Earnings Call Transcript
Village Farms International, Inc. (VFF)
Earnings Call Transcript - VFF Q3 2021
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Village Farms International's Third Quarter 2021 results conference call. This morning, Village Farms issued a news release reporting its financial results for the third quarter ended September 30, 2021. That news release, along with the company’s financial statements, is 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 by both telephone and online beginning approximately 1 hour following the completion of the call. Details of how to access the replays are available in this morning's news release. Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks, and uncertainties is contained in the company's various securities filings. Including its Form 10-K MD&A for the year ended December 31st, 2020, and Form 10-Q for the quarter ended September 30th, 2021. These forward-looking statements are made as of today's date, except as required by applicable security laws. We undertake no obligation to publish, 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, CEO
Thanks. Good morning, everyone. With me today is Chief Financial Officer of Village Farms, Steve Ruffini, and also joining us again this quarter is President and CEO of Canadian cannabis business Pure Sunfarms, Mandesh Dosanjh, who will also join us for the Q&A at the end of the call. Just wanted to say congratulations, Mandesh. Yesterday morning he had his third child, a son, and he did manage to take half a day off back to work. Just wondering, so we're really proud of you with that commitment. And I will say that it’s baby season here at Village. Just a number of folks that are pregnant on maternity leave. My daughter had a son 2 weeks ago, so it’s great to see as humans, I think the greatest of the greatest thing we do is produce offspring, so congratulations again, Mandesh. For today's call, I'll begin with an overview of highlights of the financial and operational highlights across the business. Steve will review the financial results, I'll return with some concluding thoughts about how the future Village Farms is rapidly coming into focus. And then we'll open the call for your questions. From my perspective as CEO, there are four key takeaways for me this quarter. Number 1, profitability; we generated consolidated earnings per share of $0.1 with 50% year-over-year growth in the consolidated adjusted EBITDA with positive contributions from each of the key businesses. The continued operational financial performance of Pure Sunfarms with the market-leading brand in the largest and most profitable market segment, dried flour, all of which to date has been generated organically and internally with our vertically integrated operation. The significant additional opportunity in the U.S. provided by the Balanced Health Botanicals acquisition, which is already raising its growth profile on the Village Farms platform. Our progress on emerging international cannabis opportunities. First takeaway, profitability. Our third quarter was highlighted by strong financial results with overall positive earnings per share and 49% year-over-year growth in consolidated adjusted EBITDA, with positive contributions from each of Pure Sunfarms, Balanced Health Botanicals, and Village Farms Fresh Produce. Pure Sunfarms delivered yet another record quarter since its entry into the retail branded market, late in 2019. May I remind everybody that we were last in pretty much, so that's pretty impressive when you look at that timing. They were able to record net sales that were 53% year-over-year. Record adjusted EBITDA for Pure Sunfarms is up 93% year-over-year to 10.2 million Canadian dollars, and a very healthy gross margin. Branded and non-branded are 44% for the quarter. I want to pause for a moment on the gross margin, which was driven by continued gains in production efficiencies and quality improvements. This is a crucial lever of our business model, indeed for any sustainable business. These efficiencies self-fund ample opportunities to invest in future growth organically. Our gross margin performance of 39% for the first 9 months of this year clearly validates our ability to deliver on our 30% to 40% stated target range for gross margin, long term, especially as we increasingly capitalize on additional opportunities in important areas like new strain development, genetics, growing protocols, and increasing knowledge and understanding of the plant itself, both in cultivating it and what consumers really care about. Balanced Health also contributed positively to adjusted EBITDA with just 6 weeks post-acquisition EBITDA of 700,000 in line with our expectations. Village Farms Fresh Produce also generated positive EBITDA in the amount of $1.42 million. Second takeaway is Pure Sunfarms and the Canadian market. During this quarter, Pure Sunfarms remained the top selling brand of dried flour in each of our key markets - Ontario, Alberta, and British Columbia, and a shipment we repeated again in October. In terms of the Canadian cannabis market recently, we have seen some irrational, but for us, I think unsurprising dynamics reemerge. During the third quarter, we saw very aggressive pricing, maybe desperate negative pricing tactics, probably tied to trying to buy market share or to clear out inventory to avoid write-downs or maybe even generated much needed cash. Even if that means doing so unprofitably. We do know in the CPG markets that buying market share is something that's normally done, but I think it’s a different case here while these companies haven't shown profitability. In an emerging industry that’s still developing brand loyalty, the Pure Sunfarms team makes every strategic decision to balance market share and profitability, and most importantly being best-in-class. This is not an aspirational goal. We have organically driven 12 consecutive quarters of positive EBITDA with leading market share. Even as market share is being eroded by competitors through pricing or acquisitions. And many would argue ill-conceived or overvalued or hastily transacted acquisitions. Pure Sunfarms branding position, everyday premium, coupled with deliberate investments in new product launches, production strains, and customer consumer insights were designed to create a growth business for the long term. Two years of market share data prove our strategy is clearly working. But we are not resting on our laurels; we are continuing to invest and innovate for future market share expansion. During the third quarter, we added more than 30 new SKUs in 4 product categories led by the launch of several new strains, including Black Cherry Punch and Jet Fruit Gelato both different and both high TAC offerings. And Q4 will be a similarly active quarter for new launches. We continue to learn and enhance processes. A great example of which is