Village Farms International - Earnings Call - Q4 2018

Transcript

Speaker 0

Good morning, ladies and gentlemen. Welcome to Village Farms International Fourth Quarter and Year End twenty eighteen Financial Results Conference Call. Yesterday, Village Farms issued a news release reporting its financial results for the fourth quarter and year ended December 3138. That news release, along with the company's financial statements, are available on SEDAR and on the company's website at villagefarms.com under the Investors heading. Please note that today's call is being broadcast live over the Internet and will be archived for replay both by telephone and via the Internet beginning approximately one hour following 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 today during or after the formal part of this conference call. Certain material assumptions are applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements. A summary of these underlying assumptions, risks, uncertainties is contained in our various security filings, including Village Farms' annual information form and MD and A for the year ended December 3138.

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

Speaker 1

Thanks, Sharon, and thanks to everyone for joining us by telephone and Internet. Steve Ruffini, our CFO, is here as he normally is on these calls, and I welcome him today. Just to cover four points of the agenda, I'll review some key highlights for the quarter, recap the very business and productive few months since our last call, which was in November 2018. Steve will do a brief review of our fourth quarter year end financial results, and I'll return to tell you a bit why even with all the progress we have made, this is really just a new chapter for Village Farms moving forward and then, of course, the Q and A portion. I'll keep my remarks fairly brief and clear today as I always try to do.

Ultimately, the Village Farms story is pretty straightforward, and it's easy to see how the progress across our business units are driving our financial results and value for our shareholders. As always, we strive to keep our earnings releases very straightforward for our shareholders and readers to get a quick view on what's happening in the company. So to begin with, let's start with Pure Sunfarms, our cannabis joint venture up in British Columbia. And let me first acknowledge how proud we are that Pure Sunfarms was able to generate positive net income, not only for the fourth quarter, but for its full quarter for the full year, the entire 2018 calendar fiscal year. To me, it's a remarkable achievement given how much of the facility was under construction, conversion, design, implementation, the ramp up of state of the art propagation facility as well as going through the licensing process with Health Canada, all occurring through 2018.

And really in I can tell you, I've overseen the developments of many large scale greenhouse projects across The U. S. And around the world over the past three decades. And I can tell you from experience that this is a remarkable achievement. This is the first time we've actually converted a greenhouse with growing operations.

Typically, you build out the facility that you planted out and the ramp up is usually a minimum of three years to get to profitability. So even for us at Village Farms, this is a great achievement. That said, leveraging Village Farms extensive know how using our existing assets, which we said from day one was the better way to go than build out new and established with the established systems, the experienced staff at every level from growers to maintenance to IT and of course most importantly crop workers and then pursuing an aggressive timeline through this phased conversion, Pure Sunfarms is already delivering value to the Village Home shareholders. So progress on the status of the conversion licensing production of Pure Sunfarms. As I mentioned before, it's been another very busy and productive several months of Pure Sunfarms since November.

The team has successfully completed the conversion of the remaining growing areas with the entire growing area of more than 1,000,000 square feet completed in January. So the fourth quadrant was completed and ready to go with lighting in January. It's taken a lot longer than we anticipated to get license, but we have to be patient. Health Canada has a lot going on. It's a massive industry.

It's a regulated industry. And I'm sure their plate is full. And that's just the way it's going to be right now. But so it's got us a little bit behind. And it was the same with the last two grow rooms in the third quadrant, they were ready to go earlier.

But that being said, we are now fully licensed and aggressively planning out quadrant four and moving forward to get in production on that quadrant as quick as possible. In addition, we also began replanting two weeks ago Quadrant one. That was the first quadrant we had finished, but we decided not to put supplemental lighting in just to review that because we were limited on power before the full 24 megawatts gets installed. And we elected to put the lighting in Quadrant 2 And 3, which took us through the winter with temporary cogen units in. Now we don't need any more supplemental lighting until October.

