Village Farms International - Earnings Call - Q3 2018

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to Village Farms International Third Quarter twenty eighteen Financial Results Conference Call. Yesterday, Village Farms issued a new release reporting its financial results for the third quarter ended September 3038. 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 Investor 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 the 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 during 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 our various securities filings, including Village Farms' current annual information form for the year ended December 3137, and MD and A for the quarter ended September 3038. These forward looking statements are made as of today, November 1338 and except as required by applicable securities law, we undertake no obligation to publicly update or revise any such statements.

I would now like to turn the call over to Mr. Mike DeGello, Chief Executive Officer of Village Farms International. Please go ahead.

Speaker 1

Thank you, and welcome, everybody, for joining us today. Today's conference call, I have Steve Ruffini, our Chief Financial Officer, with me today. And the agenda for the call is I'd like to begin with an update on the great progress of Pure Sunfarms. Steve will also do a brief review of our third quarter financial results. I'll return for some additional comments And then I want to allow adequate time for Q and A at the end.

So beginning with Pure Sunfarms, our production continues to steadily ramp up. And as we have said time and time again, growing is a ramp up business, especially when you change a new crop to a new crop or build a new greenhouse. And it usually takes a good couple of years to get going. That said, I'm very pleased to repeat that we are on track and doing extremely well. And in my thirty years of building mega scale greenhouses, probably 12 all total around North America, this is the first time that we've actually commenced conversion of a greenhouse while growing and while harvesting, while doing post harvest and selling product all at the same time.

So it's a remarkable effort and it's been going extremely well. The company remains firmly on track for the entire 1,100,000 square foot facility to be in production in the 2019 at a run rate as we have said from the beginning of 75,000 kilograms annually. That's a number that's more conservative than other LPs on an equal square meter basis. So our original targets from day one have all been met on time, and we continue to meet them going forward. Our cultivation license was received and in August and September, we did receive our third and fourth amendment to our original cultivation license that brought us to 550,000 square feet of license production.

I believe it's faster than most other LPs between receiving our cultivation license and our sales license. Additionally, we planted out some more area in October and we are now into our second crop cycle of what we predict will be five crop cycles per year in quadrant number two. The second half of the facility, the conversion is moving on plan and we expect the entire growing facility to be converted by year end as designed. We may not do the final planting of that final block till January. That all depends on getting Health Canada to approve the additional expansion.

There has been some delays since the migration of AMCPR licenses to the Cannabis Act license filing on October 17. All LPs have been affected by that delay. And we realize that Health Canada has a lot going on, but we don't see that as anything more crucial than maybe a two to three week delay in having the initial expansion. So our third quadrant, which is another 260,000 square feet is ready to be planted out. It's been converted.

Our generators are on-site and we're just waiting for Health Canada to okay that expansion. So this year, we still expect to harvest 7,000 kilograms. However, with the time required from post harvest, which from just from the drying, post drying phase takes about four weeks to get permission from Health Canada, where we have to do testing and verification to ship products. So I think at the end of the day of we'll probably push about 3,000 kilograms into the New Year commencing January 1. So looking for that to be sold in the New Year, most likely in the first quarter going forward when it's available for sale.

So by the way, we are very proud of Whole Village Farm team when we look at design, planning and implementation. Our thirty year experience clearly was at work here. Looking at the facility today, there's really nothing that we would do different. And I think that's commendable to our team putting together again that huge experience going forward. So continuing on as we ramp up schedule, we should be on track for 75% of our capacity in late winter, early spring the first quarter.

Now that 75% capacity it makes us just about one of the largest LPs in all of Canada. That 75% of 1,100,000 square feet. So and then as we reported before that we'll come back and put the lighting in quadrant number one. Quadrant number one has run a full crop cycle and we reserved since we didn't have enough power and won't till the second quarter of next year, we went dark in Quadrant 1 and that will go back in production. We'll be putting the lights in there this winter and they'll come back in production starting in March 2019.

So running forward looking forward in March 2019, the full 1,100,000 square foot will be in production at that point going forward fully lit. So again, even at 75% capacity, Pure Sunfarms would be among the largest producers in the country. And based off of recent actual production numbers we're seeing, there seems to be significant ramp up issues with other LPs that probably will go well into 2019, which vibes well for us going forward. From the operational side, Pure Sunfarms facility continues to operate to the high standards which was designed. The nursery is fully automated and complete.

It's fully lit with its own generators and that capacity of that nursery at full functionality can supply about 2,500,000 square feet. So we would not have to build another nursery even for double the capacity of the Delta three facility. The team is harvesting regularly and we're completed our second cycle in some of the flower rooms starting to move into our third crop and that's consistent with the expectation of five cycles annually. We have over 20 strains in production and testing. We've already decided to eliminate certain strains that we grow early on.

