future market share expansion. During the third quarter, we added more than 30 new SKUs in four product categories. led by the launch of several new strains, including Black Cherry Punch and Jet Four Gelato, both different and both high THC offerings. And Q4 will be a similarly active quarter for new launches. And we continue to learn and enhance processes, a great example of which is the work we are now doing with hang drying on a large scale. Our initial trials went well. The conversion process has started, and hang dry product will start making its way to market in Q4 with increasing scale coming all next year. Speaking of which, in anticipation of continued growth in demand, we have commenced production in the first half of Delta II facility, Pure Sun Farms' second 1.1 million square foot greenhouse, which is adjacent to Delta III. As previously reported, we started planting in September with the entirety of the first half of the facility to be fully planted out this month, and initial harvesting also begin this month, as per the plan I've discussed. Our decision to expand production is a reflection not only of our confidence in the continued growth in demand for our products in Canada, including planned expansion of our market presence geographically, but also our plans for export markets. We expect the second half of Delta II to be ready to go in the second half of next year, with some important enhancements to support the continued ramp up in the scale of the business as we prudently build for future demand, all of which I will remind you is being funded internally. On that subject, during Q3, Pearson Farms completed its first ever export shipment, a variety of high THC products to our investing partner, Altum International, for the rapidly growing Australian medicinal market. Additionally, during the quarter, inspection of the Delta III facility for EU GMP certification was completed, which was delayed about 15 months due to pandemic travel restrictions. This is a critical step towards future potential sales in the European medicinal market. Once certification is awarded, we could begin shipping product the following quarter to that region. And we will aggressively... pursue these markets with the same tenacity and everyday premium strategy that has been so successful in Canada. I will note that we are not just targeting EU. We are also pursuing other international markets as well. First and foremost, Israel, which is at the top of our list. All in all, Q3 was yet another excellent quarter for Pure Sun Farms. Not only for its continued leading operational, financial, and market share performance, but also for the significant additional groundwork we have laid to build on this performance for many quarters to come. And I'd like to say kudos to Mandish and his great team. The third takeaway is our U.S. opportunity and how balanced health botanicals significantly strengthens that. For our U.S. cannabis strategy, we took a major step forward during the quarter with the acquisition of 100% of Colorado-based balanced health botanicals. which, as I noted earlier, is already contributing positively to adjusted EBITDA. With the acquisition of Balanced Health, Q3 cannabis sales represented 43% of total village farm sales, and that was just a month and a half of contribution from Balanced Health. Balanced Health is a leader in the U.S. cannabinoid market with a diverse portfolio of CBD and other products distributed both online and in retail stores. It provides village farms with immediate access to the U.S. retail CBD market, expected to more than triple in size to $16 billion by 2025 from currently. Its e-commerce platform, CBD Distillery, is a top-five CBD brand in the U.S. and top-ranked website in the CBD category with more than 30,000 orders monthly and a significant repeat customer base. The BHB team is one of the most experienced, knowledgeable, and successful in the industry. With a passion to continue to grow their current platform as part of the Village Farms family, we welcome them aboard. And also, Balance Health has already taken an exciting next step in their product strategy with the recent launch of their unique Synergy Collection, which takes the benefits of the entourage effect in their flagship CBD-rich full-spectrum hemp extracts to a new level. This is truly innovative in the CBD space, and I expect to have much more to share in terms of product innovation in the quarters to come. So it's a familiar playbook for those of you who have been following Village Farms' transformation. Balance-held product categories are adjacent to our existing U.S. products portfolio, and we strongly believe that when there is additional regulatory clarity around CBD— Our existing relationships and experience with major grocers and large format retails will be a major advantage in capitalizing on that opportunity. To summarize, Balanced Health is a great fit for Village Farm's portfolio. It is a leader and innovator in this high growth category with a very strong, committed management team and a leading established online platform and profitability. Together with our unmatched Texas assets, nearly 6 million square feet, It provides optionality as federal legalized high THC regulations come to develop in the U.S. And of course, we are very encouraged by this past Friday's report that a new Republican-led congressional high THC cannabis legislation may be in the works. So fourth and final takeaway, steady progress on the prudent international expansion. Q3 source takes some meaningful additional steps forward in our international cannabis strategies. leveraging our strengths to build brands in emerging legal, regulated cannabis markets with existing consumer demand. We took a major step forward towards participating in what we expect to be the first legal recreational cannabis market in Europe. This past September, we signed an option agreement which gives us the irrevocable right to acquire 80% ownership interest in Netherlands-based Lille-Holland. Lille is one of the 10 applicants selected by lottery to receive a license subject to customary government approvals to legally cultivate and distribute cannabis as part of the Dutch government's cannabis supply chain pilot program. This investment will leverage Lille's local expertise along with our own experience in facility design and construction and efficient large-scale operations. including product development, genetics, and strategy, both branding and marketing. We view this as another prudent and official deployment of capital with the potential for outsized long-term returns, including a springboard to possible other legal European REC markets as they fully open. Finally, with respect to emerging international markets, earlier I mentioned Altum's imminent launch into the rapidly growing Australian medicinal cannabis market. This launch will mark Altum's first sales of high THC cannabis products and the third Asia-Pacific market in which it has commercial operations, in addition to Hong Kong and Taiwan. To conclude on Q3, we saw strong financial performance and strategic execution across each of these core growth areas. Now I'll turn the call over to Steve to walk through our financial results in more detail, and then I'll return with some closing thoughts. Steve? Thanks, Mike.
