Village Farms International - Earnings Call - Q1 2019

Transcript

Speaker 0

Good morning, ladies and gentlemen. Welcome to Village Farms International's First Quarter twenty nineteen Financial Results Conference Call. Yesterday, Village Farms issued a news release reporting its financial results for the first quarter ended March 3139. That news release, along with the company's financial statements, are available on SEDAR and 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 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 yesterday'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 materials, 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 our various security filings, including Village Farms' current annual information form for the year ending December 3138, and MD and A for the quarter ending March 3139, which are available on SEDAR.

These forward looking statements are made as of today's date and except as required by applicable securities of law. We undertake no obligation to publicly update or revise such statements. Would now like to turn the call over to Michael DiDiGiolo, Chief Executive Officer of Village Farms International. Please go ahead.

Speaker 1

Thanks, Marcella, and thank you to everyone joining us both by telephone and the Internet today. With me for today's call is Village Farms' Chief Financial Officer, Stephen Ruffini. The agenda for today's call is first update on the significant progress on both our Canadian cannabis joint venture, Pure Sunfarms and our U. S. Hemp CBD program led by our outdoor program through Village Shields Hemp.

Steve will review the first quarter financials. I'll return with some closing thoughts and then open to Q and A. So with that, we feel here management feels we're off to a good start for 2019. But before I begin, I want to take a moment to provide our perspective on the false and misleading claims that were made publicly about our company a number of weeks back. I want to be clear that as a public company, we fundamentally believe in the rightful legitimate contrarian views of our company or any company for that matter.

And we acknowledge that legitimate short sellers have a play in value and play a valuable role in the markets. But we despise parasites who engage in outright lies, distortions of the truth, partial and misleading information and innuendo to manipulate the market for short term entirely self serving purposes. This kind of activity provides zero value to the marketplace and especially hurts individual shareholders of all sizes. Worse, we know the real culprits here aren't even the public persona. But as we say in Texas, these yellow bellied cowards hiding anonymously in the weeds caused this issue.

So unfortunately, it's allowed to happen and as a company with strong share price, a successful listing on NASDAQ, strong trading volumes and a quiet period at the time as a result of our financing, we're an ideal candidate for this type of manipulation. We recognize that many of our shareholders wanted us to respond loud and strong and publicly. We have taken your comments and with that, we do appreciate your input. However, we also heard from many others, including our advisors and others in industry who advised us clearly to push past the distraction, turn off the quote feeds and focus our time and energy on continuing to execute on our multiple significant business opportunities. So we chose the latter.

And two days later, closed a $20,000,000 financing with no sweeteners, straight up equity at $20 a share. There will always be opinions in the capital markets, but what we always but what will always trump opinion is the undeniable business execution and financial results of those companies who are being targeted. At the end of the day, we are confident that our shareholders will do their own due diligence. We encourage and welcome it and that they will make up their own minds and invest accordingly. The success of our company will ultimately be judged by our ability to execute on our business opportunities and deliver in growth earnings.

And the integrity that we all have here at Village Farms and we've had for thirty years. We are a very transparent, honest and company filled with integrity at every level and we're very proud of that. So with that said, that's a great segue moving forward to our financial results. So as I mentioned, we are very pleased to once again this quarter report positive net income for Pure Sunfarms, The second consecutive quarter of profitability and with net income increasing substantially to $8,600,000 from $5,500,000 in Q4 that contributed positive net income for Village Farms overall of $7,600,000 or $0.16 a share after tax. Pure Sunfarms sales in Canadian dollars tripled sequentially to $14,400,000 or $10,800,000 and EBITDA was CAD 4,300,000.0 or $6,400,000 for an EBITDA margin of 59%, up meaningfully from 48% in Q4.

And just a quick note that we had a few questions around our JV partner pre releasing Pure Sunfarms revenue number on May 1. And I just want to say that it is our current policy here at Village Farms not to report preliminary numbers. So with respect to our numbers, it's worth noting that Pure Sunfarms achieved these results with Delta three still very much in early ramp up mode. Only Quadrant two, which was which is about a quarter of the 1,000,000 square feet was harvesting throughout the entire quarter. Half of Quadrant three was only licensed at the January and planted out in February and had no harvest in the first quarter.

And Quadrant four, the final one was only licensed mid March by Health Canada and was brought in production in April. And Quadrant one was also brought back into production in early April after being offline for several months for the installation of lighting. And those several months were during that first quarter. So we're really proud of the results based on just 25% of the operation in harvesting. Having overseen the startup of numerous large scale greenhouse operations for thirty plus years, I can tell you that this is a significant achievement to be posting these types of numbers at this point in the ramp up of the operations.

