Village Farms International, Inc. (NASDAQ:VFF) Q2 2023 Earnings Call Transcript

Village Farms International, Inc. (NASDAQ:VFF) Q2 2023 Earnings Call Transcript August 9, 2023

Village Farms International, Inc. beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.04.

Operator: Good morning, ladies and gentlemen. Welcome to the Village Farms International Second Quarter 2023 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the second quarter ended June 30, 2023, 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 replay are available in today’s news release. Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call.

Certain material assumptions are applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in the company’s various securities filings with the SEC and Canadian regulators, including its Form 10-K, MD&A for the year ended December 31, 2022 and 10-Q for the quarter ended June 30, 2023, which will be available on EDGAR. These forward-looking statements are made as of today’s date. And except as required by applicable securities law, we undertake no obligation to publicly update or revise any such statements.

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

Michael DeGiglio : Thank you, Lisa. Good morning and thank you for joining us for today’s call. With me are Village Farms’ Chief Financial Officer, Steve Ruffini; Village Farms Head of Canadian Cannabis, Mandesh Dosanjh; Ann Gillin Lefever, Village Farms, Executive Vice President of Corporate Affairs; and Patti Smith, Vice President of Corporate Control. As per our usual format, Steve and I will review the operating highlights and financial results for the quarter and then open the call for questions. Turning now to Q2’s highlights. We’re very pleased with Q2 significantly improved financial results, which builds on our very solid start to 2023 last quarter. There are three noteworthy highlights. First, we delivered continued strong and consistent growth in our Canadian cannabis retail sales, fully aligned with our strategic goal to be a leader for the long term and the largest federally legal cannabis market in the world.

Second, we have stabilized our U.S. cannabis business and in fact returned it to sequential top line growth, while generating profitability and positive cash flow. And our fresh produce business saw another quarter of significant year-over-year improvement. Importantly, with our fresh produce strength of our strategic decision to build upon our unmatched expertise and controlled environmental agriculture to deliver leading revenue, profitability and ultimately cash flow in each of our businesses. To do this, we lean heavily on the breadth and depth of our multi-talented teams’ capabilities and we leverage our wealth of experience to succeed even in difficult market and regulatory conditions and unfavorable economic cycles. Not to mention the artificial pricing environment in the Canadian cannabis industry due to the lack of enforcement of the illicit market.

Addressing each of these businesses in detail, I’ll begin with the continued improvement in fresh produce. Against a still challenging macro environment, most notably, high interest rate and high inflation, we continue to see the benefit of the actions we have taken under our ongoing plan to return the business to sustainable long term profitability including our significant progress in managing the Brown Rugose virus, while increasing our planting of virus resistance strains. Fresh produce delivered its fourth consecutive quarter of sequential improvement and generated positive adjusted EBITDA of more than $1 million. This is an improvement of nearly $12 million from Q2 last year, which brings the improvement in adjusted EBITDA for the first half of 2023 close to $17 million and moved our year-to-date EBITDA into positive territory, a committed effort by our entire Fresh team.

Execution on the multi-product operational plan for Fresh continues. We are committed to long term continuous improvement to partner with our customers and win with consumers. We are strengthening our operations with investments in infrastructure and technology, including artificial intelligence for crop management, the initial results of which are very encouraging. We are planning more virus resistant strains which will continue over the next few years. We’ve also been able to turn our attention back to important growth initiatives like product innovation, where we have had great success in the past with development of exclusive varieties that command higher margins. As an example, one of our newest products Sensational Sara is a novel tomato variety that has a perfect natural balance of sugar and acid and has been a hit with both retails and consumers.

It also marks a debut of our new sustainable packaging solution for produce, biodegradable and recyclable that also addresses safety and shelf life. With the first half of 2023 in the books, fresh produce continues to attract towards our goal of achieving positive adjusted EBITDA for the full year. Turning now to our Canadian cannabis business, which continue to deliver standout performance. Retail branded sales for Q2 grew 24% year-over-year and 8% sequentially, both well ahead of underlying market growth. We delivered our 19th consecutive quarter of positive adjusted EBITDA and importantly, we were profitable on a net income basis. We have proven again that Village Farms Canadian cannabis business has the best organic growth story in the Canadian cannabis industry.

Our growth has been achieved at a fraction of the capital costs of most other large LPs. And we have done so faster, absent a first mover advantage. The majority of that growth has been generated internally and not purchased. Our one and only acquisition in Canada, Rose LifeSciences in Quebec has posted a 300% sales growth since acquisition, more than tripling market share as it contributes meaningfully to the growth of the cannabis industry in a very important province of Quebec. Rose has proven without any doubt in my mind to be the best acquisition ever done in the Canadian cannabis industry to date, bringing with it invaluable insight and capabilities around consumer trends, product innovation and distribution, as well as industry relevant management expertise.

Our Canadian cannabis results are very much the product of our deliberate strategy to realign our business to continue to win in an environment that, as we accurately predicted, would not see any relief from the challenging conditions I described earlier. We are managing our business for the realities of the market that we have today, which is a long way from a normalized CPG playing field. The expected thinning of both competitors and excess capacity has been slow and protracted, and there has been no tax relief and very little enforcement of illicit trade, and I predict we will never see any real enforcement in Canada. To be clear, I’m not complaining. It is simply what it is, and we must manage accordingly. So on the production side of our mandate — on the production side, our mandate has been to manage output levels to match supply with expected demand.