spk06: Before I begin, a reminder, our third quarter 2021 results reflect the full consolidation of the Pearson Farms business. It was not wholly owned until November 2020. As we've been doing, we have provided segment reporting, historical 2020 and current 2021 for Q3. We're looking at the Q3 2020 standalone Pearson Farms financial results. Please remember we could not consolidate Pearson Farms in our statutory Q3 2020 financial statements. We include them in the press release for comparative purposes only as we believe it is helpful context as we discuss current business trends throughout this call. Turn to results. Consolidated sales for the third quarter were $72.4 million compared to $43 million for the same period last year. The nearly $30 million increase was primarily the result of the consolidation of Pearson Farms in this year's results, as well as the partial quarters contribution from Balanced Health. We generated consolidated net income for the quarter of $700,000, or a penny per share, which was essentially unchanged from the same period last year. Consolidated adjusted EBITDA grew 49% year-over-year to $6.8 million from $4.6 million, This was primarily the result of a 270% year-on-year increase in adjusted EBITDA from our cannabis operations, which was partially offset by the decrease in fresh produce adjusted EBITDA, although positive was down from the outsized number in Q3 last year when we were benefiting from a very favorable demand and pricing environment as a result of the U.S. lockdowns. Turning to business segment results. starting with cannabis, which now reflect our combined Canadian cannabis operations, Pearson Farms, and our U.S. cannabis operations, Balance Health Botanicals, which was acquired on August 16th. Accordingly, our Q3 2021 results reflect only about half of a quarter's contribution from Balance Health, which was still accretive to our consolidated results. Our total cannabis operations comprised 43% of total Village Farms Q3 revenues, at $31.2 million versus no in Q3 last year for the reasons I mentioned earlier. Cannabis adjusted EBITDA was $9.3 million, a nearly three-fold increase from last year's Q3. U.S., $2.5 million. To aid our investors and analysts in assessing the performance of Pure Sun Farms, we have continued to break it out separately for the quarter and year to date. As we move forward with our cannabis operations, we will report our cannabis operations by territory rather than legal business entity. We've already begun to integrate our Canadian and U.S. cannabis businesses and look forward to the collaboration between the teams. As Mike discussed, Pearson Farms delivered yet another strong quarter. When comparing Pearson Farms' results year over year or even sequentially, using Village Farms' statutory reporting currency, which is U.S. dollars, can be a bit tricky due to FX swings. For instance, the U.S. dollar strengthened versus the Canadian dollar in Q3 2021 versus Q2 2021 by 2.5%. The relative weakening of the Canadian dollar dampens Pearson Farms' U.S. dollar contribution a tad. When comparing U.S. dollar Q3 2021 Pearson Farms to U.S. dollar Q3 2020 performance, the Canadian exchange rate swung the other way. as the Canadian dollar was 5.4% stronger in 2020. As such, when comparing Pearson Farms year-on-year or quarter-on-quarter results, it is best to compare using its trading currency, Canadian dollars, versus our statutory reporting U.S. dollar currency. In my comments today, all the period comparisons will be using Canadian dollar to Canadian dollar for the respective periods for Pearson Farms. Total net sales for Q3 was 27.4 million US or 34.5 million Canadian, which were up 53% year over year and up 13% sequentially. Pearson Farms retail branded sales, which comprise 66% of total Q3 sales, increased 91% year over year to 18.1 million US or 22.8 million Canadian, and was up slightly from our Q2 of this year. As I noted on our Q2 2021 earnings call, our retail business has returned to a more normalized pace with the worst of the pandemic in the rearview mirror, but it is subject to when provincial buyers execute their POs and when they receive the corresponding shipment. We did ship several large branded orders in early October of this year that we had hoped would occur on or before September 30th. This time difference means our retail branded sales in Q3 were a bit lower than our internal expectations. However, we have commenced with a strong start to Q4 and have resumed our strong growth trajectory in this channel. Our branded sales consisted of 89% flour and pre-rolled SKUs with cannabis derivatives comprising the balance of our branded sales. Small format comprised roughly 50% versus our large format, which was also 50%. with very similar margins. Our large format sales almost entirely consist now of the single strain format, which commands similar margins to our small format flour SKUs. Our pre-roll sales grew over 24% substantially, and we improved our gross margin on this format during the quarter as we have taken on the manufacturing in-house. That said, pre-rolls carry a lower margin than our flour SKUs, at least as of today. Q3 was a particularly good quarter for non-branded sales or wholesale sales, which was 9.3 million US or 11.7 million Canadian, up from 8.8 million US or 10.6 million Canadian in Q2 last year, and up from 6.4 million US or 7.9 million Canadian in Q2 this year. And our highest quarter since we received our retail sales license from Health Canada. As prior to the receipt of our retail sales license in September of 2019, obviously all our sales by default were non-branded. Our high-quality flower and trim, especially high-potency strains, continue to be in high demand from other LPs. We assess wholesale sales based upon product availability and always in the context of making economic and strategic sense for our retail-branded business. We continue to expect wholesale sales will vary quarter to quarter depending on available supply and other LPs demand. As you may recall, we do not assign any cultivation cost to our trim since we deem it to be a byproduct of our flower. As such, trim sales effectively have a high gross profit margin. Pearson Farms gross margin for Q3 was a very healthy 48% or 44% if one excludes the purchase price accounting, which I'll address in a moment. up from 34% in Q3 last year and up from 40% in Q2 of this year. This was above our stated target range of 30 to 40% as the quarter benefited from improved production efficiencies led by an increase in yield as well as potency and consistency, resulting in not only a lower cost of production, but also higher quantities of higher