The performance makes Pure Sunfarms stand out in the Canadian licensed producer landscape, despite most others having a significant head start, in many cases years ahead and having spent tens or even hundreds of millions of dollars more to start up their operations. I've said this many times before, but it bears repeating now, especially that Pure Sunfarms has exercised its option on the second Delta facility, Delta two, which is approved on the back of the success of Delta 3 on the strength of the outstanding team that's been put together at Pure Sunfarms. Converting an existing greenhouse with the additional benefit of experience and know how in developing and ramping up large scale operations, the largest in North America that Village Farms brings to the table has a significant advantage. As I said before, lower capital cost to convert. And as a reminder, we were able to secure 24 megawatts of power for each of the Delta three and two facilities directly from the utility without spending nearly $2,000,000 a megawatt for cogeneration.

That's a huge capital cost savings versus competitors who have to put cogen in. Secondly, the speed of conversion is much quicker than building a brownfield site new development. Seven fifty years of combined grower experience, I've talked to that many times. The experienced skill force already in place that's been on the site twenty years, that by far number one in achieving these type of goals. Years of climatological data that our growth team can base it on.

So we're seeing the benefit of Pure Sunfarms and hopefully we will be provided with the opportunity to demonstrate this same level of execution in Texas with hemp. Two months ago since our last call, numerous additional harvests have been completed. I am pleased to report the facility continues to perform well meeting our expectations. Yield and quality are continuing to meet or exceed expectations. Demand for product revenues product remains strong, wholesale pricing remains buoyant and Pure Sunfarms is taking full advantage, selling essentially everything that's producing to drive near term cash flows.

As per plan, last month Delta three facility was fully planted out, as I mentioned, and we are now growing on the entire 1,000,000 square feet of growing area. Facility will very shortly be operating at its projected annual production of 75,000 kilograms on a run rate basis when we start harvesting Quadrant one and four this summer. Want to take this opportunity to provide some content for our projected production numbers of 75 kilograms annually from our 1,100,000 square foot facility. We have had a lot of questions and some criticism around this number as many believe even most of our peers are projecting higher yields per square foot. Our projections are admittedly conservative, but we have three decades as a large scale grower, we feel we have an advantage in our perspective.

It takes time to ramp up a new growing operation, even one with inherent advantages I discussed a moment ago. It's a process that cannot be cut short. And ultimately, it's farming, subject to a number of different factors out of our control, temperature, sunlight. It's not about what goes right, it's about what doesn't go the way you had hoped and how quickly the team evaluates it, finds a solution and implements a strategy to correct it. So we believe providing conservative production numbers as we ramp up is a prudent way to go.

That said, I have no doubt that when Pure Sunfarms and all of its peers, we'll be realizing yields at a minimum are on par with the industry average. And again, I think we are being conservative. So Pure Sunfarms on the extraction front, continuing to move for our extraction plans forward, very much still on track to have in house extraction operations in place by year end this year and scalable to cover both Delta 3 And 2 or over 2,000,000 square feet. Oils and derivative products will be part of the overall product strategy and to the extent that we need to be ahead of having our own capabilities in place, we will use third party extractor short term and we're having those discussions right now. We're very comfortable with the progress and the path forward.

As I said in the past, we take a serial approach initially and that's get the operation converted, build on the foundation, put together a great corporation and team, get through the production ramp up, post harvest and now the process to move forward to extraction. So with the Delta 2, we announced that a few weeks back, the next greenhouse, another 1,000,000 square feet with the unmitigated success of Delta 3 and the confidence level that the entire team has to date, including the Board conversion, licensing, production ramp up and quality of the product, we were thrilled that exercised the option jointly with our partner on Village Farms additional Delta 2 facility, which is nearly identical to Delta 3 and adjacent to it. At a minimum, Douglas Pure Sunfarms projected annual production to 150,000 kilograms. Again, this is a conservative number. Expect benefit from the significant learnings around Delta 3.

As a reminder, Village Farms contributed the Delta 2 facility and our JV partner is contributing $25,000,000 towards the estimated $60,000,000 conversion cost, with the remainder to be funded through Pure Sunfarms own cash flow and the recent $20,000,000 credit facility with Bank of Montreal and Farm Credit Canada. Timeline, we're beginning the conversion of external areas this summer and the conversion of the internal growing area in the fall, expecting first harvest mid next year and a full run rate annual production in Q4 next year. Yesterday, as many of you know, Health Canada announced a revised licensing application process for licensed producers. We understand it may require new applicants to build out their facilities and entirely before submitting their application. There's some uncertainty and we're investigating what that exactly means right now.