So that is now being planted out and will be in production in April, which means by the April, all Quadrant's entire facility will be licensed and producing. And we had mentioned previous that we felt we could be on a run rate by the beginning of the third quarter on the seventy five thousand kilos that we originally forecasted. And are right on to do that. So going forward, we've harvested thousands of kilos so far and I'm pleased to once again report that the Pure Sunfarms facility continues to perform well. Yield and quality are continuing to meet and exceed our expectations and the team continues to execute on plan.

The nursery continues to perform well. And as a reminder, we built that nursery with the capacity to do double Delta three or almost 2,500,000 square feet. Everything we see continues to give us strong confidence in our ability to be the low cost producer in Canada at the highest quality. And as I mentioned on our last call, you can look at your cost of production, you can't really look at it on a partial year. You have to take a full year because there's always variation month to month, quarter to quarter.

That said, we are very satisfied with our cost of production to date. Our success to date is no accident. It's a product of Village Farms' approach of doing things right for the first time and the decades of development, agriculture and operational know how that we bring to the table in any project we are involved in. We've always said you have to build the foundation right the first time and that will set not only the cost of production parameters that you need as products commoditize out in the future, but it really sets the culture and DNA of the organization to be focused on cost at all times. So regarding sales for Pure Sunfarms, the steady expansion of production has enabled Pure Sunfarms to continue to ramp up sales and at the same time build inventory for direct sales to provincial government and distributors and private retailers this year.

The bulk of the sales in the 2018, which totaled about $3,600,000 and through the start of twenty nineteen have been almost exclusively to other licensed producers as Pure Sunfarms continue to await its processing and packaging licenses from Health Canada. And as I mentioned earlier, we need to be patient with Health Canada and we are. We applied for those licenses back in October 2018 and we anticipate having both of them granted in the second quarter and hopefully in the early part of the second quarter. As a reminder, 40% of the production is being sold to single licensed producer under a supply agreement that concludes this December, bringing up that production for sales to provincial distributors and retailers going into 2020, which should have improvement in overall pricing and a positive impact on EBITDA. Canadian market continues to be short product and demand from other LPs continues to be very strong and spot pricing remains attractive.

There's a lot of information out there that questions that and I can tell you from our point of view, it's very solid. In February, Crosso Farms was selected as a supplier to the Ontario cannabis store and sold distributor in the province in which well more than a third of cannabis population resides and entered into the first supply agreement with provincial government distribution. We're very proud of that and ready to move forward with them and other provinces as well. Last week, we announced that Pure Sunfarms entered into a supply arrangement, one of the largest online medical cannabis sites, Canna Farms, products already on that website and selling. While medical sales were not originally part of Pure Sunfarms plan, it's a strategic complementary opportunity to establish the Pure Sunfarms brand and extend its reach to a new segment of customers.

As Pure Sunfarms production and sales ramp, we continue to receive overwhelming positive feedback on the operation, on the team and most importantly, products we have. From a vertical integration strategy, Smudson's Pure Sunfarms has already established a reputation for quality, consistency, reliability and safety. The world's great agriculture brands have all been built on a foundation of excellence and large scale growing. You simply cannot build a leading brand if you don't first have quality, consistency, reliability and safety. This team knows that and they know what we're doing.

From the onset, it was our vision for Pure Sunfarms to focus first on the conversion of the facility, increase licensing, growing and ramping production to our high standards. Now with our CEO in place, the job is now he's been on-site for now five months, the facility is hitting its marks and the team is performing extremely well. Pure Sunfarms has been rapidly advancing its brand and product development strategies. We won't give too much away here, but it will leverage Pure Sunfarms British Columbia heritage, the benefit of growing with pure natural sunlight and the integrity of Pure Sunfarms cultivation processes. You can this will be reflected on the first phase of the launch of the Pure Sunfarms website, which went live yesterday.

The full site will be unveiled in the second quarter along with our branding strategy. And we'll continue to ramp up processing, drying and we'll be making decisions on extraction over the next few months. So moving to our United States hemp CBD strategy. Our Canadian cannabis JV is just the beginning of the Village Farms transformation. The passage of the 2018 Farm Bill in January legalized hemp and hemp derived products, including CBD products at the federal level.