potency flour and trim, which increased their selling prices, which are impacted by both potency and consistency. This is especially impressive as we roll out new strains. As we have stated in the past, our cultivation will continue to evolve and we will continue to improve. That said, our Q4 gross margin percent will likely fall back into our target range of 30 to 40% as we expect an increased mix of our sales to be. Form of lower margin cannabis derivative formats as well as pre-rolls as we launch new SKUs in these formats and increase our market share in these form factors. Also, our non-branded margin can be impacted quarter to quarter by the movement in some quarters of lower potency flour and distillate. As stated, potency does impact price. As a reminder, due to the acquisition of Pearson Farms in November 2020, we were required to adjust Pearson Farms inventory values to fair value due to acquisition accounting, which impacts our statutory reported gross margin. While the overall net purchase price adjustment to inventory was close to nil in November of 2020 on the acquisition as we wrote up flour and wrote down distillate and oil inventory on hand at that time. As such, we've adjusted our EBITDA for these non-cash fair market accounting adjustments. The non-cash impact on Q3 was a reduction in our reported adjusted EBITDA of $1.2 million as we sold off and or used some of the distillate and oil inventory we had on hand in November of 2020 in Q3 2021. As of September 30th, we have roughly 6.5 million Canadian left on our purchase price adjustment balance, which will gradually work itself off over in the following quarters. Pearson Farms SG&A for Q3 was 5.3 million US or 6.7 million Canadian, which equates to 19% of total sales. This compares to 4.4 million or 5.4 million Canadian or 18% of sales for the second quarter. The expected sequential increase is primarily due to an increase in brand, and commercial activities, such as media and trade spend, as well as a larger workforce to support the increase in point-of-purchase sales and market share growth, especially in flour. Pearson Farms delivered its 12th sequential quarter of positive adjusted EBITDA of $8.6 million U.S. or $10.9 million Canadian, which is nearly double that of $4.3 million U.S. or $5.6 million Canadian in Q3 last year, and up 19% sequentially from the second quarter of this year. Our recently acquired U.S. cannabis operations, Balanced Health Botanicals, performed in line with our expectations, contributing $3.8 million in revenue during the approximately six-week post-acquisition period, with a positive EBITDA of $700,000. As some of you have seen and commented online, we have filed our Form 8 with the Historical Financials for Balanced Health last week. Yes, 2020 was a rough year for Balanced Health and the entire U.S. CBD industry. But as you can see from both the post-acquisition results and the first month of 2021, which were also performed 8K last week, the Balance Health Manager team has done a terrific job riding the ship and returning the business to profitability while continuing to innovate these products. We are very excited about this new Synergy line and some other products that will be launched in early 2022. To Village Farms Fresh Produce, I am pleased to report we continue to see the recovery of tomato pricing that I alluded to on our Q2 call after one of the most challenging periods in the last decade. Pricing is being helped as retailers and consumers return to normalized demand, which pre-COVID was higher for our higher-priced specialty tomatoes than it was post-COVID, as well as supply issues being driven as the entire industry continues to struggle with the brown reduced virus. Fresh produce sales for Q3 were 41.2 million, a decrease of just 4% from Q3 last year. When you recall, we were benefiting from significantly elevated pricing as a result of the pandemic. Demand driven by restaurant closures. We continue to utilize new methods and procedures to manage the virus and believe we will see improved results from our tech facilities during this crop cycle, which is just now kicking in and will last through the second quarter of 2022. I mentioned the Q2 call we expected to get back to break even for our fresh produce adjusted EBITDA in the second half of 2021. I'm pleased to reiterate Mike's earlier statement. Our fresh produce business generated positive adjusted EBITDA of 1.4 million in Q3. Although down from the outside level of Q3 last year during the period of elevated pandemic pricing, it is very positive turnaround from a loss of nearly 4 million in Q2 this year. Our fresh produce EBITDA is very dependent on pricing. But so far in early Q4, we continue to see better pricing and forecast another quarter of positive EBITDA from this line of business. Finally, some comments on our balance sheet and cash flow for the quarter. At September 30th, we had over $80 million in cash and close to $40 million of working capital, excluding cash on our consolidated balance sheet. We did use over $30 million in cash for the balance health acquisition plus transaction costs and spent approximately $4 million on capital expenditures on our production facilities during the quarter. Our operating cash flows from our business operations excluding working capital generated close to $5 million for the quarter, while our working capital due to the ongoing expansion of our Canadian cannabis business did increase $10 million for the quarter. Additionally, we paid down our produce and cannabis debt to the tune of $1.7 million during the quarter, and we purchased just under 108,000 shares to the tune of $1 million during the quarter under our normal course issuer bid. As a reminder, our decision to purchase shares under this program is opportunistic and tied into our broader capital and M&A strategies. Most of the $75 million acquisition price for Balanced Health shows up on our balance sheet as goodwill. Currently, we are estimating the goodwill to be approximately $68 to $69 million as Balanced Health is an asset-like business. There are not a lot of tangible assets to allocate the purchase price to, including inventory, which is being well managed and has a low days on hand. As such, we will not have the fair market value adjustments we experienced with the full acquisition of Pearson Farms in 2020. Corporate expenses skewed higher in this quarter due to approximately $1.6 million of incremental transaction and legal costs associated with the acquisition of Balanced Health in August. which accounts for the $1.8 million quarter-on-quarter increase in corporate expenses in 2.3. And now I'll turn the call back to Mike.