the work we are now doing with hang drying on a large scale. Our initial trials went well. The conversion process has started and hang dried product will start making its way to market in Q4 with increasing scale coming on next year. Speaking of which, in anticipation of continued growth in demand, we have commenced production in the first half of Delta 2 facility, Pure Sunfarms' second 1.1 million square foot greenhouse, which is adjacent to Delta 3. As previously reported, we started planting in September with the entirety of the first half of the facility to be fully planted out this month and initial harvesting also begins this month as per plan I've discussed. The decision to expand production is a reflection, not only about confidence in the continued growth in demand for our products in Canada, including planned expansion of our market presence geographically, but also our plans for export markets. We expect the second half of Delta 2 to be ready to go in the second half of next year with some important enhancements to support the continued ramp-up in the scale of the business as we prudently build for future demand, all of which I will remind you is being funded internally. On that subject during Q3, Pure Sunfarms completed its first-ever export shipment of a variety of high THC products through investing partner ALTUM International for the rapidly growing Australian medicinal market. Additionally, during the quarter, inspection of the Delta 3 facility for EU GMP certification was completed, which was delayed about 15 months due to pandemic travel restrictions. This is a critical step towards future potential sales in the European medicinal market. Once certification is awarded, we could begin shipping product the following quarter to that region. We will aggressively pursue these markets with the same tenacity and everyday premium strategy that has been so successful in Canada. I will note that we're not just targeting the EU, we're also pursuing other international markets as well; first and foremost Israel, which is at the top of our list. All in all, Q3 was yet another excellent quarter for Pure Sunfarms. Not only for its continued leading operational, financial, and market share performance, but also for the significant additional groundwork we have laid to build on this performance for many quarters to come. And I'd like to say kudos to Mandesh and his great team. The third takeaway is our U.S. opportunity and how Balanced Health Botanicals significantly strengthens that. For our U.S. cannabis strategy, we took a major step forward during the quarter with the acquisition of 100% of Colorado-based Balanced Health Botanicals, which as I noted earlier, is already contributing positively to adjusted EBITDA. With the acquisition of Balanced Health, Q3 cannabis sales represented 43% of total Village Farms sales, and that was just a month and a half of contribution from Balanced Health. Balanced Health is a leader in the U.S. cannabinoid market with a diverse portfolio of CBD and other products distributed both online and in retail stores. It provides Village Farms with immediate access to the U.S. retail CBD market, expected to more than triple in size to $16 billion by 2025. From its e-commerce platform, CBD distilleries is a top-five CBD brand in the U.S. and top-ranked website in the CBD category with more than 30,000 orders monthly and a significant repeat customer base. The BHP team is one of the most experienced, knowledgeable, and successful in the industry, with a passion to continue to grow their current platform as part of the Village Farms family. We welcome them aboard. Balanced Health has already taken exciting next steps in their product strategy with the recent launch of their unique synergy collection, which takes the benefits of the entourage effect in their flagship CBD rich full-spectrum hemp extracts to a new level. This is truly innovative in the CBD space, and I expect to have much more to share in terms of product innovation in the quarters to come. So it's a familiar play, but for those of you who have been following Village Farms' transformation, Balanced Health's product categories are adjacent to our existing U.S. products portfolio. We strongly believe that when there is additional regulatory clarity around CBD, our existing relationships and experience with major grocers and large format retailers will be a major advantage in capitalizing on that opportunity. To summarize, Balanced Health is a great fit for Village Farms' portfolio. It is a leader and innovator in this high-growth category with a very strong, committed management team and a leading established online platform and profitability. Together with our unmatched Texas assets, nearly 6,000,000 square feet, it provides optionality as federal legalization of ITAAC regulations comes to develop in the U.S. And of course, we’re very encouraged by this past Friday's report that a new Republican congressional ITAAC cannabis legislation may be in the works. The fourth and final takeaway is steady progress on the prudent international expansion. Q3 saw us take meaningful additional steps forward in our international cannabis strategy, leveraging our strengths to build brands in emerging legal, regulated cannabis markets with existing consumer demand. We took a major step forward towards participating in what we expect to be the first legal recreational cannabis market in Europe. This past September, we signed an option agreement which gives us the irrevocable right to acquire an 80% ownership interest in Netherlands-based Lilly Holland. Lilly is one of the 10 applicants selected by lottery to receive a license, subject to customary government approvals, to legally cultivate and distribute cannabis as part of the Dutch government’s cannabis supply chain pilot program. This investment will leverage Lilly’s local expertise along with our own experience in facility design and construction, and efficient large-scale operations, including product development, genetics, and strategy, both branding and marketing. We view this as another prudent and efficient deployment of capital with the potential for outsized long-term returns; including a springboard to possible other legal European recreational markets as they fully open. Finally, with respect to emerging international markets, earlier I mentioned Altum's imminent launch into the rapidly growing Australian medicinal cannabis market. This launch will mark Altum's first sales of ITAC cannabis products, and the third Asia-Pacific market in which it has commercial operations, in addition to Hong Kong and Taiwan. To conclude on Q3, we saw a strong financial performance and strategic execution across each of these core growth areas. Now I'll turn the call over to Steve to walk through our financial results in more detail and then I'll return with some closing thoughts. Steve.