That's part of the normal process that would occur all the time in farming. Even in our produce side today, we're constantly evaluating new varieties and strains as an ongoing basis. But that said, our yield and quality are aligned with our expectations and we remain confident with the ability to achieve an all in cost production of less than $1 per gram at full production. Now let me explain that you really do need a full year under your belt, anyone would, to be able to document what your cost of production will be. You cannot do it on a quarter by quarter basis.

I know some of our competitors are reporting that. But what may happen in this quarter may not happen in the next quarter in terms of yield output. So you really need a full year under your belt. And at that point, we will report what our cost of production will be, but we need to get a full year under our belt. Pure Sunfarms is clearly benefiting from the experienced management and growers coming over from Village Farms.

In my opinion, I firmly believe we are number one in the industry, and I don't think anybody comes close. You cannot buy this kind of experience. Our existing labor force, twenty plus years there, grower eleven years, maintenance people twenty years, the entire team, you cannot buy that, you need to build it. And one of the benefits in our conversion for Village Farms is having that team in place. And that plus our proven operating systems that we employed in the conversion, the two decades of history operating on the Delta facilities, the twenty years of climatological data that we've talked about before.

We have no issues on the location. We're not in the middle of any residential neighborhood like other LPs, and we've been operating there for twenty years. So clearly seeing the benefits of Village Farms experience as a large scale low cost operator play out. And as I said before, our goal is to be a vertically integrated company. But first and foremost, you need to be the low cost producer to build a very durable sustainable company.

That's what we're doing at the highest quality and most importantly, the safest product. We are on track to do that and very confident. From a selling side, we received our sales license during the July, not that long ago, and we commenced sales in September. Sales to date have been on a wholesale basis to other LPs. We won't mention who they are.

I can tell you that the phone is ringing off the hook on a daily basis. And for many of the LPs that have contracts with government that are short, in addition to our distribution agreement that we signed for Emerald Health through the 2019. And we have a number of customers that are just buying on the spot market on a daily basis. The Canadian market has documented as well short of product and I believe even more than anticipated. So we are moving forward.

We are waiting for our packaging license. That's the next key license waiting on Health Canada. Hopefully, that comes in the next two to four weeks. And that will allow us then to start to quote provinces directly, which is on our radar screen and we have been meeting with them on an ongoing basis. So the higher than expected demand, especially coming out of some of the Eastern provinces have created favorable spot market pricing for us.

It remains solid and I don't see any end to that at least through 2019. Goal is still to establish Pure Sunfarms as a vertically integrated supplier and a leading Canadian brand. We do have ideas how to do that, but again, let us get through the process of finalizing the conversion and moving forward. Alongside our current spot market sales, Pure Sunfarms is building inventory to ensure regular availability of product when it's being supplied to provincial boards. Now we see a lot of LPs that are short product for the commitments they've made.

We will never be in that position. I can tell you that we will always make sure that we over deliver on what we commit to, especially dealing with provincial boards and private retailers as well. That's how you build a trusted brand. Consistent with the VF Velocity of doing things the right way, we're taking each step process by process moving forward. Now I'm very excited to say that after extensive search, we hired Mandeep Noshar fortunate to land someone with his great credentials also indicative of the PSF opportunity.

He had many choices and he chose Pure Sunfarms. As it's been reported previously, Senior Vice President of Supply Chain and Wholesale at the Liquor Control Board of Ontario, was sort of development and management of the LCBO supply chain and wholesale strategy for adult use cannabis. He has a deep understanding of the Canadian cannabis product and the competitive landscape. He has visited, obviously, his previous position, all our competitors. He'll be a tremendous asset becomes a vertically integrated supplier.

His top priority is development of the distribution, branding and product strategies moving forward. He's a proven leader. He's aggressive, loyal, hardworking. I am very excited to have him on board, and we already see great things happening. And under his responsibility will be the provincial distribution.

Mandeep's already substantially advanced discussions with multiple potential customers since his appointment only five weeks ago in advanced stages with two provincial boards and a multi province retailer, had intended to be supplying at least one provincial board by this time, but the delays, as I mentioned previously, in obtaining the packaging licenses pushed that time frame back slightly. And the impact of delayed sales from the provincial boards being more or less offset by higher than expected spot market pricing that we're experiencing on a daily basis. We are also pleased how Pure Sunfarms opportunity is unfolding. Our production is on track. Our quality is very good.

Facility is operating exceptionally well. Sales are ramping up nicely. Organization is moving towards vertical integration, with extraction strategies that we want to implement by mid-nineteen. We're especially proud of the consistent positive feedback that we're hearing from the LPs we're selling. It's not inconsistent with what we've heard in thirty years of Village Farms and building a company that has superior quality product and the safest of all.

The same thing will flow here. And we're building a reputation as a leader in the space and working on further business development opportunities in Canada under the Pure Sunfarms banner as well. So with that, I'm going to turn it over to Steve and come back and make some other comments moving forward. Steve?