spk02: Thanks, Steve.
spk13: So concluding thoughts, over the past several years, the future of Village Farms has really come to focus. We're a vertically integrated plant-based consumer products company. Our target... is high growth, large market opportunities in North America and around the world, with a specific focus on cannabinoids, both high and low THC, and related health products. As such, it was the right time for us to unveil a new corporate branding that reflects a significant transformation of Village Farms since expanding into cannabis four and a half years ago. So today, we are a branded consumer products company that is leveraging our deep institutional knowledge and extensive capabilities gained over three decades. We have unmatched CEA assets to build on our proud heritage in the produce business through significant new opportunities in cannabis, CBD, and related products. We are united by a new mantra, good for all. You can check out our new website, which is an expression of our unrelenting commitment to responsibility, resourcefulness, and integrity, as well as to continued leadership and innovation in sustainable agricultural practices and the use of alternative renewable sources of energy. It's good for our customers, good for our consumers, good for our partners, and good for employees, and it's good for you, our shareholders. In closing, let me reiterate my overriding objective, not just as Village Farm's CEO, but as its largest shareholder, sustained creation of real value over the near, medium, and long term. Amidst what continues to be a flurry of changes in leadership, strategic direction, and business models, and repeated moving of the profitability goalposts, our Canadian cannabis operations have been able, with the benefit of decades of operational experience and deep knowledge of the sector via the best leadership team in the industry, not just operationally, but in terms of consumer packaged goods know-how, to focus on one singular item, the execution of our plan. This quarter is further evidence of this execution. Our dominant brand leadership has been built organically and profitably. Our disciplined approach means that strategic investments, either acquisitions or capital expenditures, are poised to grow as part of Village Fund's platform and contribute positively to returns from day one. We do this by building on our heritage of 30 plus years. leading with sustainable business practices and preparing for multi-year growth opportunities across numerous cannabinoid categories ahead. This is the power of Village Farm's execution of our plan, building the right platform, executing on profit and market share, and that's what really matters. So thank you, and with that, we'll open up some calls, questions for our analyst, operator.
spk09: Thank you. Ladies and gentlemen, we will now begin the question and answer session for the analysts. Please limit the questions to two. And if you did have a question, please press the star followed by the one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request and your questions will be polled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question does come from Tammy Shen from BMO Capital Markets. Please go ahead. Hi, thank you. Good morning, guys.
spk07: Good morning. First question for me is I'm just curious on the unbranded sales this quarter, why not sell that availability of high-potency flour to your own retail segment but instead to the other LPs? Aren't you enabling your competitors to
spk13: Well, that's a good question. We talk about that all the time. And first, you know, there's a couple reasons. As we gear up for Delta II, from an operational perspective, we've always communicated that even with our experience, when you're starting up, even with a change of crop, there's a lot of buildup in that operational efficiency you need. So we want to be able to continue to grow as quick as we can. We don't produce what we can't sell, no matter what the channel. And once we get that penetration out there and continue to gain market share throughout Canada, then obviously the priority will be the retail market as opposed to the non-branded market. So it's a balance, because keep in mind, while others are closing assets, we're continuing to build, and we want to make sure that that operational excellence continues, so we have to move the product wherever we can.
spk07: Okay. And my second question is, can you talk a little bit more about how you are regarding this current Canadian market in the sense that there is this increasing fragmentation we're seeing? You called out very aggressive pricing, especially in this quarter. So can you talk a bit about how you see this unfolding over, let's say, the near term? Like, do you think this sort of pricing environment by your competitors is going to continue to be the case?
spk13: Well, I'm going to turn it over to Mandish for that answer because I might have a different point of view on how they operate from my vantage point. I think it's much closer to it on a quarterly basis. So, Mandish, first step.
spk12: Yeah, thanks, Mike. I appreciate the question, Tammy. So, to answer the part about what's happening in the market, and Mike alluded to it in the comments, we're seeing some really kind of interesting pieces of our competitors in terms of dropping price to the point where they're not making any money. And we see this through the activity on the wholesale side of the business, the accretive margins we see on selling product, and to see LPs turn it around and sell it for a loss. We don't think that's sustainable, and we're already starting to see cracks in the foundation and the tides turning. Most recently, we've seen products that were doing well in Ontario take price increases to the customer as high as 12% in the last few weeks. So I think you're starting to see the requirement for LPs to have to start to turn margins around and either take price increases or change their product strategy. And so I think what we're kind of pleased with, Tammy, is in our performance and the growth in our gross margins is that, one, we're built for the long term. And two, if we want to start to invest in pricing to try to combat that and win market share, we can. We haven't needed to do that to date. but we really like the levers we can pull and the position that we're in. And then as we continue to see, you know, our growth and pre-rolls and vape on the 2.0 side, you know, competing more head-on, becoming now a top five in those customer segments, we have a lot of kind of tools at our disposal to start to kind of combat what's happening in the market. But make no mistake, I think what you're seeing today is not good for the long-term of the industry, and we believe that those practices will start to cease. or cause people to go under. And it's kind of the long-awaited consolidation that we've all been talking about. Mike, Steve, not sure if there's anything else you want to add there on kind of the market side, but those are my viewpoints.
