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Edited Transcript of VFF.TO earnings conference call or presentation 15-May-20 12:30pm GMT

Q1 2020 Village Farms International Inc Earnings Call

Delta Jun 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Village Farms International Inc earnings conference call or presentation Friday, May 15, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael A. DeGiglio

Village Farms International, Inc. - Founder, CEO, President & Director

* Stephen C. Ruffini

Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director

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Conference Call Participants

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* Aaron Thomas Grey

Alliance Global Partners, Research Division - MD & Head of Consumer Research

* Andrew Partheniou

Stifel GMP Research - Analyst

* Doug Cooper

Beacon Securities Limited, Research Division - MD and Head of Research

* Eric Des Lauriers

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Rahul Sarugaser

Raymond James Ltd., Research Division - MD and Equity Analyst of Healthcare, Biotechnology & Cannabis

* Scott Thomas Fortune

Roth Capital Partners, LLC, Research Division - Director & Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Village Farms International's First Quarter 2020 Financial Results Conference Call. Yesterday, Village Farms issued a news release reporting its financial results for the first quarter ended March 31, 2020. That news release, along with the company's financial statements, are available on the company's website at villagefarms.com, under the Investors heading. Please note that today's call is being broadcast live over the Internet and will be archived for replay, both by telephone and via the Internet, beginning approximately 1 hour following completion of the call. Details of how to access the replays are available in yesterday's news release.

Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in the company's various securities filings with the SEC and the Canadian regulators, including its Form 10-K for the year ended December 31, 2019, and the Form 10-Q for the quarter ended March 31, 2020, which is available on EDGAR and SEDAR.

These forward-looking statements are made as of today's date, and except as required by applicable securities laws, we undertake no obligation to publicly update or revise any such statements.

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

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [2]

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Thanks, Michelle, and thank you to everyone for joining us today. With me for today's call is Village Farms' Chief Financial Officer, Stephen Ruffini. The agenda for today's call, I'll start with a review of the highlights of the quarter, most notably, the fifth consecutive quarter of profitability for Pure Sunfarms as we saw a significant quarter-to-quarter ramp-up in retail branded sales. 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 then be happy to take questions.

But before I start, I just -- before I review this quarter, I'd like to provide an update with respect to our operations during COVID-19 pandemic. We are grateful to report that all of our Village Farms and Pure Sunfarms facilities, whether Canada, U.S. or Mexico, remain fully open and operational as they have throughout the pandemic. The health and well-being of our employees, customers, vendors, partners and their families continues to be our top priority. We are continuing to adhere to additional health and safety practices as per municipal, state, provincial and federal health authority recommendations, over and above the already very high standard of hygiene practices and protocols already in place as a highly regulated food producer.

We have always taken our role as one of the largest suppliers of the year-round fresh quality produce in North America, and the consumers we service very seriously, bringing that same dedication to Pure Sunfarms, but never have we taken a role more seriously than during the current environment. And I'd like to acknowledge all of our employees company-wide who are working tirelessly to ensure health and safe produce is getting to our retail partners. And in particular, I'd like to thank all of those who played a role in helping us feed over 10,000 families in Texas, with donations of over 200 tons of produce throughout the state to local food banks and pantries. We are fortunate during this difficult time that we operate essential businesses that thus far have remained largely unaffected by the pandemic.

Now turning to Pure Sunfarms, of which I remind you, we now own just shy of 59% as of April 2. Pure Sunfarms continues to clearly set the standard in the Canadian cannabis industry for growing capabilities, best-in-class facilities and operations, cost of cultivation in a greenhouse managerial acumen and brand performance, and it continues to be one of the few profitable Canadian cannabis suppliers, not just this quarter but now for 5 consecutive quarters. This performance is unmatched in Canada.

As expected during the first quarter, Pure Sunfarms saw a significant ramp-up in sales volume, following its planned transition to predominantly retail branded sales from the fourth quarter. Total net sales increased 25% year-on-year to just over $18 million, with $8.5 million of that generated by retail branded sales to provincial distributors. That's a 118% increase in dollar sales from Q4 on a 179% increase in kilograms from the fourth quarter as well. And I want to remind everyone that Q1 was just the second quarter of retail branded sales for Pure Sunfarms. Sequential growth was also the result of sales activity in the wholesale market. While positive, I do note that we expect wholesale sales to be lumpy for the foreseeable future.

