Village Farms International - Earnings Call - Q4 2019

Transcript

Speaker 0

Good morning, ladies and gentlemen. Welcome to Village Farms International's Fourth Quarter and Year End twenty nineteen Financial Results Conference Call. Yesterday, Village Farms issued a news release reporting its financial results for the fourth quarter ended December 3139. The 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.

It will be archived for replay both by telephone and via the Internet beginning approximately one hour following completion of the call. Details of how to access replays are available in yesterday's news release. Before we begin, let me remind you that forward looking statements may be made today, during or after the formal part of the conference call. Certain material assumptions 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.

These risks and uncertainties include, among other things, the factors contained in the company's filings with securities regulators, including its annual report on Form 10 ks for the year ended December 3139. These forward looking statements are made as of today's date, except as required by applicable securities law. The company undertakes 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. Thank you to everyone joining us today by telephone and the Internet. With me for today's call is Village Farms' Chief Financial Officer, Steve Ruffini. The agenda for today's call is I'll start with a high level review of the highlights, most notably the generation of net income in excess of $36,000,000 by Pure Sunfarms in its first full year of operation. I'm absolutely thrilled at the performance of the management team in this first year of Pure Sunfarms.

Steve and I Steve will then review our financial results and I'll return to discuss why we remain so confident in the future of our company and be happy to take questions at that point. Before I begin, clearly a few words with respect to all these unprecedented challenges we're facing and our thoughts and prayers are with those affected by the COVID-nineteen pandemic including the frontline healthcare works across the entire country. At Village Farms, our highest priority is the health and safety of our employees, our customers and vendors and partners and their families. As we continue to fulfill our obligations to customers and ensure that we are meeting the demands of the consumer at this critical time. As a highly regulated operation, our facilities already adhere to the highest health and safety standards and each has put of those put in place has heightened currently has heightened our hygiene practice and safety protocols across all disciplines in our company and is taking appropriate precautions as per the recommendations of health authorities.

We will continue to enhance and evolve such practices and protocols that the situation warrants. But at this time, all of Village Farms and Pure Sunfarms facilities remain open and operational at normal production levels. Consumers need fresh produce and cannabis stores in Ontario and elsewhere have been deemed essential services and we'll continue to fulfill our commitments as long as it's safe and permitted to do so. So with that, starting with Pure Sunfarms, beginning with the majority owned Canadian cannabis joint venture of which I remind you we now own just over 57%. And as per our news release this morning, we expect to very shortly increase that further just shy of 59%.

Twenty nineteen was an outstanding year for Pure Sunfarms, a year which it emerged as a best in class vertically integrated cannabis supplier, one of the largest and most efficient high quality producers with a top brand and one of just a very small number of cannabis companies that are profitable. Even at this very early stage in the industry and with nearly all of the first year sales to the wholesale market. Its operational financial performance in 2019 clearly stands out amongst the Canadian cannabis industry, proving out the value of decades of large scale growing and operational experience contributed by Village Farms' low cost production, efficient capital investment, disciplined cost management and a smart highly talented and experienced leadership team. It validates everything we said would be critical to success in the industry. All of this contributed to a business that was highly profitable in just its first year of operations generating net income of $36,500,000 and EBITDA of $54,100,000 and just shy of $83,000,000 in sales.

Gross margins for the year were a very healthy 76% with all in cultivation costs including depreciation for the year of $0.78 a gram. But more importantly for the last three quarters averaged down to $0.65 per gram which continues to be the lowest cost by far in the industry to our knowledge. This is clearly standout performance in the Canadian industry. But the performance of Pure Sunfarms is as evident in what it hasn't done. No lost crops, no bloated corporate cost structure, no asset write downs, no return provisions, no facility closures or layoffs, no restructurings, no leadership departures or changes.

It is something that we are incredibly proud of and a testament to not only the best management team at Pure Sunfarms but the right management team and to the value of the thirty plus years of cultivation and operational experience that Village Farms brings to the table. Now turning to the fourth quarter, the Canadian industry continued to be challenged by oversupply as well as a smaller than expected retail store network, especially in Ontario, which has nearly 40% of Canada's population and continue to significantly limit the true underlying legal demand and severely limit the conversion of the illicit market. Against this backdrop, Pure Sunfarms modest Q4 sales reflect its pivot from 100% restricted that we were to the wholesale market right through the end of the third quarter to nearly 100% of sales in the fourth quarter to the branded retail market. This is the foundation of sales going forward. With a leading brand position, we are selling more dried cannabis product in Ontario than any other brand.