We have placed an elevated importance on the production protocols, building on our industry lead, aimed at consistently generating efficiencies. Steve will speak more to this in a few moments. We are actively, prudently, and continuously managing our cost structure for our growth forecast, and we have successfully increased our market presence and coverage, transitioning from a branded house to a house of brands as consumer preferences evolve. Since the start of 2022, we have launched seven new brands to address consumer trends and preferences, building on our original Pure Sunfarms brands domination in the core price segment of the flower category and added more than 300 new SKUs. Our Soar brand launched less than a year ago, quickly became the top-selling premium brand in the flower category in Ontario.

Meaning, we now have two number one flower brands in their respective price segments in Canada’s largest provincial market. And Fraser Valley, which was launched just a year ago, is not only the third best-selling flower brand in the value category in Ontario, but also continues to be the fastest growing. Adding to this brand triple threat, last month we launched Super Toast, which is uniquely focused on convenience and ready-to-go products, and which is off to a great start. And further, in just a short period of time, Promenade has become the second largest selling brand in Quebec. At the top line of the Canadian share rankings, with a number of the large early leaders having given way to smaller up-and-comers, we stand out as consistent performer, maintaining a top three position nationally in Q2.

In Quebec, Rose became the top-selling producer by market share and dollars in Q2 and was the fastest growing producer. We achieved this in what has been an increasingly competitive environment there. And notably, with the addition of Hexo’s distribution in Quebec, Rose now touches approximately one-third of every dollar cannabis sales in that province. Soon, we will start preparing a portion of our world-class indoor facility in Quebec for supply to our growing export business for 2024 and beyond. There is clearly a lot going on very well and a lot to be proud of on our Canadian cannabis business. But there is also a number of areas that we are working on to deliver future growth, and I’d like to share those as I always do. Our data shows that in some markets, more than 70% of SKUs and products on the shelf today were not in existence a year earlier.

We have seen some dampening of our overall market shares, we under-indexed on newness in the core price segment. We have plans to return to being a meaningful contributor to the innovation and growth of the core segment, which is important for our retail partners. Q2 saw a marked increase in the number of our new product launches in the core price segment, with four new strains in flower and our all-new high THC-1 gram vapes with high-performance hardware. These are formulated to maximize potency and flavor, with seven flavors rolled out initially. We’ve added even more new strains in July with a very active launch calendar throughout the remainder of this year that includes more new strains, more new vape flavors, and new infused pre-rolls across our brand portfolio.

In Quebec, we launched 15 new SKUs under the first protocol this year, and targeting another healthy number of launches later this year. As we innovate, we are continuing to elevate quality, delivering bigger and better buds through harvesting and trimming, enhanced bud sorting and hand packing, achieving better moisture levels through our drying process, and offering humidity packs of Soar and Pure Sunfarms flower. And we are delivering quality on a more consistent basis with enhanced Q&A controls. Again, this is part of our commitment to continuous improvement in every part of our organization, even those in which we are excelling. This is our DNA. We have also dealt with some internal supply issues for our market-leading flower strain, Pink Kush, as it exhibited longevity with [consumers] (ph) that is uncharacteristic of most products in the Canadian market.

The good news here is that, our Pink Kush has proven that Canadian consumers will stick with great products, and we have the ability to offer those great products. We have addressed those supply issues and expect Pink Kush sales to respond accordingly. Importantly, we do not believe that price increases we took on certain high-velocity SKUs had any meaningful impact on share in Q2. We’ve worked closely with provincial partners on the implementation, and I’m encouraged by markup changes that the OCS is planning for the second half of 2023. It would make sense for other LPs to take opportunistic price increases as well. Village Farms is a 30-year-old company which is executing a successful organic growth strategy in two complementary and international businesses, fresh produce and cannabis.

We have learned a lot about our capabilities, which we are consistently pushing the team to continue to exploit for future growth. We continue to pursue opportunities in those international cannabis markets where the rules are known and clear through both our rapidly growing export business from Canada and in-country market opportunities to come. Q2 is another strong quarter for export sales, which are up more than 200% year-over-year, and we expect future growth as we continue to monitor medicinal and recreational regulatory developments, particularly in Europe. Turning now to our U.S. cannabis business, Balance Health Botanicals, sales for the second quarter increased sequentially, while generating positive net income, positive adjusted EBITDA, and positive cash flow.

The success of our innovative new products and prudent cost management have stabilized this business as the overall CBD industry has contracted. We continue to believe, however, that the U.S. market for CBD and other cannabinoids will be a high-growth multibillion-dollar opportunity with the benefits of regulatory oversight to open mass market opportunities. We remain encouraged by what appears to now be progress on the U.S. CBD regulatory and political front. We are compliant with current FDA rules for other food and drink ingredients and good manufacturing practice standards under the [NSF] (ph) organization, a track record of safety, and stand ready to work with regulators to realize this industry’s full potential. And we have been underwriting multiple studies that support the efficacy of our products.

In other words, we are ready to go. At this point, I’ll turn it over to Steve for more detailed review of our finances.