The significant increase in retail branded sales in Q1 was driven by a number of positive factors. Pure Sunfarms' dried cannabis product continued to be favored by consumers in each of the 3 provinces that we are selling. In Ontario, during the first quarter, Pure Sunfarms, once again, saw more dried cannabis than any other brand with the Ontario Cannabis Store. That's on both a volume basis and a dollar basis. That makes the second consecutive quarter that Pure Sunfarms was the top-selling brand with the OCS, each of the 2 quarters since its retail launch, right out of the gate. And once again, Pure Sunfarms had the top-selling product with the OCS, by both volume and dollars sold.

In the first 4 months of the year, Pure Sunfarms captured 14.3% of the Ontario dried cannabis market, with market share jumping to more than 20% in the month of April. Pure Sunfarms' goal is to capture at least 20% of the dried cannabis market nationally in Canada over the long term. Yes, it's too early to say, but this is just a single month of data for Ontario alone, but we think it's a strong indication that we can achieve our goal.

Retail sales growth was also driven by the start of shipments for the retail market to its third province, Alberta, where Pure Sunfarms' product is having great feedback from both retailers and consumers. At $60 per capita annual consumption, Alberta is, by far, the leader of the 5 largest provinces, clear evidence of the critical role that bricks-and-mortar retail stores play in driving sales.

I will note here that the robust sales growth and brand performance in Ontario is in a market that remains significantly underserved on a bricks-and-mortar store basis. Per capita sales in Ontario is under $25. And for additional content, per capita consumption in the U.S. states open for 2 years or more are even higher than Alberta, with Colorado leading the way at $99; followed by Oregon, $97; and Washington state at $89 as opposed to Ontario at $25, huge difference.

Recently, Pure Sunfarms took a major step towards launching its fourth province, receiving approval from the Saskatchewan Liquor and Gaming Authority to sell to private retailers in that province. It is now preparing to begin shipping. Like Alberta, Saskatchewan punches well above its weight, representing 6% of Canada's cannabis sales, with just 3% of the population.

Q1 was also a further confirmation of Pure Sunfarms' advantage around cost -- cultivation costs, with an all-in cultivation costs for Q1, which, as always, includes depreciation expense of $0.88 per gram, bringing the average for the past 4 quarters to less than $0.74. And as a reminder, cultivation costs are higher during the winter quarters when yields are naturally lower and supplemental lighting is required due to the few hours of sunlight than in the summer period. We are confident that this industry-leading greenhouse cultivation costs will continue to not only support further market share growth in the legal market, but to capture meaningful share from the illicit market. Competing directly with the illicit market is what will truly drive sales. It's the key near-term strategy of the Pure Sunfarms and the tactics to achieve this are in place and working.

At the same time, product quality, strains and blends and potency remain paramount. The team is continually striving to even further elevate the already high levels of the products, while continually working to bring the cost of cultivation down even further. It's a continuous improvement process that never ends.

And when we think safety, specifically around handling and pesticide use, especially now, will increasingly become more important to consumers. Tax revenue paid by the legal trade will become increasingly important to governments, which we think is good for the entire industry.

Finally, on price, there is no doubt that the number of Canadian suppliers needs to contract for the health of the entire industry, and we believe the current trends in the pricing environment, which we are leading, will see to this eventually.

In late March, Pure Sunfarms launched its first large format value offering, a 28-gram package with the same high-quality that Pure Sunfarms has become known for. The product has the lowest price per gram of any dried cannabis product on the market in the 3 provinces in which it is currently sold. And I wanted to just share with you some of the social media comments from consumers themselves, which underscores the strategy to take share from the illicit trade.

The first one, "After my good luck with the 28-gram bag I acquired of the Pure Sunfarms' Indica blend pulled me back to the legal market. The fact I could purchase a 28-gram bag at a pretty reasonable cost made me switch from the black market."

