Good morning, ladies and gentlemen. Welcome to Village Farms International's Third Quarter 2020 Financial Results Conference Call. Earlier this morning, Village Farms issued a news release reporting its financial results for the third quarter ended September 30, 2020. That news release along with the company's financial statements are available on the company's website at villagefarms.com under the Investor's heading. Please note that today's call is being broadcast live over the Internet and will be archived for replay, both by telephone and via the Internet, beginning approximately one hour following completion of the call. Details of how to access the replays are available in today's news release.

Thank you, Carol, and thank you, everyone for joining us today. With me on today's call is Village Farms' Chief Financial Officer, Stephen Ruffini. This morning I'm going to spend a few minutes highlighting the key takeaways for the quarter. Steve will then review the financial results and I'll return with some concluding thoughts and then we'll have some Q&A. The first highlight that I'd like to call out is profitability. Village Farms once again achieved positive EBITDA with contributions from each of our business segments—cannabis and produce. Produce showed another strong improvement year-on-year and grew quarter-on-quarter as well. And Pure Sunfarms posted its eighth consecutive quarter of positive adjusted EBITDA and, more importantly, its seventh consecutive quarter of net income. That is an achievement that is unmatched by any other Canadian cannabis supplier. Pure Sunfarms quarter-on-quarter growth was driven by increases across all key metrics. From my seat, this is an achievement in profitability that demonstrates the underlying strength of our business model, coupled with execution expertise, which shows in both Pure Sunfarms cannabis market experience and Village Farms' 30-plus years of experience in large-scale, low-cost intensive agriculture. As we welcome back this expertise under one roof with the closing of the Pure Sunfarms acquisition, we look forward to even more opportunities ahead. On our last conference call, I shared with you that Q2 was a profound quarter for Pure Sunfarms, proving out that even with a very high proportion of sales derived from our large format, lower price offerings, Pure Sunfarms could be profitable.

Thanks, Mike. I'd like to expand on Mike's comment providing more background on the financial results, which support the Village Farm strategy. Our produce business had produce sales of $43 million for the quarter, which increased over 12% versus Q3 2019, on the back of our average selling price of tomatoes increasing 30% year-on-year despite lower tomato volumes, as we had no production from our Delta 2 facility in 2020, which is now being converted to cannabis production, as Mike mentioned. The increase in produce selling prices essentially rolls directly into our gross margin, as there is no impact on our cost of sales. As such, we saw a year-on-year improvement in our Q3 gross margin of $6.2 million to $5.6 million from a loss in the prior third quarter of 2019 of $600,000. Our produce business had a 13% gross margin for the quarter, and the incremental increase in our gross margin was driven by the higher selling price and lower tomato volumes, again due to the diversion of the Delta 2 facility. Produce EBITDA increased by $4.2 million year-on-year to $2.2 million on the back of the improvement in our produce gross margin, which was offset by a lower year-on-year added-back depreciation since the Delta 2 facility was not in production, and a higher year-on-year SG&A in Q3 2020 versus Q3 2019 of $1.2 million, which is primarily related to substantial expenses involved with the acquisition and financing of the remaining Pure Sunfarms shares. I should note that these incremental SG&A expenses are not truly related to the produce business but are more corporate in nature. Supply shortages due to the increase in grocery store traffic certainly helped to support produce pricing in the late spring and throughout the summer of 2020. I'd like to extend our sincere thanks to all the Village Farms employees who have continued to work diligently on growing, distributing, and supporting our Village Farms produce brands by getting our fresh produce on the shelves of our strategic retail partners in both the U.S. and Canada. The commitment by our entire workforce has truly been amazing throughout the pandemic. I mentioned last quarter that the strong year-on-year pricing would result in positive EBITDA and cash flow in the produce business, and we expect this trend to continue for the balance of 2020. Turning to cannabis, a reminder for the quarter ended September 30, 2020, the Pure Sunfarms results have not been consolidated in the Village Farms Q3 results, as we owned 58.7% of the Pure Sunfarms business during the quarter but did not control it until November 2, at which time we owned 100%. I will address the consolidation performance financial shortly.

