Village Farms International, Inc.'s (VFFIF) CEO Michael DeGiglio on Q3 2018 Results - Earnings Call Transcript

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About: Village Farms International Inc. (VFFIF)
by: SA Transcripts

Village Farms International, Inc. (OTCQX:VFFIF) Q3 2018 Earnings Conference Call November 13, 2018 1:00 AM ET

Executives

Michael DeGiglio - President and Chief Executive Officer

Stephen Ruffini - Executive Vice President and Chief Financial Officer

Analysts

Martin Landry - GMP Securities

Ben Elliott - RBC Dominion Securities

David Zelman - Zelman Capital

Giuliano Dalgrande - Dalgrande Holdings

Robert Grahovar - Small Capital Equity Investment Fund

Operator

Good morning, ladies and gentlemen, and welcome to Village Farms International Third Quarter 2018 Financial Results Conference Call.

Yesterday, Village Farms issued a new release reporting its financial results for the third quarter ended September 30, 2018. That news release, along with the Company’s financial statements, are available on SEDAR and on the Company’s website at villagefarms.com under the Investor heading.

Please note that today’s call is being broadcast live over the internet and will be archived for replay both by telephone and via the internet, beginning approximately one hour following the completion of the call. Details of how to access the replays are available in yesterday’s news release.

Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements.

A summary of these underlying assumptions, risks, and uncertainties is contained in our various securities filings, including Village Farms’ current Annual Information Form for the year ended December 31, 2017, and MD&A for the quarter ended September 30, 2018. These forward-looking statements are made as of today, November 13, 2018, 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 Mr. Michael DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead.

Michael DeGiglio

Thank you, and welcome, everybody, for joining us today. Today’s conference call, I have Steve Ruffini, our Chief Financial Officer, with me today. And the agenda for the call is I’d like begin with an update on the great progress at Pure Sunfarms. Steve will also do a brief review of our third quarter financial results. I’ll return for some additional comments, and then I want to allow adequate time for Q&A at the end.

So beginning with Pure Sunfarms, our production continues to steadily ramp up. And as we have said time and time again, growing is a ramp-up business, especially when you change to a new crop or build a new greenhouse, and it usually takes a good couple of years to get going. That said, I’m very pleased to report that we are on track and doing extremely well. And in my 30 years of building mega-scale greenhouses, probably 12 all told around North America, this is the first time that we’ve actually commenced conversion of a greenhouse while growing and while harvesting, while doing post-harvest and selling product, all at the same time. So, it’s a remarkable effort and it’s been going extremely well.

The Company remains firmly on track for the entire 1.1 million-square-foot facility to be in production in the first half of 2019 at a run rate, as we have said from the beginning, of 75,000 kilograms annually. That’s a number that’s more conservative than other LPs on an equal-square-metre basis.

So our original targets from day one have all been met on time and we continue to meet them going forward. Our cultivation licence was received, and in August and September we did receive our third and fourth amendment to our original cultivation license. That brought us to 550, 000 square feet of licensed production. I believe it’s faster than most other LPs between receiving our cultivation licence and our sales licence.

Additionally, we planted out some more area in October, and we are now into our second crop cycle of what we predict will be five crop cycles per year in Quadrant number 2. The second half of the facility, the conversion is moving on plan and we expect the entire growing facility to be converted by year-end as designed. We may not do the final planting of that final block ’til January. That all depends on getting Health Canada to approve the additional expansion.

There has been some delays since the migration of ACMPR licences to the Cannabis Act licence following October 17th. All LPs have been affected by that delay, and we realize that Health Canada has a lot going on, but we don’t see that as anything more crucial than maybe a two- to three-week delay in having additional expansion. So our third Quadrant, which is another approximately 250,000 square feet, is ready to be planted out. It’s been converted, our generators are on-site, and we’re just waiting for Health Canada to okay that expansion.

So this year, we still expect to harvest 7,000 kilograms. However, with the time required from post-harvest, which just from the post-drying phase takes about four weeks to get permission from Health Canada where we have to do testing and verification to ship product. So I think at the end of the day we’ll probably push about 4,000 to 5,000 kilograms into the new year commencing January 1st. So looking for that to be sold in the new year, most likely in the first quarter going forward when it’s available for sale.

So by the way, we are very proud, the whole Village Farm team, when we look at design planning and implementation, our 30 years experience clearly was at work here. Looking at the facility today, there’s really nothing that we would do different, and I think that’s commendable to our team, putting together again that huge experience going forward.

So continuing on as we ramp up, we should be on track for 75 percent of our capacity in late winter, early spring, the first quarter. That 75 percent capacity makes us just about one of the largest LPs in all of Canada. That’s 75 percent of 1.1 million square feet.

So, and then as we reported before, we’ll come back and put the lighting in Quadrant number 1. Quadrant number 1 has run a full crop cycle, and since we didn’t have enough power and won’t until the second quarter of next year, we went dark in Quadrant 1. And that’ll go back in production, we’ll be putting the lights in there this winter and that will come back in production starting in March of ’19.

So running forward, looking forward in March of ’19, the full 1.1 million square feet will be in production at that point going forward, fully lit. So again, even at 75 percent capacity, Pure Sunfarms will be among the largest producers in the country. And based off of recent actual production numbers we’re seeing, there seems to be significant ramp-up issues with other LPs that probably will go well into ’19, which bodes well for us going forward.