Stephen Ruffini: Thanks, Mike. This quarter, I want to begin by reviewing our significantly improved profitability that Mike discussed earlier. Consolidated net loss for the quarter improved to $1.4 million loss or a loss of $0.01 per share compared with the net loss of $36.6 million or $0.41 per share in Q2 of last year. Our consolidated operating loss was close to breakeven at just negative $42,000. Again, a significant improvement from Q2 last year’s operating loss of $43.8 million, which included a $30 million goodwill impairment. Our result for Q2 this year was driven predominantly by the improved operating performance from fresh produce. Consolidated sales for the second quarter were $77.2 million, a decrease of 7% from Q2 of last year, with the decrease primarily due to lower volumes from our third-party growers in fresh produce.

And lower non-branded sales from our Canadian cannabis businesses, which were dampened somewhat by a reporting currency of U.S. dollars due to the weaker Canadian dollar in 2023 versus 2022. Consolidated adjusted EBITDA for Q2 came in at $4.5 million, our second consecutive quarter in positive territory, and nearly a $15 million improvement from the negative $10.3 million in Q2 last year. Again, this was driven mainly by the improvement in fresh produce, but also higher EBITDA from our Canadian cannabis business, as well as lower corporate costs, excluding stock compensation, which fell to just under $2 million. I will now review our Canadian cannabis results, which, as usual, I will discuss in Canadian dollars to provide more accurate comparative without exchange rate fluctuations.

Retail branded sales, which represent the vast majority of our Canadian cannabis sales, increased 24% year-over-year, once again outpacing the overall Canadian market growth by a wide margin. International exports from Canada of nearly $1.9 million from $600,000 in [Q] (ph) last year is nearly a threefold year-on-year increase. Non-branded or wholesale sales of Q2 were $3.9 million, which compares with $10.3 million in Q2 from last year, and especially outsized quarter for non-branded sales. We are seeing renewed inquiries recently for non-branded sales and will continue to operate our non-branded channel opportunistically, being selective around our participation in the current market environment, always with profitability in mind. These channels netted out to total Canadian cannabis sales of $37.7 million, compared with $38 million in Q2 of last year.

Gross margin for Canadian cannabis of Q2 was 38%, compared with our reported 39% for Q2 last year, which included a purchase price inventory adjustment in that period. Excluding last year’s purchase price adjustment to our cost of sales, our Q2 2022 gross margin was really 33%. The year-on-year increase was primarily related to the higher proportion of retail branded products sold in Q2 of this year versus last year. Earlier, Mike mentioned our redoubled focus on realizing production efficiencies, generating more output per dollar spent. We are realizing improved efficiencies through the optimization of growing space during the best growing seasons and continued refinement of our cultivation practices, as well as strategic pruning unintended of input costs.

We’ve also realized a 2.5 times improvement in our overall pre-roll production per hour, as we move manufacturing entirely in-house, which we expect to have completed this fall. Selling general and administrative expenses for Canadian cannabis for Q2 were $10.5 million, or 28% of sales, down slightly from $10.9 million, or 29% of sales in Q2 last year. As Mike highlighted, our Canadian cannabis operations delivered their 19th consecutive quarter of positive adjusted EBITDA of $6.7 million, which was up 97% from $3.4 million for Q2 last year, and up 26% sequentially from $5.3 million in Q1 of this year. Notably, our adjusted EBITDA margin doubled from Q2 last year. Canadian cannabis also delivered positive net income, which came in at $1.7 million, as well as positive cash flow after capital expenditures and all debt service payments.

I will now turn to our U.S. cannabis business and revert to U.S. dollars. To reiterate Mike’s comments earlier, we have stabilized this business from both a sales and profitability perspective. U.S. cannabis sales for Q2 generated entirely by Balanced Health Botanicals of $5.3 million, compared with $5.8 million in Q2 last year and $5 million in Q1 of this year. I will note here that this year’s Q2 sales were dampened by two factors specific to the quarter. First, we were out of stock in two of our best-selling gummy SKUs due to the bankruptcy of our supplier. We have begun shipping these specific SKUs from our own manufacturing facilities this week. Second, in Q2 there was a change by a major online search provider in an algorithm, which affected our affiliate partner sales.

U.S. cannabis gross margin for Q2 was 67%, up slightly from 66% from the same period last year. Adjusted EBITDA for U.S. cannabis was positive $400,000, compared with negative $600,000 last year, a $1 million improvement, and U.S. cannabis generated a net income of $200,000, as well as positive cash flow in the quarter. Turning now to fresh produce, we delivered our fourth consecutive quarter of sequential improvement and a second consecutive quarter of significant year-over-year improvement. Produce sales were $43.8 million, which was down 7% from $47.2 million last year. The decrease was primarily due to lower volumes from third-party growers, as we lost two of our larger supply partners at the end of 2022, one of which left the fresh produce space, but are picking up new growers in the forthcoming crop cycle and expect to fully recover to our former level of third-party sales by the end of 2023.

Sales from our own facilities are up year-over-year due to higher prices in a better market environment, more than offsetting our reduced production footprint in 2023 versus 2022. As I noted in our last call, our average selling price is benefiting from our focus on more profitable customers, with a higher percentage of produce sales going direct to retail accounts. I am pleased to report, with the continued improvement in our operations, fresh produce achieved positive adjusted EBITDA of $1.3 million. That is an $11.6 million improvement over Q2 of last year and a $2.3 million improvement from Q1 of this year, which pushed adjusted EBITDA for the first half of this year into positive territory. With the stabilization of the macro environment, our ongoing improvements in managing the Brown Rugose virus, and our focus on customer profitability, we continue to be confident in our substantially improved financial performance for this business in 2023.