Many states are now in the process of following suit with more expected to follow. As you know, a number of states were granted under the 2014 pilot project the ability to grow hemp for CBD, like Kentucky and South Carolina. And now all the other states or most of them are pursuing the licensing and regulatory process at the state level. We've been members of the U. S.

Hemp Roundtable Board members for a while. So we've been pushing the lobbyists through that association as well as independently in the states that we first want to operate in and that's going very well. This opportunity is tremendous for Village Farms on the heels of federal legislation in December. As soon as the legislation came to bear and President Trump signed it into law, we issued a press release that next morning that we've been working on and working on modeling this business over the last year. Cowen Bank recently published what they call the conservative forecast of sales of CBD products in The United States of $16,000,000,000 by 2025.

We've seen reports from other institutions of much higher numbers. So we're very well positioned to capitalize on this opportunity and we're aggressively pursuing a vertically integrated hemp derived CBD strategy. And that strategy will be CBD derived from hemp grown both in the field and in greenhouse. We've segmented the market and we're providing validation to our concept as we move forward. As far as the field goes, we have taken steps in this regard, forming a joint venture, which is 65% owned by Village Farms for outdoor cultivation of hemp and CBD extraction in The United States.

We're not going to start nationally that fast, but we'll ramp it up as we go. We've clearly documented the states that we want to start with this year. It's called Village Fields Hemp and we have partnered with what we believe is one of the best partners that anyone can find in hemp cultivation, the Jennings Group. They're veteran outdoor farmers. They've been farming since the 1760s, eleventh generation farmers.

They've grown commodities from tobacco to soy, corn and vegetables as well as blueberries and hemp production in Canada. And they have a great reputation and clearly have a clear understanding of the hemp cultivation process in the field. Village Farms is well positioned to rapidly become a leading supplier of branded and private label CBD products to retailers. A lot of those retailers are ones we've been selling over the last three decades. We believe there will be a huge market for these retail big box pharmaceutical retail stores for the CBD market in the next year or two.

Some of these retailers, as I mentioned, have been produce customers for decades and we have relationships. And we have already invested millions of dollars in the IT systems and infrastructure and countless personal hours required to be a vendor. Nearly every retailer has a different IT system and it's been a huge investment over the last twenty years that makes us somewhat unique. As important we have as we have been supplying fresh produce, we've established ourselves to many of these retailers as a trusted supplier with a reputation for quality, reliability and safety. And we're not going to pursue a bricks and mortar like others.

We don't plan to have 200 bricks and mortar stores out there. Our strategy will be selling larger quantities direct to this retail sector. We have already initiated discussions in fact with some of these large retailers around their CBD strategies to understand their thought process going forward. They are evaluating them across the board. There hasn't been that many decisions, but each time we meet, it's gaining a deeper conversation.

So we feel very confident in that strategy moving forward. I can't overemphasize the importance of existing in house regulatory expertise and team. The regulatory environment will evolve rapidly and our many years of experience working with the FDA, USDA and other government agencies will be invaluable. We don't think there's anyone better positioned to pursue this opportunity in Village Farms going forward from this point. Before we move on to Steve, I just want to comment Our produce business, we have put a lot of focus on as you know in Canada and the CBD business here.

Algol continues to move the produce business south to Mexico where we could be much more competitive moving forward. Our customers are well aware of that strategy. And as we replace existing assets with more lucrative crops like CBD derived from hemp grown in the greenhouse, we'll pursue that strategy. And I think long term, it will make us much more competitive than operating here in The U. S.

So with that said, I'm going to turn it over to Steve and he'll report on our earnings. Thank you. Steve?

Speaker 2

Thanks, Mike. As Mike mentioned earlier, we have tried to break down our separate businesses in our press release for full clarity to the investors, so they can see both our historical business as well as our new business. As we go forward, hopefully, we'll be adding another column at the end of this year called Hemp. So at any rate, we try to be as open and forthright, so investors can see all there is to see. Quickly on our produce business, it was a tough quarter and tough year.

There were some positives. The year on year, our price was up 4%. That was really driven by more so a change in mix and really market conditions for tomatoes, cucumbers or peppers. Again, the overall market conditions tend to be very, very tough. Our cost of productions, while down 3%, was really driven by lower volumes coming out of our Texas assets, which actually resulted in lower sales and a higher cost per pound.