From the operational side, Pure Sunfarms facility continues to operate to the high standards which it was designed. The nursery is fully automated and complete. It’s fully lit with its own generators, and the capacity of that nursery, at full functionality, can supply about 2.5 million square feet. So we would not have to build another nursery even to double the capacity of the Delta 3 facility.

The team is harvesting regularly, and we’re completed our second cycle in some of the flower rooms, starting move into our third crop, and that’s consistent with the expectation of five cycles annually. We have over 20 strains in production, and the testing, we’ve already decided to eliminate certain strains that we grow early on as part of the normal process that would occur all the time in farming. Even in our produce side today, we’re constantly evaluating new varieties and strains on an ongoing basis. But that said, our yield and quality are aligned with our expectations, and we remain confident with the ability to achieve an all-in-cost production of less than $1 per gram at full production.

Now let me explain that you really do need a full year under your belt for anyone to be able to document what your cost of production will be. You cannot do it on a quarter-by-quarter basis. I know some of our competitors are reporting that, but what may happen in this quarter may not happen in the next quarter in terms of yield output, so you really need a full year under your belt. And at that point, we will report what our cost of production will be, but we need to get a full year under our belt.

But Pure Sunfarms is clearly benefitting from the experienced management and growers coming over from Village Farms. In my opinion, I firmly believe we are number one in the industry and I don’t think anybody comes close. You cannot buy this kind of experience. Our existing labour force, 20-plus years there, grower 11 years, maintenance people 20 years, the entire team, you cannot buy that, you need to build it. And one of the benefits in our conversion for Village Farms is having that team in place. And that, plus our proven operating systems that we employed in the conversion, the two decades of history operating on the Delta facilities, the 20 years of chronological data that we talked about before. We have no issues on the location, we’re not in the middle of any residential neighbourhood like other LPs, and we’ve been operating there for 20 years. So clearly seeing the benefits of Village Farms’ experience as a large-scale, low-cost operator play out.

And as I said before, our goal is to be a vertically integrated company but first and foremost, you need to be the low-cost producer to build a very durable, sustainable company. That’s what we’re doing at the highest quality and, most importantly, the safest product. We are on track to do that and very confident.

From a selling side, we received our sales licence during the last week of July, not that long ago, and we commenced sales in September. Sales to date have been on a wholesale basis to other LPs. We won’t mention who they are. I can tell you that the phone is ringing off the hook on a daily basis, and from many of the LPs that have contracts with government that are short. In addition to our distribution agreement that we signed for Emerald Health to the end ’19, and we have a number of customers that are just buying on the spot market on a daily basis. The Canadian market has documented it’s well short of product, and I believe even more than anticipated.

So we are moving forward. We are waiting for our packaging licence, that’s the next key licence, waiting on Health Canada. Hopefully that comes in the next two to four weeks, and that will allow us then to start to quote provinces directly, which is on our radar screen, and we have been meeting with them on an ongoing basis.

So the higher-than-expected demand, especially coming out of some of the eastern provinces, have created favourable spot market pricing for us. It remains solid and I don’t see any end to that, at least through ’19, although still to establish Pure Sunfarms as a vertically integrated supplier and a leading Canadian brand. We do have ideas how to do that, but again, let us get through the process of finalizing the conversion and moving forward.

Alongside our current spot market sales, Pure Sunfarms is building inventory to ensure regular availability of product when being supplied to provincial boards. Now we see a lot of LPs that are short product for the commitments they’ve made. We will never be in that position. I can tell you that we will always make sure that we over-deliver on what we commit to, especially dealing with provincial boards and private retailers as well. That’s how you build a trusted brand. Consistent with the Village Farms philosophy of doing things the right way, we’re taking each step process by process moving forward.

Now I’m very excited to say that after an extensive search, we hired Mandesh Dosanjh [as President and CEO, Pure Sunfarms]. We’re fortunate to land someone with his great credentials, also indicative of the PSF opportunity. He had many choices and he chose Pure Sunfarms. As it’s been reported, he’s previously Senior Vice President, Supply Chain and Wholesale at the Liquor Control Board of Ontario, so the development and management of the LCBO supply chain and wholesale strategy for adult-use cannabis. He has a deep understanding of the Canadian cannabis product and competitive landscape. He has visited, obviously in his previous position, all our competitors. He’ll be a tremendous asset as Pure Sunfarms becomes a vertically integrated supplier. His top priority is development of the distribution, branding, and product strategies moving forward. He’s a proven leader. He’s aggressive, loyal, hardworking. I am very excited to have him on board and we already see great things happening.

And under his responsibility will be the provincial distribution. Mandesh already substantially advanced discussions with multiple potential customers since his appointment only five weeks ago, in advanced stages with two provincial boards and a multi-province retailer. [PSF] had intended to be supplying at least one provincial board by this time but the delays, as I mentioned previously, in obtaining our packaging licence has pushed that time frame back slightly, and the impact of the late sales from the provincial boards being more or less offset by higher-than-expected spot market pricing that we’re experiencing on a daily basis.

We are also pleased to have Pure Sunfarms opportunities unfolding. Our production is on track. Our quality is very good. Facility is operating exceptionally well. Sales are ramping up nicely. Organization is moving towards vertical integration starting with extraction strategies that we want to implement by mid-’19. We’re especially proud of the consistent positive feedback that we’re hearing from the LPs we’re selling. It’s not inconsistent with what we’ve heard in 30 years of Village Farms and building a company that has superior quality product and the safest of all. The same thing will flow here. And we’re building a reputation as a leader in the space, and working on further business development opportunities in Canada under Pure Sunfarms’ banner as well.