Stephen Ruffini, CFO
Thanks, Mike. Before I begin, a reminder. Our third quarter 2021 results reflect the full consolidation of Pure Sunfarms' business, which was not wholly owned until November 2020. As we've been doing, we have provided segmented reporting, historical 2020, and current 2021 for Q3. When looking at the Q3 2020 standalone Pure Sunfarms financial results, please remember we could not consolidate Pure Sunfarms in our statutory Q3 2020 financial statements. We include them in the press release for comparative purposes only, as we believe it is helpful context as we discuss current business trends throughout this call. Turning to results, consolidated sales for the third quarter were $72.4 million, compared to $43 million for the same period last year. The nearly $30 million increase was primarily the result of the consolidation of Pure Sunfarms in this year's results, as well as the partial quarter’s contribution from Balanced Health. We generated consolidated net income for the quarter of $700,000, or a penny per share, which is essentially unchanged from the same period last year. Consolidated adjusted EBITDA grew 49% year-over-year to $6.8 million from $4.6 million. This was primarily the result of a 270% year-on-year increase in adjusted EBITDA from our cannabis operations, which was partially offset by the decrease in Fresh Produce adjusted EBITDA. Although positive, it was down from the outsized number in Q3 last year when we were benefiting from a very favorable demand and pricing environment as a result of the U.S. lockdowns. Turning to business segment results, starting with Cannabis, which now reflect our combined Canadian Cannabis Operations, Pure Sunfarms, and our U.S. Cannabis Operations, Balanced Health Botanicals, which was acquired on August 16. Accordingly, our Q3 2021 results reflect only about half of a quarter's contribution from Balanced Health, which was still accretive to our consolidated results. Our total cannabis operations comprised 43% of total Village Farms Q3 revenues at $31.2 million versus nil in Q3 last year, for the reasons I mentioned earlier. Cannabis adjusted EBITDA was $9.3 million, a nearly threefold increase from last year's Q3 of $2.5 million. To aid our investors and analysts in assessing the performance of Pure Sunfarms, we've continued to break it out separately for the quarter and year-to-date. As we move forward with our cannabis operations, we report our cannabis operations by territory rather than legal business entity. We've already begun to integrate our Canadian and U.S. cannabis businesses and look forward to the collaboration between the teams. As Mike discussed, Pure Sunfarms delivered yet another strong quarter. When comparing Pure Sunfarms results year-over-year or even sequentially, using Village Farms statutory reporting currency, which is U.S. dollars, it can be a bit tricky due to FX swings. For instance, the U.S. dollar strengthened versus the Canadian dollar in Q3, 2021 versus Q2, 2021 by 2.5%. The relative weakening of the Canadian dollar impacted Pure Sunfarms' U.S. dollar contribution. When comparing U.S. dollar Q3 '21 Pure Sunfarms to U.S. dollar Q3, 2020 performance, the Canadian dollar was 5.4% stronger in 2020. As such, when comparing Pure Sunfarms year-on-year or quarter-on-quarter results, it's best to compare using its trading currency, Canadian dollar versus our statutory reporting U.S. dollar currency. In my comments today, all the period comparisons will be using Canadian dollar to Canadian dollar for the respective periods for Pure Sunfarms. Total net sales for Q3 were $27.4 million U.S. or 34.5 million Canadian, which were up 53% year-over-year and up 13% sequentially. Pure Sunfarms retail branded sales, which comprised 66% of total Q3 sales, increased 91% year-over-year to $18.1 million U.S. or 22.8 million Canadian, which was up slightly from Q2 of this year. As I noted on our Q2, 2021 earnings call, our retail business has returned to a more normalized pace with the worst of the pandemic in the rearview mirror. It is subject to when provincial buyers execute their POs and when they receive a corresponding shipment. We did ship several large branded orders in early October of this year that we had hoped would occur on or before September 30. This timing difference means our retail branded sales in Q3 were a bit lower than our internal expectations. However, we have commenced with a strong start to Q4 and have resumed our strong growth trajectory in this channel. Our branded sales consisted of 89% flower and pre-roll SKUs with cannabis derivatives comprising the balance of our branded sales. Small format comprises roughly 50% versus our large format, which is also 50% with very similar margins. Our large format sales now almost entirely consist of the single-strain format which command similar margins to our small format flower SKUs. Our pre-roll sales grew over 24% sequentially, and we improved our gross margin on this format during the quarter as we have taken on the manufacturing in-house. Pre-rolls carry a lower margin than our flower SKUs, at least as of today. Q3 was a particularly good quarter for non-branded sales or wholesale sales, which was $9.3 million U.S. or 11.7 million Canadian, up from 8.8 million U.S. or 10.6 million Canadian increases last year and up from 6.4 million U.S. or 7.9 million Canadian in Q2 this year. This is the highest quarter since we received our retail sales license from prior to the receipt of our retail sales license in September of 2019; obviously, all our sales by default were non-branded. Our high-quality flower and trim, especially high potency strains continued to be in high demand from other LPs. We assess wholesale sales based upon product availability and always in the context of making economic and strategic sense for our retail branded business. We continue to expect wholesale sales will vary quarter-to-quarter depending on available supply and other LP's demand. As you may recall, we do not assign any cultivation costs to our trims since we deem it to be a byproduct of our flower. As such, trim sales effectively have a high gross profit margin. Pure Sunfarms' gross margin for Q3 was a very healthy 48%, or 44% if one excludes the purchase price accounting, which I'll address in a moment. This was above our stated target range of 30% to 40% as the quarter benefited from improved production efficiencies led by an increase in yield, as well as potency and consistency. Resulting in not only lower-cost production but also higher quantities of higher potency flour and trim, which increases our selling prices which are impacted by both potency and consistency. This is especially impressive as we roll out new strains. As we have stated in the past, our cultivation will continue to evolve and we will continue to improve. That said, our Q4 gross margin percentage will likely fall back into our target range of 30% to 40% as we expect an increased mix of our sales to be in the form of lower-margin cannabis derivative formats, as well as pre-rolls. As we launched new SKUs in these formats, and increased our market share in these form factors. Also, our non-branded margin can be impacted quarter to quarter by the movement in some quarters of lower potency flower and distillate. As stated, potencies do impact price. As a reminder due to the acquisition of Pure Sunfarms in November 2020, we were required to adjust Pure Sunfarms' inventory values to fair value, due to acquisition accounting, which impacts our statutory reported gross margin. While the overall net purchase price adjustments to inventory was close to null in November of 2020 in the acquisition, as we wrote up flower and wrote down distillate and oil inventory on hand at that time. As such, we've adjusted our EBITDA for these non-cash fair market accounting adjustments. The non-cash impact in Q3 was a reduction in our reported adjusted EBITDA of $1.2 million as we sold off and or used some of the distillate and oil inventory