Another quote. "This is what the illegal market should fear." Another quote, "This is how you combat the black market."

It is very quickly becoming the top-selling product in Ontario, and in the first month in the market by both volume and dollars. Value is even more important during these tough economic times when consumers are much more price sensitive, and this product sets an OCS record for sales volume for a single product during a 1-week period in the dried flower category.

The success of Pure Sunfarms' 28-gram offering is not a surprise. We are increasingly seeing the market demanding high-quality product at a value price, and the provincial distributors seem to be taking note. For instance, in April, the Chief Commercial Officer for the entire Ontario cannabis store, in an interview, discussed the importance of price and quality in taking share from the legacy market, and note that the OCS had brought its pricing down by 25% since the beginning of the year. And even gave out a shout to Pure Sunfarms by name. We believe there is no better partner than Pure Sunfarms to support the OCS in achieving its objective, and we very much look forward to continuing to play a leading role here.

Pure Sunfarms can and will continue to be aggressive around pricing when it launches additional products, including Cannabis 2.0 products, and again, with the key attributes of quality and safety in mind. Preparations for the launch of oil products and 2.0 products has accelerated, and I'm pleased to report that we now expect our first oil and 2.0 products to be launched this coming summer. While I know everyone is eager to know the specifics here, for competitive reasons, we are going to wait until the launch to say any more, but it won't be long.

Now turning to our U.S. CBD program. On our last call, I discussed how -- our profound disappointment and really bewilderment that following the federal government's decriminalization of hemp and CBD at the end of 2018, its very own agency have failed to provide a regulatory clarity to enable law, aiding companies to participate and help this huge opportunity realize its potential. The industry has essentially come to a standstill pending the FDA providing a clear path forward, and we are now not only seeing companies dedicated to the space struggling, but failing. And it's clearly caused the large retail players to put brakes on their strategies for CBD products.

The economic impact of this foot dragging is especially egregious now when the economy is in dire need of any and all drivers of economic activity and growth. Clear FDA leadership and guidance is required, and required now. That said, we continue to be proactive in exploring additional paths forward that we can act on prudently in the nearer term. We are actively engaged in market research and looking at product development that would allow us to move forward with the current regulatory environment.

And then finally, in our produce business, during the first quarter, we saw elevated pricing due to the high demand as consumers rushed to stock up when concerns over the pandemic took hold. However, we were only able to take partial advantage as we had to honor our existing contracts with our major retailers at prices that were below the spot market.

In addition, volumes from our Texas facility continued to be below normal production volumes. Importantly, with our newest growing partners coming online, we have now replaced all of the capacity that was displaced by cannabis in Canada and then some.

The organizational breadth and strength and experience underlying our produce business remains a tremendous foundation to which to transform into new, high-value, high-growth opportunities, such as CBD. And with our greenhouse operations among the very largest and best located in the United States, there is no one in our opinion better positioned for a federally legalized cannabis market, something we are more optimistic about given the expected need for stimulus and tax revenue going forward in this election year.

We have more than USD 300 million in replacement value in our U.S. greenhouse assets. None of our publicly traded Canadian peers can say that.

I'd like to turn the call over to Steve now to walk through the financial results. Steve?

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Stephen C. Ruffini, Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director [3]

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Thanks, Mike. For those new to the Village Farms' story, our cannabis joint venture with Pure Sunfarms cannot be consolidated for accounting purposes, even though we own the majority of it, as the Pure Sunfarms' Board is jointly controlled. That said, we continue to provide full results for Pure Sunfarms to the investment public. So you can do comparisons with the other public Canadian license producers.

The Pure Sunfarms' March 31 balance sheet and Q1 income statement is contained in footnote #7 in our financial statements. It is in U.S. dollars rather than Canadian dollars, as Village Farms is required to report its statutory results in U.S. dollars.

In an attempt to help the readers, we included a financial summary in our press release in both Canadian dollars and U.S. dollars. Unfortunately, we did not translate 2 figures correctly, while the Pure Sunfarms net sales figure for Q1 is correct in U.S. dollars at $13.1 million, the breakout between retail and wholesale is not. The retail or branded sales figure should be in U.S. dollars, USD 6.2 million, and the wholesale in U.S. dollars should be USD 6.9 million. The Canadian figures, as shown in the press release, are correct.