Let me remind everyone that Pure Sunfarms is not able to sell to the retail market until the very end of the third quarter last year. In wholesale, as expected, Emerald did not take any of the 40% of production which it had contracted for. And although this was a continuation from the third quarter, Pure Sunfarms was unable to redirect such a large quantity to other buyers in this short amount of time, especially given a more or less nonexistent wholesale market in the fourth quarter. In branded retail, the timing of shipments, which is when sales are recognized, was such that the first large initial shipments to Ontario fell in the last week of Q3. And although orders for Alberta were secured in Q4, shipments were delayed until Q1.

The most important takeaway for us from Q4 is that the financials clearly underscore the validity and the strength of the Pure Sunfarms business model. Even in an unusual quarter with modest sales, gross margins were very strong and both net income and EBITDA were positive. And I will note that this was the fourth consecutive quarter of positive net income and the fifth consecutive quarter of positive EBITDA for Pure Sunfarms. And I'm pleased to report that as expected, sales to the provinces had ramped up very nicely in Q1 with our initial shipments to Alberta and regular replenishment orders with all three provinces. We've also started to see a renewed activity in the wholesale market in Q1 of this year.

Performance in the three provinces in which Pure Sunfarms products have been launched has been outstanding. During the fourth quarter, Pure Sunfarms was the top selling dried cannabis brand by both dollars and kilograms sold within the Ontario cannabis store with a 13% market share. Its flagship product was the number one selling dried cannabis product and two of the top five products within the OCS were Pure Sunfarms products. That performance was repeated in the first two months of twenty twenty with market share now increasing to 13.5% and Pure Sunfarms having two of the four best selling dried cannabis products. As I mentioned earlier in February, Pure Sunfarms entered the Alberta market which has at least doubled the per capita consumption of each of the other three largest Canadian provinces.

This is directly attributable to the size of the retail store network with around four thirty outlets and still expanding. The first shipment took longer than expected as Alberta worked through existing inventories from other producers, but the province ultimately increased the size of its initial order. The products are getting great initial feedback from retailers and consumers alike. Clearly, bricks and mortar retail stores matter to driving sales volumes and that's why it's very encouraging to finally see momentum in the resale store openings in both British Columbia and Ontario. British Columbia recently increased its store count considerably, now more than 175 stores and posted the highest rate of sales growth in January.

And Ontario is now around 50 stores with major expansion expected this year and next. Pure Sunfarms is actively looking to expand into additional provinces as well. Pure Sunfarms brand performance gives us great confidence in the prospects for its next products, pre rolls, oils and new product formats on the Cannabis two point zero launch of the first Cannabis two point zero products is expected by Pure Sunfarms later this year. As it did with dried cannabis launch, management is approaching the development introduction of new products in a measured, strategic and prudent manner. Clearly as proven out by Pure Sunfarms dried flower retail launch, you do not need to be first to market to be number one in the market.

From day one we have said that being a low cost producer would be critical to long term success in the Canadian cannabis industry. We didn't anticipate it would be as important as it has become in the very short term, not only for success and profitability, but for many other survival. Pure Sunfarms industry leading cost of production has enabled it to strategically differentiate itself as the affordable luxury brand, quality products that people want at the right price. It's value proposition that is clearly resonating with consumers while generating profitability. All in cultivation costs for Q4 were $0.66 per gram.

Again, that includes depreciation and $0.78 for the year. And again, that was achieved as operations were in ramp up mode throughout much of last year. This is a significant advantage that provides tremendous pricing power to not only capture additional market share in the legal market, but to start to take meaningful share from the illicit market. To this end, Pure recently launched a large format 28 gram one ounce value package, which will feature the same level of quality products consumers have come to know and expect from Pure Sunfarms. The package sells for $99 retail or just over $3.5 per gram at it's a price at which Pure Sunfarms can still generate a very healthy gross margin.

Pure Sunfarms will be un yielding in its pursuit of further lowering production costs and further enhancing quality. Recently Pure Sunfarms received Health Canada approval to bring its new state of the art 65,000 square foot processing center within the Delta 3 facility into full operation. The processing center significantly upped Pure Sunfarms' gain in a number of ways. Pure Sunfarms' quality is already unmatched current price point and the new processing center including new drying rooms using advanced technology and processes as well as old world techniques in drying will enable Pure Sunfarms to take quality and consumer experience to a whole another level. This new processing area will also generate efficiencies to further lower production costs.

Importantly, the new area has been designated to satisfy full European Union GMP compliance and certification which Pure Sunfarms is currently pursuing. With the significant expected growth in the cannabis market over the next several years, leading market share performance plus international opportunities, we are working towards having the additional 1,100,000 square foot of the Delta II facility at the ready and we will put the facility into full production as market demand warrants. Early this month, we announced the settlement of Village Farms and Pure Sunfarms dispute with our joint venture partner Emerald Health and we are pleased to be able to settle the matter in a timely manner. All of the details on the news release announcing the settlement, I do want to highlight that as part of the settlement, Pure Sunfarms supply agreement with Emerald Health for 2020 through 2022 was mutually terminated. We view this as a huge positive as it will allow Pure Sunfarms to focus predominantly on the retail market, building on that success to date.