We are looking at that and hope to improve upon that in 02/2009. We are expecting continued stress on the produce business from other outside sources like transportation costs. So that is outside of our control and it is delivered product. On a more positive note, the cannabis financials are all 100% related to Pure Sunfarms. For those that want to see the Pure Sunfarms financial in Canadian dollars, you can look at footnote eight in our full financials.

I'm going to go through those quickly. So those can be referenced if you go on SEDAR and see the full financials for Village Farms, footnote eight are the full financials for Pure Sunfarms. So sales of CAD 4,900,000.0 in 2018, essentially all in Q4. Gross margin for the essentially for the fourth quarter and for the full year of CAD 3,400,000.0, resulting in EBITDA margin of 48%, which obviously we're extremely pleased with and significantly higher than the minuscule margins that we have in our produce space today. The other thing to note is the bio asset.

The change in fair value of bio asset is close to CAD 8,800,000.0. That is the gross margin of the inventory. That is the buds and the trim that was on hand in on December 3138. Obviously, that's been since sold. So that's a leading indicator of strong results for the 2019.

Pure Sunfarms use of the bio asset follows the Billy Farms method, which is it only values the bud on the plants. Billy Farms values obviously the tomatoes on the vine and Pearson Farms just values the bud on the plant. It does not value as some other LPs do multiple generations of future plants. Again, this is to stress that it's only the end product that we're valuing the bio asset. With respect to full details of Pure Sunfarms, as Mike mentioned, it's still early years.

Obviously, people use varying measures of volume. People use varying measures of sales price, use varying measures of cost per gram. We will say that the for the full year sales for Pure Sunfarms is very, very close to CAD1 per gram. That includes amortization cost. That is well ahead of our expected schedule.

We didn't expect to hit that cost run rate until the 2019. So we're very, very pleased with that. Again, that does include which we've broken out in the footnote. So if you do the quick math, will quickly figure out that we are under $1 per gram cost in cash already. So we are actually looking forward to 2019 with improved volume, lower cost per gram and improved price per gram as we go forward in 2019 and 2020.

And with that, I'll turn it back over to Mike.

Speaker 1

Thanks, Steve. So concluding before the Q and A, just to do a recap of Pure Sunfarms outlook. As you mentioned, we're extremely pleased with the PSF opportunity, how it's unfolding. Facility is operating extremely well, benefiting from favorable stock market pricing. Brand and product strategies are coming into focus and it's already for all of last year in the fourth quarter, tremendous achievement.

2019 promises to be a very exciting year. Pure Sunfarms is well positioned for earnings growth throughout 2019 and beyond. It ramps up to full run rate of an annual production rate of 75,000 kilos starting midyear this year. We commenced the sale to Ontario cannabis store upon receipt of its processing packaging license hopefully in Q2, very strong we feel very confident about that. And it includes a supply agreement with Emerald Health Therapeutics for 40% of the current production this December and redirects much of that production to the retail market.

In addition, with the entire growing area that Pure Sunfarms facility is now licensed for cultivation, the option period on the Village Farms, two other Delta greenhouses has commenced. Those two facilities together represent an additional 3,700,000 square feet of production area right on the same footprint in Delta. Pure Sunfarms has already requested to the Board exercise an option for Delta 2 and Village Farms continues to be as it has for exactly one year this month in full support of Pure Sunfarms expanding its production beyond the initial Delta 3 facilities as rapidly as possible. That said, it takes both partners supporting this path forward. Regarding the hemp outlook, recapping that in The U.

S, our CBD initiative is off to a quick start. We have an excellent partner in Jennings. They mentioned to initiate our outdoor hemp cultivation program starting this spring. We are currently determining our initial location states for cultivation and extraction operations. We are targeting to have extraction capabilities in place later this year and could be supplying CBD oil at least on a wholesale basis as early as year end and early into 2020.