As stated in our April earnings call, Pure Sunfarms experienced significant quarter-on-quarter growth in terms of sales and volume to provincial governments, with provincial sales of $8.5 million in the quarter against Q4 '19 sales of approximately $3.9 million or a -- for a 118% increase, and that was primarily driven by the increase in volume of 179% going from roughly 1,100 grams in Q4 of '19 to over 3,000 kilograms in the first quarter of 2020. This revenue represents sell-in in Q1 2020 versus sell-in in Q4 of 2019.

As Mike said, Q1 of 2020 benefited from the initial sell-in to Alberta, and the sell-in of a large-format to Ontario Cannabis Store. When we're stating our market share figures that Mike provided, those represent sell-through. Those figures are provided by the OCS retail channel, and provided in POS, point-of-sale, data to the Pure Sunfarms' brand team.

The sell-through or POS data has been very strong for the large-format product, particularly in April, as it fits to our shelves. You will note that this does come at a lower price per gram obviously, with a lower gross margin to Pure Sunfarms than the retail sales of our pouch SKUs.

The Q1 2020 wholesale business, which was nonexistent in Q4 of '19, as Mike said, was lumpy. It was primarily driven by transactions with 2 Canadian extraction LPs, who are seeking dried cannabis flower in exchange for various forms of distillate. Pure Sunfarms entered into these transactions due to both the availability of high-grade extraction flower and trim as well as the delay in its extraction license from Health Canada. So in order for Pure Sunfarms to enter the Cannabis 2.0 market in the summer of 2020, it was in need of distillate. And as Mike mentioned, we'll be launching Cannabis 2.0 SKUs this summer.

As reported last May -- so May of 2019, Pure Sunfarms was anticipated to experience a very strong improvement year-on-year in our cost per gram. As the Delta 3 facility, while it was fully licensed in the Q1 of 2019, it was not fully operational as it wasn't fully planted. Now the market can see the benefit of economies of scale, with a full winter of full-scale production as well as an additional year of experience. We brought down our cost per gram by 36% on a year-on-year basis from $1.38 a year ago to $0.88 this quarter, for a $0.50 per gram difference.

I also want to quickly review the Q1 financial impact of the March settlement agreement, between Pure Sunfarms, Village Farms and Emerald. Both Village Farms and Pure Sunfarms recognized income in Q1 as a result of the transactions contained in the settlement. Pure Sunfarms recognized USD 4.3 million of income in exchange to the cancellation of the outstanding liabilities that remained under the 2019 supply agreement as well as the future supply agreement that Emerald wanted to get out of for 2021 and 2022. The amount, the USD 4.3 million, represents the remaining shareholder loan that was outstanding between Emerald and Pure Sunfarms at CAD 5.9 million. So one can look at this figure essentially as either debt forgiveness income or can look at it as essentially product revenues, but could not be recognized as product revenue since no product was delivered.

So in any event, it represents from an accounting perspective, an income recognition of USD 4.3 million and is a onetime benefit. So it has not been included in the EBITDA of either Pure Sunfarms or Village Farms presented in our financials.

Additionally, as part of the settlement, Emerald transferred 2.5% equity stake of Pure Sunfarms' to Village Farms, which resulted in Village Farms recognizing other income of $4.7 million or CAD 6.25 million at the value of the Pure Sunfarms stock received. To avoid any guesswork on the various stock blogs, if you do the math, that's an agreed value between the parties of Pure Sunfarms of $250 million.

Our produce business, like cannabis, is an essential business. And as Mike said, has not experienced any production issues related to C-19, for which we are very fortunate. That said, retail demand has been volatile. We saw a very strong pricing, as Mike mentioned, in March during what I call the hoarding period. And in early April, we saw a fall-off in demand. Even the retailers couldn't really explain that. I guess, people were buying other things other than fresh produce. But recently, we've seen very strong pricing in early May compared to historical levels for early May. And fortunately for us, we dropped one of our large retail contract effective March 31, so we are benefiting from that improved pricing in our own results in Q2.