So with that, I’m going to turn it over to Steve and come back and make some other comments moving forward. Steve?

Stephen Ruffini

Thanks, Mike. In the interest of time, I’m going to confine my remarks to some key metrics. Our complete quarter and year-to-date financial results and discussion are available on our MD&A and financial statements, which are posted on our website and on SEDAR. A summarized balance sheet and income statement for Pure Sunfarms is contained in footnote 7 of our financial statements.

Year to date for the nine months ended September 30, 2018, our net produce revenues were down 10.3 million or 8.6 percent, of which 60 percent of that decrease is attributable to the lost production from our former Delta 3 tomato greenhouse which is now growing cannabis. The balance of the decrease is to due changes in crop mix at our Texas facilities, the biggest one being, for the first time in six years, we’ve cleaned out the Permian Basin high-tech greenhouse in Texas, which has been continuously producing us since its initial harvest in early 2012. We cleaned that out this summer for the first time, which obviously impacted our year-on-year volumes.

Due to our change in mix of tomatoes, for instance, the Delta 3 greenhouse was growing a lower-priced TOV variety, and better matching of supply and demand, on a year-on-year basis our net tomato price year to date was up 5 percent in an overall tomato price market where the average price of tomatoes continues its slow decline.

Year to date, we have a slight increase in our third-party supply partner revenues, and expect that trend to continue as our primary Mexican partner expands its production facilities and we bring on new Mexican partners who want to partner with Village Farms in 2019, due to some of our exclusive varieties that we can offer them.

Pure Sunfarms had net revenues of C$247,000 in September, as it began to sell product to other LPs, which slightly exceeded its 2018 budget. Sales at Pure Sunfarms continued to grow as it gets the proper paperwork in order and to move product to other LPs. And hopefully, as Mike mentioned, in a few weeks, we’ll have our packaging licence in hand and we can commence direct sales to provincial boards.

To date, production costs have been below our budget. As we’ve stated since the inception of Pure Sunfarms, any production facility is a ramp-up process. Pure Sunfarms is already demonstrating strong operational results with a small gross profit in its initial sales quarter and a bio asset value of C$1.1 million at September 30th. Historically, new construction greenhouses at Village Farms have not shown a profit in their initial years of production due to ramp-up issues, but due to the advantage of converting an existing facility with experienced production management and labour, Pure Sunfarms is off to a great start to its operations. And with its ability to produce high-quality and low-cost production into a market short of product, it is in a great position for a very strong Q4 2018 and a full year 2019 results.

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

Michael DeGiglio

Thanks, Steve. Okay. So sometimes we basically get criticized here at Village Farms for not communicating a lot of things. In the last couple days, it’s amazing; I’ve read and listened to some calls from our competitors. I can’t believe how much information is being put out. But at the end of the day, it’s going to be how these companies perform.

So looking at our outlook for Pure Sunfarms, obviously October 17th was an historic day, but the hoopla is over and it’s time for the industry to deliver on promises, and we can’t wait to start showing what we’re capable of doing going forward. And I think the market will reward those companies that achieve their production goals, generate sales, and manage costs with strong margins and profitability.

Yesterday morning, a very, very large LP reported their earnings, and I noticed that they had $600,000 in adult use sales, 600,000. We basically did 50 percent of that just starting, receiving our sales licence in September and just starting on one small quadrant, we were able to do 50 percent of that company’s adult use sales, which was amazing to me after what they’ve been—the years they’ve been performing and the money they spent.

So we’re firmly on track to do that and deliver value, both short term and long term, to Village Farm shareholders. We continue to expect Pure Sunfarms to be cash flow positive in Q1 of next year based on our current expected licensing timelines.

Now moving forward, since Mandesh has been on board and starting to build his management team, I can tell you that Steve and I wasted on no time moving to greater opportunities outside of Canada. As I mentioned previously, we do have a number of strategies in Canada under Pure Sunfarms [we] are looking at, but Village Farms is focused on the US and Mexico where we have great relationships and had those great relationships for 20 years.

So Village Farms, we’re clearly watching momentum towards legalization around the globe, but especially in the rest of North America. At its core, Village Farms is a vertically integrated greenhouse grower of high-value crops in the US, currently tomatoes, cucumbers, peppers. We’ve grown roses, carnations, and cannabis based on legalization. So we’ve mentioned, I’ve mentioned previous, that we’ve designed and built large-scale greenhouses in New York, Pennsylvania, Virginia, four in Texas. We have unmatched platform to capitalize on these opportunities. We’re one of the oldest and most experienced operators in North America, the oldest operating greenhouse company in the United States, and one of the very largest in footprints in North America, including nearly 6 million square feet in Texas.

As you know, the US Farm Bill has a great hemp opportunity with bipartisan support. We expect that bill to be passed sometime between December and no later than July of ’19. That represents significant potential for near-term opportunity in hemp production in the US, a key input for the production of a vast array of consumer and industrial products increasingly grown for CBD. CBD is becoming increasingly popular among and for its health and wellness benefits, as everyone knows, and hemp is just a low form of THC cannabis, typically less than 0.3 percent. It’s classified still as a Schedule 1 controlled substance since 1970 due to it being a variety of the cannabis sativa plant, cannot be legally cultivated in the US under federal law for commercial purposes.