It also resulted in Pure Sunfarms and Village Farms increasing its ownership of Pure Sunfarms to 57.3 and soon to be almost 59%. Now turning to our U. S. CBD and hemp program. 2019 initially saw great progress in starting to build a foundation to capitalize on this transformational long term opportunity with a number of important achievements.

Formation of village fields hemp for outdoor cultivation and extraction, the successful inaugural outdoor growing season, the start of conversion of a portion of our Permian Basin greenhouse to hemp production and continuing advancement on our consumer packaged goods strategy working with leading CPG consultants to identify and prioritize the right products and channels to enter the space. However, at this time, the industry is significantly challenged by the lack of regulatory clarity and visibility that we clearly thought would be have been sorted out by now a year ago. The FDA has refused to provide a decision around the use of CBD compounds for food, drinks and healthcare supplements and other potential large market applications nor has it provided a timeline for such a decision. And the initial regulatory framework for hemp cultivation from the USDA and some states' ag departments including Texas are highly restricted and confusing to the point that we believe at this time prohibits profitable hemp production for large scale growers. Accordingly, we have taken a pause in our capital spending around hemp cultivation and extraction as we await regulatory clarity that means the suspension of the conversion of part of our Permian Basin Texas facility for hemp.

And at this time has not yet committed to hemp cultivation in 2020 and deferring capital expenditures for the planned extraction operations in Georgia. It's a prudent decision for the company and our shareholders. We don't believe this change is the magnitude of the opportunity in any way. It just pushes the timeframe out. And I want to be clear that this does not mean we have stopped working on our CBD strategy.

We remain committed to the industry and continue to work currently on opportunities moving forward. We are not alone here. The FDA's resistance to providing a regulatory path forward is preventing lawful companies, including some of The U. S. Largest and most respected CPG companies and retailers from pursuing their CBD strategies.

We need the FDA to act as a collaborative partner within the industry to develop a regulatory pathway for CBD. This will enable lawful companies like Village Farms and others to pursue hemp and CBD strategies with the associated broad based economic benefits and alleviate the significant risk of public health that exists today in an unregulated gray CBD market. For produce, I've discussed on prior calls our produce business is transitioning as we execute on our strategy which we've currently moved 65 acres of our own production of our own assets that was displaced by conversions for cannabis and hemp to partner growers in Mexico and Canada. Based on annual crop cycles and building new relationships, this is a process and it takes time. As expected, 2019 produce results continue to be impacted by pricing pressure from our U.

S. And Canadian retail customers, although we have seen a sizable change in the first quarter of this year as demand has spiked due to the current situation with the virus. We've also isolated production challenges at one of our facilities, which put further pressure on volumes ahead of the additional 120 acres of growing partner capacity coming on stream in 2020. This will allow us to drive revenues higher while maintaining costs and mitigating the agricultural risk that can negatively impact our produce results as we work towards our goal to return the produce business positive EBITDA generation. We will keep our talent and other resources in place and strong for the future opportunities in CBD and cannabis in The U.

S. Now I'd like to turn the call over to Steve to walk through financials at a high level. Thanks, Steve.

Speaker 2

Thanks, Mike. First, obviously, the company was disappointed, me in particular for not being getting our full 10 ks filed yesterday. We made a, valuing effort, but ran simply ran out of time due to the agorization and XBRL nature of coding all our financials. We were very close, but we're not going to make the 05:30 deadline yesterday. So we expect to file that on Wednesday of this week.

I thank everyone for their efforts. Obviously, between ourselves, our attorneys, our accountants, and everyone else working from home, it just was not a very efficient process as well as the printers not working at full speed. So I appreciate all those that worked throughout the last week into the wee hours and the weekends. We didn't quite get there, but, the whole world can read all 550 pages on on Wednesday. Give something something for people to do.

And then it creates the primary differences that I've said before between U. S. GAAP and IFRS is biological assets. The Pure Sunfarms financials will be included in our big 10 ks filing and Pure Sunfarms is a Canadian company, have the bio asset in it. Village Farms excludes bio asset, which has no impact on Pure Sunfarms revenue or EBITDA.

But for those that want to try to compare Pure Sunfarms to the other Canadian cannabis companies who do report bio asset, you'll be able to do that. The other difference, between US GAAP and IFRS as it reflects on Village Farms is, as most people know, Emerald had escrow shares out outstanding for most of 2019 and 2017 and part of 2018. Under US GAAP, escrow shares are now counted, in allocating income. So for 2017 and 2018, those farms in The U. GAAP results compared to IFRS took a larger share of the early Pure Sunfarms expenses since they didn't have revenue in 2017 and didn't have any revenue in the 2018.