Speaker 2

Thanks, Mike. In the interest of time, I'm going to confine my remarks to some key metrics. Our complete quarter and year to date financial results and discussion are available on our MD and A and financial statements, which are posted on our website and on SEDAR. A summarized balance sheet and income statement for Pure Sunfarms is contained in Footnote seven of our financial statements. Year to date for the nine months ended September 3038, our net produce revenues were down $10,300,000 or 8.6 percent, of which 60% of that decrease is attributable to the lost production from our former Delta three tomato greenhouse, which is now growing cannabis.

The balance of the decrease is due to changes in crop mix at our Texas facilities. The biggest one being for the first time in six years, we've cleaned out the Permian Basin high-tech greenhouse in Texas, which has been continuously producing us since initial harvest in early twenty twelve. We cleaned that out this summer for the first time, which obviously impacted our year on year volumes. Due to our change in mix of tomatoes, for instance, the Delta three greenhouse was growing a lower priced TOB variety. Due to our change in tomato varieties on a year on year basis and better matching supply and demand, our net tomato price year to date was up 5% in an overall tomato price market where the average price of tomatoes continues its slow decline.

Year to date, we have a slight increase in our third party supply partner revenues and expect that trend to continue as our primary Mexican partner expands its production facilities and we bring on new Mexican partners who want to partner with Village Farms in 2019 due to some of our exclusive varieties that we can offer them. Pure Sunfarms had net revenues of CAD 247,000 in September as it began to sell products to other LPs, which slightly exceeded its 2018 budget. Sales of Pure Sunfarms continued to grow as it gets the proper paperwork in order and to move product to other LPs. And hopefully, as Mike mentioned, few weeks, we'll have our packaging license in hand and we can commence direct sales to provincial boards. Today, production costs have been below our budget.

As we've stated since the inception of Pure Sunfarms, any production facility is a ramp up process. Pure Sunfarms is already demonstrating strong operational results with a small gross profit in its initial sales quarter and a bio asset value of 1,100,000 at September 30. Historically, new construction greenhouses at Village Farms have not shown a profit in their initial years of production due to ramp up issues, but due to the advantage of converting an existing facility with experienced production management and labor, Pure Sunfarms is off to a great start to its operations. And with its ability to produce high quality and low cost production into a market short of product, it is in a great position for a very strong Q4 twenty eighteen and a full year 2019 results. And with that, I'll turn it over to Mike.

Speaker 1

Thanks, Steve. Okay. So sometimes we basically criticize here at Village Farms for not communicating a lot of things in the last couple of days. It's amazing. I've read and listened to some calls from our competitors.

I can't believe how much information is being put out. But at the end of the day, it's going to be how these companies perform. So looking at our outlook for Pure Sunfarms, obviously October 17 was an historic day, but the hoopla is over and it's time for the industry to deliver on promises. And we can't wait to start showing what we're capable of doing going forward. And I think the market where we board those companies that achieve their production goals, generate sales and manage costs for strong margins and profitability, Yesterday morning, a very, very large LP reported their earnings and noticed that they had $600,000 in adult use sales, dollars 600,000.

We basically did 50% of that just starting receiving our sales license in September and just starting on one small quadrant, we were able to do 50% of that company's adult use sales, which was amazing to me after what they've been the years they've been performing, the money they spent. So we're firmly on track to do that and deliver value both short term and long term to Village Farms shareholders. We continue to expect Pure Sunfarms to be cash flow positive in Q1 of next year based on our current expected licensing timelines. Now moving forward, since Mandeesha has been on board and starting to build his management team, I can tell you that Steve and I wasted no time moving to greater opportunities outside of Canada. As I mentioned previously, we do have a number of strategies in Canada under Pure Sunfarms are looking at, but Village Farms is focused on The U.

S. And Mexico where we have great relationships and had those great relationships for twenty years. So Village Farms, we're clearly watching momentum towards legalization around the globe, but especially in the rest of North America. At its core, Village Farms is vertically integrated greenhouse growth, high value crops in The U. S.

Currently tomatoes, cucumbers, peppers, we've grown roses, carnations and cannabis based on legalization. So we've mentioned I've mentioned previous that we've designed and built large scale greenhouses, New York, Pennsylvania, Virginia, four in Texas. We have unmatched platform to capitalize on these opportunities. We're one of the oldest and most experienced operators in North America, the oldest operating greenhouse company in The United States and one of the very largest in footprints in North America, including nearly 6,000,000 square feet in Texas. You know The U.

S. Farm Bill has a great hemp opportunity with bipartisan support. We expect that bill to be passed sometime between December and no later than July 2019. That represents significant potential for near term opportunity in hemp production in The U. S.

Key input for the production of a vast array of consumer industrial products increasingly grown for CBD. CBD is becoming increasingly popular among and for its health and wellness benefits as everyone knows and hemp is just a low form of THC cannabis typically less than 0.3. It's classified still as a Schedule one controlled substance since 1970 due to being a variety of the cannabis sativa plant cannot be legally cultivated in The U. S. Under federal law for commercial purposes.