But it could be easing up Health Canada's workload and clearly there are many applicants that have no intention of going forward due to lack of capital or assets. So that could be a positive, I think, for the industry. Regarding our product branding and strategies, significant process has been made. We've continued to build a superior branding team now well advanced and we expect to brand launch the Pure Sunfarms brand. The management team of Pure Sunfarms will be launching that by the end of this quarter.

Packaging and processing license also continue to be expected before the end of this quarter. We know that Ontario is very impressed with our operation and our product and is very eager to get our product into their system and we expect to begin shipping very quickly after the licenses are in place as well as adding other provincial buyers who are waiting. So I think in the third and fourth quarter, we'll see that coming to fruition. So I can assure you that the process is moving forward and we continue to plan around receiving the licenses in Q2 they mentioned. So let's move to The U.

S. Very quickly moving forward with our U. S. Hemp CBD initiative, opportunity to be an early move in the space. Some background there.

We realized that even with a number of states passing legislation currently going on, in fact, Georgia as Al mentioned, the Governor of Georgia signed it into law this morning for Georgia. We realized that by the time the USDA has all the regulatory processes and even the states that are permitted now will not be able to produce this year in 2019 outdoors. So we focused on the 2014 farm build states and it was a great move I think by our partners in doing so. So kudos to those guys who have the vision to see that. So as a reminder, in December, the 2,000 Farm Bill was passed legalizing hemp, the CBD level at the federal level.

And we issued a press release that next day moving forward aggressively in the space and the sector has a conservative projection to about $16,000,000,000 market. Our goal is to be vertically integrated consumer packaged goods company. That's our focus going forward growing, extracting, producing our own products for the retail space. And many of those are existing customers that we reported before. And it's an expanding consumer space through many channels.

Moving first as an outdoor grower Village Fields Hemp 65% joint venture we formed in March with the Jennings Group, very experienced in hemp since our last call. I'm pleased to report that we have started germination preparation for planting on more than 800 acres in three states. We're evaluating opportunities for additional acreage will depend to some extent on regulatory developments. And as I just mentioned this morning, the Governor of Georgia, where Village Fields Hemp is headquartered and where we expect to locate our first large extraction operation signed into law in that state's hemp bill permitting cultivation. In anticipating of being in anticipation of beginning to grow this spring, last fall we secured more than $2,000,000 worth of seed, which is in short supply and we will which will be more than adequate to address our plans for this year.

The timeline is we already started germination for all 800 acres last week, transplanting the field in the next two to three weeks. All acres should be planted by mid June, planting five different varieties of seed, all with good genetics from a very strong breeder, still harvesting, start harvesting this summer. We'll initially sell biomass as we get extraction operations in place, evaluating several site locations in Georgia and targeting extraction by Q4 into Q1, begin CBD oil on a wholesale basis next year and transition into production of branded and white label CBD products to our existing national customers and new channels going into mid to late twenty twenty. Aspirations for a parallel greenhouse program to leverage our existing large scale operations in Texas, let's talk about that. In March, Texas rescheduled hemp as a controlled substance bringing its status in line with that, which is federally legal, but can't grow until Texas passes law to create a hemp program, which would provide the regulatory framework for the cultivation and processing of hemp and production of hemp derived CBD products.

Hemp bill was passed by Texas House with a unanimous vote and is now on way to the Senate, strong supporter of the Hemp Bill that we are. We are encouraged by the process progress to date that's being made. I'd now like to turn the call over to Steve, who will walk through the financial results. Steve?

Speaker 2

Thanks, Mike. I'll make a few highlights and then we'll open up to Q and A. So one of the items that is different this quarter is the gain on disposal of assets. I've had questions on that already. That is simply a reflection of the $25,000,000 of Pure Sunfarms stock that we received in exchange for the contribution of the Delta two assets, which obviously have a book value of substantially less than $25,000,000 of value.

So the $13,500,000 gain on our income statement is simply a reflection of the fair market value of over and above the book value of our assets. The remaining assets on our books, two ten acres are on our books for $70,000,000 So they're clearly worth substantially more than the $70,000,000 And that is not the first time we also recognized a gain on disposal income when we contributed to Delta II asset. So if Delta I were ever to be option, which is the largest greenhouse in North America, would see a substantive gain on disposal of assets in that quarter as well. As stated in other calls, which we need Pure Sunfarms, we're not going to give very specifics on Pure Sunfarms brands sold, grown, program figures. We will, like we have for Village Farms for years, give directions and add some color.