And then for 2019, we took a larger share of the profits in the early part of the year, again, simply due to The U. S. GAAP treatment, which allocates more of the profits and loss to us based on the paid for shares versus the true economic interest. So we have adjusted our EBITDA as you will see in our press release for, to adjust our EBITDA down to what we believe is the correct way of looking at it essentially is with our economic interest. We also, in April, will be, refiling, an eight ks for every one of our 2019 quarters.

So we will be restating, the The US GAAP quarters from the IFRS quarters, which were filed earlier this year. So stay tuned for that. As Mike said, Pearson Farms outstanding year, 83,000,000 in sales, 54,000,000 in EBITDA. I will note in the gross margin, the gross margin for the full year 76% is a better comparable, rather than trying to compare the gross margin between Q3 and Q4. Due to the settlement of the animal dispute, the the kilograms that that pertains to were charged against the earnings of Pure Sunfarms and the gross margin in the third quarter.

But due to the dispute, the revenues were settled in the fourth quarter. So, it does skew the two quarterly gross margins. So the readers should pay attention to the full gross margin for the year of 76%. As we've noted in the press release, the cost of cultivation for the full year was 78¢. Obviously, there's other cost of goods sold and packaging, handling, transportation being the primary reasons, but we've broken out the cost of cultivation.

Really, for the first three quarters, there wasn't a lot of other significant costs that went into our cost of goods other than the cultivation. When you're selling it in 100 gram big bags, it's there's not a lot of packaging costs. Obviously, with the launch of the retail, adult use, channel, those costs will will increase with respect to packaging and transportation. But with respect to the quarter to quarter comparisons, while we've broken up cost of cultivation, as Mike mentioned, the last three quarters were significantly below $0.78 as you may recall. The first quarter was about $0.4 Obviously, the full facility was not in full cultivation.

So the market should expect a significant decrease in 2020 compared to 2019 in the cost of cultivation. With respect to produce, Mike mentioned, tough year, in particular the quarter from an accounting perspective, we allocate our cost on a full year expected yield and full year expected cost due to ceasing delta two earlier than expected than we had budgeted. There was a charge related to that as well as some disease pressures that we've had in the Texas greenhouses. So we took, we were rather aggressive with some of our cost of production, in the fourth quarter of this year. And with that, I will turn it back over.

Speaker 1

Steve. Once again, thanks everybody for joining. We look forward to speaking with you and we're going to take some questions. But before I do, I just have some closing remarks. So I want to be very clear about why we as a management team and I personally as the largest shareholder company continue to be so confident in future Village Farms.

First, Village Farms remains one of the largest, largest operating greenhouse grown produce business in North America serving virtually every major growth and big box retailer in The U. S. And Canada. And we're making steady progress on returning that business and transitioning it as we change our assets into the cannabis market. In the meantime, the produce business does give us a solid foundation and a big head start to our institutional knowledge, capabilities, infrastructure mass over decades as we've produced our cannabis opportunities.

Secondly, the long term opportunity in The U. S. Hemp and CBD strategy may be even larger than our Canadian cannabis opportunity once we get clarity from the FDA and USDA in the months ahead. We're off to a great start We continue to believe that Village Farms is well positioned to capitalize for the long term and we are continuing to work on near term opportunities as well in Canada.

So finally, we continue to believe that there is no company better positioned for success in the Canadian cannabis industry than Pure Sunfarms. Pure Sunfarms has proven out the validity and the strength of the business model profitable for the last four consecutive quarters. It has rapidly established itself as the premier brand, consistently number one in dried cannabis brand in Ontario. Its ability to produce quality products with an industry leading cost reduction is a significant advantage in the continuing and it's continuing to grow its market share in the legal market as well as taking share from the illicit market. New product launches are eminent to extend the value of the brand and capture more market share, and it is very well capitalized.

Even conservative revised forecasts have addressed the Canadian market at north of $11,000,000,000 by 2025. We believe, as many do, that the industry will be dominated by just a handful of vertically integrated producers and that Pure Sunfarms will be one of those producers. And with a successful growing business in Canada, now the right time for Pure Sunfarms to be pursuing opportunities abroad in the proper order of operations, not the other way around. So with that, operator, we'll take any questions.

Speaker 0

Your first question comes from Doug Cooper with Beacon Securities.

Speaker 3

Hi, good morning guys. Congratulations on a nice year for Pure Sunfarms. Just a couple of questions on the first quarter is essentially, I guess, it's over today. You talked a little bit about the trends, whether it's in BC and in Ontario. How do you see the year shaping up in terms of your volumes?

