Village Farms International, Inc. Q2 FY2023 Earnings Call

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.

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's significantly improved financial results, which build on our 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 in 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. Our fresh produce business saw another quarter of significant year-over-year improvement. Importantly, with our fresh produce strength, we are building upon our unmatched expertise in controlled environmental agriculture to deliver leading revenue, profitability, and ultimately cash flow across each of our businesses. To do this, we lean heavily on the breadth and depth of our multi-talented teams' capabilities, leveraging 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 challenging macro environment, most notably high interest rates 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 significant progress in managing the Brown Rugose virus, while increasing our planting of virus-resistant 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. For 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 retailers and consumers. It also marks the debut of our new sustainable packaging solution for produce, biodegradable and recyclable that addresses safety and shelf life. With the first half of 2023 in the books, fresh produce continues to trend toward our goal of achieving positive adjusted EBITDA for the full year. Turning now to our Canadian cannabis business, which continues 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. Moreover, we have done so faster, without 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 Quebec. Rose has proven without any doubt to be the best acquisition ever made in the Canadian cannabis industry to date, bringing 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, there has been no tax relief, and very little enforcement of illicit trade. 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. 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 brand dominance 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. This means we now have two number one flower brands in their respective price segments in Canada's largest provincial market. 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 has had a great start. Furthermore, in just a short period, Promenade has become the second-largest selling brand in Quebec. At the top 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 a 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 an increasingly competitive environment there. Notably, with the addition of Hexo's distribution in Quebec, Rose now touches approximately one-third of every dollar in 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 in our Canadian cannabis business. But there are also several 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 were not in existence a year earlier. We have seen some dampening of our overall market shares; we under-indexed on new offerings 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, 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. Again, this is part of our commitment to continuous improvement in every part of our organization, even in those areas where we excel. This is our DNA. We have also dealt with some internal supply issues for our market-leading flower strain Pink Kush, which exhibited longevity with consumers 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 the 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 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 consistently push our team to exploit for future growth. We continue to pursue opportunities in those international cannabis markets where the rules are clear, through both our rapidly-growing export business from Canada and in-country market opportunities to come. Q2 was 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 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 organization, have a track record of safety, and stand ready to work with regulators to realize this industry's full potential. 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 a more detailed review of our finances.

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, a loss of $0.01 per share compared to 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 somewhat dampened by reporting in U.S. dollars due to the weaker Canadian dollar in 2023 compared to 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 comparatives 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 were nearly $1.9 million compared to $600,000 in Q2 last year, a nearly threefold year-on-year increase. Non-branded or wholesale sales of Q2 were $3.9 million, compared with $10.3 million in Q2 from last year, despite that being an 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 total Canadian cannabis sales of $37.7 million, compared with $38 million in Q2 of last year. Gross margin for Canadian cannabis in Q2 was 38%, compared to 39% reported 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 truly 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 optimizing growing space during the best growing seasons and continued refinement of our cultivation practices, as well as strategically managing input costs. We've also seen a 2.5 times improvement in our overall pre-roll production per hour, as we move manufacturing entirely in-house, which we expect to complete this fall. Selling general and administrative expenses for Canadian cannabis in 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, 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 of $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 earlier comments, we have stabilized this business from both a sales and profitability perspective. U.S. cannabis sales for Q2 generated entirely by Balanced Health Botanicals were $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 manufacturing facilities this week. Second, in Q2, there was a change by a major online search provider in their algorithm, which affected our affiliate partner sales. U.S. cannabis gross margin for Q2 was 67%, up slightly from 66% in 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, 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 we 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, largely due to a stronger Canadian dollar versus the U.S. dollar in Q2 compared to 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.

Well, thank you, Steve. I want to reiterate one point about what we are building at Village Farms, which I think gets lost amid 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 the importance of 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 in 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. We have received quite a few questions regarding that, and I'll address it here. We are currently on extension with NASDAQ and we are extremely confident that we will be able to secure 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 U.S. have structured on the TSX, and some Canadian LPs are even working with 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 exploring it. Just as a reminder, coming out of 2022-2023, post-COVID, about 25% of all NASDAQ companies are currently trading under a dollar, just a sign of the times. 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.

Thank you. Our first question today is from Aaron Grey of Alliance Global Partners. Your line is open.