However, this 2018 US Farm Bill includes a provision that would remove hemp from the DEA controlled substance list, making hemp just another agricultural crop. You’ve heard us say that before, we look at hemp, we look at cannabis as another agricultural crop. When we’ve been doing this for north of 30 years, I think we have the right to say that.

So Village Farms is doing some strong foundational work. We are spending dollars. We have lobbyists. We’re working in multiple states. We’ve been elected to the board of the US Hemp Roundtable. And this is potentially a very lucrative opportunity for Village Farms. Expecting hemp to generate a much higher revenue and margins than in produce. We will look at opportunities with existing assets as well as field opportunities.

Also, momentum towards federal legalization of cannabis, recent midterm elections, more states legalizing, et cetera, we think it’s very exciting over the next couple of years. Again, with our strength, one of our primary strengths being on the production side, that’s where we’ll start and move quickly. And we have built a vertically integrated company that’s very successful, still operating in the US. We plan to do the same.

Also the potential opportunity in Mexico. We have looked hard at Colombia and Central America and we’ve decided that Mexico is where it’s at. We have great relationships there with some of the largest companies in Mexico, and these established relationships will enable us to move forward there as well.

So I don’t think there’s any other grow operator or company today in North America, when looking at the United States, better positioned to capitalize on these opportunities than Village Farms. So we are very focused on shifting our time into these opportunities going forward.

With that, I will open it up to the audience, any questions you may have for Steve or I. Thank you.

Question-and-Answer Session

Operator

At this time, ladies and gentlemen, if you would like to ask a question, please go ahead and press *, then the number 1 on your telephone keypad. Again, that’s *, then the number 1 on your telephone keypad.

Your first question today comes from the line of Martin Landry of GMP Securities. Your line is open.

Martin Landry

Hi. Good morning, guys.

Michael DeGiglio

Good morning, Martin.

Martin Landry

It’s very interesting to hear you speak about the farm bill and the potential implication that it could have on hemp production in the US. But under a scenario where the farm bill is passed and hemp production becomes legal on a federal level, is it fair to say that we could see hemp being farmed outdoor in large fields? And if that’s the case, is it fair to say that the CBD extracts could—the price of CBD extracts could decrease dramatically? So just wondering a little bit how you’re assessing the economics of growing hemp with the price of CBD that could be a little bit depressed?

Michael DeGiglio

Well, for sure it’ll be field production, and we will be in field production. I mean I think a large array of CBD production will clearly be out of the field. Just because we have 6 million square feet of assets in Texas doesn’t mean we’re limited to Texas. We already have relationships in many states and with people who have literally hundreds of years of experience growing crops outdoors. So for Village Farms as an agriculture producer, we will clearly be in field production of hemp, but that’s not to say that hemp grown in greenhouses for very specific applications will not happen. We absolutely know it will because we’re in conversations with companies who want and who demand the type of output that really can come only from a controlled environment. So even if 5 percent of the market comes to greenhouse, it’s still thousands of acres of greenhouse that you would need to do that, and you can see the type of companies you can imagine that would be looking for that. And in that case, we will be looking at growing those specific strains, and we do have programs going on for specific strain development going forward, specifically for greenhouse.

Now the other thing to keep in mind is we produce 30 to 35 times more yield per square metre in a greenhouse on many of the crops we grow. So one may not, even though field production will probably always be a lower cost, we’ve been able to take and cannibalize the entire field tomato market in 30 years because we were able to reduce our cost through much higher yield. So it’s not just a question of growing product that may be completely pesticide-free, limited from toxicity, and sustainable in the sense that it doesn’t use soil, and there may be applications or customers who are looking for a sustainable, responsible growing product. So I think it’s going to be both for sure, and we plan to be on both sides of that equation as well.

We have done some initial calculations, and Steve has been working on that diligently on just what the potential would be if we apply the same sort of dynamics to greenhouse growing versus field, and it’s pretty interesting.

Martin Landry

Okay. So if you compare the economics of growing cannabis in Canada right now to maybe growing hemp in the US, how would you compare the two?

Michael DeGiglio

Well, I think look, I think there’s a lot growing of hemp in Canada and there’ll probably continue to be a rise in hemp production for CBD oil in Canada, and I think the same is going to happen here. I think the segmentation of the market is yet to be seen, but I still, I don’t necessarily know how that comparison would work today. I think it’s too early for us to look at. But I can say that I think CBD will be an enormously large market, and the market will be made up of products that are both grown in the field and grown in controlled environments.

Martin Landry

Okay.

Michael DeGiglio

Now beyond that, Martin, I’m not sure. It’s still too early to know how that segmentation will break out.

Martin Landry

Okay. And you also mentioned Mexico. Can you give us a little bit more colour as to what your strategy would be there? Would you partner up with an existing local player to cultivate cannabis domestically? Would that be the plan?

Michael DeGiglio

Well, I think the plan is for sure we’re going to be there. So when you look at Canada, I mean Village Farms was a little late to the party. And when I really consider, like I said earlier, that we’ve done about 50 percent of the sales in our first quarter production than some of the companies that have been there for years with market caps in the billions. And the fact that we didn’t have a medical program up in Canada prior to these companies, I think we’ve done phenomenal things in the one year we’ve been basically operating there.