However, this 2018 U. S. Farm Bill includes the provision that would remove hemp from the DA controlled substance that's making hemp just another agricultural crop. You've heard us say that before, we look at hemp, we look at cannabis as another agricultural crop. When we've been doing this for north of thirty years, I think we have the right to say that.

So Village Farms is doing some strong foundational work. We are spending dollars. We have lobbyists. We're working in multiple states. We've been elected to the Board of the U.

S. Hemp Roundtable. And this is potentially a very lucrative opportunity for Village Farms, expecting hemp to generate a much higher revenue and margins than in produce. We would look at opportunities with existing assets as well as field opportunities. Also momentum towards federal legalization of cannabis, recent midterm elections, more states legalizing, etcetera, we think it's very exciting over the next couple of years.

Again, with our strength, one of our primary strengths being on a production side, that's where we'll start and move quickly and we have built a vertically integrated company that's very successful still operating in The U. S. We plan to do the same. Also the potential opportunity in Mexico, we have looked hard at Colombia and Central America and we've decided that Mexico is where it's at. We have great relationships there with some of the largest companies in Mexico And these established relationships will enable us to move forward there as well.

So there's I don't think there's any other grower operator company today in North America when looking at The United States better positioned to capitalize on these opportunities in Village Farms. So we are very focused in shifting our time into these opportunities going forward. With that, I will open up to the audience any questions you may have for Steve or I. Thank you.

Speaker 0

Your first question today comes from the line of Martin Landry of GMP Securities. Your line is open.

Speaker 3

Hi, good morning guys.

Speaker 4

Good morning, Martin.

Speaker 3

It's very interesting to hear you speak about the farm bill and the potential implication that it could have on hemp production in The U. S. But under a scenario where the Farm Bill is passed and hemp production becomes legal on a federal level, is it fair to say that we could see hemp being farmed outdoor in large fields? And if that's the case, is it fair to say that the CBD extracts could price of CBD extracts could decrease dramatically? So just wondering a little bit how you're assessing the economics of growing hemp with the price of CBD that could be a little bit depressed?

Speaker 1

Well, for sure, will be field production and we will be in field production. I mean, I think a large array of CBD production will clearly be out of the field. Just because we have 6,000,000 square feet of assets in Texas doesn't mean we're limited to Texas. We already have relationships in many states and with people who have literally hundreds of years of experience growing crops outdoors. So for Village Farms as an agricultural producer, we will clearly be in field production of hemp.

But that's not to say that hemp grown in greenhouses for very specific applications will not happen. We absolutely know it will because we're in conversations with companies who want and who demand the type of output that really can come only from a controlled environment. So even if 5% of the market comes to greenhouse, it's still thousands of acres of greenhouse that you would need to do that. And you can see the type of companies you can imagine that would be looking for that. And in that case, we will be looking at growing those specific strains, and we do have programs going on for specific strain development going forward, specifically for greenhouse.

Now the other thing to keep in mind is we produce 30 to 35x more yield per square meter in a greenhouse on many of the crops we grow. So one may not even though field production will probably always be a lower cost, we've been able to take and cannibalize the entire field tomato market in thirty years because we were able to reduce our cost through much higher yields. So it's not just a question of growing product that may be completely pesticide free, limited from toxicity and sustainable in the sense that it doesn't use soil and there may be applications or customers who are looking for a sustainable responsible growing product. So I think it's going to be both for sure and we plan to be on both sides of that equation as well. We have done some initial calculations, and Steve has been working on that diligently on just what the potential would be if we apply the same sort of dynamics to greenhouse growing versus field.

And it's pretty interesting.

Speaker 3

Okay. So if you compare the economics of growing cannabis in Canada right now to maybe growing hemp in The U. S, how would you compare the two?

Speaker 1

Well, I think look, I think there's a lot of growing of hemp in Canada, there probably continue to be a rise in hemp production for oil for CBD oil in Canada. And I think the same is going to happen here. I think the segmentation of the market is yet to be seen. But I still I don't necessarily know how that comparison would work today. I think it's too early for us to look at.

But I can say that I think CBD will be an enormously large market and the market will be made up of products that are both grown in the field and grown in controlled environments. Beyond that, Martina, I'm not sure it's still too early to know how that segmentation will break out.

Speaker 3

Okay. And you also mentioned Mexico. Can you give us a little bit more color as to what your strategy would be there? Would you partner up with an existing local player to cultivate cannabis domestically? Is that would that be the plan?

Speaker 1

Well, I think the plan is for sure we're to be there. So we look at Canada, I mean, Village Farms was a little late to the party. And when I really consider, like I said earlier, that we've done about 50% of the sales in our first quarter production in some of the companies that have been there for years with market caps in the billions. And the fact that we didn't have a medical program up in Canada prior to these companies, I think we've done phenomenal things in the one year we've been basically operating there. In The U.