we had on hand in November of 2020 in Q3, 2021. As of September 30, we have roughly $6.5 million Canadian left on our purchase price adjustment balance, which will gradually work itself off over the following quarters. Pure Sunfarms' SG&A for Q3 was 5.3 million U.S. or 6.7 million Canadian, which equates to 19% of total sales. This compares to $4.4 million or $5.4 million Canadian or 18% of sales for the second quarter. The expected sequential increase is primarily due to an increase in brand and commercial activities, such as media and trade spend, as well as a larger workforce to support the increase in point of purchase, sales, and market share growth, especially in flower. Pure Sunfarms delivered its twelve sequential quarter of positive adjusted EBITDA of $8.6 million U.S. or 10.9 million Canadian, which has nearly doubled that of 4.3 million U.S. or 5.6 million Canadian in Q3 last year and up 19% sequentially from the second quarter of this year. Our recently acquired U.S. cannabis operations Balanced Health Botanicals performed in line with our expectations, contributing $3.8 million in revenue during the approximately 6-week post-acquisition period with a positive EBITDA of 700,000. As some of you have seen and commented online, we have filed our Form 8 with the historical financials for Balanced Health last week. Yes, 2020 was a rough year for the entire U.S. CBD industry, but as you can see from both the post-acquisition results and the first 6 months of 2021, which were also filed in our Form 8-K last week. The Balanced Health management team has done a terrific job riding the ship and returning the business to profitability while continuing to innovate. We're very excited about its new synergy line and some other products that will be launched in early 2022. Turning to Village Farms Fresh Produce, I am pleased to report we continue to see the recovery of tomato pricing value I alluded to on our Q2 call, after one of the most challenging periods in the last decade. Pricing is being helped as retailers and consumers return to normalized demands, which pre-COVID was higher for our higher-priced tomatoes than it was post-COVID, as well as supply issues being driven as the entire industry continues to struggle with the brown reduced virus. Fresh Produce sales for Q3 were $41.2 million, a decrease of just 4% from Q3 last year when you recall, we were benefiting from significantly elevated pricing as a result of endemic in-sourcing demand driven by restaurant closures. We continued to utilize new measures and procedures to manage the virus and believe we will see improved results from our facility during this crop cycle, which is just now kicking in and will last through the second quarter of 2022. I mentioned in the Q2 call, we expected to get back to breakeven for our Fresh Produce adjusted EBITDA in the second half of 2021; I am pleased to reiterate Mike's earlier statement; our Fresh Produce business generated positive adjusted EBITDA of $1.4 million in Q3. Although down from the outsized level of Q3 last year during the period of elevated pricing, it is a very positive turnaround from a loss of nearly $4 million in Q2 this year. Our Fresh Produce EBITDA is very dependent on pricing. But so far in early Q4, we continue to see better pricing and forecast another quarter of positive EBITDA from this line of business. Finally, some comments on our Balance Sheet and cash flow for the quarter. At September 30, we had over $80 million in cash and close to $40 million of working capital, excluding cash on our consolidated Balance Sheet. We did use over $30 million in cash for the Balanced Health acquisition plus transaction costs and spent approximately $4 million on capital expenditures on our production facilities during the quarter. Our operating cash flows from our business operations, excluding working capital, generated close to $5,000,000 for the quarter, while our working capital due to the ongoing expansion of our Canadian cannabis business did increase by $10 million for the quarter. Additionally, we paid down our produce and cannabis debt to the tune of $1.7 million during the quarter, and we purchased just under 108 thousand shares to the tune of $1 million during the quarter under our normal course issuer bid. As a reminder, the decision to purchase shares under this program is opportunistic and tied into our broader capital and M&A strategies. Most of the 75 million acquisition price per Balanced Health shows up on our balance sheet as goodwill. Currently, we are estimating the goodwill to be approximately 68 to 69 million as Balanced Health is an asset-light business. There are not a lot of tangible assets to allocate the purchase price to, including inventory, which is being well managed and has a low days on hand. As such, we will not have the fair market value adjustments we experienced with the full acquisition of Pure Sunfarms in 2020. Corporate expenses skewed higher in this quarter due to approximately $1.6 million of incremental transaction and legal costs associated with the acquisition of Balanced Health in August, which accounts for the $1.8 million quarter-on-quarter increase in corporate expenses in Q3. And now I will turn the call back to Mike.
Michael DeGiglio, CEO
Thanks, Steve. Still concluding thoughts. Over the past several years, the future Village Farms has really come to focus. We are a vertically integrated plant-based consumer products company. Our target is high growth, large market opportunities in North America and around the world with a specific focus on cannabinoids, both high and low THC and related health products. As such, it was the right time for us to unveil a new corporate branding that reflects a significant transformation of Village Farms just expanding its cannabis offering. So today we are a branded consumer products company that is leveraging our deep institutional knowledge and extensive capabilities gained over three decades. We have unmatched CEA assets to build on our proud heritage in the produce business through significant new opportunities in cannabis, CBD, and related products. We are united by a new mantra, good for all. You can check out our new website, which is an expression of our unrelenting commitment to responsibility, resourcefulness, and integrity, as well as to continued leadership and innovation in sustainable agricultural practices, and the use of alternative renewable sources of energy. It's good for our customers, good for our consumers, good for our partners, and good for employees. And it's good for you, our shareholders. In closing, let me reiterate my overriding objective, not just as Village Farms' CEO, but as its largest shareholder; sustained creation of real value over the near, medium, and long term. Amidst what continues to be a flurry of changes in leadership, strategic direction, and business models and repeated moving of the profitability goalposts, our Canadian cannabis operations have been able, with the benefit of decades of our operational experience and deep knowledge of the sector via the best leadership team in the industry, not just operationally, but in terms of consumer packaged goods know-how to focus on one single item: the execution of our plan. This quarter is further evidence of this execution. Our dominant brand leadership has been built organically and profitably. Our disciplined approach means that strategic investments, either acquisitions or capital expenditures, are poised to grow as part of Village Farms' platform and contribute positively to returns from day one. We do this by building on our heritage of over 30 years, leading with sustainable business practices and preparing for multi-year growth opportunities across numerous cannabinoid categories ahead. This is the power of Village Farms' execution of our plan. Building the right platform, executing on profit and market share. And that's what really matters. So thank you. And with that, we'll open up some calls, questions for our analysts.
