Village Farms International - Earnings Call - Q1 2021

Transcript

Speaker 0

Good morning, ladies and gentlemen. Welcome to the Village Farms International's First Quarter twenty twenty one Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the first quarter ended 03/31/2021. 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 archived for both replay via telephone and via the Internet beginning approximately one hour following completion of the call.

Details of how to access the replays 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 the 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 the 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 regulators, including its Form 10 ks MD and A for the year ended 03/31/2021, which are available on SEDAR and EDGAR.

These forward looking statements are made as of today's date and except as required by applicable securities law, we undertake no obligation to publicly update or revise any such statement. I'd now like to turn the call over to Michael DiGiulio, Chief Financial Officer of Village Farms International. Please go ahead, Mr. DiGiulio.

Speaker 1

Thank you, James. Good morning, everyone. With me for today's call is Village Farms' Chief Financial Officer, Steve Ruffini. This morning, I'll spend a few minutes highlighting the key takeaways for the quarter, and then Steve will review the financial results and I'll return with some concluding thoughts and then we'll open up the call to questions. On to the quarter.

So Q1 was a solid start for 2021 for Pure Sunfarms, most notably retail branded sales, which is the core focus of the business, increased 20% sequentially and marks our third consecutive quarter of 20% or greater sequential growth. That's a 115% increase in our retail branded sales over the last three quarters. And when we factor in the fewer numbers of selling days in Q1 as compared to Q4, our sequential retail branded sales growth was actually 23%. We would have been pleased with the Q1 growth in a normal market environment, but we view this performance as especially encouraging given the softness in the Canadian retail sales in Q1 due to the impact of the pandemic related lockdowns across much of Canada. Clearly, Pure Sunfarms has excellent momentum, momentum that's being driven by the right marketing strategy and the successful execution of that strategy, specifically high quality premium products that customers want at an everyday price.

And I want to note that that includes our large format offerings, which includes our highest quality strains in the large format. Secondly, innovation and continued enhancement of our product offerings, such as our new and unique Blueberry Kush strain, which has been a great performer right out of the gate. Next is expansion into new categories building on the success of our dried flower products and a reputation for proactive SKU management to meet the demands of the provincial distributors. This is an exercise in balancing capacity, the right strains, and the right inventory levels. Pure Sunfarms was again the top selling dried flower brand with the Ontario cannabis store in Q1 as it actually was for the month of April, which is a great start to the second And by the way, it has been since our retail launch in October 2019.

That's a period now of seventeen months in duration, almost a year and a half. I'll again remind you that Ontario continues to be the only provincial distributor from which we directly receive market share data. Other third party data is available. However, we prefer to share publicly only that which we know to be 100% reliable and accurate. We wish we were able to get that same data from the other provinces and can share it with the audience.

Sales of our cannabis two point zero products, which we launched in the second half of last year, were relatively flat in Q1, so more in line with the broader Canadian market performance. Although it's still very early days for us, our two point zero products are off to a slower start than we would like. The two point zero market is a fair bit different from the dried flower market. It's a congested space with more producers that are specializing in that segment of the market. The Pure Sunfarms team has a specific focus on this part of the business and our goal remains to be the number one or number two brand in every category that we are in, including two point zero categories and have every confidence in the team to get us there.

Let me remind you that we are now in categories that comprise of 90% of the sales in Canada. That said, dried flower is still by far and away the largest product category in Canada. And it still is in more mature markets such as Colorado that are several years more developed in Canada. I want to take the opportunity here to touch on the consistent brand performance of Pure Sunfarms to date as well. There exists a perception that due to the inability to market and advertise, it is not possible to build a brand in Canada.

But we clearly disagree and we think our track record of market share performance proves this out. You know, as you know, a brand is more than a name or logo. It's how the customer perceives that name or logo, what the customer associates with the name or logo. It's what drives repeat purchases of existing products and entices purchases of new products based on previous experience with that brand. And we believe our track record of leading market share performance over the long term is a reflection of a real brand, the Pure Sunfarms brand, the brand that equates to a premium quality product at an everyday price.