Thanks, Steve. So going forward, the outlook for Village Farms, I believe, has never been so positive with strong momentum in the business and considerable opportunity still ahead. It was a very solid quarter with many accomplishments, and the team has done a superb job. Going forward, each quarter is marked by steady meaningful progress in our transformation to a vertically integrated agricultural-based CPG business as we aggressively pursue high growth opportunities in emerging legal cannabis and related markets in the United States and targeted markets internationally. We are proving out the value of leveraging the expertise, people, and institutional knowledge for new high growth, high value markets. Pure Sunfarms is built entirely on the foundation of Village Farms—our model, our facilities, our people, our experience, our know-how—all of which set it up for success by allowing us to bring in the best management team in the industry, and those are the Pure Sunfarms' folks who continue to perform brilliantly. Owning the entirety of Pure Sunfarms not only provides our company and our shareholders with the full contribution of its financial success, but as sole owner, we are now in a position to work to capitalize on opportunities that were constrained by this particular joint venture. We expect continued steady strong sales momentum based on a number of very clearly visible factors: growth in the Canadian cannabis market, which should be accelerated by the swift opening of new retail stores, especially in Ontario and British Columbia; the ramp-up of sales of our vape oil products; and the introduction of new 2.0 products. Additionally, there is a natural shift in the market landscape to fewer suppliers. This momentum, combined with unmatched North American assets totaling over 10.5 million square feet, more than half of which is in the United States and which no other cannabis company in the United States or Canada has, is why we continue to be so confident in our prospects for both low and high THC cannabis markets in the U.S. and internationally. We have the considerable benefit of being able to pursue these opportunities funded by our produce business, which again is performing quite well. All this continues to position our company to deliver growth and generate a return on invested capital that leads our industry and drives value creation for all our shareholders. So with that, we'll open up to any questions. I'll hand it over to Carol.

Thank you. Your first question this morning comes from Doug Cooper from Beacon Securities. Please go ahead.

Good morning, everybody, and congratulations on a great quarter. Steve, I just want to start with clarification on revenue per gram. You said it was up 13.3% sequentially. And is that just on the retail side? Or is that an average pricing between retail and wholesale?

Across all channels.

Okay. And can you talk a little bit about the difference maybe between the retail pricing and the wholesale in terms of—if you don't want to give exact numbers maybe just the quantum difference between the two that you're seeing?

Again, the range of wholesale pricing is all over the place, whether we're selling, for instance, trim or selling high potency grade 1 flower. So, the range is much broader. The retail pricing has been pretty consistent quarter-on-quarter between Q2 and Q3 in terms of large format and small format. Essentially, our average price was enhanced, and our margin was also enhanced in Q3 versus Q2, because as a percentage, we sold more small format in Q3 compared to Q2, which was predominantly driven by large format.

Can you give us some idea of the breakdown on the retail side, the breakdown by region, say Ontario, BC, Alberta? And then did you have much sort of loading into Saskatchewan? I think that came live in the quarter, if I'm not mistaken.

Well, Ontario clearly continues to be our largest customer. Also impacting pricing are the differences on the format between the provincial buyers. So, it's not like a national price; it varies. A weighting of sales into one province versus another quarter will impact the average selling price for a particular quarter.

Yes. I think going forward, Doug, the aggressive growth in retail stores in Ontario is currently very aggressive over the next year, coupled with BC. I think that'll continue to drive more penetration going forward in Ontario, seconded by BC.

What do you think the optimal split in your business is between retail and wholesale? And Mike, can you just comment maybe a little further, maybe I've missed it. You've talked about a number of suppliers dropping. Can you just expand on that a little bit?

Well, that's a perception. But I guess I'll expand on it by saying there are many examples of premium brands, CPG companies that are very well-known brands, have huge penetration and market share but have a wholesale strategy. There's a lot of examples of that. It's still a very massive industry, and we want to keep our options open where we're going. For us, we've made the investment already to capital investment in Delta 2, which can double the capacity right here with Village Farms. As I mentioned in my remarks, we have Delta 1, which is larger than those two, cumulatively. So, our focus is as a branded house to continue to maximize market share at the retail level. Right now, I think a wholesale venue for us works. There are a lot of smaller companies that have a unique niche in the marketplace or are doing unique things that don't have cultivation. To the extent those companies are innovative and may be doing things we won't do, or can't do, or may never do, why not have a relationship with them? In our 30-year history in produce, even though 75% to 80% of our sales are direct to the retail trade, we've always had relationships that make sense on portions of our business. So, I'd rather not specify what that percentage will be, Doug, but we'll see how it goes over the next two years. There should be a lot of interesting changes in the Canadian landscape.