Just one thing to note. While not much happened with our U.S. hemp business in Q1, we are having continued interest with respect to our existing biomass. I do want to note, we do have a -- we did receive in March our license to grow hemp in Texas. But at this stage, we are not embarking on that until these regulatory hurdles are out of our way.

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

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [4]

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Okay. Thank you, Steve. So in conclusion, here, we are a little over 1.5 years into the legalized market for recreational cannabis in Canada, a market that has been slower to develop than expected and smaller currently than originally expected. But with just as much long-term potential, the industry is now clearly segmenting into leaders, survivors and everyone else.

From day 1, we conceived of and built Pure Sunfarms to not just be a leader in the cannabis industry, but to be the leader. We focused first on getting the cultivation underpinnings right, providing the lowest cost of cultivation in the industry. We then installed what we believe is the best management team in the business. And then that team launched what immediately became and has consistently been the top-selling dried cannabis brand in Canada's largest market.

So I'm going to come back to something you've heard me say before, it's Ferrari's famous motto, that we are the competition. And yes, it's a bold statement, but one that I'm proud to similarly make about Pure Sunfarms, not with arrogance but with confidence. It's the confidence that I've had since day 1 about 30 years ago in our large-scale, low-cost cultivation, knowledge, experience and DNA, operational know-how and best-in-class facilities and operation. And it's the confidence I have today based on consistently being the top-selling dried cannabis brand in Ontario, having the lowest cost of greenhouse cultivation in the country and quarter-after-quarter generating profitability.

No one knows exactly what the next 6 to 12 months look like. The unprecedented withdrawals of financial guidance by public companies, even the largest and most mature has evidenced that. That said, I am comfortable with where our businesses are today, and I remain very confident on what lies ahead.

While the Canadian cannabis industry will likely see some choppiness in the near term due to the effects of the pandemic, Pure Sunfarms has a number of catalysts that directly leverage its leading brand performance: the build-out of retail store network in Ontario, further expansion across Canada and the introduction of new products, including Cannabis 2.0, that make for a very exciting 2020 and beyond.

So thank you for listening, and we'd be happy to take some questions if anyone has. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Aaron Grey from Alliance Global Partners.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [2]

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Congrats on the quarter and the strong market share momentum heading into April. Just a first one from me. Just in terms of the commentary on the price per gram for adult use. Just as we look to have these large formats kind of become a higher portion of the mix going forward, how should we think about that $2.08 per gram kind of trending? And how much does that kind of come down as we look to model it out going forward?

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [3]

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I think probably not going to answer that directly, but I think, in general, that our philosophy is, as I've clearly said, it's -- we have to be competitive with the legacy business. And pricing will just come down as we see that penetration to the point where we believe the penetration rate will increase. And we're going to remain with that strategy as we launch these other products this summer. And I think it will be much clearer maybe when we report the third quarter, how that's going to look.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [4]

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All right. Great. And then the second question is just on 2.0 and plans for launch this summer. I can certainly appreciate for competitive reasons why you don't want to disclose too much. Could you maybe instead just talk about what you're seeing right now in the marketplace? And maybe the opportunities you see, specifically in oils or baked edibles for Pure Sunfarms, specifically given how well you executed on the second mover advantage in Cannabis 1.0. So any commentator on your view of the competitive landscape and 2.0 products would be helpful?

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [5]

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Well, I think the management team at Pure Sunfarms sat back and watched, as they've done before, what was working from others and what was not working. So that's proven to be a positive for them. And in terms of not just the performance of the product, but where the pricing needs to be. And I think as they launch their first product, and I'm not going to say what it is, I think you'll see the same aggressive pricing strategy that they launched when they started retail sales in the fourth quarter. So again, that will show clearer when we report the second quarter.

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Operator [6]

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Your next question comes from Andrew Partheniou from Stifel.

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Andrew Partheniou, Stifel GMP Research - Analyst [7]

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Congrats on a good quarter. So I'd like to talk a little bit about the supply chain dynamics. At the beginning of this year, we were -- and the launch of 2.0 products, we were hearing that, overall provincial distributors were changing their ordering dynamics and ordering more frequently, but less volume in order to be closer to adjusted time type of ordering dynamic. And -- just wondering now with COVID, have you seen any changes in that sense, perhaps volumes increasing or higher frequency in ordering?