Still, we are not resting on our laurels. The market is evolving, customer preferences are evolving, and the Pure Sunfarms team remains laser focused on continuing to elevate its already premium level quality, develop new processes to enhance our products and new products that will continue to resonate with our customers. Case in point, our high THC Pink Kush strain, which was a follow on offering after our initial product launch, was the best selling dried cannabis strain within the OCS in the first quarter of this year. We believe 2021 is the year of high potency and we look forward to building on this success with new offerings. Noted a moment ago, it has been from day one, our overriding focus at Pure Sunfarms to drive retail branded strategy sales.

Our goal remains to capture a full 20% or more of the retail market. Non branded or wholesale sales are something that we look at from both a strategic and opportunistic perspective. It is by no means our objective to sell as much wholesale as we can each quarter. In fact, we have done in previous quarters, during Q1, we made the decision to turn down a number of potential non branded sales to other LPs. Any wholesale sales need to be more than just profitable, needs to meet a profitability threshold, and it needs to make sense within the contents of our retail branded strategy.

Our retail brand and our retail customers will always take priority. Still, the wholesale market, as I indicated on the last call I had, continued to be sluggish amidst what appears to be an inventory glut with too many players in the industry, with too much low potency, low grade and old inventory, and many dealing with the impact of provincial SKU rationalizations. As a result and per our expectations, non branded sales for Q1 declined from Q4. But 84% of our Q1 sales were retail branded sales, up from 69% in Q4. But this is, by design, far more than it's a reflection of the weakness in the wholesale market.

Again, quarter, Pure Sunfarms generated positive adjusted EBITDA of CAD 3,100,000.0, our tenth consecutive quarter of positive adjusted EBITDA, continuing our track record of positive adjusted EBITDA in every quarter since we commenced sales. And that goes way back to before we even received our retail license. We were selling only to the wholesale market. It's quite an accomplishment for Pure Sunfarms. We continue to be prudent and manage our inventories, which continue to be at healthy levels and were essentially unchanged from the end of Q4.

As I noted on our past calls, we proactively scaled back production during the summer of last year to align output with the Canadian market environment. It's our objective to produce only what we can sell and then as I mentioned earlier, to sell as much of that as we can through our retail branded channel. So Delta three is operating in full production and we continue to prepare for the startup of cultivation at Delta two in the third quarter, which will increase our production capability up to 50% from current levels by the end of this year, with plans to double capacity from current levels in the second half of And that is not a decision made in isolation. We have done so in consultation with the provincial distributors based on their forecasts and buying plans. As many of you know, Ontario has been rapidly opening new stores and now has more than six locations which now makes it the largest retail network in the country.

While still small on a per capita basis, these new outlets are clearly contributing to sales as evidenced by Ontario market expanding slightly from January to February while the three other largest provincial markets contracted by 9% to 10% lower. Ontario has a target of more than 1,000 stores by year end and is well on track and we are poised to benefit accordingly. I would like to again publicly acknowledge the best in class management team and operational teams at Pure Sunfarms led by Mandi Stoce on their outstanding accomplishments. So to our produce business, Q1 was a strong quarter operationally. We saw a 14% year over year increase in production values combined with a decrease in production cost at Village Farms' own Texas facility and improved utilization of our transportation handling costs.

However, the pricing environment of tomato market has swung from one extreme to the other as elevated prices of last year due to high at home demand during quarantine have given way to one of the lowest pricing periods for tomatoes, specifically the commodity tomatoes like tomatoes on the vine and beefsteak varieties that we've seen in the past ten years. As a result, although our volumes were up driving a 9% year over year increase in produce sales, gross adjusted EBITDA was down 50% year on year. With the opening of The U. S. Restaurant and travel industry amidst the lifting of the pandemic restrictions, foot traffic at U.

S. Grocery stores had decreased significantly, while at the same time overall industry supply is up. I'm very encouraged by the operating performance in Q1, which bodes well when pricing environment eventually normalizes. So all in all, Q1 was a solid start to this year. Pure Sunfarms continues to execute on plan with strong momentum in retail brand sales positioning itself very nicely for sustainable long term growth.

The Canadian market is still in the early rounds of a 15 round boxing match on its way to becoming an $8,000,000,000 or $8,000,000,000 plus market at retail. And we think outperform today positions us very well to capture a sizable portion of that market and to do so profitably. I will talk about this more in a few minutes, but now I'd like to turn the call over to Steve to walk through our financial results. Steve?