Okay. Do you have a—talk about the breakdown between sales at the retail level between flower and 2.0 products? And I guess I’m just trying to— if 2.0 products were 4.5% of your sales, what do you think they could be six months to a year from now?

We still believe flower rules. I mean, if you look at the U.S. or individual states, it's still flower. There's no indication that that’s changing. I think we'll see increased cannibalization of the illicit trade with 2.0 products taking a larger share as the stores roll out and there is a retail presence, and the Canadian government perhaps, once there's an adequate number of retail stores, will shut down more and more illegal trades. As far as the split, I think 2.0 products will continue to grow, but the greater percentage is still flower. As I mentioned on the call, while 3.5 gram premier strains are doing very well, we see that continuing to grow for the foreseeable future.

Our next question comes from Rahul Sarugaser from Raymond James. Please go ahead.

Good morning, Mike and Steve.

Hi, Rahul.

Thank you for those comments. Congrats on the great quarter. Well done, guys. So, first question is, clearly there's a clear dominance in the value segment and flower. Now with the emergence of you're putting out vapes on the market and noticing the pricing, I guess you guys have been pretty aggressive in pricing. So, how do you see pricing going forward driving revenue relative to the competition, particularly as retail is opening up as you noted?

Well, I'm just going to reiterate, Rahul, that our pricing strategy was always based on the fact that we saw the illicit trade, and the main consumer in Canada being consumers who have been there for decades—everyday users, casual weekend users. That's the target market we've gone after. In order to cannibalize that customer, we have to offer these key attributes in terms of quality, potency, safety, and so on, but at an affordable price. That was coined by the team at Pure Sunfarms as 'affordable luxury.' That's our focus. So, that's where we're positioning the price points. If that price point is 30% under other competitors, so be it. You just have to live with it, because that's setting the market. It's a $5 billion to $6 billion illicit trade market that needs to be absorbed here. That's how we position the pricing going forward.

Okay, great. Thanks so much. And then in terms of the wholesale community, that was a relatively large portion of your total revenue. So, number one, do you see that as being durable? Are you seeing durability in that going forward? And also, maybe provide your comments in the context of the recent Croptober outdoor growth, and how do you see Village Farms products competing particularly in the wholesale market relative to all that outdoor growth?

Well, wholesale has a stigma attached to the term. So, maybe the correct term is alternative channels. An example would be if Costco in Canada wants to eventually sell cannabis under their corporate brand name, that's an alternative channel. I think wholesale tends to have this stigma that it's not important. It's too early to tell, but we will look at those relationships that we think could be meaningful. We are profitable using the term wholesale; we have proven that all along. Right now, we look at the fact that we've made our investment in Delta 2, but we weren't quick to put that into production. We're very prudent with our decisions. We don't want to produce anything that we can't sell. We're going to be patient as we ramp that up. We can look at alternative channels and still remain true to our positive cash flow. I view it as a combination of wholesale, private brands, and other markets, and other channels where companies are doing very innovative, niche-oriented offerings, and we'll see how that flows in the next couple of years for us.

Your next question comes from Adam Buckham from Scotiabank. Please go ahead.

Good morning. Thanks for taking my question. Now I understand the Canadian retail market is both volatile and dynamic. But as we think about Q3 flower mix versus moving forward, do you see this quarter as a more normal mix? Or do you think there could be further shifts in small format in the near term?

I would say this is a more normal quarter compared to the second quarter. Certainly for us, if you remember last year, Adam, we didn't have our sales license until almost the fourth quarter of last year. So, it's been one year. We can't look at how we performed last year. As Steve said, it was a different market last year, and we were selling solely 100% wholesale from the first three quarters. For us, getting historical data going forward is what we need. The second quarter of this year and to an extent the third were really impacted by COVID, especially the second quarter, with pantry hoarding and so on. The fact that we launched a large format at that time was advantageous; it was the right product at the right time. I think this third quarter has shown more normalization between our offerings. It’s early for us on the 2.0, we just launched at the very end of last quarter. We are very pleased where we are today. We didn’t want to talk about any specific numbers at this point, but I can tell you we remain very confident in the direction we're going based on early numbers we're seeing. I think it's a great question. The fourth quarter will likely reinforce what that balance will be.