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [8]

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No. I think there's so many moving parts. It's really hard to get a handle on it, but I would probably say that like many other consumer products, there was a higher purchase towards the end of the first quarter. But I think that's going to thin out. My view is that's going to probably contract somewhat in the second quarter, and then probably get back on track in the third and fourth quarter.

I think if you look at Ontario, sales aren't quite even back to the level they were in January. So I think it's still -- still need to get through the second quarter because it's going to give the provincial governments time to move through the inventory assessment they have before they start replenishing.

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Andrew Partheniou, Stifel GMP Research - Analyst [9]

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Okay. And maybe if I can dive a little deeper towards your comment in Ontario. Are you able to maybe give a little bit more color in how click and collect and delivery is doing? I know you just said that they're not back towards the level in January, but could you give a little bit of color in terms of types of magnitude? Or potentially -- are they suffering from lack of inventory? Or is it just not being able to fulfill demand as quickly as before?

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Stephen C. Ruffini, Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director [10]

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Andrew, this is Steve. We're a bit removed from those level of details. Actually, from a delivery perspective, I was quite excited about it. One of the advantage the legacy business has, the dealer is no longer a [wretch], he delivers it to the house, so -- which is what was happening. So actually, the developments of them closing -- freaking us all out, closing the stores and then changing their mind, (inaudible) having store pickup and home delivery, hopefully home delivery continues when things go back to whatever the new normal is. So we don't have specifics for that, but I think it's also benefited the large format as well as people want to make less trips to the -- to go out. So hopefully it turns out to be a long-term benefit for the legal industry.

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Operator [11]

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Your next question comes from Doug Cooper from Beacon Securities.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [12]

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Congratulations on a great quarter. Just want to follow up your comments of 20% market share of the OCS in April. Can you talk a little bit about the breadth of your distribution beyond the OCS in Ontario?

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Stephen C. Ruffini, Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director [13]

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Doug, Steve. We don't -- unfortunately, other provincial governments don't provide that to Pure Sunfarms, so I -- pure conjecture. I know other people say they're X percent of the total market, but we've asked Pure Sunfarms what the market share is in these other provincial sales, and they said they don't have the information. So we can't -- we're not going to report what we can't support.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [14]

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Right. What about just how many doors are you -- or how many actual retail stores is your product available in Ontario of the actual retail stores, what percentage?

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Stephen C. Ruffini, Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director [15]

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I don't know. I haven't asked the Pure Sunfarms team. They might know that. I can get back to you maybe, but I don't know.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [16]

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Okay. Do you -- just in terms of the large format. Can you just remind us what the THC level is in that? Is it sort of 18% to 22%? Is that the sort of range selling in?

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [17]

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Yes, I think -- we don't want to -- look, it varies somewhat, but -- I mean, that 28 packs Indica and it's -- the sweet spot there is probably in the 15 to 16 range. We're always striving to get that balance better and improve on that. But for the most part, that's the current range that it's in and being well accepted there.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [18]

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Okay. Can you talk about -- there's some other kind of value packs being offered in the marketplace. What is the price advantage or the -- that you have over those other value packs in terms of -- well, I guess, in terms of where the retail is pricing them?

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Stephen C. Ruffini, Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director [19]

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I guess, it's where...

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [20]

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Well, I think what we heard from Ontario, that's the lowest -- We have the lowest price. They're selling at the lowest price they have. They've come off 25%, as I said. And our product is being sold at the lowest price. But I think the key differential to anyone else is we're profitable doing it.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [21]

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Right. And is it retail -- just remind us, is it around $99 before [HSD] that we're at?

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [22]

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Yes.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [23]

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Okay. I think you guys mentioned, unless I missed it on the call, the strategy for opening up D2 given this environment?