Again, as Mike said, this is an agricultural business and managing and reporting numbers quarter to quarter is not the way we manage the business and I don't think it's a good way of analyzing the business. So the gross margin for Pure Sunfarms in quarter one was 65%. The full Pure Sunfarms financials are contained in Footnote seven of the Village Farms financials in Canadian dollars for they're there for everyone to see. The 65% gross margin was very much in line with the gross margin in the fourth quarter of which was 68%. So very consistent in March.

You heard us say that the 2018 cost per gram was roughly $1 We also said that due to seasonal and operational costs involving lights, and in our case, cogen in this first quarter of this year, we expected higher cost in the dollar per gram, which was in fact the case. Roughly one third of the Pure Sunfarms Q1 cost of sales were due to seasonal factors, which will not be incurred in Q2 and Q3. So since the gross margin was at 65% comparing to the prior 68%, that essentially which is essentially flat quarter on quarter, That obviously means with higher cost per gram that our revenues per gram also increased on a quarter on quarter basis. The increase in the revenue per gram is a reflection of ever improving quality. As Mike said, it's a ramp up operation, particularly in the post harvest operation of Pure Sunfarms.

Again, the full notes of the financials are in Note seven. And I also want to call out in Note seven, the increase in bio assets on the balance sheet March 31 was 18,200,000 compared to the opening balance January 1 of $7,400,000 So that's a strong leading indicator that the gross margin for Pure Sunfarms will be subsequently higher in Q2 than it was in Q1. On the produce business, as reflected in our press release, it was a tough quarter. As reflected, as I've just said on our cost program on Pure Sunfarms, it's the same in our produce business. We don't get into cost per pound.

That is how we track our costs internally. Due to production issues at our Texas assets, in the winter, we did have some crop issues. So the fixed cost essentially when we pull up a portion of the crop or we have lower yields does drive up our cost of production, which is reflected in our cost of sales in the first quarter. We are keenly aware of the production issues. They have been addressed.

There will be a little bit of carryover on some of the more expensive Texas pounds in the beginning of the second quarter, but the second crop in Texas as well as Canadian crop look good and we expect improvements in our produce margins in the second quarter and as the year progresses. With respect to adding a little color to Village Field Temp, at a high level, we've disclosed 800 acres for the year. You will hear in the industry estimates of production between 1,000 to all the way up to 2,500 pounds. We're a Village Farms, so we're going to be conservative. So

Speaker 1

we're going

Speaker 2

to use 1,000 pounds per acre. So that's roughly 800 pounds of biomass, as Mike said. Some of that will be sold direct to third party extraction as biomass and some will be retained for own extraction, which won't be up and running until late twenty nineteen into 2020. So in that regard, if you use the benchmark of $40 a pound of biomass 800,000 pounds, the full $32,000,000 of revenue will not be realized all in 2019. Some of that will carry into 2020 and that will be decision made by Billsfield Temp based on our own extraction.

As Mike had said, we're all about cash flow. So we will certainly sell enough of our own biomass into the market to certainly cover our cash flow needs for this crop as well as for some of our extraction costs. And then we'll retain some of that for ourselves to launch our own extraction, which has substantially higher margins. But we are projecting a cost per pound for field hemp of roughly $10 a pound in the field. So with that, I'll turn it back over to Mike.

Speaker 1

Thanks, Steve. So continuing just as an outlook moving forward, we're very pleased with Pure Sunfarms opportunities unfolding during the in this past first quarter and clearly halfway through the second quarter, I can tell you as well. We are feeling very confident, one of the few Canadian licensed producers that is profitable and even more impressive given that Pure Sunfarms has been able to achieve this well in advance of reaching full production and with significant room to lower production cost. Unlike many of our peers, we are very focused on near term cash flow and profitability, building an institutional attractive business with key fundamentals at home before casting our lines all around the world of what we're doing. I mean, some point, you just can't be the biggest and you can't be everything in this space for every consumer.

Our focus is to continue to grow, but be much more focused and get it right on what we're doing before we move on to something new. This has been a guiding principle from Pure Sunfarms Delta three operation from day one and it will be for Delta two. And that's part of building a very strong foundation on Granite and it will be for the CBD business in The U. S. Pure Sunfarms is well positioned for sales and earnings growth throughout 2019, very excited about the packaging and processing license, which we're to green light this quarter and starting to sell retail, all coming together over the next few months.

Equally ramping up production on a full run rate starting with third quarter towards 75,000 kilos. We haven't even been in the space twenty four months. So it's a real credit to the whole team, including the Pure Sunfarms new management team that have taken the baton and done extremely well, not even twenty four months and we're very pleased with how quick we're moving and the deliverables as well. So commenced conversion of Delta two, that's expected. Now we're already in the planning and procurement phase and we've learned a lot on the Delta three conversion.