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 a number of times, to be careful at reading the POS data versus your sales because your sales are to retailers, 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.

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.

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 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. A couple of them indexed medium to lower end on the potency scale, and we know that right now in the industry there's just really hyper-competitive factors at play. The never-ending chase for potency has led to 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 timeline and runway will run out for those folks on how they're trying to come to market and gain share in the short term. So we see that competitiveness there on the potency-price equation. We also note that because of the abundance of supply, people are taking premium products and offering them at value pricing. This creates unstable dynamics in the industry, and I think everybody is impacted somewhat by that. So, hopefully, it gives you the right color around kind of what we're seeing in the industry. Your second part of your question was around what gives us confidence. Again, Mike alluded to something very important: 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. When I'm in market myself and with the team, we talk to stores and consumers, and they love our products. So there's a lot of noise right now, a lot of news every quarter, every month, and we just have 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. 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.

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 I wanted to get your perspective on the 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 in the 2023 Farm Bill? And then, what impact it might have on minor cannabinoids, such as Delta 8? States have taken various actions, some banning, some putting regulations and age limits on it. Any implications you might have for the Farm Bill and how that might change the dynamics and impact the business? Thank you.

Well, the past Farm Bill was profound. It really kicked off the whole CBD industry from the start. There's not a lot of leakage coming out of the USDA and what they're looking for. We don't expect to see any 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 endorse it, but I think it's here to stay. However, I don't think there will 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 Congress members putting pressure on the FDA. I think that's an even more important development because the FDA controls the purchasing decisions, so to speak. They have been somewhat negative towards any movement forward, and that's what we, as a group and industry, are working towards. I think that's the bigger win: 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.

Okay, great. Appreciate the comment. I'll jump back in the queue.

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

Hi, good morning. Thank you for taking my questions. Congrats on the quarter. Just first on your comment about these 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.

Well, it's overall for the U.S. Look, it remains a huge market for us and we've done a tremendous amount of homework internally. We don't think we're disadvantaged to enter the U.S. market upon decriminalization or legalization. We believe there are some great companies out there 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. I think that's where we'll shine. I mean, our Texas assets are probably the best assets and best location for high-quality, low-cost cannabis that can be delivered throughout the United States. That will make us competitive 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 the 35 or 36 states that have legalized cannabis, either medicinal or recreational. Just being in New York, there are 1,400 illegal dispensaries operating in cannabis on every corner, but the federal government is really not moving forward. So, before I answer your question about Texas, that's why we have our focus on international, especially Europe, where the clarity is available and decriminalization is occurring. We believe it will be a huge potential market, and we can leverage everything we've done in Canada into Europe and win there along with collaborations and alliances, as I mentioned. Regarding Texas, it just blows our mind how everything we've put into Texas comes down to one individual controlling not just the 30 million people but the size of the Canadian market. 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 medical licenses. We've applied for one, so we should know if we've been allotted one in the fall. That will help position us a step forward into the future. So I hope that gives you some color, Frederico.

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.

Yes. I think the international side will be lumpy at times because it's nascent and will get going. So I wouldn't expect the growth curve to be steady and continually increasing, but it will improve year-over-year. We are very bullish on that. You might see some compression at times like Israel due to political issues going on there and others. However, 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. Some competitors are looking at that market; some are in, others have spent a fortune without a clear path. We've been prudent, as we've reported, and waited for regulatory clarity. It is there, and we are moving forward, increasing our sales and effort going forward. This is all medicinal. We anticipate that most of the European market will operate on a medicinal platform for at least the next three to five years, with the exception of certain countries like Luxembourg and specifically the Netherlands, where we're one of the ten license holders, as you know. We've secured two out licenses with two locations, and there was some slight change in the government recently. I don't think it's going to impact our ability to move forward, which we hope will commence in the fourth quarter of this year. But we always wait to ensure that the political situation is solid before we push the final button to move forward. I believe we will have more updates by November on our progress there.

Great. Thank you, and congrats again on the quarter.

Thanks, Frederico.

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

All right. Great. Thank you for taking my questions. I apologize if this was addressed already. I'm filling in for 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 expand on that a bit and help us understand the primary drivers of that? Thank you.

The primary drivers of that are the management of our current assets. Some of those current assets will convert from receivables to cash. So it's going to be a strong cash collection quarter across all our business lines. It's straightforward. We're six weeks into the quarter, so we are confident this is occurring.