In the US and in Mexico where we’ve been operating for 20 and 30 years, we have very strong relationships and we will be active in the market, and we will be active on the CBD side of that market. That is what we’re focused on. So even in Mexico, it would be a focus on CBD, not on recreational. And most likely recreational will be approved going forward, but our goal is to play in that CBD side. And Mexico, with 120 million people, even if you take a third of that, it’s larger than the Canadian opportunity in terms of population. The key is who are going to be the first licence holders once that regulation comes out. And if we’re successful both in the US and in Mexico in being an early starter, based on our relationships, then I think it’s going to be a whole different game for us than it was in Canada where we had that late start. So having those relationships in Mexico makes a difference for Village Farms, we believe.

Martin Landry

Okay. And my last question is on the Canadian business at Pure Sunfarms. There’s obviously been a lot of discussions about shortage of product in the industry. So I’m wondering how have the spot prices—because I think you sell spot sometimes—how has the evolution of spot prices evolved in the last six to nine months? Have you seen an increase in spot prices that third-party LPs are willing to pay?

Michael DeGiglio

Yeah, absolutely. I mean just the spot price, if you’re not playing north of 5, you’re doing something totally wrong today on the spot side. And so I think that’s the bottom line, that’s the bottom number, is it starts with a 5. And of course, you can see other companies that even have gotten cash and equity to sign longer-term deals. We have floated some of those deals out there to other LPs, and they’ve jumped on them that they would love to have a long-term deal, so we tested those waters. So not just looking at the spot 5, but you’re probably able to secure 5, at least on a two- to three-year basis, along with additional sweeteners on the deal going forward.

But again, as I mentioned earlier, a lot of these companies have made a commitment to the provinces and don’t have the capacity to deliver on them. So if I was in that position, I’d pay whatever I had to pay to meet the goals of my customer no matter what it is. And I think we’re seeing some of that today.

Martin Landry

Okay. Okay. Thank you very much. That’s it for me.

Michael DeGiglio

Thank you, Martin.

Operator

Your next question comes from the line of Ben Elliott of RBC Dominion Securities. Your line is open.

Ben Elliott

Hey, guys. Congrats on the cannabis progress to date, and certainly the increased transparency and guidance is appreciated. It sounds like we’re—

Michael DeGiglio

Thank you.

Ben Elliott

—yeah—it sounds like we’re kind of close to seeing some announceable agreements, which is really positive for sure. I just wanted to clarify. Is Pure Sunfarms obligated to sell 40 percent of supply for the next year or so to Emerald? And can you also clarify, it looks like we’re looking increasingly more at direct. And what kind of the 2019 mix of wholesale direct is being targeted as right now?

Michael DeGiglio

Well, it’s a good question. Yeah, I mean, we have a binding LOI with Emerald Health for one year, basically; it ends in December of ’19 for 40 percent of the output. Again, that was as a partner, as Emerald Health Therapeutics is a partner, they really wanted to have supply. And as a partner, you have to treat your partner in a good way. So we made a decision to do that.

Also, the fact that we didn’t want to—just to give you some background—we didn’t want to start to recruit for the CEO ’til we had our cultivation licence because that was an unknown at the time. So really, we didn’t start the process till April. We figured it would take four months, and it did, ’til basically October, November. And regulations are changing all the time, and we felt let’s give our new CEO an opportunity to get his feet wet and get in the game. So from a Pure Sunfarms perspective, giving up 40 percent for basically one year was something that we deemed acceptable. So that is in the works.

As far as the remaining 60, it’s a good question because we’re getting many calls. Companies are willing to even tie more lucrative deals for supply into ’19. At the same time, we’re sort of hoarding inventory to make sure that when we do sell provinces, and we’re planning to sell at least two of them shortly, that we have that supply.

So it hasn’t been defined, and that’ll be something that Mandesh is working on, he is working on, and he’ll come to a strategy here shortly in deciding what he will do with the 60 percent, how that’ll split into ’19. And of course, then going into ’20, it’ll be back to the full capacity on a 75,000-kilo run rate.

Ben Elliott

Great. Thank you very much.

Michael DeGiglio

Okay.

Operator

Your next question comes from the line of David Zelman of Zelman Capital. Your line is open.

David Zelman

Hi, gentlemen. How are you today?

Michael DeGiglio

Good.

David Zelman

And thank you for the increased colour on some of the other activities that are going on. But let’s start in Canada. You mentioned the possibilities of the new CEO is also reaching into some other distribution channels as well as what you just talked about, holding product for branding, which suggests obviously higher margins. And if I’m also thinking about, with that shortage and the media talking about product not being on the shelves, can you kind of talk about that other 60 percent potentially as branding? And then also, with availability for maybe year two, three, the opportunity to be a very meaningful, branded, extraction-related product company?

Michael DeGiglio

Well, I think those are the kind of strategies we will be looking at over the next six months. So one is clearly extraction. I mean first and foremost, we’re all in agreement that we need to get our extraction program in ’19 set down. It’s still a very nascent industry, and when it comes to extraction, there are a lot of different technologies.

And one thing we know, in the 30 years with Village Farms, is I could—I could take you to the boneyard of equipment that we’ve purchased that was obsoleted in a year or two. And we don’t want to make the same mistake where we’re spending millions on extraction. And keep in mind, even by the second quarter, we’re probably going to be one of the largest producers in Canada, so we don’t want to have 35 smaller extraction machines. So we have a whole ongoing program to evaluate not just conventional extraction that’s being used in the cannabis industry, but extraction equipment from other industries to see what we can apply here. Because we really need to get to that first value-added, and that’s oil.