Okay, that's great. Thanks. I was just wondering if there were any updates on progress on signing some new provincial customers.

Well, there is progress. I mean, we're still aiming for Quebec. The team's doing a lot there. It's not easy to penetrate, but we feel confident we will slowly make an entrance there. What's more interesting for us is finally the traction that Ontario and British Columbia are showing with opening stores. Ontario's talking about promoting the opening of 40 to 60 stores per month, looking at potentially 500 stores by April and doubling that to 1,000 by next September. That is very exciting for us. We've had conversations regarding greater capacity. I think British Columbia is moving in that direction, perhaps not as aggressively. I'm excited, because we've always mentioned that it feels like the end of prohibition in the U.S., except that the U.S. government did nothing to shut down the Kentucky Moonshine operations. At some point, when there are enough retail stores and a great channel for legal product, there should be pressure on the illegal trade, which will support greater penetration and market share for us going forward.

Your next question comes from Aaron Grey from Alliance Global Partners. Please go ahead.

Good morning, guys. Congrats on the quarter and as well as the recent acquisition of Pure Sunfarms. First question for me, Mike, you just mentioned that you're pretty encouraged by the 2.0 products thus far, having just recently launched them in September. Just wondering if you could give any incremental color there? It's been another category where you're starting to see some pricing pressure, even just looking at the OCS website. They have a dedicated section for products under $7. So just curious about what you're seeing in terms of the dynamics and how you think Pure Sunfarms has been positioned, especially leveraging the brand equity you have right now within the flower category. Thanks.

Oh, I didn't realize the price was that attractive. I must have missed that. But anyway, we were pleasantly surprised. We sold out pretty quickly at launch, and indications show we are gaining traction, including at our price point. We are using our best strains for extraction with no by-products to ensure quality. We think that our 2.0 products are building a strong reputation, and we feel positive about that. We don't have a full quarter under our belt yet, so we want to be a little careful talking specifics. But it is growing, and we’re keeping focused on where we want to strengthen our market share. We're not really focused on confectionery or beverages right now; perhaps those will come more in the future since those markets are relatively small for us now. For now, we want penetration as quickly as possible, and so far, so good.

Good morning, and thanks for taking the question. Can you provide just a little color on the cadence of 2.0 products and the velocity at the provinces? It seems, as you said, there are too many competitors and brands, some are moving and others are not performing well at the inventory level. Can you share your sense of the velocity of your 2.0 products moving forward?

We sold our products pretty quickly at launch, which was pleasantly surprising. So, we feel good about our traction, especially at our price point. We think our 2.0 line will resonate well as we use only the top quality strains. We're still figuring out some specifics, as we don’t have a full quarter yet. We want to approach cautiously while we're in this growth phase, although we are optimistic about where we are right now.

And then a follow-up on that—how many 2.0 SKUs do you have out there? And what's the plan for different products and SKUs as we look into 2021?

Well, I think there are currently about three, but we're rolling out another vape product as we speak. As I mentioned on the last call, we are ready to roll out edibles in the foreseeable future. That should put us initially somewhere between five and seven. For us, that’s a solid start.

Your next question comes from Eric Des Lauriers from Craig-Hallum Capital Group. Please go ahead.

Alright. Congrats on a solid quarter, guys, and thanks for taking my questions. So, you mentioned that you're at full production in Delta 3, and that Delta 2 could come online in 2021. Can you just help us understand what you need to see in the market before bringing Delta 2 online?

We need to evaluate our summer performance. We saw some slowing down, and we felt it prudent to slow our production. We always want to produce what we can sell. We’ve been monitoring our inventory closely. In the third quarter, we sold more than double what we produced in August, due to our cautious approach. Our inventory is right where we want it to be, our churn is solid, so now we're back into full production on Delta 3. It takes time to ramp up. We have the capital sunk into Delta 2; it’s just about gearing it up appropriately. We envision that we'll start looking at increased capacity probably in the third quarter and prudently ramping things up based on supply and demand numbers.