S. And in Mexico, where we've been operating for twenty and thirty years, we have very strong relationships and we will be active in the market and we will be active on the CBD side of that market. That is what we're focused on. So even in Mexico would be a focus on CBD, not on recreational, most likely recreational will be approved going forward. But our goal is to play in that CBD side.

And Mexico with 120,000,000 people, even if you take a third of that, it's larger than the Canadian opportunity in terms of population. The key is who are going to be the first license holders once that regulation comes out. And if we're successful, both in The U. S. And in Mexico and being an early starter based on our relationships, then I think it's going to be a whole different game for us than it was in Canada where we had that late start.

So having those relationships in Mexico makes a difference for Village Farms, we believe.

Speaker 3

Okay. And my last question is on the Canadian business at Pure Sunfarms. There's obviously been a lot of discussions about shortage of product in the industry. So I'm wondering how have the spot prices because I think you sell spot sometimes. How has the evolution of spot prices evolved in the last six to nine months?

Have you seen an increase in spot prices that third party LPs are willing to pay?

Speaker 1

Yes, absolutely. I mean, just the spot pricing, if you're not playing north of five, you're doing something totally wrong to them on the spot side. And so I think that's the bottom line. That's the bottom number is it starts with a five. And of course, you can see other companies that even have gotten cash and equity to sign longer term deals.

We have floated some of those deals out there, the LPs, and they've jumped on them to that they would love to have a long term deal. So we tested those waters. So not just looking at the spot five, but you're probably able to secure five at least on a two to three year basis along with additional sweeteners on the deal going forward. But again, as I mentioned earlier, a lot of these companies have made a commitment to the provinces and don't have the capacity to deliver on. So if I was in that position, I'd pay whatever I had to pay to meet the goals of my customer no matter what it is.

And I think we're seeing some of that today.

Speaker 3

Okay. Thank you very much. That's it for me.

Speaker 1

Thank you, Martin.

Speaker 0

Your next question comes from the line of Ben Elliott of RBC Dominion Securities. Your line is open.

Speaker 5

Hey, guys. Congrats on the cannabis progress to date and certainly the increased transparency and guidance is appreciated. Sounds like we're yes, it sounds like we're kind of close to seeing some announceable agreements, which is really positive for sure. I just wanted to clarify, is Pure Sunfarms obligated to sell 40% of supply for the next year or so to Emerald? And can you also clarify, it looks like we're looking increasingly more at direct and what kind of the 2019 mix of wholesale direct is being targeted as right now?

Speaker 1

Well, it's a good question. Yes, I mean, we have binding LOI with Emerald Health for one year basically that ends in December 2019 for 40% of the output. Again, that was as a partner as Emerald Health Therapeutics as a partner wanted they really wanted that supply. And as a partner, you have to treat your partner in a good way. So we made a decision to do that.

Also, the fact that we didn't want to just to give you some background, we didn't want to start to recruit for the CEO till we had our cultivation license because that was an unknown at the time. So really, we didn't start the process until April. We figured it would take four months and it did until basically October, November. And regulations are changing all the time, and we felt let's give our new CEO an opportunity to get his feet wet and get in the game. So from a pure Sunfarms perspective, giving up 40% for basically one year was something that we deemed acceptable.

So that is in the works. As far as the remaining 60,000,000 it's a good question because we're getting many calls. Companies are willing to even tie more lucrative deals for supply into 2019. At the same time, we're sort of hoarding inventory to make sure that when we do sell provinces and we're planning to sell at least two of them shortly that we have that supply. So so it hasn't been defined and that will be something that Mandish is working he is working on and he'll come to a strategy here shortly in deciding what he will do with the 60%, how that will split into 2019.

And of course, then going into 2020, it will be back to the full capacity on a 75,000 kilo run rate.

Speaker 5

Great. Thank Your you very

Speaker 0

next question comes from the line of David Zelman of Zelman Capital. Your line is open.

Speaker 4

Hi, How are you today? Good. Thank you for the increased color on some of the other activities that are going on. But let's start with Canada. You mentioned in the press release that the new CEO is also reaching into some other distribution channels as well as what you just talked about holding product for branding, which suggests obviously higher margins.

And then I'm also thinking about with that shortage and media talking about product not being on the shelves, can you kind of talk about the other 60% potentially as branding and then also with availability for maybe year two, three, the opportunity to be a very meaningful branded extraction related product company?

Speaker 1

Well, I think those are the kind of strategies we will be looking at over the next So one is clearly extraction. I mean, first and foremost, we're on agreement that we need to get our extraction program in 2019 set down. It's still a very nascent industry. And when it comes to extraction, there are a lot of different technologies.