Our net loss from fresh produce improved to a negative $700,000 for the quarter. Turning now to cash and the balance sheet. At the end of Q2, we had cash of $31.7 million, compared with $34.9 million at the end of Q1 of this year, and $84.9 million in working capital, up from $80.3 million at the end of Q1. Both are significant improvements from $21.7 million and $60.8 million at the end of last year. Total debt at the end of Q2 was $51 million, down slightly from $53 million at the end of Q1 on a stronger Canadian dollar versus U.S. dollar in Q2 versus Q1. The sales process for our Monahans facility in Texas continues to advance with expressions of interest expected during this quarter. Finally, I’m pleased to report that we are forecasting not only continued positive cash flow from our cannabis division, but also positive consolidated cash flow from all operations for the third quarter of 2023.

And with that, I’ll turn the call back to Mike.

Michael DeGiglio: Well, thank you, Steve. I want to reiterate one point about what we are building at Village Farms, which I think gets lost in all the headwinds of 2022-2023, some of which we got caught in as well. The Village Farms model is a proven decades-long survivor of the intersection of a cyclical agriculture industry and a branded consumer products business. We understand both, and we are very focused on deploying our considerable expertise in each for industry-leading returns in cannabis and produce. We are not distracted by non-core businesses. We are not dealing with the legacy of poorly thought through investments made when capital was cheap and abundant. We have not gambled on a diversification strategy as the only path forward.

We are equally focused on delivering profitable growth with a prudent capital mindset, investing where there is regulatory clarity. I keep hammering in the organization on focus because we believe it is the most important factor to drive organic top line growth and take an outsized percentage of category profitability. We are already doing this. We believe organic growth, leaning on partnerships, alliances and collaboration with very selective high quality investments at this point of the industry life cycle is the right path to creating shareholder value. That is our ultimate focus. I’ll now turn things over to the operator for analyst questions. And while the operator queues up for questions, I will comment on one question we’ve received regarding our NASDAQ status.

So we received quite a few questions regarding that, and I’ll address that here. We are currently on extension with NASDAQ and we are extremely confident that we will be able to get another extension come the fall that will take us well into 2024. Equally, although we are very confident that we will remain on NASDAQ and want to, we are also investigating what some other MSOs in the US have structured on the TSX, and some Canadian LPs are even working with the NASDAQ to find a structure that will allow them to compete in the U.S. market. So not that we’ll necessarily go down that path, but we are investigating it. Now, as just a reminder, coming out of 2022-2023, post-COVID, I think around 25% of all NASDAQ companies are trading under a dollar currently, just a sign of the time.

So we’re very confident that our share price will be increasing, and if not, our extension will go through into 2024. With that, operator, turn it over to you for analyst questions.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question today is coming from Aaron Grey of Alliance Global Partners. Your line is open.

Aaron Grey: Hi, good morning. Thank you for the questions, and congrats on a strong quarter across the board. First question I have is on Canada and the price increases, specifically around that and share performance. You mentioned, Mike, that you don’t believe the price increases had an impact on share, that’s great to hear. Your sales outperformed the POS data. I fully understand, as you’ve cautioned it number of times, be careful at reading the POS data versus your sales because your sales are to prevent a bores, but can you speak to the delta that we’re seeing there because there was some share softness in the POS data that seemed to somewhat align with the price increases, but you’re not seeing it on your end. So maybe if you can kind of speak to the POS and kind of what’s giving you that confidence that those price increases are not having an impact for you. That’d be helpful. Thank you.

Michael DeGiglio: Yes, as I said, we’re not seeing it, but I’m going to give more color to you, Aaron, from Mandesh. Go ahead, Mandesh.

Mandesh Dosanjh: Thanks, Mike. Hey, Aaron, thanks for the question. So Mike touched on a lot of the topics, but what we’re seeing in the quarter, we’re very consumer driven, insights-driven, looking at our product innovation strategy, and we know newness drives a lot of that growth and maintenance of sharing and growth of share. We did have quite a bit of newness in this quarter and more coming. We did see some of that newness come late to the quarter, specifically around our vapes, our all-new vapes, which are performing ahead of our expectations and we’re going to continue to innovate and push on that. And then with some of our flower strains, some of our high-performance, high-potency strains, seeing really good uptake. Couple of them indexed kind of medium to lower end on the potency scale, and we know that right now in the industry there’s just really a hyper-competitive factors at play.

The never-ending chase for potency, we’re seeing really poor dynamics in terms of how people are pricing their products to try and gain share. We don’t believe it’s profitable share, so we think that the time and the [indiscernible] the runway will run out for those folks on how they’re trying to come to market and gain that share in the short term. So we see that competitiveness there on the potency price equation. And then what we’re also seeing is, because there’s still this abundance of supply, people are really taking premium product and throwing it into value pricing. So that creates some unstable dynamics in the industry, and I think everybody was impacted a little bit by that. So hopefully it gives you the right color around kind of what we’re seeing in the industry.