Speaker 2

Thanks, Mike. Just to reiterate, our twenty twenty one Q1 results reflect a full quarter of Pure Sunfarms results, whereas when comparing our consolidated results to Q1 twenty twenty, Pure Sunfarms was not consolidated. As such, sales, cost of sales, and SG and A have changed significantly year on year. To simplify the comparison of Pure Sunfarms results as we've done in the past, We showed that Pure Sunfarms results for Q1 twenty twenty one, Q4 twenty twenty, and Q1 twenty twenty on a standalone basis in our press release. With the addition of a full quarter of Pure Sunfarms, we have begun segment reporting in 2021.

Our segment our operating segments are produce, cannabis, clean energy, and corporate, most of which are related to being a public company and have historically been included inside the produce division. I also want to note again, as I did last quarter, that our results for Pearson Farms reflect the noncash impact of the write up of inventory to its net realizable value upon the acquisition of all of Pure Sunfarms last November. That impact was a 2,800,000.0 US dollar or 3,500,000.0 Canadian dollar increase in our cost of sales, in q one twenty twenty one compared to a 3,300,000.0 US dollar and a 4,200,000.0 Canadian write up in our cost of goods sold in q four twenty twenty. This effectively meant that from accounting perspective, a portion of our q one sales and our q four sales had a zero gross margin as they were written up to the fair market value on the acquisition date. But I also need to remind the audience that offsetting this was a two point a 23,600,000 statutory gain we realized upon the acquisition of Pearson Farms in q four twenty twenty on the book to Village Farms.

With respect to what's remaining, with there is a little less than $1,000,000 US of increase in the fair market value, left on our Pure Sunfarms inventory. So we're about through with the, inventory write up. Consolidated sales were 52,400,000.0, which was compared to $34,900,000 which was comprised of $34,900,000 of produce sales and $17,400,000 or $22,100,000 Canadian in net sales at Pure Sunfarms. This compares to $32,100,000 of consolidated sales in Q1 twenty twenty, which was essentially all produce sales. While our year on year increase in sales of 63% was driven by the addition of Pure Sunfarms, produce sales year on year increased 9% due to the increased production from our Texas greenhouse facilities as well as additional third party partner supply of tomatoes, cucumbers, and peppers.

While our produce volume was up and our actual as Mike mentioned, our actual year on year cost of production were down, the pricing environment is much different in 2021, which was not totally unexpected. And Mike's already given you the reasons for that. Turning to Pure Sunfarms. Q one sales were 17,400,000.0 US, 22,100,000.0 Canadian, which were up 23% from q one twenty twenty and were essentially flat to q four twenty twenty sales. The year on year increase was driven by our continued growth in branded sales.

Q one twenty twenty one being the third consecutive quarter of over 20% growth in this sales channel. Our success in branded sales continues to be our focus and execution on flower. In q one twenty twenty one, our large format SKUs, our single strain large format SKUs outperformed our expectations. While q one had some headwinds such as out of stocks, and fewer delivery windows due to operational issues at the provincial boards, we were able to increase our market share in dried flower in q one twenty twenty one and also saw a nice increase in April. With respect to non branded or as some call it, wholesale sales, as we have stated in the past, this sales channel act activity is lumpy.

Non branded sales, no surprise to us, were impacted, as Mike mentioned in his comments with respect to SKU rationalization. The decrease in our gross margin in q one twenty twenty one our our gross margin percentage in 2021 of 29% was a decrease from our gross margin of 39% in q four twenty twenty. This was driven by a higher percentage of large format versus small format dried flower, as well as high margin, gross margin, non branded sales we had in 2020, in particular with some high CBD strains that did not reoccur in the 2021. So the market should not presume that all non branded sales are not at good, strong margins. In some instances, they're they're actually very strong.

Just as non branded sales are lumpy, so so is the gross margin driven by market dynamics with respect, to those sales. SG and A for q one twenty twenty one for Pure Sunfarms was 4,000,000. 5,000,005 million Canadian was down from 4,500,000.0 US, 5,900,000.0 Canadian in q four twenty twenty due to the fact of not incurring any bad debt write offs in 2021. We had one the only one we've had historically in q four twenty twenty. As well as we had some incremental one off q four costs with respect to our ERP system.