Okay, that's helpful. I appreciate the color there. Turning to the U.S. Since the election, there's been more talk of cannabis legalization in Texas. One law firm projected Texas could produce billions of dollars in tax revenue. Just this week, we've seen 13 pieces of cannabis legislation filed in the state. Can you comment on your readiness to serve a potential Texas cannabis market? And how your existing agriculture business could position you for a successful license application?

I'm not going to front load any of our strategies except to say that we are working and have been working tirelessly on multiple strategies. So we're very excited about the U.S., but I don’t want to reveal too much at this time. I think if you look at our playbook, our principles, and our achievements in Canada—we were newcomers in Canada, yet we are now leading in major metrics like brand recognition and low-cost production. Those results will definitely support our entry into the U.S. market. We're exploring the regulatory landscape and have multiple strategies in mind. I'm excited about the possibilities in the U.S. for Village Farms.

Your next question comes from Andrew Partheniou from Stifel GMP. Please go ahead.

Thanks for taking my questions. Congrats on the great quarter, guys. You continue to set yourself apart from your peers.

Thanks.

Thank you.

Just on the ordering dynamics from the provincial boards. Could you give us a little bit of color on how that's going? We've already seen a little shift from big initial bulk orders to smaller and more frequent ones. Would you say that’s still the case? You called out that your initial launch of 2.0 products sold out quickly. How quickly did you feel that provincial boards reordered? And are you satisfied with the inventories you have at the retail level?

As I mentioned, the distribution system is still new. Provincial buyers have access to certain SKUs or certain strains, and their options aren't always moving quickly. There’s some uncertainty on their part. We’ve been very happy with our sell-through. As Mike mentioned, we sold out of the vape pens, signaling strong demand; but from the CPG standpoint, that's also a lost sale if a consumer walks into a store asking for a Pure Sunfarms product and it’s out of stock. We're continuing to actively work with the provincial buyers to ensure our products are available on store shelves. We believe putting resources behind major inventory levels at all points is crucial to driving the long-term success of the brand.

Yes, and the Pure Sunfarms team is expressing a strong desire to grow. The collaboration with the provincial buyers is more positive than ever, and orders are becoming more consistent. The teams are getting better at their forecasts, so we are seeing growth exceeding the orders placed. We believe it’s definitely improving.

Your next question comes from Doug Cooper from Beacon Securities. Please go ahead.

Hi, guys. Everything has been answered. Thanks very much.

Okay, we’re good. I think we’re good, operator.

Thank you. Your next question comes from Rahul Sarugaser from Raymond James. Please go ahead.

Sorry, Mike. Just yes, one last question. So, I know you said that you'd prefer to keep your U.S. strategy to yourself. But maybe if you can just sort of elaborate more generally, given the recent changes in the U.S. at the federal level. How do you see things playing out? And how do you think Village Farms would be able to compete relatively to the multistate operators which are quite favored at the moment?

Let me say this. The multistate operators have done a great job. A lot of them are pure play cannabis companies focused on bricks and mortar and distribution. However, we believe interstate commerce will eventually occur, where we would shine. You can't have multiple production facilities in a given state with multiple growers and be effective in achieving the best strains and consistency. As great as multistate operators are, and will continue to be more successful, competition will get tougher. In the end, as we've proven in Canada, pricing will also get more competitive. From a Texas perspective, there are many bills out there, but Texas meets every two years. We have this one window between January and May to see if anything will pass. If we launch in Texas, we’ll be first when our assets are ready. The size is nearly the same population as Canada, and Texas will likely look just like Canada in a few years. That in itself is like the Republic of Texas or a country. However, that does not mean we won't consider national strategies. We are also prepared to look at acquisitions or partnerships in various locations where we can contribute our strengths. I believe many opportunities await us.

Great, that's all for me today. Cheers.

Thank you. Okay, thanks, Carol.

This does conclude the Q&A portion of our call. I'd like to turn it back for any closing remarks.

Once again, thanks, everyone, for joining us today. We look forward to speaking with you on our next call, which will be very exciting for the fourth quarter year-end with a full quarter of consolidation and updates on how well we're doing. I can just tell you, I remain the largest and happiest shareholder on this call today. I'm very excited about our opportunities going forward. I thank you for your participation today. Thanks, operator.

Ladies and gentlemen, this does conclude today's conference call. Thank you once more for your participation. You may now disconnect.