Can you talk a little bit about you noted market share in Ontario? Is it too early to talk market share in BC and Alberta? And maybe just some comments on the new one ounce package and how you think that will be received by the market?

Speaker 1

Yes, think it's a little too early. We're just finishing today, as you said, but the traction has been we've been very pleased with the traction in the first quarter because really it was a pivot. As I said, the fourth quarter was the pivot for Pure Sunfarms, where the handcuffs came off from being restricted as a wholesale provider once they received the Health Canada Life sales license, which was literally the last week of the third quarter. That coupled with the end of the MO Health Therapeutics supply agreement has now just uncuffed and unleashed the company to pursue what it always wanted to do and be vertically integrated to the retail market. So that fourth quarter was the pivot.

And now the focus is independently pursuing the retail market across all of Canada with the three of the four major provinces on board and increasing. And of course, with Alberta, they had some backup. So really that order that was sort of placed in December didn't start didn't ship till February. So I think they're now seeing what the feedback is on those products and we understand it's positive as we expected. And I think we'll see greater traction and have a much clearer viewpoint when we report the first quarter, which is only about six weeks away at this point.

Speaker 2

Doug, this is Steve. Ontario is very good about supplying their vendors or their supply to Pure Sunfarms, all the POS data. Alberta and British Alberta will not, We were told yesterday, and British Columbia, I don't think it's reports the same type of level of data to Pure Sunfarms, they can't measure their market share.

Speaker 1

Okay. Right. And the other thing I'll add to that is just that we're probably now we've gone in a matter of basically one to two months from nearly one hundred three months from 100% wholesale to probably north of 90% retail and we're building on that. So

Speaker 3

Yes. You mentioned, Mike, that the wholesale seems to have come back a little bit in Q1. How do you expect it to play out for the year? Do you anticipate 90% of your revenue will be retail in 2020?

Speaker 1

Well, I would say greater than 80%. I mean that's clearly the focus. That's always been really that was the initial business model. And we look at the wholesale market is just another conduit that we made up of different channels within the wholesale market. I think depending on where the market goes with extractors that are sort of a pure play extraction company, which I think has taken a lot of that wholesale demand back in 2019 where that business model goes in the future.

But for us, we're going to look at the wholesale market as sort of a secondary market. And you know, if if it's 75% retail, 25%, for lack of a better term, wholesale, even though it may go to different channels, that's the focus of the company going forward. And then with, more derivative products entering in later this year and into next year, I think that will just boost our opportunity for increasing that retail side. And then, of course, we'll enter Delta two. That wholesale market may be an important part of doubling our capacity for some time, which is normal, as we continue to make new product introductions and greater penetration in existing market.

Speaker 0

Next question comes from Rahul Saragazar with Raymond James.

Speaker 1

Thank morning, you.

Speaker 4

Mike and Steve. Thanks for for taking our questions. And perhaps on the five consecutive quarters of positive EBITDA for Houston Farms. So just following up from Doug's question, so I'd like to start with the shift from being an exclusive wholesaler to an adult use focused company. Given that your comment was that wholesale was more or less non existing in Q4, what proportion of the revenue was wholesale versus adult use?

And what was the average selling price in each of these channels?

Speaker 1

Either for for, say, q one going forward?

Speaker 4

So q four, but also q

Speaker 2

one if possible. Yeah. Q q q four was a 100% retail. Yeah. No wholesale.

Speaker 1

Then and then q one went full. And

Speaker 2

and as Mike said, the wholesale market is coming back. So for the first three quarters of last year, there was clearly a rush by many LPs for either the expectation of, you know, big big sales of provincial governments or some let's just say some of them maybe had growing cultivation issues. And then I think the realized realization of all the LP all the LPs in the summer and fall was, wow, the the rollout of retail stores is way slower than everyone expected and sales totally backed off. Now we are, as Mike said, we're seeing a return to the wholesale business, but the orders are not huge. They're a 100 kilograms versus a million to 2,000,000 to 3,000,000, which were some of our orders in the wholesale market in 02/2019.

So it's coming back, but people are being very prudent about their purchases. And, yes, Pure Sunfarms is being very prudent about who they sell to because obviously we're well aware of the, financial issues that that some are experiencing. So no sense selling to someone who can't pay for

Speaker 1

Right. Right. Great. Thanks And for the answer on pricing, I mean, the end of the day, we still see pricing as pricing has to be at a level that has to start the cannibalization of this trade. That's just the bottom line.

That's that's how market share is gonna increase. So, you know, that that's what we're looking at and and where we position that price point based on different product categories. So I think that's going to we'll have a better handle on that this year going forward.