Operator, Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session for the analysts. Please limit the questions to two. You'll then hear a 3-tone prompt acknowledging your request and your questions will be pulled in the order that they are received. One moment, please, for your first question.
Tammy Chen, Analyst
Hi, thank you. Good morning, guys.
Michael DeGiglio, CEO
Good morning, Tammy.
Tammy Chen, Analyst
Morning. First question from me is, I'm just curious about the unbranded sales this quarter. One is the availability of high potency flower to your own retail segments, but instead to the other LPs. Aren't you enabling your competitors?
Michael DeGiglio, CEO
Well, that's a good question. We talk about that all the time, and there are a couple of reasons as we gear up for Delta 2 from an operational perspective. We've always communicated that even with our experience when you're starting up, even with a change of crop, there’s a lot of buildup in that operational efficiency you need. So we want to be able to continue to grow as quickly as we can. We don't produce what we can't sell, no matter what the channel. Once we get that penetration out there and continue to gain market share throughout Canada, then the obviously the priority will be the retail market as opposed to a non-branded market. So it’s a balance because keep in mind while others are closing assets, we're continuing to build and we want to make sure that that operational excellence continues. So we have to move the product wherever we can.
Tammy Chen, Analyst
Can you discuss your perspective on the current Canadian market, particularly in light of the increasing fragmentation and aggressive pricing we've observed this quarter? How do you envision this situation developing in the near future? Do you expect this competitive pricing environment to persist?
Michael DeGiglio, CEO
Well, I'm going to turn it over to Mandesh for that answer because I might have a different point of view on how they operate from my brand vantage point, which is much closer to it on a quarterly basis. So Mandesh, first step.
Mandesh Dosanjh, President & CEO of Pure Sunfarms
Yes. Thanks, Mike. I appreciate the question, Tammy. The answer is partly about what’s happening in the market, and Mike alluded to it in the comments. We’re seeing some really interesting pieces from our competitors in terms of dropping prices to the point where they’re not making any money. We see this activity on the wholesale side of the business. The accretive margins we see on selling product, and to see LPs turn it around and sell it for a loss – we don’t think that’s sustainable and we’re already starting to see cracks in the foundation and the tide is turning. Most recently, we’ve seen products that were doing well in Ontario take price increases to the customer as high as 12% in the last few weeks. So I think you're starting to see the requirement for LPs to have to start to turn margins around and either take price increases or change their product strategy. We're pleased with our performance and the growth in our gross margins; is that, one, we're built for the long term. And two, if we want to start to invest in pricing to try to come back to that, win market share, we can. We haven't needed to do that to date, but we really like the leverage we can pull and the position that we're in. As we continue to see our growth improve roles and vape in the 2.0 side, competing more head-on, becoming now a top 5 in those customer segments. We have a lot of tools at our disposal to start to combat what's happening in the market, but make no mistake, I think what you're seeing today is not good for the long-term of the industry. We believe that those practices will start to cease or cause people to go under. It’s the long-awaited consolidation that we've all been talking about. Mike, Steve, I'm not sure if there’s anything else you want to add there on the market side, but those are my viewpoints.
Michael DeGiglio, CEO
That covers it. Regarding your first question, we are still working with distribution channels through the provincial governments, and they are still ramping up to some extent, so we can't always achieve the penetration we want. However, we have experienced sequential increases of over 40% in retail over the last year, although there is still significant variation quarter-to-quarter. As we ramp up, our focus is entirely on retail branding, but it will take time. Thank you.
Operator, Operator
Your next question comes from Aaron Grey from Alliance Global Partners. Please go ahead.
Aaron Grey, Analyst
Hi. Good morning. Thanks for the questions and congrats to you, Mandesh. First question from me, I'd just love to double back on what Tammy just asked. Some of your peers have been talking about the return to brick and mortar and offering opportunity for some of the LPs to regain market share they've lost in recent months. Just from your perspective, are there any initiatives that you guys currently have in place as potentially get more brick and mortar shopping versus online, just so that you guys continue to outperform some of the other bigger LPs and continue to gain share going forward as people turn to in-store shopping? Thank you.
Michael DeGiglio, CEO
Mandesh, do you want to take that?
Mandesh Dosanjh, President & CEO of Pure Sunfarms
Absolutely, Mike. Good question, Aaron. I alluded to it in the past quarter about what the opportunity has; is a head for Pure Sunfarms, and we’re executing on that, which is great brand presence, really good recognition with bud tenders and consumers, and we’re seeing that brand growth and that brand resonance. And last quarter I mentioned it, Steve, you even talked about on SG&A growing the team, continuing that presence on the ground in each of our key markets. We're continuing with our trade marketing activation on the digital front as well as in-store, and really starting to continue to bring the brand to life at POs. Collaborative partnerships with our retail partners to ensure bud tenders are engaged, know about all of our new SKUs and new launches. The release talked about 31 new SKUs that we launched in the quarter, continuing that aggressiveness in growth into Q4 and making sure the product education is really known with the bud tenders. And that we’re seeing that pull-through. We’ve seen really good progress towards that, in terms of sell-through and sell-in. We're pleased with the talent that we're attracting. Every time we go to market for roles across the country, the amount of people that want to join our organization because of the strength in our brand and the strength of our sales, people who are in the cannabis industry continue to want to come to work at Pure Sunfarms. So we're pleased with everything we're doing on the build side, the team is executing really well. Really strong digital programs as well as trade programs and outreach to consumers to continue to build that awareness. A lot of collaborative partnerships with our retailers and boards to bring that forth so people know about the great SKUs we’re bringing to market and continuing the momentum on our sales.