So it should go fast and smooth and perhaps even at a lower cost. Option on the Delta one facility, we regularly get questions about the economic sense of adding another 2,600,000 square feet or another 180,000 grams. As we had said, just on that one footprint converting now with the two conversions of three, if we did Delta one, we can do a significant amount of Canadian market. But I'm not concerned with the with that going forward. As we said, our philosophy is that this is farming as far as the cultural side of this business and you need to be the low cost producer.

So at the end of the day, it's not just any overcapacity issues, it's who's the low cost producer and who's going to get a seat at the table when the music stops. So we think we're in a great position if we move it forward. Hemp CBD outlook parallel outdoor and greenhouse opportunities for us. We did a market segmentation business model where we're breaking down about 85% CBD derived from field and 10% to 15% from controlled environment hitting different markets. We feel very strong with that.

And at 16,000,000,000 to $20,000,000,000 market, there's not enough high-tech greenhouse in The U. S. To even come remotely close to that number. So cultivation is going to start planting, as I said, very quickly and with cash flow generation, as Steve mentioned. And we believe we're positioned as the early mover for this massive opportunity already, a supplier to the big box and retailers, we think and we're having discussions with them about their CBD strategy.

So we're excited over the next couple of years what that can bring as we transition more to a CPG company under that banner of hemp. Greenhouse, we expect to know very shortly if Texas will put a hemp program in place. It's eminent maybe within the next ten days. And we are ready to move. Think as you can see from The U.

S. Hemp initiative, we knew what we are secured, who we're where we're going to be growing and we secured the seed early on. And I can tell you we're ready to go on the controlled environment side. And one thing to keep in mind is as we if the hemp program goes forward in Texas and we convert assets and growing systems as we've done in Canada, those will be the same growing systems, whether it's low THC CBD, hemp varieties or high THC. So if legislation in The U.

S. Changes for high THC, we are ready to go in the greatest growing climate anywhere in the Continental United States for growing cannabis or hemp And with a nearly 6,000,000 square foot footprint, we think we can be a major player in The U. S. Moving forward. So it's going to be a very busy year for us and we look forward to talking to you in August.

Thanks for participating in the call today, and we'll open it up for some Q and A. Operator?

Speaker 0

Your first question comes from the line of Doug Cooper from Beacon Securities. Your line is open.

Speaker 3

Hi, good morning guys. Great results. Let's start with Steve on the biologic assets. I just want to be clear, the $18,200,000 of biologic assets for PSF at March 31 versus the $7.4 as of December 31, you were talking directionally obviously positive. Is there any linear relationship we can draw?

Like it's up 150%. All other things being equal, should that imply that we anticipate gross profit to be up 150%? Or is that or should we just look at it directionally and quantitative as opposed to direct Yes.

Speaker 2

It's not a specific linear. It's certainly a strong indicator. There's not necessarily a linear percentage, but it's a strong indicator. The biological asset for Pearson farms is a function of the estimated buds on the plants on March 31 versus December 31. Obviously, as Mike has said, more introduction on March 31 and we'll even have more as the year progresses.

So it's a strong indication that there's more volume in April than there was in January and also an indication the other driver of that could be margin. I've already said that the cost per gram were higher in Q1 due to the seasonal issues of energy use, which you will not see in Q2 and Q3, telling the market that cost per gram will be substantively lower on a program basis in the summer months than it is in the winter months. And again, margins are on the revenue side, prices are very strong.

Speaker 3

Okay. Just moving on and maybe talk working the pricing into this. Mike, you said the run rate 75,000 kgs in Q3, so that would imply at least 18,750 kilograms run rate if it's split equally amongst the quarters. My back of the envelope would have Q1 around 4,000 kilograms. You indicated that we were 25% capacity utilization essentially in Q1.

What percentage utilization would you anticipate in Q3 or excuse me, Q2 if Q3 is getting upwards of 100?

Speaker 1

We're not changing our projections. So we're staying on an annual basis this year with the 46,000,000 to 50,000,000 or so. So I'm not we're just not even though you can do the math based on one quarter being in the third in the first quarter versus all four in the second quarter. But I would leave it up to you, Doug, to do the math because we just want to stay with original projections and work off of that, which for this year again, $4,650,000 and then on $75,000 next year, but that run rate on a twelve month basis starting with the third quarter at $75,000

Speaker 3

Okay. Can you just maybe walk through it again in the quadrants? So Q1, I couldn't write all that fast.