Speaker 4

Great. Great. So a quick follow-up then. So given the actual number of kilograms sold in Q4 was relatively nominal, Can you give us an idea of how inventories are looking and how you see this as a strategic asset for wholesale versus adult use in the future? And in particular, focus on the evolution of your Cannabis two point zero portfolio?

Speaker 1

Well, I mean our inventories have increased into Q4 because when you look at the actual sales versus what was produced, it's there. And we realized that. And again, I'm going to reiterate that it was very difficult I think it would be very difficult for any company that's based on a 40% contract. And keep in mind with Emerald for last year's production of what was produced and really for the first two months of this year or two, we have the settlement agreement, 25% of the production. When an entity is focused on that and that disappears, you can't just find a home for it tomorrow, especially as Steve was saying, what we saw in the wholesale market in the fourth quarter coming down.

So when we look at the fourth quarter, the takeaway for us is, yes, the sales were not great in the fourth quarter and that was just the beginning of traction on the provinces rolling out greater stores. This is no everybody knew the fourth quarter was challenging wholesale and retail. And we looked at the positive coming into the fourth quarter that all sales were retail. So that pivot was great. Yes, would have been nice if the sales were much higher, but that was an incredible accomplishment by that team out there.

I mean, take my hat off to them and in in that amount of time. So inventories have backed up. But now as we go forward, you know, we said we're vertically integrated. We have our first two machines that will be coming online this year on extraction and working on a whole number of other products. So we feel pretty good where our inventories level are, and I think we'll start getting some greater it's gonna be very interesting and I think very positive and very confident where our sales start ramping up through in Q2 and Q3.

Speaker 4

Great, great. Thanks. I'll just leave it there then.

Speaker 1

Thank you. Thank you all.

Speaker 0

Next question comes from Aaron Grey with Alliance Global Partners.

Speaker 5

Hi, good morning and thanks for the questions. First, I'd just like to start off on continue to have strong share in Ontario throughout the Pure Sunfarms at retail. But you are seeing a lot of you know, competition especially in the deep value space. And, you know, I just want to know your current thoughts on Pure Sunfarms price points, you know, given you are operating at such a low cost per gram. Do you feel any need to lower the price to capture more share?

Are you comfortable with letting the market more or less, you know, fight at the deep value price down there? And I know you rolled out the 28 gram, you know, body price product as well. Or how are you feeling right now with your, you know, price positioning, whether or not you want to get a little bit more aggressive there in order to, you capture more share for volume? Thank you.

Speaker 1

Yes. Well, leadership, Manish, the leadership of Pure Sunfarms, they do an incredible amount of work. They really have a phenomenal understanding of the market, who is the market. And, you know, they've identified that market as the everyday casual user that is at that price point. On top of the attributes of the product, they all have to be there, but price point works.

And I think it's like a head vice, I've often said, where you turning it slowly and then seeing what happens and turning it more and seeing what happens. And I think that will determine as they build market share how they can eventually find a sweet spot of that price point based on whether it's an award winning Afghan Kush product that's number one in the marketplace or it becomes a blended product or it goes into derivatives. So I think, you know, it's just gonna be a work in progress, Scott. But ultimately, that was the whole reason for being the low cost producer is because you have to take away the illicit trade. We look at The US pricing.

US pricing of cannabis is so far superior to Canadian. And I think one of the reasons is The US has a number of federal agencies that continue to arrest the listed and illegal growers and distributors of cannabis. And they are supporting the legal trade. And in Canada, that's not the case. So the case is that the producers and the marketers like Pure Sunfarms that will have to find that price point where they can have a consumer say rather than buy it from an illicit trade, I like the fact that I can walk into a retail store and look at my selection.

I know the product has grown to very, very tight regulations and standards without pesticides. And the price differential, whatever that, you know, split may be five, ten, 15% is worth it to me. And I think that's the goal going forward. So it's still a work in progress to define, you know, the exact price point.

Speaker 5

Okay, great. Thanks. Appreciate the color there. And then just one more. In terms of as you think about the retail sales over the next couple of quarters, obviously, one of the things we've looking at historically has been the number of stores.

But just as we think about COVID-nineteen, it seems like there's only more uncertainty than we have had historically. So it looked like the most opportunity would be in Alberta. But we have seen some delays there, you know, from December to February shipments. So as we think about the potential impact, you know, with COVID-nineteen and specifically in Alberta, do you think that will have any impact on the reorder rate? I know Canvas was deemed essential, you know, in that province, but just, you know, given things probably won't be operating as efficiently and you are one of the newer people selling it to the province, do you think that will impact kind of the rollout and how that ramps up for the province?

Thanks.

Speaker 2

Erin, it's Steve. Actually, we've seen the inverse. We've seen very high demand for, cannabis, in all three provinces that we've been in. I was on the phone the other day with someone who's actually ordering product online, and the the post office has stopped delivering it, but essentially, they can go pick they can now go pick it up direct. So, we have not we've seen the inverse.