Aaron Grey, Analyst
Great, thanks for that color, Mandesh. And then second question on international markets. It seems like a lot of opportunity are there for you. For you guys can execute a second mover advantage similar to what you did for the Canadian 1.05 market. As you get that final GMP certification, you talked about Israel being the big market. How can you help us to quantify the opportunity there and how you're going to look to allocate flower between the Canadian market, both the retail and wholesale opportunities, as well as international markets, especially if those offer potentially higher margin. Thank you.
Michael DeGiglio, CEO
Well, I think, first and foremost, is Canada. Our priority was always on being maximum penetration in Canada across the whole country. But that was part of the reason we brought on Delta 2. Remember Delta 2 should yield even higher than Delta 3. We have a lot of capacity coming onboard and outside of Canada. We've definitely earmarked export, both to Australia now and the EU as a priority if the margins are good. We know who’s competing there, we know what the revenue numbers are and the margin growth, and it will be a key priority for us going forward next year.
Operator, Operator
Your next question comes from Rahul Sarugaser from Raymond James. Please go ahead.
Rahul Sarugaser, Analyst
Good morning, Mike, Steve, Mandesh. Congratulations on the excellent quarter, and Mandesh, special congratulations on your new arrival. I appreciate you taking my question. I wanted to revisit the Canadian market and the wholesale sector. As you mentioned, Mike, there is a lot of irrational selling occurring. I would like to explore your strategy further because in the past, you successfully navigated that market profitably while others struggled. Is your strategy, in addition to what Mandesh discussed regarding active selling, also focused on being defensive? Can you maintain the same margins as before in both your unbranded and branded products? Are you waiting out your competitors, or are you planning to take proactive measures to defend your market share during this period of irrational selling?
Michael DeGiglio, CEO
I’ll start by addressing that and then let Mandesh share his perspective. There are many factors we want to excel in, and while market share is significant, profitability is also crucial. We need to operate the business with these metrics in mind. The market is being evaluated in several ways today, not only by market share but also through profitability and growth on both quarterly and annual terms. We have to consider that alongside the increased capacity that will be coming online over the next 12 months and make decisions that will yield the best results. Ultimately, our goal is to sell as much of our product as possible; while reaching 100% is unlikely, we aim for around 70% or 80% at some point. Any company can function in an environment aiming for 100%. However, it's essential to remember that not all our non-branded products are purely competitive. We are working to establish numerous partnerships in Canada that have unique intellectual property or positioning, and nurturing those relationships is beneficial. I'll now let Mandesh provide further insights on this, which he has been overseeing.
Mandesh Dosanjh, President & CEO of Pure Sunfarms
Thank you, Mike. I appreciate your comments and good wishes. I think you are spot on; we will continue to develop our strategic relationships in the non-branded segment. We’ve consistently said that a portion of our sales will come from that area of the business to enhance our profitability margin and enable us to invest in our business, brands, offerings, and people. So we will keep pursuing that. In regard to your question about the recent developments in the industry, we always focus on our medium to long-term success. There are indeed some intriguing dynamics at play. At a macro level, we are pleased with our results in terms of profitability and growth. At the micro level, we are noticing interesting developments at the provincial level. This does not mean we will immediately engage in aggressive competition, but we are open to it, provided it aligns with our strategic vision for maintaining our market position in the long run. We will adapt where necessary and focus on certain areas. We are excited about our growth in pre-rolls and vapes, as we were previously under-indexed in those segments given our size and growth potential. There remains a significant opportunity to further expand in these areas. Steve mentioned the growth we are seeing in both categories. Fundamentally, we have often been questioned about our adaptability in a constantly changing landscape, and I believe we are one of the few producers in this space that has stayed true to our narrative, demonstrating our ability to remain profitable and grow despite market challenges. We have a solid foundation and will adjust as needed. As these situations evolve, we will have unique insights and pursue creative strategies in the market to attract consumers and continue our growth narrative.
Rahul Sarugaser, Analyst
Thank you, Mandesh. I’d like to follow up on the international aspect. As we look to expand into Holland and launch our programs there, we noticed a significant presence in the lottery sector, especially with experienced groups and licensed entities participating. We've seen a competitor recently make a move in this area as well. The success of our rollout will depend on how well the pilot program performs. Electronics is just one part of this, and I’m curious about your forecast for its potential success, especially considering the number of inexperienced players holding licenses currently, even if some are from competing firms. How do you envision this developing in the long term? Additionally, with strong margins reported in the U.S., do you anticipate these margins to be sustainable, and what is your outlook for their progression over time?
Michael DeGiglio, CEO
I will address the first part of your question and then hand it over to Mandesh for the latter part. Regarding Holland, what is beneficial from the Dutch government is that among the 10, the surviving members have sufficient capacity, possibly all 10 or just 6. Their main concern, given that this is an exclusive trial for 79 coffee shops, is ensuring there is enough capacity to supply these shops that currently source from illegal markets. You raised a valid point about the lack of experience among some of them, which does pose a challenge but might also present an opportunity for us. We view this as an initial step forward. The Dutch government has significant stakes in the success of this initiative, and we anticipate additional opportunities may arise. We are committed to ensuring its success because we believe it could serve as a model for other European countries in the future. Our focus is on the recreational side, where we feel confident that the current medicinal market in Europe can be met effectively, efficiently, and with top-quality products at the right price from Pure Sunfarms. For years, we've considered investments in the EU for products but haven’t seen it as the best use of our capital given our ability to export. The recreational side is different, as it represents a built-in consumer base that we aim to influence, similar to what we accomplished in Canada, leveraging our existing model there. We also have strong, established connections in the Netherlands, which excites us about this opportunity.