Speaker 1

One, they basically take 1,000,000 square feet and divide it by four. So that's the quad. Quadrant one was in production in the fourth quarter, but then we pulled it because we had limited energy. We couldn't light the whole greenhouse. So rather than waste time when we got the original cultivation license for Quadrant one and continued to put the lighting in it, we just left it without lighting and did the lights in Q2.

So we turned off Q1 in October, November or so after that last harvest and then we put Q2 fully lit with rental cogens in production. So that's what went that was fully in production during the first quarter. Then we got Health Canada approved Quadrant three and two. There's four flower rooms in there, two and two. But that was not even though we planted out half of quarter three in the first quarter, we had no harvest till the second quarter now.

So that was not in production at all. In the fourth quarter, we got approved in April, the fourth quarter rather, and that was planted out in April. So and simultaneously implanting out the fourth quarter, we came back because we had installed the lights in over the winter and planted out the first quarter. You get it. So the April, half the greenhouse is planted out, not in the first quarter.

And the third quarter that was planted the third quadrant that was planted in the first quarter was planted, but no harvest. Does that make sense?

Speaker 3

I think you got mixing that by quarters and quadrants.

Speaker 1

Yes. I'm sorry about that.

Speaker 3

Okay. The EBITDA margin is obviously best in class to date amongst the peer group. Are these sustainable you think? And do we anticipate G and A costs maybe to increase as you get the packaging license and roll out your brand portfolio?

Speaker 1

Yes. I think we would like to keep our G and A costs like a normal operating company somewhere in the 8% to 12% of sales range. So obviously, as we ramp up sales, it will go down. But as we put more costs into marketing packaging, it will go up. But at that full run rate, we want to operate like we operate all our businesses in that level.

Speaker 3

So this quarter 9.2% of sales. So that's sort of in line with your anticipation?

Speaker 1

Absolutely. And I think we'll see basically that's based on higher volumes and higher sales that will go down, but based on spending more money, it will go up. So but that's the variation till we get fully operational on our packaging, marketing, distribution while we're ramping up production. So that's sort of eight to 12 sweet spot we want to be in. We're very cash flow oriented and growing.

I mean, want to grow our top line, but we want to be profitable all the way.

Speaker 3

Okay. And just a final question on the hemp side. You talked 800 acres, and Steve ran through the math. If you're just selling the biomass, I get US32 million dollars of revenue. You talked about your cost of $10 so that's that would leave gross profit US24 million dollars You have 65% of the joint venture, that's US15.5 million of incremental gross profit.

How much of that would you anticipate? You indicated you might not sell all of it this year and hold some for your own extraction. But how much would you anticipate of that biomass selling in this year, assuming obviously there's no issues on the farming side?

Speaker 2

Roughly 50%.

Speaker 3

50%. That will be

Speaker 2

Again, it's what we're currently anticipating. Again, on the timing and execution of our extraction.

Speaker 3

Okay. And that would be sales, guess, by the time you harvest and sell the biomass, would that be a Q4 event?

Speaker 1

Q3, Q4. Again, it's important

Speaker 2

to understand the 800 acres are rolling. So they're not it's not all going to produce once. It's not one piece of land. It's any number of farms. So it's a rolling production.

Speaker 1

Different harvest dates, drying is different everywhere. It depends on the humidity levels. So between harvesting, drying and the harvesting going on over a sixty, seventy day period, it's in Q3 and Q4.

Speaker 3

And how much available land does your partner bring to the table? Like 800 acres, how much more could you have with your partner, not including Texas, but just with your partner? How many acres could you have in 2020?

Speaker 1

We can have five times the amount. It's just that, again, with the legislation being passed even in Georgia and the governor signed it, as I mentioned this morning, you can't cultivate in Georgia. I mean, the Commissioner of Agriculture of Georgia made it very clear that we know hemp grown in Georgia this year because every state that's approving it and this will be for Texas should they approve it is going to wait for the federal USDA to come down with the regulatory requirements and they indicated don't expect that any sooner than September. Well, you can't plant out in October outside. So nice you can, but it's very you can and we're looking at that, but it's in a very limited area where you can do that.

So that's why we couldn't use the land we have in Georgia this year.

Speaker 3

But all of the things being equally presumably your farmer partners will rip out soybeans or corn or whatever else they're growing to do this as long as the profitability holds?

Speaker 1

Yes. I think right now many growers are looking at ripping out soybeans and tobacco and things of that nature because it's a very new industry and it's tough on a lot of farmers. They're very excited about growing hemp this year at the margins we're looking at. But that will change in a few you said.

Speaker 3

And my final question, just on the last conference call, you had talked about the packaging license in the sort of April timeframe. Obviously, that's come and gone. Any visibility on the government or it's hard to really to make any estimates of when the government might come in through?