And then your second part of your question was around, what gives us confidence. And again, Mike alluded to something very important is that, specifically around Pink Kush and some of our longer term strains, Pink Kush being the first focus, and then Fraser Valley being an entire brand in the value space, we see great resilience and performance. And when I’m in market myself and with the team, we talk to stores and consumers, they love our products. So there’s a lot of noise right now, there’s a lot of news every quarter, every month, and we just got to keep fighting that battle and keep doing what we’re doing, which is, launching great products, great strains, bringing amazing brands to market, not just in the Pure Sunfarms portfolio, but also in the Rose portfolio, and picking our spots to win and improving our margins, as you saw what we did this quarter with continued cost reduction and executional focus.

Because for us, it’s a little profitable share. So, we took it a little bit on the chin here and there, but we like where we’re positioned and we like our positioning for growth in the upcoming quarters.

Aaron Grey: Thanks, Mandy. That was really helpful color. I appreciate that. Second question for me, I want to shift gears a bit, we don’t always talk a ton about CBD, but you mentioned some things in your prepared remarks, Mike. So, wanted to get your perspective on line of sight of how the farm bill might potentially drive change at the regulatory level for CBD and other minor cannabinoids? I think you have a unique perspective at Village Farms because you’ve obviously had a lot of interaction with the Farm Bill just from the legacy business over the years, I’m sure. So, anything you might anticipate in terms of changes to regulations and the 2023 Farm Bill? And then, what impact it might have on minor cannabinoids, such as Delta 8, states have taken various action, some banning, some putting regulations and age limits on it. So, any implications you might have for the Farm Bill and how that might change the dynamics and impact the business? Thank you.

Michael DeGiglio: Well, the past Farm Bill was so profound. It really kicked off the whole CBD industry as a start. So, there’s not a lot of leakage coming out of the USDA and what they’re looking for. We don’t expect to see some tangible color on that till probably October-November. But we are bullish that there will be some changes like on Delta 8. I don’t believe Delta 8 is going away. I don’t necessarily believe in it, but I think it’s here to stay. But I just don’t think there’s going to be tremendous change. But on the CBD side, I mean, we’re encouraged that the Farm Bill may help us, but we’re also encouraged that we’re starting to see a big number of congressmen that are now putting pressure on the FDA. And I think that’s even a more important development because really the FDA controls the [purchasing] (ph), so to speak.

They are the ones that are being sort of negative towards any movement forward. And that’s what we as a group and industry are working towards. So I think that’s the bigger — the bigger win is, what’s the FDA going to do in 2024. But we’ll probably have some better color when we talk to you in November on that, Aaron.

Aaron Grey: Okay, great. Appreciate the comment. I’ll jump back in the queue.

Operator: Thank you. One moment for our next question. And our next question will be coming from Frederico Gomes of ATB Capital Markets. Your line is open.

Frederico Gomes: Hi, good morning. Thank you for taking my questions. Congrats on the quarter. Just first on your — Mike, on your comment about these [indiscernible] uplistings and how you look at that. I’m just curious, if you have any update on the Texas medical cannabis application and when you look at the U.S. market, is it really about Texas for you or would you consider other potential markets as well? Thank you.

Michael DeGiglio: Well, it’s overall for the US. Look, it remains a huge market for us and we’ve done tremendous amount of homework internally and we don’t think we’re disadvantaged to enter the US market upon decriminalization or legalization. Because we believe that there are some great companies out there that are executing very well today. However, I think, the game is going to change, really coupled to interstate commerce and where that’s going to go. And I think that’s where we’ll shine. I mean, our Texas assets, again, are — we believe are probably the best assets and best location for high-quality, low-cost cannabis that can be delivered throughout the United States. And that’ll make us compete, we believe, at any point in the future.

But we’re not going to sit here and just waste time waiting for that to occur. We’ve heard so many promises on the U.S, front, it’s really ridiculous when you think about 35 or 36 states that are legal for cannabis, medicinal or recreational. Just being in New York, there’s 1,400 illegal dispensaries operating in cannabis on every corner, but yet the federal government is really not moving forward. So, before I answer about Texas, that’s why we’re very focused on international, especially Europe, where the clarity is there, the decriminalization is occurring. We believe it’s going to be a huge potential market and we believe we can leverage everything we’ve done in Canada and Europe, and win there, along with collaborations and alliances, as I mentioned.

Regarding Texas, it just blows our mind here with all the effort we’ve put forward in Texas, how it really comes down to one individual that controls not the 30 million people, the size of the Canadian market in Texas to not move the medicinal program forward. That was a real disappointment during this last legislative session ending in late May. The next round is two years away. However, Texas is granting additional medicinal licenses. We’ve applied for one, so we’ll probably move that forward. We’re hoping we’ll know if we’ve been allotted one in the fall. And that’ll help position us a step forward to the future. So I hope that gives you some color, Frederico.

Frederico Gomes: Yes. Thanks for that. And then just on international, you mentioned, how should we think about growth in that segment? I know that you had a good increase there this quarter, but in terms of the ramp and how volatile those international sales can be. And just tied to that, any updates on the Netherlands? Thank you.

Michael DeGiglio: Yes. I think the international side, I mean, you could see that it will be lumpy at times, because it’s very nascent and it’ll get going. So I wouldn’t have an expectation that the growth curve is going to be sort of steady and steadily increasing. But it will year-over-year increase. We are very bullish on that. You’ll maybe see some compression at times like Israel, due to some political issues going on there and others. But really, the EU is the market we’re focused on. Germany is leading the way, but France, Italy, Poland, all these other countries are looking at the German regulatory process that they went through. And it’s happening. So, there’s a number of competitors looking at that market. Some are in, some have spent just eons of money without the clear path.