And one thing we know in the thirty years with Village Farms is I can take it to the boneyard of equipment that we've purchased that was obsoleted in a year or two. And we don't want to make the same mistake where we're spending millions on extraction. And keep in mind, even by the second quarter, we're probably going to be one of the largest producers in Canada. So we don't want to have 35 smaller extraction machines. So we have a whole ongoing program to evaluate not just conventional extraction that's being used in the cannabis industry, but extraction equipment from other industries to see what we can apply here because we really need to get to that first value added and that's oil.

Now going forward into 2020, I think so 2019 will be that year that we look at extraction and we start to build our branding and product selection, anticipating what the regulatory requirements that will be coming out for edibles and additives from Health Canada for 2020. So I can't add too much more color than that except that that is what we plan to start looking at. First and foremost of the 60% is getting into the provinces where we can establish at least relationships on flower as we start to develop the next line of products going forward. I hope that helps answer the question, David.

Speaker 4

Yes, it does. Okay. Also given obviously, we've heard a bunch of issues with the other LPs. Canada is not a very friendly place to grow, sunlight, humidity, lack of experience. There's a lot of capital, but there might not be a lot of experience.

Therefore, what are the hurdles and timeline that you guys are operating on as it relates to converting your next greenhouse, especially as you're thinking about extraction and all that, whether it's branded products or others, I would think, do you are you comfortable in thinking that the demand is there to convert that next greenhouse? And if so, what are the hurdles and timeline in order to see that happen?

Speaker 1

Well, optionality of the other greenhouses really doesn't commence till Delta three, the current greenhouse is fully planted out, which we anticipate depending on Health Canada approving the rest of the remaining square feet to get to the $1,100,000 We anticipate that, let's say, January. So that's really when the optionality would commence. And but what we did do is based on experience again and I keep saying it because it's very important as we built a nursery fully automated at a size that's capable of doing at least 2,500,000 square feet because to build two nurseries and run two nurseries would not be efficient. So that was put into the mix of Delta three. The extraction area in Delta three will also be large enough to encompass like the nursery an additional, let's just say, million square foot without having to spend additional capital.

And to date, we've secured the power at least another 24 megawatts. And each of these Delta three is using 24 megawatts, an additional 24 megawatts that's been secured to date is enough power for another 1,100,000 square feet. And incidentally, one of the benefits that we have over other LPs is we did not have to buy generators to generate electricity for lights. We were able to secure it all from the local utility BC Hydro saving us about $50,000,000 worth of capital cost if we had to buy cogen. So and then we unencumbered the other greenhouse, as you know, that was one of the original raises we did to take the debt off of that.

So when that decision gets made, it really will start with the CEO, Mandish, as he puts his program together looking into 2020, 2021 and looking at capacity, he'll have to make that decision in the strategy. But I did mention that there are other strategic possibilities in Canada as a country outside of just the conversion of an additional Delta facility that's being looked at. Okay. On hemp,

Speaker 4

you mentioned obviously the quality and the standardization and going into branded into high quality, which makes perfect sense. Just can you give us the back of the envelope of converting just simply 20 acres, which is only 15% of your Texas greenhouse, Steve, you have sort of a back of the envelope, how we can think about what that could mean as far as EBITDA contribution?

Speaker 2

Yes. Back of the envelope, West Texas is a better growing climate than anything we have or anybody else has in Canada due to the more southern latitude. So we're certainly very confident that the yield profile of 20 acre facility in Texas would be higher than the Delta 3. So let's say we're growing 40,000,000 kilograms in 20 acres. Everyone can put their own metrics.

So let's say we use the Village Farms $2 which is how we model these things. So that facility, that 20 acres would generate $80,000,000 in revenue for hemp. That's U. S. And today generates $8,000,000 for tomato sales.

So give you a quarter of magnitude, it's a stunning difference. And as Mike said, we believe there are two markets. There's two markets today for tomatoes, right? There's field tomatoes and there are greenhouse tomatoes in The U. S.

So there are customers who want the advantage of the greenhouses. We're going to produce five to six crops per year. And if you're growing in the fields in The U. S, maybe you can get two crops in, more than likely one, and then you're obviously susceptible to Mother Nature. They tried to grow hemp in Wisconsin this year and lost the entire crop.

So, you know, if you're a maker of the CBD oil, you're not looking to align yourself with someone who may deliver you nothing, Just this cheap field product, but they ultimately not deliver it. You don't have any CBD oil on the shelf. So we're very confident that there will be a market for greenhouse capacity in hemp. And as we said, ultimately, is a different strain of cannabis and ultimately, it gives us a leg up and a lead into when additional cannabis is allowed to be grown federally and in the state of Texas, we'll already be in position to do so with we'll have the greenhouse already be converted. So it's just a matter of changing strength at that stage.

Speaker 4

And would you could you share with us what a potential EBITDA profile would be on that math?

Speaker 2

So if take $1 a gram, the EBITDA profile of 20 acres is $1,000,000 an acre, infinitely higher than what that facility is doing with tomatoes today.