Our s g and a cost in q one twenty twenty one were up 56% from Q1 twenty twenty due to higher year on year addition of new staff and sales and marketing costs related to our branded sales. Share compensation expense of 1,100,000.0 for Pure Sunfarms is due to the achievement of certain performance criteria by Pure Sunfarms management in q one, as well as the issuance of Village Farms stock options to the key management team key management members of Pure Sunfarms in recognition of their success to date. Jumping to our balance sheet, we ended the quarter with $136,000,000 of cash and had bank debt of $66,000,000 for a net cash balance of $70,000,000 Over the last two quarters, we have renewed all of our bank facilities, both in produce and cannabis, on very attractive terms. So we are very comfortable with our capital position today. Our produce business historically has negative cash flow in Q1 as we ramp up our Delta one facility.

And Pure Sunfarms in Q1 was also ramping up the Delta three facility to full scale production as as Mike mentioned, in his comments. So with respect to ongoing cash flow from operations, we expect that to improve, in the following quarters throughout 2021. And we are well positioned to fund our operations, our CapEx for 2021 and 2022 as well as we're actively looking at M and A opportunities as well as alternatives to further enhance our results and operations. With that, I'll turn it back over to Mike.

Speaker 1

Hey, thanks, Steve. So concluding here on my closing comments before we take some questions. As we look ahead to 2021, we believe it's shaping up to be another year of steady progress and execution in our strategy based on large scale, high growth opportunities for the near term, medium and long term. As we have been throughout our thirty year plus history, we will be prudently optimistic. It is a opportunistic, I'm sorry, I'm optimistic as well.

It is a year of building on a tremendous success of Pure Sunfarms to date, taking Pure Sunfarms to the next level of success, revenue growth and profitability. And we do expect to continue to capture more of our proportionate share of the growth in the Canadian market as I mentioned. Our model for consistent, sustainable profitability has been proven and our significant scale over the next year will propel this to new levels as we capture more of the industry's profit pool. Medium term, we'll continue to be optimistic about the evolution of the regulatory environment in The USA. We are being patient, prudent, and strategic to ensure responsible investment in the right way at the right time.

The US is clearly a massive opportunity, but it's also a long term opportunity. Using my boxing metaphor from earlier, the bell to start the match is barely rung in The USA. We are aggressively working behind the scenes, continuing to evaluate the breadth of opportunities from our seat here in The United States to be prepared regardless of how this plays out. I wanna remind you that in Canada, Pure Sunfarms entered the branded retail market at least year after many of the other large players. Being a later entrant allowed us to create a winning business plan and the most profitable business model at Pure Sunfarms.

And we think that same dynamic is setting up in The US market as well because, in fact, we think it is likely that The US market will look very different than it does today upon full legalization. And that will give new entrants to market a significant advantage. Because of how the regulatory environment unfolds, we are preparing with multiple parallel strategies that will bring us to bear our deep experience, including now our success in Canada, our organizational strength in one of the largest greenhouse footprints in The USA. Again, over 6,000,000 square feet in some of the best growing areas in The Continental US. For the longer term, we are planning to see to leverage our cannabis success and leadership beyond North America to strategically targeted markets where there's high growth opportunities in these international markets, again, through efficient capital investment.

And we believe our foundation in Canada, cultivation expertise positions us well for success. As I noted on our last call, we increased our investment in our Asia Pacific partner Altum earlier this year to 12%, which is indicative of both the progress and our increased confidence in the opportunity here. Before I open the call to questions, I wanna touch on one important topic that has long been a part of our DNA here at Village Farms, one that in these heaty days of early days of cannabis industry, we haven't spent much time talking about, and that is sustainable agricultural practices. Controlled environment greenhouse growing is by far the most sustainable form of agriculture, period. We are now the oldest operating greenhouse produce company in The United States with over thirty years behind us.

And in this responsible way of growing, just to reiterate, we don't use soil, so there's no soil erosion depletion of nutrients. We can grow 30 to 40 times more yield per acre than a field grower. We recirculate water, meaning 86% less water usage than outdoor growing, and no leaching into the groundwater whatsoever. We capture our CO2 from our boilers and put it back into our greenhouses, which the plants convert to oxygen, meaning not just a neutral carbon footprint but negative carbon footprint. All of this has long been a foundational principle of produce operations which now has enabled us to lead the cannabis industry in this regard where the cultivation practices are identical.