Speaker 1

Well, you asked me the question yesterday, I'd probably say no. But today, will say that, yes, we have visibility on it and we feel we're feeling much more confident it will happen. I should have just said the second quarter because it's hard to predict things out of our control, in this case, Health Canada. But April, June. So we're in that timeframe and I feel pretty good that we'll be there by the end of the second quarter, yes.

And I'm actually saying that, but I don't want to elaborate anymore on it.

Speaker 3

Okay. What is the incremental pricing difference between what you got in the wholesale market today versus what you could have got if you sold directly to the retailers?

Speaker 1

Well, you kind of asked me to back into what we're getting now, which I don't want to do, but let's just say in a percentage

Speaker 3

Is it 20% premium or 30% premium or Yes.

Speaker 1

Other than the 40% that's earmarked this year, it would be minimum of 20%.

Speaker 3

20 higher. Okay. Great. That's it for me. Thank you, guys.

Speaker 1

Thanks. Your

Speaker 0

next question comes from the line of Aaron Grey from Alliance Global Partners. Your line is open.

Speaker 4

Thanks for the question guys and congrats on the quarter.

Speaker 1

Thanks Aaron.

Speaker 4

So just two higher level questions from me. First on the competitive landscape, can you talk about how you see that evolving especially with the change in new licensing that Health Canada just kind of rolled out and announced yesterday. Assuming that does kind of weed out some of the players who aren't really ready to compete and leads to expediting licensing, how do you think that impacts the industry dynamics in terms of when you see Canada kind of reach equilibrium of supply and demand and how that kind of impacts your strategy going forward?

Speaker 1

Well, we're analyzing it specifically because it was a little bit nebulous. So our team up at Pure Sunfarms is working on it over the next days to really understand it. But I can understand Health Canada being inundated with so much and if they have to deal over a lot of their time processing the initial license request from companies that will never do anything. They really need to take that noise off because they have their hands full and I feel for them. So I think that's a very positive move.

And I think there should have been sort of a event people should have been screened in the beginning even years ago and not just apply for license when you're online. I mean, that's why we took a different course of action because we thought we were going to go it alone, but it could have taken a long time to get there. So that's a positive thing from that's just my personal opinion. However, if that is the case, then I think it's going to start separating the train has left the station. And if you're not in it now, in my opinion, because again, we say everything commoditizes out and it's a price demand situation.

So as LPs continue to ramp up their production, it's going to the day is going to come when the music stops as we say in Village Farms and that's a day when there's one too many buds out there. And so I think if I was if somebody was looking to put capital into a new startup, I think it's going to be pretty tough because if you're not in a game now, by the time you ramp up, you could be talking three, four years for some of these guys who have no experience, these companies. So I think that's a big positive and may even lead to some consolidation of existing players moving forward. So yes, I think it bodes well for us going in that direction. And then the other thing is cost of production.

I mean, you have to look at what is the cost ultimately of different companies. I mean, if you hire my opinion, if you're growing indoors and I'm not going to get into people's quality and this quality and that quality and all this. But at some point, the high cost guys, are they going to be able to survive long term? And we're not talking the next few years down the road. So yes, I think putting some curtailment on it is a good thing.

Speaker 4

All right, great. Thanks. That's helpful. And then just can you kind of discuss your plans in terms of novel form factors as they come online later this year and into 2020? Was there any partnerships you might be looking to form to help roll out those products or any color there on your strategy?

Speaker 1

No. I think we feel really confident where we're at with Pure Sunfarms. The team, our CEOs put together is dynamite. They really they're in a good place. So that's not to say we would the company Pure Sunfarms can operate anywhere they want in the world.

They have no restrictions. They have a tremendous amount of independence. And but yet they've decided let's get it right first at Delta three, let's launch the brand, let's get our retail sales going, let's build out the next million square feet, let's continue to execute, generate cash flow. And I think that's the right decision for the management team. But that doesn't mean that they would look at opportunities or acquisitions or partnerships or even moving outside of Canada when the time is right.

We like where they are at this point, building up that experience base and knowledge. And certainly, they could look at many opportunities going forward.

Speaker 4

Okay, great. Thanks. And then just to clarify, guess, more specifically I was talking about with the novel form factors being vapor, edibles and beverages. And so no plans kind of with your branded product going forward to kind of go in those categories, you're going to kind of stick more to vapor and

Speaker 1

extract? Absolutely positively they do. So

Speaker 4

Yes, yes, that's more of what

Speaker 1

I'm the first thing will be pre rolled and other current products that are allowed by Health Canada. That is all in place right now and extraction by year end because it's got to start at the extraction point. And as soon as that gets going and it's working well and up to speed, then it's about product development and rollout. So yes, they're keenly on that going forward. And we've had sort of a I think it's been a great thing that Health Canada moved too forward on that, let everybody catch their breath so far.