Now going forward into 2020, I think—so ’19 will be that year that we look at extraction and we start to build our branding and product selection, anticipating what the regulatory requirements that will be coming out for edibles and additives from Health Canada for 2020. So I can’t add too much more colour than that, except that that is what we plan to start looking at. First and foremost, of the 60 percent is getting into the provinces where we can establish at least relationships on flower as we start to develop the next line of products going forward. I hope that helps answer the question, David.

David Zelman

Yes, it does. Okay. Also, given—obviously, we’ve heard a bunch of issues with the other LPs, Canada’s not a very friendly place to grow, sunlight, humidity, lack of experience, there’s a lot of capital but there might not be a lot experience. Therefore, what are the hurdles and timeline that you guys are operating on as it relates to converting your next greenhouse? Especially as you’re thinking about extraction and all that, whether it’s branded product or others, I would think—are you comfortable in thinking that the demand is there to convert that next greenhouse? And if so, what are the hurdles and timeline in order to see that happen?

Michael DeGiglio

Well, the optionality of the other greenhouses really doesn’t commence ’til Delta 3, the current greenhouse, is fully planted out, which we anticipate—depending on Health Canada approving the rest of the remaining square feet—to get to the 1.1 million, we anticipate that, let’s say, January. So that’s really when the optionality would commence.

And but what we did do is, based on experience again—and I keep saying it because it’s very important—is we built a nursery, fully automated, at a size that’s capable of doing at least 2.5 million square feet, because to build two nurseries and run two nurseries would not be efficient. So that was put into the mix at Delta 3. The extraction area in Delta 3 will also be large enough to encompass, like the nursery, an additional let’s just say million square foot, without having to spend additional capital. And to date, we’ve secured the power, at least another 24 megawatts. And each of these, so Delta 3 is using 24 megawatts; an additional 24 megawatts that’s been secured to date is enough power for another 1.1 million square feet.

And incidentally, one of the benefits that we have over other LPs is we did not have to buy cogenerators to generate electricity for lights. We were able to secure it off of the local utility, BC Hydro, saving us about $50 million worth of capital cost if we had to buy cogen, so.

And then we unencumbered the other greenhouse, as you know. That was one of the original raises we did, to take the debt off of that. So when that decision gets made, it really will start with the CEO, Mandesh, as he puts his program together, looking into 2020, 2021 and looking at capacity. He’ll have to make that decision in his strategy. But I did mention that there are other strategic possibilities in Canada as a country, outside of just the conversion of an additional Delta facility that’s being looked at.

David Zelman

Okay. I understand. You mentioned obviously, the quality and the standardization and going into branded, into high-quality, which makes perfect sense. Just can you give us the back of the envelope, of converting just simply 20 acres, which is only 15 percent of your Texas greenhouse, Steve? Do you have sort of a back of the envelope, how we can think about what that could mean as far your EBITDA contribution?

Stephen Ruffini

Yeah. Back of the envelope, West Texas is a better-growing climate than anything we have or anybody else has in Canada, due to the more southern latitude. So we’re certainly very confident that the yield profile of the 20-acre facility in Texas would be higher than the Delta 3. So let’s say we’re growing 40 million kilograms in 20 acres—everyone can put their own metrics—so let’s say we used the Village Farms $2, which is how we model these things. So that facility, that 20 acres would generate 80 million in revenue for hemp, that’s US, and today generates 8 million for tomato sales. So gives you order of magnitude.

It’s a stunning difference. And as Mike said, we believe there are two markets, there’s two markets today for tomatoes. There’s field tomatoes, and there are greenhouse tomatoes in the US. So there are customers who want the advantage of a greenhouse because we’re going to produce five to six crops per year. And if you’re going in the fields, in the US, you maybe—and maybe—you can get two crops in, more than likely one. And then you’re obviously susceptible to Mother Nature. They tried to grow hemp in Wisconsin this year and lost the entire crop. So if you’re a maker of CBD oil, you’re not looking to align yourself with someone who may deliver you nothing. Just it’s cheap field product, but if they ultimately not deliver it, you don’t have any CBD oil on the shelf. So we’re very confident that there will be a market for greenhouse capacity in hemp.

And as we’ve said, ultimately, it is a different strain of cannabis, and ultimately, it gives us a leg up and a lead into when medicinal cannabis is allowed be grown federally and in the state of Texas we’ll already be in the position to do so, with—we’ll have the greenhouse already be converted so it’s just a matter of changing strains at that stage.

David Zelman

And would you—could you share with us what a potential EBITDA profile would be on that math?

Stephen Ruffini

So if you take $1 a gram, the EBITDA profile of 20 acres is $1 million an acre, infinitely higher than what that facility’s doing with tomatoes today.

David Zelman

Okay. And then, obviously, given that there’s broad support on both sides now for hemp bill, is there opportunity for that bill do you think to get passed in this calendar year? There’s been some talk of a lame-duck session maybe wanting to do that. Obviously there’s a timeline when the funding to the agricultural community is going to run out. So do you think there’s a chance this could happen in this calendar year?

Stephen Ruffini

I don’t know if it’ll happen this calendar year. Obviously, there’s lots of—there’ll be lots of leadership issues in Congress, so probably not this year. The other thing that needs to occur, every state has a controlled substance list. And for instance, California is an interesting one. You can grow cannabis strains in California but you can’t grow hemp, and it’s illegal. So it’s still on the illegal list, as weird as that sounds.