It's something we're quite proud of not only because of the positive environmental and social implications but also because we know it makes us better, more profitable operators. With that, we'll turn it over to any questions that anyone has. Operator, James?

Speaker 0

And we will now take questions from analysts only. If you're an analyst and would like to ask a question, And our first question comes from the line of Doug Cooper with Beacon Securities. Go ahead please. Your line is open.

Speaker 3

Hi, good morning guys. Just a couple of things for me. Just first, let's start with on the gross margin. I just want to make sure I'm clear, Steve. So reported gross margin 29%, is that inclusive of the inventory write up that you talked about?

Speaker 2

Yeah. We we back we back that out. So that's that's that's the true gross margin. The statutory gross margin is less. Okay.

Speaker 3

And that includes some cost of sales in there. Correct? And so, if I take the 22.1 times point two nine, g and a was 5,000,000 in the quarter.

Speaker 4

Pure Sunfarms? So

Speaker 3

excluding cost of sales that are that are included in the gross margin, you're upwards of 30 mid thirties, I would guess. Is that a is that right?

Speaker 2

No. The the the 29%, we've added back the inventory inventory. Adjustment.

Speaker 3

But not the there's there's still there's still depreciation of the fixed assets in that number. Correct?

Speaker 4

Correct.

Speaker 2

Yes. Yes. We always we've always both in produce and cannabis, we always include depreciation as as part of of cost of sales.

Speaker 4

Okay. Capital is not free.

Speaker 3

Yep. Can you give us an idea of sort of what the pricing environment is like and maybe just, what percentage large format was of your, flower sales in the quarter?

Speaker 2

Yeah. I mean, with respect to the pricing environment, I there there was no change in our pricing. I mean, pricing does vary based on strain and bay and obviously based on format. But quarter on quarter sequentially, there was zero zero change in our I can't speak to, you know, the overall marketplace and what other people are experiencing. But with respect to us, it was it was the SKUs that I did look at, you know, was was exactly, the same.

With respect to the the breakdown for the quarter, between large format and small format, the large format was roughly, let's say, 60% of our flower sales, and small format was 40.

Speaker 4

Sure. And can

Speaker 2

give an idea what the yeah.

Speaker 5

Can you give us

Speaker 3

an idea what the pricing differential between those two is on a per gram basis?

Speaker 2

Again, it's it's based it's based on it's based on the string.

Speaker 4

It it it varies.

Speaker 3

Okay. Longer term, when you get more production in, you get more economies of scale, what what would your long term EBITDA or gross margin targets be, you think? What what should we be thinking about from a longer term perspective, assuming pricing remains where it is?

Speaker 4

Well, I mean,

Speaker 1

there's a lot of variables, Doug. I mean, who's gonna be in the marketplace? That's one thing. It's still too many players. So I think long term, we have to look at who are the survivors.

That's going be a big impact as well. So, you know, I think we think it'll get better, but, you know, we're forecasting those stay pretty steady because, again, our pricing is based on what the pricing for the gray market is regardless of anyone else. And as that changes, then maybe pricing will increase going forward.

Speaker 0

Our next question comes from the line of Aaron Grey with Alliance. Go ahead please. Your line is open.

Speaker 5

Good morning. Thanks for the questions. You know, great to see the, continued growth on the flower side quarter over quarter. So I wanted to specifically kinda speak to Ontario where you guys, continue to outperform. Just curious, as we see more stores roll out in the province, particularly after things normalize, from COVID, hopefully, soon.

Can you speak to how you're working to ensure Pure Sunfarms has the appropriate shelf space to continue or maintain gaining share as these incremental stores come online? Thanks.

Speaker 1

Yes. I think while we're well positioned for that, I mean, some of the besides the lockdown at the consumer level and the stay at home orders, especially in Ontario, that's affected commerce in such that the distribution centers are maybe not operating at full capacity for the same reasons, store rollouts as well. So as I said in my remarks, we've been in contact, and our future growth is based on the confidence we have in discussing that with the provincial distributors. So we feel very solid about gaining more market share as it gets back to normal whenever that may occur in Canada.

Speaker 5

Alright. Great. Thanks for that color. And then second question for me is just on the two point o products. Michael, you know, you mentioned, you know, flat quarter over quarter.