We’ve been prudent with that as we’ve reported to wait till the clarity was there. It is there. We’re going forward, increasing our sales and our effort going forward. This is all medicinal. We anticipate that the majority of the European market will just operate on a medicinal platform for at least the next three to five years. With the exception of certain countries, Luxembourg, and specifically the Netherlands, where we’re one of the 10 license holders, as you know. We’ve secured two out license with two locations. And there was some slight change in the government recently. Don’t think it’s going to impact our ability to move forward, which we hope that will commence in the fourth quarter of this year. But we’ve always prudent before we push the final button to make sure that the political situation is solid.

So, I think we’ll be able to update you clearly by November on our progress there.

Frederico Gomes: Great. Thank you, and congrats again on the quarter.

Michael DeGiglio: Thanks, Frederico.

Operator: Thank you for your question. One moment please for the next question. And our next question will be coming from Eric Des Lauriers from Craig-Hallum Capital Group. Your line is open.

Eric Des Lauriers: All right. Great. Thank you for taking my questions. I apologize if this was addressed already. I’m [indiscernible] another call. But I was wondering, first, if you could expand on the guide for positive consolidated cash flow in Q3. Just wondering if you could just expand on that a bit and help us understand the primary drivers of that? Thank you.

Michael DeGiglio: Primary drivers of that are the management of our current assets. Some of those current assets are going to flip from receivables to cash. So it’s going to be a very strong cash collection quarter across all our business lines. So, it’s pretty straightforward. We’re, obviously — we’re a good bit in, six weeks into the quarter, so with confidence that — we’re very confident that is occurring in real time. Simple as that.

Eric Des Lauriers: All right. Great. Thank you. I appreciate that. And then my next question is just on the investments in produce and your overall infrastructure and AI technology, et cetera. I’m just wondering if you can help us sort of frame the either expected CapEx involved or expected timing of this. You characterized it as continuous improvement. So, I’m assuming it’s not necessarily just like — there’s a sort of set date where everything will be completed. But just if you can help us kind of frame that in terms of either timing or dollar amounts, that’d be very helpful. Thank you.

Michael DeGiglio: Yes. So Texas operates predominantly not on a calendar year, but on a crop cycle, which commences — starts the beginning of that crop cycle, depending on which asset we’re talking about commences in June and sort of is in full plant out mode by September and then runs through the following summer. So, we have done two years of experiments with the investment in AI in one of our facilities over the last two years and have rolled it out completely now in all Texas facilities. And in fact, we’re rolling it out in our Canadian Delta facility and plan to roll it out next year as well in cannabis. It’s proven to be a great partner to our growing operations. Secondly, this year alone, we’ve already spent in the last four or five months approximately $3.5 million in capital improvements in packing technology, sorting and grading for efficiency, cutting labor costs, as well as shading systems and new technology across the board from irrigation, CO2 capture and whatnot.

So, yes, so we — all of it is about continuing — continuous improvement to cut our costs and increase our quality and yield going forward. We already have plans for 2024 CapEx improvement in all our facilities as well. So is that enough, Eric?

Eric Des Lauriers: Yes. So I mean, so you’ve spent the $3.5 in CapEx thus far. Do you have a figure for us either in sort of second half or into 2024 that you’re willing to share now?

Michael DeGiglio: Not for 2024, because we haven’t finalized that, but possibly in November.

Eric Des Lauriers: All right, great. Thanks.

Operator: Thank you. One moment for our next question. And our next question will be coming from Douglas Cooper of Beacon Securities. Your line is open. Douglas Cooper of Beacon Securities. Your line is open.

Douglas Cooper: I was on mute. Sorry for that. You got me now?

Michael DeGiglio: Yes, we have you, Doug.

Douglas Cooper: Okay, perfect. Thanks, guys. A terrific work in the quarter. A couple of things I’m just looking to get your comments on. Let’s start with the Canadian industry as a whole. We talked about, obviously, the competitive nature of it and continue to be competitive out there with lots of players. Do you think, how do you think this will play out over the next 12, 24 months? It just seems to me that a lot of these smaller guys are not going to be able to get capital to survive, A. B, some of your major or historically major companies have sort of left the adult use space, either A, for the medicinal market, or B, pursuing an alcohol strategy. How do you think this will play out? To me, it seems to me that ultimately this will end with three or four companies, and obviously you being the biggest of those.

Michael DeGiglio: Yeah, I’ll answer part of that and the I’m going to turn to Mandesh, because he’s in the trench every day fighting those battles on the front lines, so to speak. But from a macro perspective,, I’m not going to comment on other LP strategy. I think what’s — what makes the industry unique and in certain cases fun being this nascent legal cannabis industry is that every LP in Canada seems to be looking for what that magic path forward is, whether it’s a diversified strategy or focused strategy. As opposed to the US, even though it’s not fairly legal, when we look at the US MSOs, or at least I do, they’re very focused on cannabis. They’re not diversifying, they’re wanting to win in cannabis in the U.S. So it’s very different.