So the other thing that we need, and we’re confident will occur this spring when the Texas Legislature goes back into session, is that hemp will be taken off the controlled substance list in Texas. So even if it were to come off, let’s say the US Farm Bill passes in December, we still need it off the controlled substance list in Texas as well.

David Zelman

Okay.

Michael DeGiglio

And I think 26 states that have approved. So there’s 26 states that have already—

Stephen Ruffini

Cannabis.

Michael DeGiglio

—approved hemp production.

Stephen Ruffini

No. Cannabis. Hemp has got three.

Michael DeGiglio

Yeah. Cannabis. Three. Yeah. Three.

David Zelman

Okay. But it’s reasonable to assume that if it’s legal at the federal level, that it’s just procedural to get it removed? And obviously in Texas, with Sessions no longer there, any kind of colour on the willingness in order to get it off the banned substance list, irrespective of if it’s three months or six months from now?

Michael DeGiglio

Yeah. And like we said earlier, we have a number of lobbyists in a number of states, not just Texas, that are working right now, writing legislation and working as that gears up. So we’re very active in [audio gap].

David Zelman

Okay. And then my last question. On Mexico, obviously, there’s movement there as far as making cannabis legal there as well. Anything you could share with us as far as if cannabis were legal in Mexico, what might be the opportunity?

Michael DeGiglio

Well, maybe, but I think we’re going to concentrate on CBD. The location we’re at is ideal, it’s just absolutely perfect where we’re at. So we already have our plans and designs ready to go on what we would do and what we would build. These would be specific builds. I don’t want to elaborate too much on it, so we have the relationships and we’ll see what happens down the road. I think we feel much more comfortable, and from a risk mitigation perspective, to stay with the CBD at this point in Mexico and not sort of venture into the adult use at this point. That’s I think what we’re going to do.

David Zelman

Okay. Thank you very much for your time, gentlemen. Keep up the good work.

Michael DeGiglio

Thanks.

Operator

And again, ladies and gentlemen, if you would like to ask a question, please go ahead and press *, then the number 1 on your telephone keypad.

Your next question comes from the line of Giuliano Dalgrande of Dalgrande Holdings. Your line is open.

Giuliano Dalgrande

Hey, guys. Good morning. How’s it going?

Michael DeGiglio

Good morning. It’s going good.

Giuliano Dalgrande

Great. First and foremost, I just wanted to say congratulations on your progress so far. You’re absolutely knocking it out of the park versus other LPs, and I really enjoy listening to the progress that you put forward today. The question that I have to ask is with regards to next year. You guys are focusing on extraction technology, and I’m just wondering if you’re just maybe looking to wholesale the oils? Or perhaps you want to do some more vertical integration with future legislation changes with edibles and drinks? And if you’re going to be coming out perhaps with your own line of edibles?

Michael DeGiglio

Yeah, absolutely yes, yes, yes. I mean it’s just a process. So we have to get to oil, and if we got our extraction strategy down and started to produce oil, that’s not to say—just as we’re doing flower today—we wouldn’t sell it to other LPs or wholesale. We’re all about generating profitability immediately and reinvesting that.

But then that process would go, now that we’re selling oil, we want to do it ourselves. That’s what we’ve always done. So as I mentioned earlier, it’s looking at the new regulatory requirements coming from Health Canada and preparing for that. Right now we’re starting to build that team of development people who will be involved in that. And so the answer is yes. I can’t just say if we’re going to be there by the end of ’19. It could be into 2020.

And I also believe also, there’s going to be great opportunity for working with other companies. I think that when we look at the market today, if you’re not in the cannabis game, I think the train left the station if you’re just starting out. And I don’t believe that many companies—well, I believe that there will be companies available that may be further down the road in terms of branded products that we may look at working with in some capacity. So I think there’s a lot of opportunity either way going forward.

Giuliano Dalgrande

Perfect. Okay. Well, thank you very much. I look forward to seeing all your future progress, especially in the States. You guys are getting a lot of knowledge, I’m sure, from Pure Sunfarms, and I’m excited to see what happens in Texas.

If I could just add one more point. Perhaps in the future, would we be able to get a little bit more information on the Pure Sunfarms website so it’s not just a landing site?

Michael DeGiglio

Yeah. Mandesh has got that under—yeah. And you’re right. So that’s on his initiative and start to build that website up going forward, and be able to communicate much better. We know—Village Farms, I mean we’re just a conservative company. When we put things out, we’re 100 percent sure we’re going to be successful with them. But that wasn’t a priority with the whole conversion, but it is now. So that’s well taken and thanks for bringing that up. We’ll move forward on that.

Giuliano Dalgrande

Yeah. Absolutely. I know there’s a lot of hot air from other LPs, so I really appreciate it. Don’t take that as any sort of criticism. I know you’re focused on actually producing versus other people. Thank you very much, Mike. Have a great day.

Michael DeGiglio

All right. Appreciate it, Giuliano. Thank you.

Operator

Your next question comes from the line of Robert Grahovar of Small Capital Equity. Your line is open.

Robert Grahovar

Good morning, gentlemen. How are you?

Michael DeGiglio

Good, Robert. How are you?

Robert Grahovar

Good, good. I’m going to apologize in advance in case I get disconnected here. I’m on my way to the airport. And I’m not sure—

Michael DeGiglio

Okay.