We expect to begin production of branded CBD products for big box and retailers in 2020. The bottom line there is we could be generating revenue from hemp and CBD sales at the end of this year, early next year. We continue to watch legislative developments around the potential legalization of hemp at the state level, especially in Texas for both the field and greenhouse. In Texas, with 5,700,000 square feet of existing technologically advanced greenhouse operation in West Texas, we stand ready subject to full legalization at the state level to address what we believe will be significant demand for controlled environment growing up CBD derived from hemp in the greenhouse to meet the needs of specific customers. If Village Farms was to convert the Texas operations to hemp production, they would be they would comprise the largest greenhouse hemp production footprint in North America.

Excuse me. Sorry, today I'm a little bit under the weather. In conclusion, as a publicly traded company, Village Farms is duly bound to continually seek out the highest returns for our assets, our capabilities and know how as an organization to drive our value for our shareholders. Our diversification into cannabis through our Pure Sunfarms JV is already beginning to transform the earnings profile of our company and we similarly intend to advance our hemp CBD business towards profitability rapidly as possible and look forward to keeping you abreast of our progress in this regard throughout the rest of this year. With that, we'll open up Sharon to any Q and A.

Thank

Speaker 0

Thank And your first Comes from Martin Landry with GMP Securities. Your line is open.

Speaker 3

Hi, good morning, Mike and Steve.

Speaker 1

Good morning. Good morning.

Speaker 3

My first question, Mike, is on your sales during the quarter at Pure Sunfarms. I believe last earnings call in November, you had alluded to a potential to sell all the way up to four tons into Q4. And it does look like it's come up much less than that. Wondering is this I would assume it's not a factor of lack of demand, but rather more a factor of product availability. Is that the case?

Speaker 1

Yes. I'll let Steve answer the question, Martin.

Speaker 2

Yes. Martin, the indication of the production yields, which I think is what Mike was alluding to back in November is more indicated by the fair value of bio asset that you see on the balance sheet to Pure Sunfarms at twelvethirty 1. The actual production was very strong, but there is the drawing and curing process and it just takes a bit longer to go to market with this product than it does with the tomato, which essentially we pick and pack and ship on the same day. So at any rate, the actual production was good. The production was negatively impacted by the slower process than expected with getting each grow room approved.

But we are expecting to be up to the annualized run rate at 75,000 kilograms in late

Speaker 1

Q2 this year.

Speaker 3

Okay. So if I hear you correctly, there's no issue from a demand standpoint from your product on from third party LPs. Is that correct?

Speaker 1

That is correct. There is no lack of demand out there.

Speaker 3

Okay. And to that end, can you talk to us a little bit how have wholesale prices evolved from Q4 into Q1 selling to third parties? Because it looks like that's going to be most of your market in Q1. Just curious a little bit about the evolution of the wholesale prices.

Speaker 1

Well, we commented on it in November, and I'm not going to say any specific pricing, although I can tell you it's exactly in line with where it was. There's really no change. We see strong demand. And in fact, we see strong demand. As you know, we have 40% of the fixed price, which I won't disclose.

But I can say that other LPs are paying more than that. So no change there, Martin.

Speaker 3

Okay. So still strong wholesale prices Q4 Q1 versus Q4. You have been accepted as a supplier to Ontario. Can you just tell us a little bit how many SKUs you intend to list there and what product farms will that

Speaker 1

be? Well, I can't tell you the amount of SKUs longer term. It will change this year, but we will start just with flower for them initially as we are gearing up downstream equipment to meet their greater demand of need, but that's probably not going to happen until the third, fourth quarter. So to start with flower and as far as the split of the packaging and the weights, I don't have that information at this point. Was all given to them and they're satisfactory and ready to roll as soon as we can get our packaging license.

Speaker 3

Okay. And then last question for me. Your production costs are pretty low, and congrats on that. It's a nice achievement, especially with a low capacity utilization. But wondering when you start shipping to the provinces, your shipping costs and your packing costs and packaging costs are probably going to be higher than selling to third party wholesale healthies.

Any color you can give us as to what we could we should look to add above and beyond that $1 to look at your cost of goods sold?