spk13: Yeah, that covers it. And also, Tammy, on your first question, you know, we're still, you know, distribution channels through the provincial governments, and I think to a degree they're still ramping up. So we can't always get the penetration we want, but you can see I mean, we've had – in the last year, we've had sequential increases up at north of 40% on retail, and that variation – there's a lot of variation still quarter to quarter. But clearly, as we ramp up, our focus is 100% retail brand. It's just going to take time.
spk02: Thanks.
spk08: Thank you. The next question comes from Erin Gray from Allianz Global Partners. Please go ahead.
spk03: Hi, good morning. Thank you for the questions and congrats to you, Mindy, and your wife.
spk10: So first question for me, I'd just love to double back on what Tammy just asked. Some of your peers have been talking about kind of the return to brick and mortar and offering opportunity for some of the bigger LPs to regain market share that they've lost in recent months. Just from your perspective, are there any initiatives that you guys currently have in place as tends to get more brick and mortar shopping versus online? to ensure you guys continue to outperform some of the other bigger LPs and continue to gain share going forward as people return to in-store shopping.
spk03: Thank you.
spk02: Mandy, do you want to take that?
spk12: Absolutely, Mike. Good question, Aaron. I kind of alluded to it in the past quarter about what the opportunity is ahead for Pure Sun Farms, and we're executing on that, which is great brand presence, Really good recognition with bud tenders and consumers, and we're seeing that brand growth and that brand resonance. And last quarter, I mentioned it. Steve even talked about it in our SG&A. Growing the team, continuing that presence on the ground in each of our markets, key markets, continuing with our trade marketing activations on the digital front as well as in-store, and really starting to continue to bring the brand to life at POS. Collaborative partnerships with our retail partners to ensure bud tenders are are engaged, know about all of our new SKUs, new launches. The release talked about 31 new SKUs that we launched through the quarter, continuing that aggressiveness and growth into Q4 and making sure the product education is really known with the bud tenders and that we're seeing that pull through. We've seen really good progress towards that in terms of sell through, sell in, We're pleased with the talent that we're attracting, and every time we go to market for roles across the country, the amount of people that want to join our organization because of the strength in our brand and the strength of our sales, people who are in the cannabis industry continue to want to come to work at Pearson Farms. So we're pleased with everything we're doing on the build side. The team is executing really well, really strong digital programs as well as trade programs and outreach to consumers to continue to build that awareness. and a lot of collaborative partnerships with our retailers and boards to bring that forth. So people know about the great skews we're bringing to market and continuing the momentum on our sales.
spk03: All right, great. Thanks for that color, Mandy.
spk10: And then second question for me on international markets. It seems like a lot of opportunity there for you. You guys can kind of execute second mover advantage, advantage similar to what you did for the Canadian 1.0 flower market. As you kind of get that final GMP certification, you talked about Israel being a big market. How can you help us to maybe quantify the opportunity there and how you're going to look to allocate flour between the Canadian market, between both your retail and wholesale opportunities, as well as international markets, especially if those offer potentially higher margin? Thank you.
spk13: Well, I think first and foremost is Canada. So our priority will always be maximum penetration in Canada across the whole country. But that was part of the reason we brought on Delta 2. Remember, Delta 2 should yield even higher than Delta 3. So we have a lot of capacity coming on board and outside of Canada. We've definitely earmarked export both to Australia now and the EU as a priority. The margins are good. We know who's competing there. We know what the revenue numbers are and the margin growth. And it will be a key priority for us going forward next year.
spk02: Okay, great. Thank you very much.
spk08: The next question comes from Raul Segreze from Raymond James.
spk09: Please go ahead.
spk11: Morning, Mike. Steve Mendes. Congratulations on the great quarter. And Nick Mendes in particular, congratulations on your new arrival. So thanks for taking my question. And I kind of wanted to double back again on the Canadian market and wholesale. So as you referred to, Mike, that there's essentially a lot of irrational selling. I just wanted to dig a little deeper on your strategy there because previously when this happened, you guys were able to sell into that market profitably and watch others essentially flounder. Is your strategy, of course, beyond what Mendes talked about in terms of the act of selling, in terms of being able to be defensive, Are you able to continue driving the same margins you were able to before in both your unbranded and branded? Are you waiting out your competitors or are you looking to do something proactive as you defend your space while this irrational selling happens?
spk13: Well, I'll take a first stab at that and then give you Mandesh's point of view. But look, you know, there's a lot of drivers. We want to be best. That's first and foremost. And market share is important, but profitability is important. So we have to run the business as we see it in order to deliver on all these metrics. The market is being measured many different ways today, not just in market share, but in profitability and growth on a quarter and annual basis. So we have to take that on account coupled with the increasing capacity that's coming online over the next 12 months and make decisions that do the best. But ultimately, as I said, I'll go, why would I go not be to sell a hundred percent of our product or we will never be a hundred, but let's just say 70 or 80% of our product retail at some point in time. I think any company would have that as a target. You'll never be in this type of environment, a hundred percent. So, uh, But keep in mind that all our non-branded are not necessarily two competitors. There's a lot of partnerships that we're trying to establish in Canada that have unique IP or position, and building those relationships are good. And I'll let Mandish provide some more color on that. Go ahead, Mandish.