Robert Grahovar

—if I missed part of the call here. Yeah. In terms of Pure Sunfarms, in the future—I don’t know if this was sort of dealt with—are they going to directly issue press releases? Or is that something in combination where you release a press release and Emerald releases a press release? How is that sort of going to be worked out? Where’s the information going to come directly from?

Michael DeGiglio

Yeah. I think that—yeah—basically, Emerald release their own press releases—

Robert Grahovar

Okay.

Michael DeGiglio

—and to the extent that it involves anything with Pure Sunfarms, they’ll do it and we’ll do it. Because Pure Sunfarms will remain private, but that’s not to say—

Robert Grahovar

Right.

Michael DeGiglio

—they won’t put a press release out when they have something to report. But this call is mandatory for us, or not the call, but the fact that we’re reporting our third quarter earnings. So otherwise, we probably wouldn’t be having this conference call, so.

Robert Grahovar

So if I could say congratulations. If I look at the 12 months from this time last year, what you guys have achieved is absolutely remarkable. I guess the last coup for me was when you got Mandesh. Just looking at his profile on LinkedIn, I think there are more people crying that he left the LCBO than wishing him well. Truly a popular guy with a lot of depth, so I think that you guys made a great choice with him. D1 and D2, is there anything happening there with Emerald? Or what’s sort of the status on that in terms of the optioning?

Michael DeGiglio

Well, Rob, there’s not been any decision on the optionality of conversion with them. As Village Farms is securing—

Robert Grahovar

That makes me very happy.

Michael DeGiglio

—yeah. Because we need—

Robert Grahovar

I’m hoping they don’t option that.

Michael DeGiglio

Well, there’s been no discussion to option it. So at this point, we’re just going forward with Delta 3. Village Farms does have the secure power at this point. Not saying we’re going to put that into tomatoes, but, and we have some other things that Pure Sunfarms is working on. So there’s been no decision—

Robert Grahovar

Okay.

Michael DeGiglio

—on that optionality for the next phase.

Robert Grahovar

Am I clear in this sort of understanding? I think maybe, Steve, you might want to jump in on this. Is it not—do they not have until next year, June the 15th of 2019, where if they do not option it at that point, Village Farms is then free to pursue its own LPs? In other words, you’re going to have all the rights that Emerald has right now, if they don’t exercise—if Pure Sunfarms doesn’t exercise by June 15th? That’s sort of my understanding. I’m just wondering if you might clarify that. I mean, that makes me happy, if that’s the case.

Stephen Ruffini

No. I think we—

Robert Grahovar

But maybe Steve or you could elaborate on that?

Stephen Ruffini

The option’s online. Anybody can read it. It’s on SEDAR so anybody can see it. So the option is for—off the top of my head, it’s for either 24 or 30 months, once Delta 3 is complete. So—

Robert Grahovar

Oh, once Delta 3 is complete? Okay.

Stephen Ruffini

Yeah.

Robert Grahovar

Okay.

Stephen Ruffini

And again, at the time, it was hard to get something licensed, so obviously—

Robert Grahovar

Right. Right.

Stephen Ruffini

—things are going faster. Not quite fast enough but they are going faster than they were a year ago. We’d like them to go faster, but anyways. So yeah, so in that option, Pure Sunfarms has the option for Delta 2 and Delta 1 for a number of years.

Robert Grahovar

Okay. So do you think that they’re going to generate enough cash flow to sort of—would it be self-funding, Pure Sunfarms, where Village Farms and Emerald are not putting money into exercising that option? What’s your feel on that?

Stephen Ruffini

Emerald has to put x dollars in; it’s been redacted. But Emerald has—and those farms’ equity contributions would be Delta 2 or Delta 1. And yes, Pure Sunfarms, we’ve said should be cash flow-positive. And based on the timing of the construction costs and the cash flow for Pure Sunfarms, Village Farms may have to put none to a little—

Robert Grahovar

Okay. Okay.

Stephen Ruffini

—of CapEx into the conversion of—obviously Delta 1’s the largest greenhouse in North America, so that’s a whole different cup of tea than converting Delta 2. Delta 2 would be—

Robert Grahovar

Okay.

Stephen Ruffini

—a lower CapEx cost than Delta 3 because it doesn’t need the nursery, doesn’t need a vault, has the extraction room built for essentially, as Mike said, 2 million square feet already. So Delta 3’s been designed with the concept of Delta 2 being in production with cannabis.

Michael DeGiglio

Yeah. And we did 16 grow rooms. There was 17; we lowered it to 16 grow rooms in Delta 3. That’s at a much higher expense. So if we were to do eight grow rooms, we could reduce the cost considerably over Delta 3 for Delta 2 and move very quick.

Robert Grahovar

Congratulations, guys. It’s a great 12 months that we had.

Stephen Ruffini

Thank you.

Michael DeGiglio

Thanks, Rob.

Robert Grahovar

Bye-bye.

Stephen Ruffini

Bye.

Michael DeGiglio

Operator, I think that’s good. We’re good.

Operator

All right. So there are no further questions in queue. Did you have any closing remarks today?

Michael DeGiglio

Just want to thank everybody for taking the time to participate in this third quarter. We really look forward, we’ll be talking to you in March, reporting year-end going forward. And we think a lot of good things will be transpired over the next five months for Village Farms, and look forward to having that communication. Wish everyone a Happy Thanksgiving. Thank you.

Operator

And this concludes today’s conference call. You may now disconnect.

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