Mandesh Dosanjh, President & CEO of Pure Sunfarms
As for the export side on margins and so on, I think we can expect some durable margins. We know that the Dutch government is controlling price degradation. They don't want to open up that market to current non-users, and they are very cognizant of that. So I think there will be very strong price controls that keep that margin very high initially, at least during this experimental portion of the test. I’m not going to elaborate, but we’ve done a lot of homework on that, and we feel very solid. That’s one of the reasons we’re making the investment; we believe we can get a return on our investment within the experimental period. So that’s a pretty – actually less than the 4 years, so that should tell a story about how strong the margins are in pricing.
Operator, Operator
Your next question comes from Doug Cooper from Beacon Securities. Please go ahead.
Doug Cooper, Analyst
Good morning, everyone. I have a couple of questions. First, can you provide an update on how many retail locations you expanded in the quarter? Also, did you experience any impact on your pricing due to aggressive pricing strategies during the quarter?
Michael DeGiglio, CEO
Mandesh?
Mandesh Dosanjh, President & CEO of Pure Sunfarms
Yes. So no real degradation in the pricing, Doug. I think it's been commented that our overall pricing remains really strong and there was no major adjustments to price. Obviously, we're tweaking as we see fit. On the door side, Doug, I don’t have that stat for you, but as retail doors continue to open up across the country, we continue to see our selling, the teams are tracking that. Obviously selling into the boards is a different relationship than going direct. And my level on tracking to know the doors policies, and I don’t have that data for you. But the team is seeing and knocking on doors as new stores open, continuing to work with our key accounts and making sure our product offerings are continuing to roll out across the province.
Doug Cooper, Analyst
Just moving to the whole document -
Michael DeGiglio, CEO
Yes, Doug can I just add to that too. One thing I couldn't take away on that is, the last couple of years, what was really important was reporting revenues per se and cost of production. And we’ve all stopped giving out cost of production out of competitive advantage. But in the margins that we communicated, a 44% blended. To get to a blended margin of 44%, you can interpolate what the retail margin may have been to get there. That's a little telling, to answer your question.
Doug Cooper, Analyst
Regarding the wholesale aspect, could you provide some insight into how many different LPs you sold to in the quarter, and clarify the extent of your private label business during that period?
Michael DeGiglio, CEO
I think that's pretty confidential, Doug; we'll have to talk to you offline on that.
Doug Cooper, Analyst
Okay. Finally Quebec.
Michael DeGiglio, CEO
You can ask another question if you want.
Doug Cooper, Analyst
Any updates on Quebec and when you might get into Quebec? And I'll leave it there.
Michael DeGiglio, CEO
Regarding Quebec, we are still in the process of working on it. Let's just leave it at that.
Operator, Operator
Your next question comes from Andrew Partheniou from Stifel. Please go ahead.
Andrew Partheniou, Analyst
Hi, good morning. And I want to echo my congrats, both on the professional and the personal side. As my perennial question on Quebec has already been asked, maybe switch over to your branding. You guys have done things a little bit differently on many different aspects versus a lot of the larger LPs; one of them is putting the full force behind one brand, Pure Sunfarms. But now, just wondering how your thinking is around that one brand. If you’re thinking about potentially another brand, as you guys work on R&D with hang dried or any other activities that might warrant a separation and potentially something new that could enter the market that’s your own. And what that could do to price and maybe market share as well. Thanks.
Michael DeGiglio, CEO
Well, only a connoisseur can drum up that question, so I’ll turn that over to Mandesh.
Mandesh Dosanjh, President & CEO of Pure Sunfarms
Yes. Thanks Mike, and appreciate the comments, Andrew. Sure. Absolutely. Being on restarted, being a branded house for efficiency and making sure we could build brand recognition loyalty across the consumer landscape and instill confidence, and I think we’ve done that. We’ve done that extremely well. This is the year that coming up that we’re exploring; we’re actively building and looking at brand extensions, as well as new entry points and brands to start to look at how sub-brands approach. It will all be done cost-consciously. Mike alluded to it in his earlier comments, the expansion of hang dry. Our continued investment in our production operations basically translates to improved product quality. It’s always at the heart of everything Pure Sunfarms does and will continue to do. So as we continue to make those investments, we actually think they’ll improve our costs and quality. Continuing to do them very streamlined and thinking about the long-term will open up opportunities for us, Andrew, and we are actively looking at customer segmentation. We believe there’s an opportunity for us to continue our reach into stores, working with bud tenders and winning over consumers. Through brand extensions and new brands, it’s absolutely something I think customers should start to expect from Pure Sunfarms, actively exploring it. We believe the time is right for it. Our product expansion, our strain offerings, our overall quality will continue to be a big focus for what you see in 2022. That will absolutely lead to the potential for new brands as well as brand partnerships that we’re being approached with, and we continue to look to expand that and win over shelf space in the stores.
Andrew Partheniou, Analyst
Could you share your thoughts on brand partnerships? Are there specific types of customers or partners that would be more beneficial for you? Feel free to discuss as much as you're comfortable with.