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [24]

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We're going to wait and see what transpires here. I mean, look, we don't know -- there's so many moving parts, I mean, where the pandemic changes or what happens in the fall. So we wanted to be very cautious because till there is a resurgence of the bricks-and-mortar stores, we don't want to have an overcapacity. It's a prudent thing to do. And we're -- actually we'll monitor even Delta 3. We're very focused on having how capacity meet our demand. And we can even cut that back. I mean, remember, Delta 3 has 16 grow rooms. So if we wanted to cut that back to 14 or 13, we could. And then half of Delta 2 is ready to go. So we can move that going forward towards year-end or the beginning of the year as we see where the market goes.

So the good news is, long term, we can double our capacity with the same cost structure, which I think is now starting to prove how it differentiates us from the competitors, and get to a double capacity going forward. And at the same time, if we have to curtail with 16 grow rooms in Delta 3, we can adjust that pretty quickly. As you know, it's an 8-week cycle for us inside the flower room. So -- but we just have to monitor it because it's really hard to see what the demand is going to be in the current situation.

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Operator [25]

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Your next question will come from Rahul Sarugaser from Raymond James.

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Rahul Sarugaser, Raymond James Ltd., Research Division - MD and Equity Analyst of Healthcare, Biotechnology & Cannabis [26]

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Let me reiterate, congrats on a strong quarter and also really like 6 straight quarters of positive EBITDA. That's really unprecedented in this industry. So huge congratulations to you and the team.

So there's been a lot of questions on the retail, and of course, that's really important. I wanted to sort of focus on your product split. We saw that there's been a real reemergence of wholesale, almost sort of about 50-50 split between your adult-use and your wholesale. So where do you see that wholesale going? Do you see that being durable? Do you see that being essentially a larger proportion of your revenue, particularly as the market continues to sort of be slow? And then sort of as a follow-up to that, like who do you see as the primary buyers, are they extractors, are they other LPs, because that really kind of speaks to the competitive advantage that you guys are building?

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [27]

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Yes. I think our strategy is to be a fully vertically integrated company so that ultimately means that we want to control our whole production and everything we do into Cannabis 2.0 ourselves. So yes, I think the retail, at the end of the day, we're shooting to be a very high percentage of retail at the 60%, 70% level, let's say. So to the extent that wholesale is there, and you're always going to have to have another outlet because of quality, consistency, that's just the way it is. It's still a farm product, right?

But I don't know what the future is going to hold on wholesale. I mean, I think it would probably be working more with extractors for the foreseeable future. Believe it or not, there are other LPs that are asking us for product. And I'm a little bewildered by it, but maybe it has to do with cost structure. But I think as this contraction takes place in the industry, at some point, that's going to really change what the dynamics between wholesale and retail for us are. Everybody is still in the game right now, even with tremendous losses, on a quarterly basis, that we're seeing, because they think as long as they are able to get financing, there's just -- there's like 50-plus suppliers in the industry. It's just way too many, and I think that's going to have a varying impact on the wholesale dynamic. So I would think -- to answer your question, more or less, retail, we're shooting at retail as a larger percentage of our overall revenues.

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Rahul Sarugaser, Raymond James Ltd., Research Division - MD and Equity Analyst of Healthcare, Biotechnology & Cannabis [28]

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Great. That's very helpful. And then sort of moving forward now to Cannabis 2.0. So you guys, as you said, Mike, as second mover, you were able to use your cost advantage to drive -- grabbing market share in the whole flower segment, and what we're also seeing is likely in the wholesale segment over time. And again, like you said, you were able to actually do that profitably. When it comes to Cannabis 2.0, the cost of goods of the flower is less of a key component, whereas formulation and intellectual property tends to be a driver of cost of goods. So how are you managing your strategy in Cannabis 2.0 when your cost advantage in cultivation is not as strong as it is in Cannabis 1.0?

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [29]

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Yes. I think -- yes, to a degree, it's an ingredient. But what we've done is like we've done in the past and Pure Sunfarms has done, and I think they've been [building] about it, as they've watched everybody else position, pick a product, I don't know, chocolate, [dates], whatever, and see how they positioned pricing, and then they've come back in and analyze where they can be overall. So I think, more importantly, at the end of the day, I know they can be much more aggressive than -- that's why they wait to see where the market is and the pricing structure. And then that evaluation, and I've seen that, has shown that they can be very aggressive over the competition. So even though it may be an ingredient, it's still -- that -- it still adds up to having an advantage.