Speaker 4

Okay. And then obviously, given that there's broad support on both sides of the Al for Hemp bill, Is it there opportunity for that bill you think to get passed in this calendar year? There's been some talk of the lame duck session maybe wanting to do that. Obviously, there's a timeline when the funding to the agricultural community is going run out. So do you think there's a chance this could happen in this calendar year?

Speaker 1

I don't know if it will

Speaker 2

happen this calendar year. Obviously, there's lots of there'll be lots of leadership issues at the Congress, so probably not this year. The other thing that needs to occur, every state has a controlled substance list, and for instance, California is an interesting one. You can grow cannabis strains in California, but you can't grow hemp. Hemp's illegal.

So it's still on the illegal list, as weird as that sounds. So the other thing that we need, and we're confident will occur this spring when the tax legislation goes back to recession, is that hemp will be taken off the controlled substance list in Texas. So even if it were to come off, let's say The U. S. Farm Bill passes in December, we still need it off the controlled substance list in Texas as well.

Speaker 6

Okay.

Speaker 1

And there's I think 26 states that have approved. So there's 26 states that have already approved hemp production.

Speaker 2

No cannabis. Hemp and hemp, three.

Speaker 6

Yes, three.

Speaker 4

Okay. But it's reasonable to assume that if it's legal at the federal level and it's just procedural to get it removed. And obviously, in Texas, with Sessions no longer there, any kind of color on the willingness in order to get it off the banned substance list irrespective of if it's three months or six months from now?

Speaker 1

Yes. And like we said earlier, we have a number of lobbyists in a number of states, not just Texas that are working right now, writing legislation and working as that gears up. We're very active in that.

Speaker 4

And then my last question. On Mexico, obviously, there's movement there as far as making cannabis legal there as well. Anything you could share with us as far as if cannabis were legal in Mexico, what might be the opportunity?

Speaker 1

Well, maybe, but I think we're going to concentrate CBD. The location we're at is ideal. It's just absolutely perfect where we're at. So we already have our plans and designs ready to go on what we would do and what we would build. These would be specific builds.

I don't want to elaborate too much on it. So we have the relationships, and we'll see what happens down the road. I think we feel much more comfortable and from a risk mitigation perspective to stay with the CBD at this point in Mexico and not sort of venture into the adult use at this point. That's what we're that's I think what we're going to do.

Speaker 6

Okay. Thank you very much for

Speaker 4

your time gentlemen. Keep up the good work.

Speaker 0

Your next question comes from the line of Giuliano Del Grande of Del Grande Holdings. Your line is open.

Speaker 7

Hey guys, good morning. How's it going?

Speaker 6

Good morning. It's going good.

Speaker 7

Great. First and foremost, I just wanted to say congratulations on your progress so far. You're absolutely knocking it out of the park versus other LPs. And I really enjoy listening to the progress that you've put forward today. The question that I have to ask is with regards to next year, you guys are focusing on extraction technology.

And I'm just wondering if you're just going to be looking to wholesale the oils or perhaps you want to do some more vertical integration with future legislation changes with edibles and drinks and if you're going be coming out perhaps with your own line of edibles?

Speaker 1

Yes, absolutely. Yes, yes, yes. I mean, it's just the process. So we have to get to oil. If we were if we got our extraction strategy down and started to produce oil, that's not to say just as we're doing flower today, we wouldn't sell it to other LPs or wholesale.

We're all about generating profitability immediately and reinvesting that. But then that process would go now that we're selling oil, we want to do it ourselves. That's what we've always done. So as I mentioned earlier, looking at the new regulatory requirements coming from Health Canada and preparing for that. Right now, we're starting to build that team of development people who will be involved in that.

And so the answer is yes. I can't just say if we're going to be there It could be into 2020. And I also believe also there's going to be great opportunity for working with other companies. I think that when we look at the market today, if you're not in the cannabis game, I think the train left the station if you're just starting out.

And I don't believe that many companies well, I believe that there will be companies available that may be further down the road in terms of branded products that we may look at working with in some capacity. So I think there's a lot of opportunity either way going forward.

Speaker 7

Perfect. Okay. Well, you very much. I look forward to seeing all your future progress, especially in The States. You guys are getting a lot of knowledge, I'm sure, from Pure Sunfarms, and I'm excited to see what happens in Texas.

If I could just add one more point, perhaps in the future, would we be able to get a little bit more information on the Pure Sunfarms website, so it's not just a landing site?

Speaker 1

Mandish has got that under. And you're right. So he's that's on his initiative and start to build that website up going forward and be able to communicate much better. We know we're just a Village Farms, I mean, we're just a conservative company. When we put things out, we're 100% sure we're going to be successful with them.

But that wasn't a priority with the whole conversion, but it is now. So that's well taken, thanks for bringing that up. We'll move forward on that.

Speaker 7

Yes, absolutely. I know there's a lot of hot air from other LPs, so I really appreciate it. Don't take that as any sort of criticism. I know you're focused on actually producing versus other people. Thank you very much, Mike.