In Canada, for the reasons we have, companies are looking at different ways. So I don’t know which is the winning formula, but we know that we want to focus on being number one, not just in Canada, that’s our goal, being number one internationally as well. It sounds bold, but we know the only way to get there is a total commitment and focus on the industries we’re in and not get — not dilute our ability to operate. So that’s sort of the macro level. As far as my comments were, we’ve talked a lot of quarters about the industry in Canada, that there’s over capacity. There still is over capacity. And that’s from a number of LPs that continue to linger on. The capital markets are closed, interest rates are through the roof. So at some point, I think there’s an inflection point coming, we thought it would be here by now.

But I think once the dominoes really start to fall, they’ll fall away. And in the end, I do believe there’ll be three to five companies that are leading the Canadian and the Canadian export industry going forward. Now for the frontline, Mandesh, you want to add color on that?

Mandesh Dosanjh: Yes, thanks Mike. And I think you’ve hit most of the pieces. Thanks for the question, Doug. We’ve been consistent, right, on our business strategy and how we’ve deployed everything from of being a branded house [indiscernible] house of brands and with the Rose acquisition and kind of what they’ve been able to show and do and they are agile — their ability to be agile and nimble. And we still have a lot of opportunity in Canada. I think, I know, based on what we have in the pipeline and the work we’re doing with Rose and Pure Sunfarms across the Canadian landscape. And hope’s on a strategy. So we’re not sitting here hoping, waiting that either people will go by the wayside. Mike, articulated it very well that we believe that that’s going to happen.

But underneath that, we just continue to operate and execute, generate cash, generate profitability, create great products through innovation with a really strong assortment strategy that attacks the market from different consumer profiles and segments. And we think that’s going to continue to allow us to be successful. And if the industry breaks open and people do start to go by the wayside, because on the trenches, we see it. We see cracks in the foundation. We see products that are constantly hitting the market. Great one week, not great pull through or sell through in the following weeks. We see the relationships we have with stores and bartenders. We value those. We have built a solid reputation across this country in Canada and we continue to want to execute on that.

So we like how we’re positioned. We think things will evolve, but we’re going to continue to find ways to win and outperform where we can.

Douglas Cooper: That’s great, Mandesh and Mike. Any comments on the fire and flower and what do you think is going to happen there and the impact that it’s having or may have on the actual retail sale of products?

Michael DeGiglio: Not really, Doug. I think we want to just be cautious about commenting on others. So probably going to pass on that question, but if you want to ask another one, we’ll take it.

Douglas Cooper: Okay. And just last one for me. Just from a balance sheet perspective, maybe Steve, how do you feel about your balance sheet right now and any color on the potential sale of the assets in Texas? I think you mentioned, Steve, that you expected some expressions of interest this quarter. Do you expect something to play out before the end of the year? And is there a minimum threshold of which you will not consider something below? And I’ll leave it there. Thanks, guys.

Michael DeGiglio: Yes, we feel good about our liquidity in our balance sheet at this stage of the year. Obviously, Monahans is an active process, probably taking a bit longer. Capital markets have tightened up and I think that has impacted the speed of which the process is taken, but we haven’t arrested parties, actively looking at it and we’ll see how fast it plays out like any other real estate transaction. It’s capital — the buyer will have to bring capital to the forefront and we are — capital markets are tightening. So we’ll see how it plays out. Will it happen by year end or not? We’ll remain [indiscernible] and yes, will we have some minimum? Yes, we will have a minimum price, absolutely.

Douglas Cooper: Okay, great. Thanks very much, everyone.

Michael DeGiglio: Thanks, Doug.

Operator: Thank you. One moment for the next question. And our next question will be coming from Scott Fortune of ROTH. Your line is open.

Unidentified Participant: Hey, good morning. This is Nick on for Scott. First question for me, just on the new product side, you mentioned launching seven new brands in the last 18 months. Can you just give us a rough sense of what those are contributing now, kind of in terms of mix and are there any specific product categories you feel under indexed in that you’re looking to address in the future? Thank you.

Michael DeGiglio: Go, Mandesh, take that one, please.

Mandesh Dosanjh: Yes, so we don’t really break it out totally by brands. I mean, Pure Sunfarms is still our main state brand and contributes the most amount to our chair. Some of the other brands have just started to launch and we think that they’ll play very positively in certain consumer spaces and index and with innovation behind it, but we don’t really give out the components underneath that. Your second part of your question was around where do we feel under indexed? Infused pre-rolls has been probably one of the — probably has been the biggest story over the last eight to 12 months in the industry and we’re significantly under indexed there and then continuing to grow our pre-roll share, just our base pre-roll share. So when you think about how strong we are in flower and how we have over indexed on the flower side, we believe through our great brands and products and our specific great strains, we can use those as extensions to play in spaces where we’re under indexed and that’s what you’re going to start to see.

So specifically in pre-rolls and infused pre-rolls and then with the launch of our new vapes, we’re starting to really regain some of the share we lost and we think there’s some upside there. So vapes, pre-rolls, infused pre-rolls.

Unidentified Participant: I appreciate that color. Thank you. And then second one for me, just wanted to follow up on the international side, Germany specifically, you launched products through IUVO in May, just kind of any early puts and takes on that side and just wondering if you had any color on the competitive landscape and maybe the pricing environment there? Any color would be helpful. Thank you.