And keep in mind, that's the margins that you have -- the margins of 70% or 80% are just not realistic. I mean, at the end of the day, it's a CPG product. And as it matures out, I think it's going to have typical average CPG margins in the 30%, 40% range. And I think we're going to compete very well there. So again, I think it's a great question that can be better answered on the third quarter conference call.

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Operator [30]

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Your next question will come from Scott Fortune from Roth Capital Partners.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [31]

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Congrats on the quarter. A lot of the questions have been answered. But I don't know if you break it down percentage coming from Ontario and the different provinces. But can you provide just a little bit of color from Alberta and BC as far as the ramp or reorders are going there compared to what you experienced in Ontario at all? Just kind of the throughput and reorders velocity from that standpoint.

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Stephen C. Ruffini, Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director [32]

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Yes. I mean the reorders are coming in, and that's something, actually, Scott, that we're looking at is what's unique about, at least from my experience, unlike dealing with the large retailers here in Canada, the U.S., where we're rolling out our forecast and what we're going to be doing a year ahead of time, it's really not that way currently in the cannabis sector in Canada. So it's hard to get more of a handle on these projections going forward. But we are sitting in a good position in British Columbia, and we just started with Alberta recently. So I think it's too early to say. That was something that finally we got going actually in the first quarter. So I'd probably just feel better answering that question when we get some traction towards reporting the second quarter.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [33]

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Okay. And then I know you guys are continuing to explore the other provinces, congrats on Saskatchewan, but -- Québec and then 2 other large provinces that you guys look at?

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Stephen C. Ruffini, Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director [34]

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Well, obviously, the apple of our eye is Québec, but hopefully, that will happen sometime soon, but I don't know -- we're not -- Mike and I are not involved in the day-to-day, but I know there's ongoing discussions there.

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [35]

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I've asked about the Yukon, too, so I'm waiting to see...

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Operator [36]

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And our final question for today will come from Eric Des Lauriers from Craig-Hallum Capital.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [37]

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First one for me, a bit of a follow-up on the previous question. I'm just wondering if you guys have noticed any change in regulators appetite to either sign additional supply agreements or to license additional retail stores in light of COVID. Just any kind of impact that COVID may have on regulators signing the supply agreements or opening retail stores from your guys' point of view?

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Stephen C. Ruffini, Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director [38]

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No, not tied to regulation that we're aware of. Just -- it's just kind of compressed and slowed things down, so -- but we haven't seen anything unusual, just a slowdown because of the essential business issues, in general. So we haven't. Just like in the U.S., we haven't. But I will want to say, with the U.S., I know that's not part of your question, but we're starting to see some political flavor towards looking at decriminalization of cannabis, I think, due to the pandemics, probably not the way we wanted to get there. But again, that's a big possibility for Village Farms in the future, should that happen in the next year or so. And so that's a regulatory issue that we're looking very clearly in the U.S. that would be beneficial to us going forward.

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Eric Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [39]

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Okay. That makes sense. And then last one for me. Great to see the kind of impact that your low-cost bulk products has had in the market right now. Great demand, obviously, seeing increased market share. You guys mentioned that you have new bulk products coming out, the sativa blend as well as some 14 gram products. Anything you can share on sort of when you expect that to maybe hit your guys' retail sales?

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Stephen C. Ruffini, Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director [40]

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It's launched. I mean it's launched. I -- we haven't seen POS data, but I think the initial shipments have shipped in whichever provincial governments are taking in. So we'll have more to report on that, but hopefully, that does garner Pure Sunfarms additional market share in the market those SKUs are in.

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [41]

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Thank you, Michelle.

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Operator [42]

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You're very welcome.

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Michael A. DeGiglio, Village Farms International, Inc. - Founder, CEO, President & Director [43]

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Thank you, everyone. That will conclude the call, and thank you for participating today. It's much appreciated, and wishing everybody to be safe. Thank you.

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Operator [44]

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Thank you, everyone. This will conclude today's conference call. You may now disconnect.