You know, you mentioned that, you know, you're hoping they'd be a little bit better yourself and spoke to kind of a different competitive environment with more, producers that are specializing in that part of the market, think, is what you said. So, you know, just curious because you've had, you know, such great, you know, efforts in terms of, you know, your one point o flower products on the Pure Sunfarms brand. How You are you looking to kind of potentially leverage that with the products? What are your plans to hopefully improve your performance in the category to perform better to

Speaker 2

what you would like to expect? Thanks.

Speaker 1

Yeah. Well, the team at Pure Sunfarms, as I said, they're very focused on it. They're in war room mode right now, as they say, and and looking at those products. But again, I wanna remind everybody, you know, we didn't roll any of those out till the later part of last year. So, we're not even approaching, you know, a full year.

And, we're at 92% of the approved products from Health Canada, just not in confectionery or beverage. We think those markets still are quite small and have to be proven out. Not that we won't be at some point if we think there's gonna be traction there. But within the other two point o products, yeah, we're focused increasing that market share. We think some clarity coming out of Health Canada will help that position, and I won't comment more on that.

But also, you know, we think we put like our gummies, we put that against anyone with all fresh fruit and the taste. And and I think potency, you know, we have a lot more strains coming on with higher potency. It seems to be what the market is really looking for. So I think a combination of all those attributes because the high potency will translate into some of the derivative products as well. And we just keep hammering away, but that's that's the best color I can give you at this point.

Speaker 5

Alright. Great. Thanks for that color. Appreciate. I'll jump back in the queue.

Speaker 1

Thank you.

Speaker 0

Our next question comes from the line of Rahul Faragazar with Raymond James. Go ahead, please. Your line is open.

Speaker 4

Morning, Mike and Keith. Thanks for taking my questions. I'm correct on the strong quarter. Just wanted to both of you brought up the inventory

Speaker 5

write offs. Just wanted to get

Speaker 4

a little more clarity here. So it looks like that write up for the quarter was that noncash write up was around $2,900,000 So if add that backwards, I should expect to correct that on you know, the reported EBITDA of $400,000 That would actually be saving EBITDA of around 3.3. Is that right?

Speaker 2

Clarify. What what was that question again, Raul? I wasn't Right. You broke up there, Lina.

Speaker 4

I'll repeat that. So given given the the the noncash write up of inventory, on on the consolidation, given that yeah. And also that the adjusted reported adjusted EBITDA was 400,000.0. So if we correct for that, the corrected adjusted EBITDA number would be close to 3,300,000.0. Is that right?

Speaker 2

No. We we've added it back already.

Speaker 4

Oh, you have added it back. Okay. Great. Yep. And then in terms of the, and in terms of the the 2020% quarter over quarter growth, in in retail sales.

Now we've seen many of many of your peers, showing declining quarter over quarter growth. So can you give us a little more color, Mike, potentially on how Pure Sunfarms is able to drive that while much of the sector is showing a decline?

Speaker 1

Well, I mean, I I kinda said in my remarks, Raul, I think that, one, the execution by Pure Sunfarms and and the quality of the products at the price point we have is just driving. That's been our model from day one. That's been our strategy. We've never wavered from when we entered the market that we need to that price point, you have to have you know, I think it's everything we produce is a premium quality, and I think people talk about premium and value. It's nothing value.

Our high format, large format rather, is made up of 100% of our top selling strains. It's not secondary product or anything. So we just discount it because it's a it's a high volume sale. So, you know, if you go into Costco and buy, you know, four pounds of olives, you're gonna get a better price than going to a regular grocer where you buy a can of olives. And I think that sometimes gets misconstrued.

Maybe some in the market want that to be misconstrued that it has to do with the premium versus nonpremium product. That's anything from the truth. And I think that's resonated because even in today's pandemic times in Canada where people want a good deal on a large format, you could see that drove about 60% of our sales in the first quarter. If it wasn't premium product, it wouldn't be there. And I can't speak for what others are doing, but, you know, we saw the data where there was a client with everybody, and we just think it has to do with our quality, our strains, our execution that's driving it.

And we're that's why I said we're very proud of that execution of the team. And, we think we've got it pretty right so far.