Mandesh Dosanjh, President & CEO of Pure Sunfarms
I can take this one, Mike. Regarding brand partnerships, Andrew, the spot market and what we sell B2B includes a mix of strategic and tactical opportunities. What you're referring to involves contract growing or contract manufacturing with brands interested in collaborating with Pure Sunfarms. Our approach is selective; we don't work with just anyone. We are approached regularly by brands from Canada and beyond that seek us to white-label and contract grow for them. This is a lengthy process, and we prioritize ensuring that our values and long-term success perspectives align with those of our partners. We won’t invest time and resources just to launch something that might fail. It's crucial for us to understand the outlook of our partners and ensure we share a common vision. We are in discussions with various companies to confirm this alignment. If a brand has strong consumer resonance, it becomes very appealing for us to collaborate, as we aim to enhance the market landscape together. When introducing new players, we ensure they connect well with consumers, knowing we will be recognized as the licensed producer associated with them, which boosts consumer confidence. Thus, our focus is on finding the right partner who shares our vision and understanding of the cannabis landscape. We believe there are brands and products that fit this potential, and we're excited to see what 2022 holds for us.
Operator, Operator
Your next question comes from Eric Des Lauriers from Craig-Hallum Group. Please go ahead.
Eric Des Lauriers, Analyst
Thank you for taking my questions, and congratulations on your achievements. I'll be brief. My first question is whether you have an estimated timeline for when you expect to receive the GMP certification and when the inspection will be completed.
Michael DeGiglio, CEO
Yeah, we're thinking probably towards the mid-late first quarter, just due to delays. So that's kind of feeling in the First Quarter. If successful, which we are confident we will be, we hope to start getting very aggressive in the Second Quarter of next year.
Eric Des Lauriers, Analyst
Great. I appreciate that. Then, looking at Pure Sunfarms' operations, and the impressive share gains that you guys continue to make here, do you talk about some of the cultivation improvements that you guys have seen since you started those operations? Whether that's in potency, yields, efficiencies, just anything you guys can point to. I'm just wondering if this is more of the same blocking and tackling in the market or if you guys are using some bona fide call patient improvements as well? Thanks.
Michael DeGiglio, CEO
Yes, I may take that only because of the secret source, so to speak. I think we've tried to be vocal with why our strengths. I think it’s clearly cumulative; it’s not just one item. As often said, the cards we were dealt with in Canada very restrictive on our cultivation side, the use of really know tools. So just being much more proactive in decisions, great growing team, it’s a combination of strains working together, techniques and processes. Probably not going to say one or two specifically, but that’s what we do. What we do good. Not patting ourselves on the back. It's just the duration of time to get here. So I hope that answers the question for Rahul.
Operator, Operator
Your last question comes from Scott Fortune from ROTH Capital Partners. Please go ahead.
Scott Fortune, Analyst
Thanks for the questions and congrats again. Real quick, the factors are keys to bring on the second half of Delta 2 production. Do you need Quebec or the international supply agreements to churn on from that edge? How are you looking at the second half of production for Delta 2 here?
Michael DeGiglio, CEO
We're confident in our strategy. As mentioned, we aim to enhance our geographical presence, and in Canada, we are continuing to penetrate retail markets. Although we faced delays in obtaining EU GMP certification due to travel restrictions, that has now been resolved. The market is expanding, particularly in Australia, where the market has doubled compared to last year, despite not requiring EU GMP certification. We have structured Delta 2 similar to Delta 3, with about 16 grow rooms, of which 8 are in full production this month. We plan to gradually increase our output, monitoring both the export and domestic markets without the necessity of ramping up all at once. This gives us flexibility. In 2020, we had to slightly reduce Delta 3 production during the summer to manage effectively, and we could do the same now. We're very confident that by the end of next year, we will be in full production and are estimating close to 200,000 kilos when both facilities are fully operational.
Scott Fortune, Analyst
Thanks for that color. And it really shifted focus here on the CBD Balance Health side and the digital expansion into Canada and EU, and timing potentially there. And then opportunity leveraging Texas assets or kind of using your retail relationships to expand into brick-and-mortar for them. I know there's a lot online with great margins. But how do you look at those opportunities going into 2022 for PureCel here.
Michael DeGiglio, CEO
In the 24-month period from 2022 to 2023, we considered various entry points into the U.S. market, and acquiring a leading cannabinoid company like Balanced Health Botanicals was a key strategy for us. We believe our competitors have invested heavily to establish themselves, but we were more strategic with our timing. We feel that both the timing and the evaluation for the acquisition were appropriate, and having a presence in Colorado positions us well for our high THC business moving forward. While our competitors have a first-mover advantage and consolidation continues in the U.S. market, we recognize our significant potential with nearly 6 million square feet in Texas. The U.S. cannabis market holds enormous possibilities, and we anticipate numerous opportunities ahead, even beyond legalization. We are mindful that many investments could fail, similar to what we observed in Canada over the past four years. Our approach will prioritize the opportunities ahead, and we expect Balanced Health to be a crucial component of this strategy. Their online platform is unmatched, which will help us as we explore U.S. entry points. We are carefully monitoring legislation and will apply our acquisition methodology thoughtfully. We are enthusiastic about the Balanced Health acquisition and are optimistic about the potential regulatory clarity from Congress regarding CBD, which could facilitate our expansion into brick-and-mortar operations. We are ready for that development. I just want to say I mean, when we looked at Village Farms today, I think a lot of investors are still seeing us from one lens. BHP on its own competes with some of the largest brands solely in the pure CBD market, both publicly and privately owned companies. They are just as good as anyone out there in my opinion and those top-tier companies. They'll start proving themselves more and more both as part of the Village Farms family and on a standalone basis as well.
Operator, Operator
That concludes our question-and-answer session. There are no further questions at this time. You may please proceed.
Michael DeGiglio, CEO
Well, thanks, everyone. Appreciate your participating in the third quarter and we look forward to reporting our year-end and fourth quarter results at the next conference call in early March. Thank you all.
Operator, Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.