spk12: Yeah, thanks, Mike, and I appreciate the comments, Rahul, and the well wishes. So I think Mike nailed it there is that, you know, there are strategic relationships on our non-branded side that will continue to develop. And we've always said that there's going to be a portion that we sell into under that side of the business to strengthen overall profitability, margin structure, and the ability to invest in our business, our brands, our offerings, our people. And so we'll continue to do that. And Rahul, I think the heart of what your, you know, part of your question is, is, you know, given some of these things happening in the industry, what are we going to do? But we always think about medium, long-term success. There's no doubt some interesting things playing out. So at the macro level, we love our results. Profitability, growth, love it. On the micro level, we see some interesting things happening at the provincial level. Does that mean we'll sharpen our pencil and jump in and wage some wars and battles? We're not going to say no to that. But it's going to be done with a kind of very strategic outlook on where we think we need to be and how we're going to continue to win in the market in the long term. So I think we will pivot around. We will sharpen the pencil on some pieces. We love our growth in pre-rolls and vapes, two prior mentioned categories that we were under-indexed on for our size and our growth. We think we have huge opportunity to continue to expand and scale that. And again, Steve alluded to the growth we see in both those categories. And absolutely, I think the one thing that we've always been asked about is, our ability to pivot and move with an ever evolving landscape. And I think we're the one producer in this space that have stuck true to our story and have showed that no matter what's happening in the market, we can continue to remain profitable and see growth regardless of the headwind. And I think, you know, strong footing, strong foundation, we're going to, we're going to pivot as we need to. And yeah, as, as these things unfold, we'll have some interesting viewpoints and, do some creative things in market to win over consumers and continue that growth story.
spk11: Thanks, Mike. So just to follow up, moving to the international now, recognizing, of course, the move into Holland and the program there, what we saw, of course, was a lottery, a lot of essentially unexperienced groups secured their licenses. We were able to purchase one. We saw one of your competitors do so recently as well. Now, of course, the future rollout of that will be dependent on how successful the pilot program is, and, of course, village farms being one of 10. How do you forecast the potential success of that, given that there are likely going to be a lot of under-experienced players with those licenses at the moment, even if some of them are acquired by your competitors? And how do you see that playing out over the long term? And I'm going to shoo on a second question. In terms of international, given that we've seen the strong margins in the U.S., Do you expect that those margins to be durable, and how do you expect to see that play out over time?
spk13: Well, I'll answer the first part of the question and turn it over to Mandus for the second part. But on the first part, as far as Holland goes, I think what the Dutch government is most hopeful for is that the surviving of the 10, they have enough capacity of the surviving members, maybe all 10, maybe just six, because what they're really concerned with since It is an exclusive experiment for 79 coffee shops is that there's enough capacity to provide the product to make commerce with those current 79 coffee shops that now buy from the listed trade. So to your point that some of them do not have experiences of concern, but that may be an opportunity for us as well. You know, we're looking at this as a first step in. There is a lot riding at stake for the Dutch government to be successful here, and we may have other opportunities that present itself. And we're going to do our part to make sure that it's successful, because I think this will be a stepping stone for many other countries in Europe to come. We're focused on the REC side. We believe the strong clay for the medicinal market, current medicinal market in Europe, can be satisfied effectively, efficiently, and with the best quality product and right price out of PureSun Farms. We've totally looked for years at investing in the EU for medicinal. We don't see it as a viable use of our capital when we can export. This is different. The REC side is where we want to be because as a built-in consumer, that we've just got to change the landscape like we have done in Canada and leverage up the current model we have there. And we have long, deep ties in the Netherlands as well. So we're very excited about that. As for the export side on margins and so on, Mandish, you want to comment?
spk12: Yeah, Roland, can you just clarify the last part of your question?
spk11: I want to make sure I clearly understand your question on the margins. Sure. One was how do you see margins playing out in that Dutch market, but also we see probably large margins out of balanced health in the U.S. So I wanted to sort of ask about durability of those fat margins that you're seeing coming out of the U.S. going forward. Not for export, you mean?
spk12: Okay. Yeah, the U.S. I think you should take that. I think Mike and Steve, you should take the U.S. margin questions and potentially on the Dutch side as well before I take that question.
spk13: We see the margins very strong in the Netherlands because the Dutch government is controlling price segregation. They don't want to open up that market to current non-users, and they're very cognizant of that. So I think there will be very strong price controls that keep that margin very high initially, at least during this experiment portion of the test. I'm not going to elaborate, but we've done a lot of homework on that. We feel very solid. That's why one of the reasons we're making the investment is we believe we can get a return on our investment within the experiment, the four-year experiment period. So that's a pretty – actually less than the four years. So that should tell a story about how strong the margins are in pricing.
spk02: Great. Thanks very much. We'll get back to you. Thanks.
spk08: Your next question comes from Doug Cooper from Beacon Securities. Please go ahead.
spk14: Hi, good morning, guys. A couple of things. First of all, on the retail side, can you give us an indication maybe how many doors you expanded in the quarter? And did you have, with the aggressive pricing, did you have any degradation of your pricing in the quarter?
spk03: Mandy?
spk12: Yeah, so no real degradation in the pricing. Doug, I think it's been commented that our overall pricing remains really strong and there was no major adjustments to price. Obviously, we're tweaking as we see fit. On the door side, Doug, I don't have that stat for you, but as retail doors continue to open up across the country, we continue to see our sell-in, the teams are tracking that. Obviously, selling into the boards, it's a different relationship than going direct. So at my level, not tracking the doors, apologies to not have that data for you. But the team is seeing, you know, and knocking on doors as new stores open, continuing to work with our key accounts and making sure our product offerings are continuing to roll out across the province. Okay. Just moving to the whole thing.