I can say our sales to our number one customer, Ontario, know, started off January pretty well. We doubled that in February. We doubled it again in March, in particular with with the one ounce product. So we be it tomatoes, as Mike mentioned in his remarks, or or be it cannabis, actually, COVID nineteen has certainly, helped ourselves, not hurt them.

Speaker 5

Okay. Great. Thanks. And just one quick follow-up. Just specifically on Alberta, that'd be the same for that case too, just because I know that's a newer one where you're selling into the province where you have more recurring sales within the Ontario market.

Speaker 1

Yes. I mean, I've seen

Speaker 2

the stats. They're, you know, I don't know if they're in our deck, but seen the stats. So Alberta, even though it had a lot more stores for the whole province last year sold, you know, it was give or take a few percentage points within what Ontario did. So I I appreciate it's a lot more stores, but it has comparable sales. So we have seen an increase in the number of stores in Ontario, obviously, because of success of the brand, with the existing stores, the the certainly, the initial sell in to each of the new stores had and, you know, has has been very good for Pure Sunfarms because they're all sharing the same POS data.

So, doesn't you know, it may slow down what what COVID nineteen may do. It may slow down the the new store openings. I I I can't speak to that. But the existing stores are, as Mike said, are deemed to be essential, and, we've we've seen good demand.

Speaker 1

Yeah. And I could add that I think the tax revenues the tax revenues are gonna become very important for both Canada and The United States. And I think this is a very unfortunate scenario but it could help. Know every governor in The United States is going to be clamoring for tax revenues so maybe they'll have some impact on the legalization in the future in The U. S.

Too.

Speaker 5

Okay, great. Thank you.

Speaker 1

Thank you.

Speaker 0

You. Next question comes from Scott Fortune with Roth Capital Partners.

Speaker 6

Good morning. Congrats on a good year. Where are we as far as other provinces and potentially Quebec kind of discussions there as far as products going into other provinces here?

Speaker 2

The discussions are ongoing, Scott. Quebec is a bit you may know or not know, Quebec is a bit of a different market. Essentially, you don't sell on to well, you sell through the province, essentially, but you have to deliver to each store. So there are some, operational logistics that Pure Sunfarms needs to get in place, but, you know, they're they're close on that. They're also very close to several other problems, but obviously, Quebec is is the other big market that, obviously, they wanna get into.

So I would expect to see something hopefully in in q two of this year, seeing an announcement there. I don't know when the initial shipment will be. And, initial shipment to Quebec is different than an initial shipment to Alberta and Ontario because they're shipping to each each individual store.

Speaker 6

Okay. And then just a follow-up, kinda as we roll out or you guys roll out new product offering pre rolls, oils and two point o product offerings, kind of step me through on this kind of sales and marketing side and kind of putting that infrastructure in place or what the needs are there? Are we going to expect higher cost to continue to build brand, Pure Sunfarms brand through Canada from that standpoint?

Speaker 1

No, I don't think so. I think they've done a phenomenal job of managing that. And when you look at the way they've the team there has marketed the product to the number one brand in Ontario, I think, they they have that secret sauce pretty well down. So I don't think we'll be hiring any celebrities going forward. So I don't see that as increasing and at the same time their efficiency on the growing side I think will balance it out.

But now it's to say that as Delta two comes on, we won't see increases for a while which would be normal on SG and A overall, but I think they've managed that superbly and they're very focused on the color of the percent of sales that we need to be in to drive profitability. I feel good about that, Eric.

Speaker 0

Next question comes from Eric DeLorea with Craig Hallum Capital Group.

Speaker 7

All right, great. Thanks for taking my questions, guys, and congrats on the strong profitability in Pure Sunfarms even with the lower sales. A couple of questions just on timing. Mike, I think you said that you're going to take the D2 ramp sort of as market demand warrants. What specifically are you looking for?

And do you have any expectation for timing of when you'll begin and ramping Delta two?

Speaker 1

Yes. Well, Delta two is basically 70 half of it could go in production now. So when we saw this downturn in the fourth quarter across the board, by the time the beginning of the fourth quarter was coming on, the activity was just kind of dwindling there with overcapacity discussions, wholesale drying up, even though the market is there, okay? So we just thought it more prudent at that point to just slow things down and come through the transition. And again, we had to go through this whole settlement agreement with Emerald, both companies getting together to get through it.