All right. Great. Thank you. I appreciate that. My next question is on the investments in produce and your overall infrastructure and AI technology, etc. I'm just wondering if you can help us sort of frame the 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 set date where everything will be completed. But just if you can help us sort of frame that in terms of either timing or dollar amounts, that'd be very helpful. Thank you.

Yes. Texas operates predominantly not on a calendar year, but on a crop cycle, which commences at the beginning of that crop cycle, depending on which asset we're talking about, generally starts in June and is in full plant mode by September, running through the subsequent summer. We have conducted two years of research and development with investments in AI in one of our facilities over the last two years and have rolled it out completely now in all Texas facilities. In fact, we’re rolling it out in our Canadian Delta facility and plan to roll it out next year in cannabis as well. It has proven to be a great partner to our growing operations. This year alone, we've already spent about $3.5 million in capital improvements in packing technology, sorting and grading for efficiency, cutting labor costs, and implementing new technologies across the board for irrigation and CO2 capture and whatnot. So yes, all of it is about continuous improvement to cut our costs and increase our quality and yield going forward. We already have plans for 2024 CapEx improvements in all our facilities as well. Is that enough, Eric?

Yes. So you've spent the $3.5 million in CapEx thus far. Do you have a figure for us either in the second half or into 2024 that you're willing to share now?

Not for 2024 because we haven't finalized that, but possibly in November.

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.

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

Yes, we have you, Doug.

Okay, perfect. Thanks, guys. 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 the continuing competition out there. Do you think, how do you think this will play out over the next 12 to 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 for either the medicinal market or are pursuing an alcohol strategy. How do you think this will play out? To me, it seems that ultimately this will end with three or four companies, and obviously you being the biggest of those.

Yeah, I'll answer part of that and then I’m going to turn to Mandesh, as he's in the trenches every day fighting those battles on the front lines. From a macro perspective, I'm not going to comment on other LP strategies. What makes the industry unique and, in certain cases, fun about being in this nascent legal cannabis industry is that every LP in Canada seems to be searching for that magic path going forward, whether it's a diversified strategy or focused strategy. In the U.S., even though it’s not fully legal, when we look at the U.S. MSOs, at least in my view, they are very focused on cannabis. They want to win in cannabis in the U.S. So it's a very different situation. In Canada, for several reasons, companies are taking various approaches. I don’t know what the winning formula will be, but we know 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 that the only way to get there is a total commitment to focus on the industries we’re in and not dilute our ability to operate. That's the macro level. As for my comments, we've discussed the industry in Canada many times, noting that there’s overcapacity. There still is overcapacity due to the number of LPs that continue to linger. The capital markets have closed, and interest rates are through the roof. At some point, I think there’s an inflection point coming. We thought it would be here by now. However, once the dominoes truly start to fall, they will likely fall quickly. I do believe there will be three to five companies leading the Canadian and export cannabis industry going forward. Now for the frontline, Mandesh, do you want to add color on that?

Yes, thanks Mike. 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 being a branded house to a house of brands with the Rose acquisition and what they've been able to show in their agility and nimbleness. We still have a lot of opportunity in Canada. 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. So we're not sitting here hoping and waiting for others to go by the wayside. Mike articulated it well; we believe that will happen, but underneath that we continue to operate, execute, generate cash, generate profitability, create great products through innovation with a strong assortment strategy that attacks the market from different consumer profiles and segments. This is going to allow us to be successful, and if the industry breaks open and people do start to fall away, because from the trenches we see it. We see cracks in the foundation. Great products hitting the market one week, not achieving that pull-through or sell-through in the following weeks. We're building solid relationships with stores and consumers. We value those and have built a solid reputation across Canada, and we are committed to executing on that. We like how we're positioned and think things will evolve, but we will continue to find ways to win and outperform.

That's great, Mandesh and Mike. Any comments on Fire and Flower and what you think is going to happen there and the impact it’s having or may have on the actual retail sale of products?

Not really, Doug. I think we want to avoid commenting on others, so I'm going to pass on that question, but if you want to ask another one, we’ll take it.

Okay. And just the last one for me, 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.