spk13: Yeah, Doug, can I just add to that? One thing I can take away on that is, like, the last couple years, what was really important was... reporting revenues per se and cost of production. And we've all stopped giving our cost of production out as competitive advantage. But in the margins that we communicated of 44% blended, to get to a blended margin of 44%, you can interpolate what the retail margin may have been to get there. So that's a little telling to answer your question.
spk14: Okay. Just moving to the wholesale side, can you give us an indication maybe of how many different LPs you sold to in the quarter and how much was – I'm assuming when you talk strategic relationships, maybe this means private label. Can you give us an idea of how much private label business it did in the quarter? I think that's pretty confidential, Doug. We'll have to talk to you offline on that. Okay. Okay. And finally, go back.
spk13: You can ask another question if you want.
spk14: Any update on Quebec and when you might get into Quebec? And I'll leave it there.
spk02: Operator? Mike, do you want to take the Quebec question? We couldn't hear it.
spk15: Oh, just wondering what the updated timing might be to move into Quebec.
spk02: Or plans. With respect to Quebec, we'll still work on it. Let's leave it at that. Okay, that's it. Thanks, guys.
spk08: Your next question comes from Andrew Perthino from CISLS. Please go ahead.
spk01: Hi, good morning, and I want to echo my congrats both on the professional and the personal side. You know, as my parental question on Quebec has already been asked, I'll maybe switch over to, you know, your branding. You know, you guys have done things a little bit differently on many different aspects versus a lot of the larger LPs. One of them is putting the full force behind one brand, Pearson Farms. But now, you know, just wondering how you're thinking is around that one brand, if you're thinking about potentially, you know, another brand as you guys, work on R&D with hang dried or any other activities that might warrant kind of a separation and potentially, you know, something new that could enter the market that's your own and what that could do to price and maybe market share as well. Thanks.
spk13: Well, only a connoisseur can drum up that question, so I'll turn that over to Randy Schiff.
spk12: Yeah, thanks, Mike, and appreciate the comments, Andrew. So you're absolutely bang on. We started, you know, being a branded house for efficiency and making sure we could build brand recognition, loyalty across the consumer landscape and instill confidence. And I think we've done that. We've done that very extremely well. And you're absolutely right. You know, this is the year that, you we're actively building and looking at brand extensions as well as new entry points and brands to start to look at the house of brands approach. It'll all be done obviously very cost consciously. And Mike alluded to it in his earlier comments, the expansion of hang dry. And so our continuing continued investment in our production operations basically translates to improved product quality and It's always at the heart of everything Pearson Farms does and will continue to do. So as we continue to make those investments and we actually think they'll improve our costs and quality, continuing to do them very streamlined and thinking about the long term, will open up opportunities for us, Andrew, and we are actively looking at customer segmentation. We believe there's an opportunity for us to continue our reach into stores, working with bud tenders and winning over consumers. And through brand extensions and new brands, it's absolutely something I think the customers should start to expect from Pure Sun Farms, actively exploring it. We believe the time is right for it. Our product expansion, our strain offerings, our overall quality will continue to be a big focus for what you see in 2022. And that will absolutely lead to the potential for new brands, as well as brand partnerships that we're being approached with. And we, you know, continue to look to expand that and win over shelf space in the stores.
spk01: And, you know, to the extent that you're comfortable talking about it, you know, you mentioned brand partnerships. You know, is there a certain type of customer or partner that would be more favorable to you than others? You know, just to the extent that you're comfortable discussing, of course.
spk12: Yeah, I think I can take this one, Mike. On the brand partnerships, absolutely, Andrew. I mean, you know, the spot market and what we sell B2B, you know, some of those are, most of those are strategic. Obviously, some of them are tactical and opportunistic. And what you're talking about is, you know, whether it's contract growing, contract manufacturing, working with brands that want to work with Pearson Farms. And so for us, it comes down to who, you know, we're just not going to work with anybody. We get approached daily, weekly, monthly for brands in Canada as brands outside of Canada that want us to white label and contract grow for them. And it's a long process, Andrew. We want to make sure the value system, the way these partners are looking at the market and thinking about long-term success is aligned with Pearson Farms. We're not going to invest the time and energy just to bring something to market to only see it fail. And so for us, it's about making sure we understand whoever we're working with and what their outlook is and making sure we have an aligned vision. And so we're obviously talking to various companies and making sure we see that. Obviously, if an organization or brand has really good resonance with consumers, it's always strong and attractive for us to work with them to continue to build that landscape both ways as we bring any new entrants to market. We want to make sure that they're going to have the right resonance with the consumer, but also as we know that, you know, we will be the LP of record and we'll get tagged along with that. And that also inspires great consumer confidence. So it's about finding the right partner with the right vision, the right belief, the right understanding of the cannabis landscape. We believe there are brands and products out there that meet that potential and and we're excited to see what happens in 2022 and how that unfolds. Hopefully that answers your question and gives you enough colour about how we think about it, and we'll hope to see what 2022 holds, and excited to see how that plays out.
spk01: Yeah, that's fantastic colour. Thanks again. I'll get back in the queue.
spk09: Your next question comes from... Your next question comes from Eric Deslauriers from Craig Halem Group. Please go ahead.