Speaker 2

Yeah. Rule 75% of our large format sales were the single strain. So that's that's what's moving the needle. Because of our quality, we're able to do that.

Speaker 1

Of course, it's because of our cost of production as well. I just wanna make that clear. We couldn't do it and be profitable if we didn't have low cost production we did and the scale.

Speaker 0

And our next question comes from the line of Eric DeLoret with Craig Hallum Capital. Go ahead please. Your line is open.

Speaker 6

Okay, great. Thanks for taking my questions guys and congrats again on the steady execution here.

Speaker 4

I was wondering if could talk a

Speaker 6

bit more about the dynamic between retail and wholesale channels, especially as provincial buyers are becoming more prudent with their inventory purchases. Presumably, that would benefit you guys with the number one retail brand, but wondering if you could talk a bit more about how that's impacting your wholesale buyers. You mentioned a profitability threshold. Just wondering if you can sort of elaborate a bit on how these changing purchasing dynamics at the provincial level are impacting your wholesale customers.

Speaker 1

You know, I can't speak for for others that we sell, but if I was to put myself in in in that environment, and I do, I look at it that in order to compete at the retail level, if you're not being able to cultivate your own product that meets that quality that that and what the market wants, let's just say in terms of freshness, quality, and potency at a profit, you know, then you have to go out and buy product from competitors, so to speak. However, if you have to compete with the price points that are out there, not just Pure Sunfarms, but as I said, the price points were set by the gray market and are to a large degree, that you have to be able to purchase at a low enough price to then be able purchase bulk at a low enough price to then package it, label it, do all the things you need to do, sell it, make a profit, and be competitive. But I think that's, you know, that's a hard road to hoe up in Canada, so to speak. So, you know, that's why we're really not focused on it, but we're not gonna just sell it at a price that doesn't make sense.

The other thing is as the market is demanding higher potency, you know, that's first and foremost for us. And, of course, others would want that higher potency. And, you know, there's a there's a limit to what that is, and we're never gonna lower our inventory levels, for future quarters beyond what we think is prudent to meet, retail customers' demand. So there's a lot that goes into it, and that's why we say it's very strategic. And, you know, we're much more we call it unbranded sales because there is a portion of that those sales that are going to, maybe light asset model players that are strategic and are willing to pay us a higher price because they have a branded situation as opposed to maybe other LPs.

And I won't elaborate more, but I hope that helps.

Speaker 0

And our next question comes from the line of Scott Fortune with Roth Capital Partners. Go ahead please. Your line is open.

Speaker 7

Yes, good morning and thanks for taking the questions. I want to call out some of the other provinces. And just with respect as you bring in on more production starting in third quarter from the Delta 2 facility, How much of this is driven from Ontario or kind of some of the new provinces? I know you're not in Quebec or some of the other provinces opportunities going forward here for you guys?

Speaker 1

Yeah. Well, in our plans, we didn't, this year include Quebec. Of course, we're working hard on it. We would love to be in Quebec, but, we wanna be realistic with the timing of that. But, you know, I think one of the drivers for Ontario was just the aggressive rollout now.

They're really on a fast track of rolling out of the stores. We didn't see that much in the other provincial areas. So I think, post, lockdown that those provincial areas will continue to add retail stores, which will help. But, but I would say, outside of, Quebec, you know, Ontario is a big driver, but so is BC and so is Alberta. And keep in mind that our Delta 2 facility, like our Delta 3, has 16 grow rooms.

So as we bring on eight by the end of the year, we could vary that down to seven, increase it to nine to 12 till we get to full capacity. And that's something that we're doing, you know, every month as as we rationalize the increase in capacity. Again, as I mentioned in my comments, we're not going to produce what we can't sell and have huge inventory levels. That just doesn't make sense. But we have complete flexibility.

And as I said, Scott, last summer, we brought down production very low to align with what the market was and what our specific sales were. So I think that formula for managing that is solid for us.

Speaker 7

Okay. I appreciate the color. And just kind of follow-up, maybe Steve can help. What's the CapEx for the kind of the target for the year? And then on that note, what about additional international initiatives going into Europe potentially?

I know you guys are looking at kind of getting EU GMP certified per se from that standpoint, but any color on kind of European timing or initiatives over there?