Michael DeGiglio: Yes, I think the competitive environment is going to be, I think it’s going to be pretty solid going forward because for the Canadian LPs that are all dealing with sort of the macro issues in Canada tax and others, which a number of companies are not able to get cash flow positive, they’re looking at the international markets, of course, where there is no tax. So — but I think to win in that market, it’s going to take the same vision we had in Canada, that’s going to be high quality, low cost. And there is price compression already happening in that market, just like we’ve seen in the U.S. very quickly, price compression. We predicted that early on, even in Canada, and I think the same will happen in Europe.

But, that being said, we think we can win there, it’s still much more lucrative from a gross margin perspective and we’re bullish on it. And I don’t think everybody — it’s not as easy. Shipping internationally, especially trying to be under the EU GMP banner is a very difficult process and not everybody can do it. There are some greenwashing and there are some ways you can circumvent the system. And ultimately that’ll play out. But again, for us, we believe we stand a great chance of leading in Europe as well. And as regarding our IUVO. Yes, IUVO, we’ve made multiple shipments. And then we have many other alliances that we’re working on throughout the whole EU that we haven’t put out yet, but probably give some more color towards the end of the year on that, Scott.

Thank you.

Unidentified Participant: Thank you. I appreciate the color. I’ll pass it on.

Operator: One moment for our next question. And our next question will be coming from Mike Regan of Excelsior Equities. Your line is open.

Mike Regan: Hi, thanks a lot and congrats on the great quarter, getting the produce turned around much faster than I think at least I expected. Real quick on the Canadian cannabis side, can you sort of give us your perspective on how Ontario reducing their distribution margin is sort of going to work from your perspective in terms of how they decide the end real tail pricing versus the wholesale price they’re paying you?

Michael DeGiglio: Sure. Well, I’m going to turn that over to Mandesh, Mike, but before I do, thanks for launching on Village Farms this week. We appreciate it. Mandesh?

Mandesh Dosanjh: Yes, thanks for the question. It’s a good one. So earlier this year, the OCS revised their markup pricing kind of strategy and approach where they were much more variable and they went to more of a fixed approach. They were playing around with how they were marking their products in the various segments, and they kind of realigned everything to go to a fixed model. So for — in some categories, i.e. flower, actually they’re giving margin back to the producer. In other cases, such as on concentrates where the infused pre-rolls come in, they’re going to be taking a greater margin. So they’re kind of balancing everything else and kind of a certain percentage will be fixed. So for a producer, we’ll now know clearly like we do in other provinces when we submit a product, how the markup will play through the supply chain and how that will impact end pricing.

So from a producer standpoint, some real big wins, better margins for us, more visibility to end consumer pricing. And given where Pure Sunfarms sits on the Canadian cannabis side, those will be positive for us given where we play and how we play. What we’re also hearing in the industry is that, there is ability now for producers to pass along that margin to consumers and reduce their pricing. But that’s not what we’re hearing. With our GPI increase we took earlier this year, we were a leader in kind of maintaining price, improving price. And now we’re hearing that the industry is going to follow us behind that. So it’s a good news story, we believe, for the industry. It shows leadership in the Ontario market to look at their margin structure and making sure they’re doing the right thing when it comes to pricing.

And we think it’s great for the industry and we’re excited about it.

Mike Regan: I know that sounds great, especially you can thread the needle of wholesale price increases and end user price flats down to drive even higher volumes. And then quickly on the produce side, I guess you sort of guided to a goal of positive EBITDA for the year in produce and you’ve achieved that by June 30th. Is there any reason to think going forward that you wouldn’t at least be breakeven or could we keep having continue seeing that positive EBITDA on the produce side going forward?

Stephen Ruffini: This is Steve. So the produce will be quarter to quarter. So we would expect that in the third quarter, we will not have positive EBITDA and we’ll have strong positive EBITDA in the fourth quarter. And that’s due to the seasonality of demand and supply. There’s less supply of essentially see controlled environmental ag tomatoes in the fourth quarter and demand is usually pretty steady and we usually see improved pricing such that we’re profitable in Q4 and struggle a bit with pricing in Q3. But for the full year we are expecting to land in positive territory.

Mike Regan: That’s great. Thanks a lot for taking the question.

Michael DeGiglio: Thank you, Mike.

Operator: Thank you. One moment for the next question. And our next question will be coming from Ben Klimber of Stifel. Your line is open.

Unidentified Participant: Hey. Good morning. I’m filling in for Andrew. Thank you for taking my question. I just want to turn back to international sales. There was some news out of Israel this week where the health ministry announced some reform that could provide patients with easier access to medical cannabis. I’m wondering is this something that you’re watching closely? And if so, how should we be thinking about future shipments to Israel going forward given that these changes are supposed to come into effect at the end of this year? Thank you.

Michael DeGiglio: Yeah, we are watching it. That and the political issues going on there that has sort of dampened some exports there. So we’re in touch with our partner there and we’re encouraged. But that may not start back up till the fourth quarter or the first quarter next year. So I don’t have much more color on that at this point.

Unidentified Participant: All right. Thank you. That’s all for me.

Michael DeGiglio: Thank you.

Operator: Thank you. This concludes the Q&A session. I will now turn the call back over to Mike DeGiglio for closing remarks. Please go ahead.

Michael DeGiglio: I just want to thank everybody for participating today and we look forward to our next call in November. And thank you for your continued belief in Village Farms. We are confident that we will lead the industry going forward. Thank you.

Operator: This concludes today’s conference call. Thank you all for joining. You may disconnect. And everyone have a great day.