Yes, we feel good about our liquidity and balance sheet at this stage of the year. As for Monahans, it’s an active process, taking a bit longer. Capital markets have tightened up, which has impacted the speed at which the process is taken, but we have potential buyers actively looking, and we'll see how fast it plays out like any real estate transaction. The buyer will have to present capital, and given that the capital markets are tightening, we’ll see how it goes. Will it happen by year-end or not? We'll remain cautious and yes, we will have a minimum price, absolutely.

Okay, great. Thanks very much, everyone.

Thanks, Doug.

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

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 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.

Go, Mandesh, take that one, please.

Yes, we don't break it down by brands. I mean, Pure Sunfarms is still our main state brand and contributes the most amount to our share. Some other brands have just started to launch and we think they'll play very positively in certain consumer spaces and index and with innovation behind them. We don't give out the components underneath. Your second part of the question was about where we feel under-indexed. Infused pre-rolls have been one of the biggest stories over the last 8 to 12 months in the industry, and we are significantly under-indexed there. We're also growing our pre-roll share, specifically our base pre-roll share. While we are strong in flower with over-indexed products, we believe that through our great brands and specific great strains we can utilize those to play in spaces where we’re under-indexed, which is what you're going to start to see in pre-rolls and infused pre-rolls, along with the launch of our new vapes, where we are regaining some of the share we lost. We think there is upside there. So, vapes, pre-rolls, and infused pre-rolls.

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 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.

Yes, I think the competitive environment is going to be pretty solid going forward, as Canadian LPs deal with the macro issues in Canada related to taxation. Many companies are not able to achieve cash flow positive operations, so they are looking at international markets that are free from taxes. However, it will take the same vision we had in Canada; high quality and low cost will win in that market. There is price compression happening in that market, just like we’ve seen in the U.S. very quickly. We predicted that early on, even in Canada, and I think the same will happen in Europe. But that said, we think we can win; it remains more lucrative from a gross margin perspective, and we are optimistic about it. Not everyone will win in this space; shipping internationally, especially under the EU GMP banner, is a challenge that not everybody can tackle. There are some instances of greenwashing and ways to circumvent the system, and ultimately that will play out. For us, we are confident that we have the opportunity to lead in Europe as well, and regarding IUVO, we've made multiple shipments. We have many other alliances that we’re working on throughout the EU that we haven’t discussed yet, but we’ll likely provide more details towards the end of the year.

Thank you. I appreciate the color. I'll pass it on.

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

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 going to work from your perspective in terms of how they decide the end retail pricing versus the wholesale price they're paying you?

Sure. I'm going to turn that over to Mandesh.

Thanks for the question. It's a good one. Earlier this year, the OCS revised their markup pricing strategy where they were much more variable and moved to a fixed approach. They were experimenting with how they were marking their products across various segments, and they aligned themselves to a fixed model. For flower, in some categories, they're giving margin back to the producer. In other cases, like concentrates where the infused pre-rolls come in, they’re taking a greater margin. They are balancing everything, and a certain percentage will be fixed. For producers, we will now know how the markup will pass through the supply chain and how that will impact end pricing. From a producer standpoint, there are significant benefits that will provide us with better margins and more visibility for consumer pricing. Given where Pure Sunfarms sits on the Canadian cannabis side, these will positively impact us given our market position and player in the flower category. We're also hearing that producers will have the ability to pass along that margin to consumers and reduce their pricing, which we do believe is positive for OCS and industry leadership.

I know that sounds great, especially you can thread the needle of wholesale price increases and end-user price flat-down to drive even higher volumes. And then quickly on the produce side, I guess you 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 seeing that positive EBITDA on the produce side going forward?

This is Steve. So the produce will be quarter to quarter. 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. That's due to the seasonality of demand and supply. There’s less supply of controlled environmental ag tomatoes in Q4 and demand is usually steady, allowing for improved pricing that typically leads to profitability in Q4. We anticipate some challenges in Q3 pricing but expect to land in positive territory for the full year.

That's great. Thanks a lot for taking the question.

Thank you, Mike.

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

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 reforms that could provide patients with easier access to medical cannabis. I'm wondering if this is 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.

Yes, we are monitoring it closely. The political dynamics in Israel have dampened some exports. We’re in contact with our partner there and are encouraged. Shipments may not start back up until the fourth quarter or early next year, but we are hopeful.

All right. Thank you. That's all for me.

Thank you.

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.

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

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