Speaker 1

Well, I'll answer the second part, and then I'll turn it to Steve on the CapEx. So we have been aggressively, working on, the European theater. We, you know, it's the pandemic has affected things there. It's a highly regulated market. We definitely want to be engaged in it, but we don't feel pressured to move forward just to the sake of announcing it without the right strategy.

We're clearly gonna leverage up our strengths that have proven ourselves in Canada just like we are in The US for the EU. We're watching it very clearly, what the penetration rates of, medicinal are in the other states. So we're patient as well. As far as The Netherlands, we're not out yet. We've been working on that, the coffee shop experiment there.

Can't say much more about that. And then, you know, in the Asia Pacific region, as we mentioned, we're gearing up there. In fact, we should hopefully have our EU GMP certification by August, September this year. We're ramping up now to start commence, high THC, sales out of Pure Sunfarms for the medicinal market in Australia. We think we'll be shipping product this year to start and ramping up, our programs in Australia, as well as supporting Altum in their continued penetration into Hong Kong and working on Japan now and, of course, other markets for the future.

So those are the two areas internationally that we're very focused on. But I do wanna say that number one is The USA. As I mentioned, you know, we just don't wanna we wanna be very clear on how The USA is gonna go forward. We don't wanna deploy capital that would be a sunk cost type of investment down the road as things change in that environment. So

Speaker 2

And, Scott, with respect to CapEx, you know, remaining CapEx for the rest of the year is between 22 and 25,000,000 US between produce and and cannabis for the rest of this year. Much of much of Delta's the West the West half of Del Delta 2 It's waiting for Health Canada's seal of approval. And, you know, the rest is, CapEx for the year is is partially the east half of Delta 2 as well as enhancements to our operations both, with cannabis and with produce.

Speaker 4

Thank you for the color. Our

Speaker 0

next question comes from the line of Raul Fargazer with Raymond James. Go ahead please. Your line is open.

Speaker 4

Thanks, Mike. Just a one quick follow-up question. There have been quite a few movements in the Texas legislature. And given the, you know, significant assets that you have in Texas, are there any thoughts that you can share in terms of how those legislative changes that are or potential legislative changes, may impact how you guys look at the state and or The US?

Speaker 2

Well, Steve, we were hoping that the state would move more aggressively into medicinal. Yes. The house did pass a bill, but their definition of medicinal was to increase the THC debt to to 5%, which is still really low, particularly for, patients. So doesn't really necessarily assist a lot of the people that that need higher THC, which is unfortunate. That being said, the senate, hasn't even, essentially they've recognized the house bill, but they haven't even assigned it to a committee yet, and time is running out.

So at this stage, we don't see the state move, but, you know, things could change over the next two weeks. You know, ultimately, what we believe may happen, like Texas itself isn't gonna move, the Texas constitution forces it to follow federal law. So if the federal government will reschedule cannabis, which Schumer and others, in the federal government have have certainly been hinting towards, then Texas will have to move, so which is fine. So maybe Texas legislature will be forced forced to catch up with the times. And ultimately, Texas is a very business friendly state.

As we stated, cannabis, particularly where we're located in West Texas, it's great growing climate. And we believe Texas will get on board seeking and screening, maybe, but they'll they'll get on board with the rest rest of The United States, hopefully, you know, next year at the latest.

Speaker 1

Yeah. And I would just say, yeah, we're a little bit disappointed. You know, we've been operating there for a quarter century or more, and it was a slow start on Hampton, Texas. So, maybe the legislative session all happen. Steve said the entry will be the federal.

But the other side of that coin is, you know, nobody's there. So when it goes, we will go aggressively either way, whether it's Texas first or the federal government first. And I think at some point, you know, when you really look at the northern country, Canada and southern country, Mexico, all legalizing, as well as the adjacent states of Texas at some point, you know, they just need to make a decision, we hope, in the right way. So that's part of being patient.

Speaker 4

Indeed. Great. Thanks for taking the call, question. Thanks.

Speaker 0

And there are no further questions in queue at this time. I'd like to turn the call back over to Mr. DeGiglio.

Speaker 1

Okay. Thanks, James, and thanks once again, everyone, for joining us today. Thanks for your continued interest and support of Village Farms, we certainly look forward to speaking with you again on our next call. Have a good day.

Speaker 0

This concludes today's conference call. You may now disconnect.