Speaker 1

Well, based on what we are seeing now, I feel favorable that our costs will decrease. Because look, we're only in a fraction of production right now and at the same time, I mean, is a fixed cost business. So the greater your output while holding your input costs the same, our input costs outside of packaging and transportation will not vary. So that'll just be divided by higher yield. So we had said in the past that we felt we can get significantly under $1 especially as we move into oil and other things downstream, which is our plan.

And of course, looking at where health counter legislation is going to go on edibles later on and so forth. So we feel that we can get significantly under $1 depends on the packaging side. That's a huge component of our costs. But what we're seeing now and the yield profiles we're seeing, I can tell you at this point, I feel confident we can drive our costs lower even with the ramping up of packaging and transportation. And then we'll know that better by the end of this year.

Speaker 3

Okay. That's it for me. Thank you. Question

Speaker 0

comes from Doug Cooper with Beacon Securities. Your line is open.

Speaker 4

Good morning, guys, and congratulations on the excellent progress. Just on the pricing, you mentioned obviously 40% Emerald has a 40% call on production to the end of this year. And I think Mike you just mentioned that there are they locked in pricing like in so maybe just give us an idea of what Emerald is paying versus what the current wholesale market is versus what do you think it could be on the direct sale and once you get the packaging license just in terms of percentage? Well,

Speaker 1

I can't comment, Doug, on what they're paying, but I could say that other LPs are we're receiving higher pricing than what Emerald is playing. That was the deal we made at the time and which goes back to 2018. It was still a little dicey on the direction that Health Canada was going to go, but LPs are paying more. When we model our numbers, we've taken some of our competitors' pricing even the last quarter that they reported extracted out tax and packaging and that differential was still fairly significant on a per gram price. And when you have 75,000,000 grams, it does have a significant impact to the EBITDA.

So I think it's going to be favorable moving forward.

Speaker 4

Yes. Guess I'm just trying to understand or if you can let us know like what premium the wholesale market is versus what Emerald's locked in pricing is.

Speaker 1

Yes. But if I said that, then you could back into the number. You can ask it three different ways, but really we are American. All

Speaker 4

You talked about integration for processing as part of a vertical integration strategy. How is that how do you think that rolls out? And what would be the CapEx for that?

Speaker 1

Well, I mean, we have a lot of capacity and the question we have is if we do manage to get more than 75,000 kilos, we have to put the whole integration of drying and packaging is it's a big process for that size facility. In the end, we did take one growing room away. We were at 17, we went to 16 because we didn't want to cut ourselves too short on the equipment for extraction, packaging and so forth. And that's going in place now. And like everything we do in a more systematic and methodical in the process.

So we really want to get our drying and packaging to make sure our quality stays very high from the grow rooms through the packaging process. And then as we talk, we're planning out the equipment for making the products that our customers are going to want and of course extraction in the end. Overall, that CapEx will probably be in the realm of 7,000,000 to 8,000,000 at some point million dollars going forward. But with retained earnings coming in, we're in a very strong position. And just to reiterate, I mean, I think one of the things too that we bring to the table with our loans with BMO and Farm Credit on this $20,000,000 line of credit, we have had relationships with both those financial institutions up in Canada for thirteen years.

And it's a testament, I think, to them taking a very typical ag term loan viewpoint for us. So we have a good banks behind us and good debt and we're generating positive cash flow. So we'll just churn some of that those retained earnings back into the CapEx we need.

Speaker 4

Just on the yield, you're still forecasting a similar yield, guess, that you had earlier or I guess in 2018. Given your experience to date on the growing side, is do you feel that you can get better than the 75% based on the yield you're seeing now?

Speaker 1

Well, like we said, the way we've always done it, we've learned this thirty years ago, you don't want to have to explain to people that, hey, this was a hot year, a cold year, we had this pressure, that pressure. You don't want to have to answer those questions. So we take an approach and take all our risk that we know can occur in a farming operation and come out with 75,000 kilos. And I think a lot of folks have said, why are you conservative compared to your competitors who are all much higher in the tune of 25%, 30% more. And we said because things it's a ramp up business and we want to be sure that what we're putting out, we can execute on and achieve.