It's a very fast moving industry before you take it to the next level. So we think we're positioned timing wise very well there.

Speaker 4

Okay, great. Thanks.

Speaker 1

You're welcome.

Speaker 0

Your next question comes from the line of Ryan MacDonald from GMP Securities. Your line is open.

Speaker 5

Hi, good morning guys.

Speaker 1

Good morning.

Speaker 5

Just most of my questions have been answered so far. I'm just wondering on the hemp side, in the press release you mentioned the potential to explore hemp cultivation in Latin America and Mexico. Could you elaborate a little bit on this? In particular, have you explored the possibility of importing that raw material into The U. S.

And or the cannabis extract or the sort of the hemp extract into The U. S?

Speaker 1

From Canada?

Speaker 5

No, sorry, Latin America and Mexico into The U. S?

Speaker 1

Not as yet, but that's clearly on we're clearly let me put it this way, we're well aware that that may be a possibility. If you look we did mention before and in our press release that as we move forward with The U. S, the foundation of The U. S. Strategy to grow upon, we're clearly looking down south.

We have great relationships out of the border. We have ongoing conversations. So let me put it to you this way. If I knew what I knew now thirty years ago when I built the first greenhouse in Pennsylvania, I would have built the first greenhouse in Mexico simultaneously based on political decisions that have wreaked havoc on the industry. And it's not just greenhouse tomatoes and vegetables, the strawberry guys in The U.

S. Are suffering. So it'd be naive to not take that experience level and be prepared for things that change both for Canada and The U. S. And not have a relationship at least in Latin America.

And so that's a kind of backward way of answering your question, but yes.

Speaker 5

Yes. Thank you. That's good color. Also on hemp, you mentioned you're going to be using five genetics for the initial cultivation in 2019. Can you share with us what the expected concentrations are of those genetics for CBD?

Speaker 1

They're all different. In general, we're shooting for ten percent this year. That's our goal. People are incentivized based on that percentage. But a lot's going to go into it.

It's a very as it scales up, I mean, and more of the harvesting manufacturers now are looking at the space. You have to treat the harvest different than others. So I think it's going to get better as it goes. I mean, the genetics are just starting with these genetics. We have a whole host of genetics that we're looking at going forward.

The difficulty in The U. S. Is the 0.3 THC level. Hopefully that changes in the future. But at the same time, it's really working on the genetics to have better CBD possibilities while maintaining that 0.3.

So we've worked hard even on the legislation to have 0.3 being measured at the extraction point where we can take out that THC if it's hot. But it's we'd just be happy to get legislation passed this time around and work on it for next time.

Speaker 5

Cool. And for transitioning to Pure Sunfarms on the cost lines of margins, do you continue to expect that as production scales up and the production costs per gram go down that you with the added packaging costs once you start shipping direct to provinces, can maintain your margins longer term at their current levels in the 65% to 70% range on the gross margin line?

Speaker 2

Certainly, when we add oils, oils come with a higher margin than that. So there may be some percentage pressure later in the year depending on how extraction is up and running and of course licensed by Health Canada. So but the gross margins, all in cost of your extracted oils is much higher than our current dry bud margins, which are great. Certainly from a tomato perspective, their 60% plus gross margins are phenomenal compared to our traditional crops.

Speaker 1

Yes. And also on the labor side, unlike produce, mean post harvest labor in cannabis is huge. It's equal to the it's higher even than the cultural side. So as you extract, you reduce that cost, which is pretty significant going forward.

Speaker 5

Cool. Yes. Okay. Thanks for the color there. And lastly from me, I appreciate all the color you guys gave on the timing of the licensing and the planting of Delta three Quadrants.

Just kind of a high level question. It sounds like revenue in Q2 could actually double from Q1. Is that reasonable?

Speaker 2

Well, we've more than doubled the bio asset quarter on quarter from 7.4% to 18.2%. So that's again a That's the gross margin leading indicator gross margin of how strong Q2 could be. And again, that's the gross margin, that's not the sales figure.

Speaker 5

Okay. Okay. That's all for me. Thank you.

Speaker 2

Thanks.

Speaker 1

Thank you everyone. Look forward to the next report come August. And thank you so much for participating in this call and being part of Village Farms family here. Much appreciated. Thank you, operator.

Speaker 0

There are no further questions. Have a great day.