spk05: Great. Thanks for taking my questions and all for my congrats as well, both professionally and personally here. I'll be quick here. First question, I may have just missed it, but do you guys have any expected timing for when you might receive that GMP certification that the inspection has done?
spk13: Yeah, we're thinking probably towards the mid-late first quarter, just due to delays. And so that's kind of our feeling in the first quarter. And if successful, which we're confident we will be, we hope to start getting very aggressive in the second quarter of next year.
spk05: Okay, great. I appreciate that. And then... Just kind of looking in at the Pure Sun Farms operations and the impressive share gains that you guys continue to make here, can you talk about some of the cultivation improvements that you guys have seen since you started those operations, whether that's in THC potency, yields, efficiencies, just anything you guys can point to? I'm just wondering if this is kind of more of the same blocking and tackling and sort of, you know, the market moving towards you guys, or if you're seeing some, some bonafide cultivation improvements as well.
spk13: Thanks. Yeah, I may take that only because, you know, the secret sauce, so to speak, I think we've tried to be vocal with why we, you know, our strengths. And I think it's a cumulative, clearly cumulative. It's not just one item. As often said, the cards were dealt with in Canada, very restrictive on the cultivation side, the use of really no tools. So just being much more proactive in decisions, great grower team. It's a combination of strains working together, techniques and processes. So really probably not going to say one or two specifically, but that's what we do and what we do good. not patting ourselves on the back. It's just the duration of time to get here.
spk02: So I hope that answers the question for you, Eric. Yep. Thanks, guys.
spk08: Your last question comes from Scott Fruitune from Roth Capital. Please go ahead.
spk04: Thanks for the questions and congrats. Again, real quick, are there factors or keys to bring on the second half of Delta 2 here production? Do you need Quebec or the international kind of supply agreements to turn on from that standpoint? How are you looking at the second half of production for Delta 2 here?
spk13: We're confident. You know, we, as I said, we want to complete our geographical presence within Canada and continue our penetration into those retail markets. And we were delayed with the EU GMP certification due to travel restrictions, which is now complete. The market is growing there. The market in Australia, for example, which is not a requirement for EU GMP certification, has doubled in the medicinal market last year to this year. So we feel very confident. And just keep in mind that the way we structure Delta 2 like Delta 3 is just roughly 16 grow rooms. Eight are in full production this month. So even if we turn on half of the second half and each month get our pulse of both the export market, how we're doing, and domestic market, it's not like we have to turn on the whole half in one go. So that's the flexibility we have. You know, last year in 2020, we kind of curtailed Delta 3 in the summer a little bit just to give us a breath, and we can apply the same thing. So we're very confident, Scott, by year end next year we'll be in full production, and we're probably estimating close to 200,000 kilos once we're fully ramped up from the two facilities.
spk04: All right. Thanks, John. And then really shift the focus here on the CBD kind of balance health side and the potential expansion into Canada and EU and timing potentially there and then opportunity leveraging your Texas assets or kind of using your retail relationships to expand into brick and mortar for them. I know there are a lot online, which is great margins, but how do you look at those opportunities going into 2022 for those firms here?
spk13: Yeah, well, 2022, 2023, I mean, that's a 24-month period if we took the two years. So really, we had looked at one of many entry points into the U.S., and probably coming one of those was obviously buying a top brand cannabinoid company, in this case, Balance Health Botanicals. We watched our competitors probably, in our opinion, just spent a lot to get there, and the timing wasn't right, and timing's everything. So we think the entry point was right. We think the valuation was right for both companies. And the location in Colorado also gives us a foothold to our high THC business that we're going to go forward with. And, you know, we just feel that even though the MSOs have a first mover advantage in the consolidation, plus the consolidation goes on the U.S. market, We already see ourselves of having the optionality in the U.S. with our nearly 6 million square feet in Texas. Even though the U.S. has a tremendously large potential for cabinets, there'll be plenty of opportunities going forward. And we think even upon legalization, there'll be a lot of money thrown in there, a lot of bad investments right off, not unlike what we saw in Canada the last four years. So, you know, our strategy will focus on the opportunities going forward, and BHB will play a significant role in that. Their online platform, assuming that cannabis will be sold online, is, you know, second to none. And so one of a couple entry points for the U.S., and, you know, we're being patient, watching legislation very carefully, and then applying, you know, our strategically sound acquisition methodology going forward. So we're excited about it and we're very happy about the BHB acquisition to start with. And of course, clarity, whether the FDA gets clarity from Congress on CBD, we feel that's going to come, maybe even part of a cannabis regulatory change. And at that point, it will be game on on the bricks and mortar side. So we're prepared for that. Got it. Thanks for the color there, Mike. Yeah, and I think, you know, I just want to say, I mean, when we looked at Village Farms today, I think a lot of investors are still seeing us from one lens. And because, you know, BHB on its own competes with some of the largest brands in the pure CBD market. both publicly and private companies. And they're just as good as anyone out there, in my opinion, in those top-tier companies. And they'll start proving themselves more and more, both as part of the Village Farms family and on a standalone basis as well.
spk02: Thanks.
spk09: You're welcome.
spk02: Okay, operator, that's it.
spk09: Yes, there are no further questions at this time. You may please proceed.
spk13: Okay. Well, thanks, everyone. Appreciate participating in third quarter, and we look forward to reporting our year-end and fourth quarter results at the next conference call in very early March. Thank you all. Bye.
spk09: Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.
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