Have a great day.

Speaker 1

All right. Appreciate it, Julien. Thank you.

Speaker 0

Your next question comes from the line of Robert Goehaber of Small Capital Equity. Your line is open.

Speaker 6

Good morning, How are you? Good, Robert. How are you? Good. I'm to apologize in advance in case I get disconnected here.

I'm on my way to the airport.

Speaker 1

I'm not

Speaker 6

sure if I missed part of the call here. Yes, in terms of Pure Sunfarms in the future, I don't know if this was sort of dealt with. Are they going to directly issue press releases? Or is that something in combination where you release a press release and Emerald releases a press release? How is that sort of going to be worked out?

Where is the information

Speaker 1

coming Yes, think directly yes, both basically Emerald release their own press releases and

Speaker 4

to the

Speaker 1

extent that it involves anything with Gerson Farms, they'll do it and will do it because Gerson Farms will remain private. That's not to say they won't put a press release out when they have something to report. This call is mandatory for us or not the call, but the fact that we're reporting our third quarter earnings. So otherwise, we probably wouldn't be having this conference call.

Speaker 6

So if I can say, congratulations. If I look at the twelve months from this time last year of what you guys have achieved, it's absolutely remarkable. The last I guess the last coup for me was when you got Dinesh. Just looking at his profile on LinkedIn, I think there are more people crying that he left that DLC build and wishing him well. Truly a popular guy with a lot of depth.

I think that you guys made a great choice with him. D1 and D2, is there anything happening there with Emerald? Or what's sort of the status on that in terms of the option?

Speaker 1

Well, there's not been any decision on the optionality of conversion than them. We as Village Farms Because that makes me very happy.

Speaker 6

Yes. I'm hoping they don't option that.

Speaker 1

Well, there's been no discussion to option it. So at this point, we're just going forward Delta three. Village Farms does have the secure power at this point. Not saying we're going to put that into tomatoes, but and we have some other things that Pure Sunfarms is working on. There's been no decision on that optionality for the next phase.

Speaker 6

Am I clear in this sort of understanding? Think maybe Steve, you might want to jump in on this. Is it not do they not have until next year, 06/15/2019, where they if they do not option it at that point, Village Farms is then free to pursue its own LPs. Other words, you're going to have all the rights that Emerald has right now if they don't exercise if Pure Sunfarms doesn't exercise by June 15. That's sort of my understanding.

I'm just wondering if you might clarify that. I mean that makes me happy if that's the case. But maybe Steve or you could elaborate on that?

Speaker 2

The the option's online. Anybody can read it. It's on SEDAR, so anybody can see it. So the option is is for off the top of my head, it's for either twenty four or thirty months once delta three is complete.

Speaker 6

Oh, once delta three is complete.

Speaker 1

Okay.

Speaker 2

And, again, you know, at at the time, it was hard to get something licensed. So, obviously,

Speaker 6

things are

Speaker 2

going faster, not quite fast enough, but they're going faster than they were a year ago. We'd like them to go faster, but anyway. So yes, so now that option Pure Sunfarms has the option for Delta two and Delta one for a number of years.

Speaker 6

Okay. So do you think that they're going to generate enough cash flow to sort of would it be self funding Pure Sunfarms where Village Farms and Emerald are not putting money into exercising that option? What's your feel on that?

Speaker 2

Emerald has to put X dollars in. It's been redacted, but Emerald has to and those farms equity contribution would be delta two or delta one. And yes, Pure Sunfarms, we've said should be cash flow positive and based on the timing of the construction cost and the cash flow Pure Sunfarms, Village Farms may have to put none to a

Speaker 4

little of

Speaker 2

CapEx into the conversion of obviously Delta one is the largest greenhouse in North America. So that's a whole different cup of tea than converting Delta two. Delta two would lower CapEx cost than Delta three because it doesn't need a nursery, doesn't need a vault, has the extraction room built for essentially, as Mike said, million square feet already. So Delta

Speaker 1

three has

Speaker 2

been designed with the concept of Delta two being in production with cannabis.

Speaker 1

Yes. And we did 16 grow rooms. It was 17. We lowered it to 16 grow rooms in Delta three. That's at a much higher expense.

So if we were to do eight grow rooms, we could reduce the cost considerably over Delta three for and Delta move very quick.

Speaker 6

Congratulations, guys. It's a great twelve months that you had. Thank you. Thanks, Robert.

Speaker 4

Bye bye.

Speaker 2

Operator, I think that's good. We're good.

Speaker 0

All right. So there are no further questions in queue. Did you have any closing remarks today?

Speaker 1

Just want to thank everybody for taking the time to participate in this third quarter. We really look forward. We'll be talking to you in March reporting year end going forward. And we think a lot of good things will be transpired over the next five months for Village Farms and look forward to having that communication. Wish everyone a Happy Thanksgiving.

Thank you.

Speaker 0

And this concludes today's conference call. You may now disconnect.