And an example this year is what's out of our control, the licensing process of quadrant three and four delayed longer than we thought. So that's an example where we can't control that. So let's be conservative. So based on that, even with those delays, I'm very confident we're going to hit the numbers we put out a year ago for this year and extremely confident on an annualized run rate starting in the third quarter, we'll be at $75,000 So I don't want to project if we're going to exceed that. I think let's get to sort of the second, third quarter, take a hard look at that point and we'll report at that point how we think we could go forward.

How's Good.

Speaker 4

Two more quick ones for me. You talked about the option to roll in some of the other assets. For example, if D2 is rolled in and you have to convert, can you talk about the experiences that you've had at converting D3 and how that might translate into a quicker turnaround of D2?

Speaker 1

Well, I think we started D3 going through the winter. So obviously, went through in British Columbia with the rain and cold delays things. So the quicker D2 got going, while it was better weather, I think we could move on the construction timetable quicker. We already know we can spend less on the overall CapEx, even if it has the same wattage per square meter in the greenhouse lighting wise. So I think we could save on CapEx.

Of course, we would not build another propagation facility, which was a huge expense. The extraction capabilities and other things we're putting in D3 would be cost reduction overall for D2. And I think it can move fairly quickly. We've learned a lot, but honestly, D3 went pretty damn good. I mean, it should have gone good because we've been doing this for three decades and it's not like it was luck.

So I think we can only get obviously better. Of course, like D3, the grower team, maintenance team, IT and most importantly, the crop workers are all there experienced twenty years. And so it's sort of a no brainer to move that forward. And as I said, we would do that quickly if it was up to us, totally up to us.

Speaker 4

Okay. And finally, just on the hemp rollout, you've talked about 500 to 1,000 acres by the end of the year. Can you just based on the I guess the availability of farmland through your partner, how do you envision that potentially rolling out over the next few years in terms of acreage?

Speaker 1

It's really positive. I mean, look, there's so many commodities out there, whether you're greenhouse or field farming. We've talked about the commoditization of our products even on the we grow high value vegetables in greenhouses. When you're competing I mean, that's the beauty here is we're not competing with any third world country so to speak where their labor costs are a fraction of ours. So with this is just like Canada.

There's no importation of CBD oil coming in at least for now. So when you look at a lot of the farmers, unless they're doing very specialized crops, they're competing to a degree with open markets. So a lot of growers would be very keen on switching to hemp. The questions will be can they get the right seed, the right varieties, seeds it's very massive. There's a lot of work that has to be done and we're working on that all out on working on programs to start strain research, breeding resistance into the strains, increasing CBD content and so on.

And but right now everybody's kind of jumping in it. The Achilles heel will be extraction. But in the end, things will settle out. So everybody out there is more or less doing the same. Every state is looking at the state universities are looking at doing research.

Growers are looking at growing it. Companies are looking at extracting it. So it's really going to see how you shape that out with the more knowledgeable agricultural players in the end coupled with CPG, which I'm sure will come into the market and finding that right partnership between the two, I think is going to be a winning formula.

Speaker 3

Okay. Thanks Mike. Appreciate it. And

Speaker 0

we have a question from Michael Freeman with Paradigm Capital. Your line is open.

Speaker 5

Hi, Mike and Steve. Thanks very much for hosting the call. And I hear that a lot of people are asking questions about your cost of goods and I apologize in advance for the onslaught. My question is could let us know how much cannabis was sold over the last quarter and over the last year from Pure Sunfarms?

Speaker 2

This is Steve. Again, getting into specifics and how that's measured, I will leave it up to the reader if you get the financials out. You can see the cost of sales for Pure Sunfarms and as I've said, we were very, very close to $1 So I'll let the reader figure out what that equivalates to is the equivalent of on a per gram basis.

Speaker 1

And again,

Speaker 2

demand has been strong, even things like TRIM are in the revenue and cost of sales. So it's good quarter and we look forward to future good quarters and getting into specifics and metrics and trying to how that equates to everybody else's metrics and how they're measuring that, but there is no standardization. So we're just we're not going to get into those gains.