And I can't you have to be somewhat cognizant to that was a lot of noise, so to speak, in one, knowing that we had to come to a settlement with them secondly, that the supply agreements would no longer be in place and how that affected the new strategy going forward and then implementing and executing on it, which I think was done in a very swift manner and very with a lot of positives of it. And even the fact that our fourth quarter numbers had some of the sales that were tied to the supply agreement, that really is legitimate sales because they should have been in the third quarter and had to just go through the settlement. So all that being said, while all that was going on, there were so many things happening that are now behind us, including the year end, the fourth quarter. Now the stores are gaining momentum. But at that point, we just decided let's slow things down in Delta two.

So to answer your question, I think we'll start coming online later this year with part of Delta two and then ramping it up. We feel pretty confident ramping it up pretty pretty full going into the new year.

Speaker 7

Alright. Thanks for that. And then on the two point zero products, can you remind us which product formats you guys are going for and which licenses are needed from Health Canada to get you guys there?

Speaker 1

You know, I can't really comment on that other than I mean, we're we're hopeful to get extraction here very shortly in the next month or two, which will now, you know, start our oil extraction going forward. But we haven't revealed anything yet as for the products we're working on. Again, as I said in my briefing, the team there has been very prudent in their decisions so far and watching maybe some of the errors other make and then capitalizing on that and that's still a work in progress. So other than pre rolls and just oils, but specific to other derivatives that's yet to be announced. Thanks, Eric.

Speaker 7

All right. Fair enough. And then last one from me, just regarding the further increased ownership of Pure Sunfarms to close to 59%. Just given the history with Emerald, I'm just wondering if you expect any potential dispute from that, or if this was kind of, expected on their end, after the, after the previous settlement? Thanks.

Speaker 2

Eric, this is Steve. This was all part of, the settlement. This this, equity investment was, you know, part of the settlement agreement. So there will be no dispute with respect to it, fully approved. And again, it was in conjunction with an amendment and expansion of our existing, credit facility.

So, we're very excited about it. I think it's, shows third party support, from a, you know, large Canadian bank, who essentially financed many companies, and they're essentially showing their support, in particular, for Pure Sunfarms. And I think that that helps, go for the market and identify, the the the what will go on in 2020, which is selection of horses. So, no longer should everyone bet on all horses. You gotta pick your horses now.

So, Pure Sunfarms will will be there for the long run, and, you know, we hope to see our our our brand shares and market shares significantly increase, you know, from above 13%. So Alright. That's great

Speaker 7

to hear. Excited to see what's in store for Pure Sunfarms. Thanks, guys.

Speaker 2

Thanks.

Speaker 0

And we have a question from Andrew Perthino with Stifel GMP.

Speaker 8

Hi. Thanks for taking my questions. All my questions have been answered, but maybe if I could follow-up from Eric with the Pure Sunfarms increasing ownership in with Village Farms increasing ownership in Pure Sunfarms, your last press release. You know, there's still some extra interest that you guys can might be able to take in the future. How much more of this can we expect?

And, you know, is there any kind of cadence that maybe you can provide with potential future contributions?

Speaker 1

We really can't comment on that, Andrew. This we're pretty happy where we are right now. It's all part of this whole kind of global settlement with them, this piece. So, you know, what tomorrow brings, neither of us know at this point.

Speaker 8

Very fair. And maybe another one relating to your processing center. I fully expect that that could increase the quality of your products. Are you, thinking about, maybe segmenting your product portfolio? And if so, what can we see which relates to, the dried cannabis products and average pricing?

Speaker 1

Well, I think on the dried flower, we think that we would like one of our goals right here on the dried flower side is to increase is to take sort of about 13.5% current market share that we have in Ontario and increase that along with the other provinces we're selling and we'd like to get to a 20% market share in those provinces. That's the goal we have. If we're successful, we'd like to think we can get to 20% market share in Canada. And then on the cultural side, we see that maybe we can get to twenty, twenty five, maybe even north of that one day of, you know, the cultural side of cannabis in Canada. And so that's number one.

And then number two, again, on the pricing, we have to take it step by step to see how much that that pricing is gonna drive market share. Mean, we just see it as an important part of market share because, again, it's a cannibalization of the illicit trade. And it's best to take that in steps, not come down too much. But we also think as we go in that direction, it's positive because the sooner that the field kind of thins out, the better for the survivors. So I think this year will provide greater clarity to answer that question better, certainly after the second, third quarter.

Speaker 8

Okay. Thanks.

Speaker 0

And at this time, I'll turn the call over to the presenters.

Speaker 1

Okay. Well, I want to thank everyone. It's been about four and a half months since we spoke last time and it will be about six weeks until the update on the first quarter, which we're looking forward to. And I thank you for supporting Village Farms. The last few months have been a time of clarity for the company in the direction we're going.

And thanks for your participation. Please, thoughts and prayers are with everyone during this current crisis that we're all suffering from. Thank you.

Speaker 2

This concludes today's conference

Speaker 0

call. You may now disconnect.