Speaker 1

Yes. And the other thing, I mean, honestly, we didn't start selling too well into halfway through the fourth quarter. So really looking at last year, that was the sales period, those six weeks of 2018. So I think, Michael, it's just going to be a better picture picture to discuss going forward after the first, second quarter of this year when we start we have our sea legs here, so to speak, and we're operating with our eight cylinders.

Speaker 5

Thing. Sure thing. There's definitely going to be some equilibration going forward, so I understand. And I trust the same answer is going come to this question, but you mentioned that there are just different metrics by which people and companies measure their cost of goods. I'm just wondering from what part of the process to what part of the process you would calculate your approximate $1 per gram cost of goods?

Speaker 1

Well, we've always said, I mean, we put, first of all, depreciation. We depreciate the assets and what we've done and it's always in our cost of sales. It's in our cost of sales. It's not a separate line item. It's the way it should be.

And unfortunately, it's very hard to compare apples to apples between the players right now. But I think in time, especially towards the end of this year, there's got to be sort of that bar. So for us, our cost of sales encompasses pretty much everything, including depreciation. The way we look at a biological control is unfortunately, there's not a lot of public agricultural companies on the cultural side. We've always taken a very conservative approach.

As Steve has indicated, it's prudent to just look what's on the plant that you will be harvesting over the eight weeks or so ahead. I think a lot of companies, if they're looking at mother plants and they think they can get 40 generations out of it, they're projecting that in their biological control. The problem with that is, if you have a disease issue or a crop issue, then you have to do a write down. So we don't take that approach and I'm glad that the management team of Pure Sunfarms adapted that more conservative approach, it's more realistic. Honestly, I mean, I try to look at some of our competitors' earnings release and I get fatigued after about three minutes of reading it to find out what the numbers are.

And I think we put those numbers out, whatever they may be right there, so the reader can see it and make a quick call on what the numbers are. So anyway, I hope that answers your question, Michael.

Speaker 5

Yes. No problem. We respect that very much. My last question is just sort of a broader question. Looking forward for the future of Village Farms and Pure sorry, Village Farms and Pure Sunfarms.

You guys are achieving massive scale and you are you're pros at this going back decades. Other growers are ramping up their capacity and they're going to achieve scale similar to yours sooner or later and I trust that they'll become as good as you guys are at this. So I wonder what your plans are for keeping ahead of the curve and what's the plan when this is truly a commodity market for both cannabis and hemp? Just

Speaker 1

answer that. Yes, that's an easy question to answer because we've been in that space. We've gone from our commodities that we have grown over the years, we've seen them in certain cases go from 25% EBITDA margins down to 4% to 6%. Then you grovel in the commodity business and you wait and see what you're going to do. But we've said since day one.

Day one when we came out and everybody was talking about brand and this and that, that hey, the most prudent thing in agriculture is you'd have to be the low cost producer. We've said it time and time again, it doesn't mean you can't you have to have high quality, you have to have integrity in your product, you have to have safety in your product, but you need to build your business model knowing that it will commoditize out. And in the end, the low cost producer will win at the end of the game. In some cases, we've seen it where we're just the ones getting the sale from a big box retailer, while the other ones miss that sale have to go to a wholesale market and then they wind up going out of business. So I think that's not going to be any different here.

This is an agricultural crop, putting aside the branding at the end of the day. So technology, innovation, all those items are very critical to drive that low cost production and seeking better varieties, better crops, the investment in strains that have higher yields, as I said earlier, higher components of what the market wants, be it a higher THC level, higher CBD level, the ability to grow more crop cycles per year. So all that comes sort of full circle to drive to be the guy you want to be the one at the table when the music stops. So that's how we think. And like we said, it's in our DNA.

Nobody wants to really be in a commodity product, but that's the reality if you're in agriculture and that's what this is.

Speaker 5

That's it. Mike and Steve, thank you very much. That's all for me today.

Speaker 1

You bet. Thanks. And

Speaker 0

at this time, I will turn the call over to the presenters.

Speaker 1

Okay. On behalf of Steve, myself, the rest of Village Farms, we are Village. We are very thankful to have everyone on the call today, and we're thankful for our villagers as well. So until next time we report, have a great week. Thank you.

Bye.

Speaker 0

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