Good morning, ladies and gentlemen. Welcome to Village Farms International's Third Quarter 2022 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the third quarter ended September 30, 2022.

That news release, along with the company's financial statements are available on the company's website at villagefarms.com under the Investors heading.

Please note that today's call is being broadcast live over the Internet and will be archived for replay, both by telephone and via the Internet beginning approximately 1 hour following completion of the call. Details on how to access replays are available in today's news release.

Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call. Certain material assumptions 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 files with the SEC and Canadian regulatories, including its Form 10-K MD&A for the year ended December 31, 2021, and Form 10-Q MD&A for the quarter ended September 30, 2022, which are available on EDGAR.

These forward-looking statements are made as of today's date and except as required by applicable securities law, we undertake no obligation to publicly update or revise any such statements. I would now like to turn the call over to Michael DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead, sir..

British Columbia and Alberta, where the value segment is prominent. In British Columbia, we have had a full quarter's worth of sales data, and we're ready to top-selling LP to launch a Fraser Valley contributed to an increase in our market share from 6.5% in Q2 to 8.5% in Q3. That number increased further to 9.4% for the month of October.

And I will note that we achieved this despite regular sell-outs in a province where we already are the top-selling LP. In Alberta, the second province we launched later in the quarter, Fraser Valley has returned us to market share growth.

This success is the result of our precisely defined brand strategy, a value-oriented brand with individual and unique strains that, like all of our products, is now 100% hang-dried. We feel confident in our ability to maintain growth with our continued innovation and growth of the Fraser Valley brand.

In mid-October, we launched the first Fraser Valley SKUs in Ontario, and we are seeing similar positive results.

Although still early days, we're quite impressed that the team delivered a strong start to the Fraser Valley launch, while at the same time, continuing to support the rollout of Promenade and other brands and while continuing to growing market share of our first brand, Pure Sunfarms. This is a hallmark of great execution.

We have also continued to execute on the cost side of the Canadian business.

Gross margin remains within our stated target range and SG&A was down meaningful compared to the second quarter of this year, both in absolute dollars and as a proportion of net sales as the bulk of our investment spend in multiple major brand launches this year, which is now driving market share gains as well as our major innovation that I'll discuss later is behind us.

All of this contributed to our 16th consecutive quarter positive adjusted EBITDA for our Canadian Cannabis business. That's every quarter since Q4 of 2018, with adjusted EBITDA, which is 100% generated, by cannabis sales only, increasing with each in the last 2 quarters. We have successfully enhanced profitability while gaining market share.

This is yet another hallmark of great execution. To summarize, our Canadian cannabis business is growing sales, increasing market share and adding new customers, all while we are lowering our costs, benefiting from the increased efficiencies of scaling up our cultivation operations and gaining even more experience every day.

This will further enhance profitability to invest for future growth. Now turning to our U.S. Cannabis business, Balanced Health Botanicals continues to perform well and more importantly, remain profitable despite restrained consumer spending.

Last quarter, I discussed the broad slowdown in consumer purchasing that was being exasperated by the lack of clarity of the CBD category's ability to access traditional retail selling channels.

We have been proactive here pursuing new sales opportunities and implementing a number of initiatives aimed and customer traction and retention as we are seeing some positive results. During the quarter, we grew our subscription program by more than 5% to over 19,000 active subscribers.

Balanced Health also recently launched its second product in its Synergy+ line, Deep Sleep Synergy+, which is positioned to help customers fall sleep and stay asleep using plant-based ingredients. Our continued success in Canada makes me even more excited about and confident in our other international opportunities.

We continue to make steady progress on our international strategy during the third quarter as we pursued emerging legal cannabis markets in which we are confident that we can win.

As discussed in our last call, through our Netherlands subsidiary, Leli Holland, we have one of just 10 licenses to cultivate and distribute cannabis in the Dutch supply chain program, which is expected to be the first major legal recreational market for cannabis in Europe.

We look forward to directly participating and what is expected to be the first major European market to permit large-scale cannabis cultivation and distribution for recreational purposes. In other international markets, we are very pleased with the pace of sales in the Australian medical market and export from our Canadian cannabis business.

Sales to Altum International, our investing partner, have accelerated meaningful this year, in addition to starting shipments to a new customer during the quarter. In fact, Q3 sales to Australia have more than tripled over the past 2 quarters.

And we continue to prepare for our first exports to both Israel and Germany via our Canadian Cannabis business.

Admittedly, preparation has taken longer than expected as we navigate the evolving testing protocols and delays for each country to approve these protocols, but we are ready to go otherwise, and our market intelligence continues to support that our product, as it is in Canada, will be consumer preferred.

It's a bit of a horse race as to which market will ship to first. So now turning to our Fresh Produce business. We continue to be impacted by a number of significant pressures, most notably input cost inflation, which with that is now more or less a demand-supply balance, has limited our ability to pass pricing to our customers.

Specifically in Q3, we continue to be impacted by the Brown Rugose virus, which is affecting growers and yields globally, although it is confined solely to our Canadian operations.

We did see some of the inflationary pressures abate in Q3 and this is apparent in the improved financial results compared to the first and the second quarter of this year that Steve will discuss in a moment.

Although we expect these pressures to persist into next year, we do not think -- we do think the worst is behind us, which means we expect year-over-year comps to improve in 2023. Last quarter, I discussed the start of an intensive operational review of the Fresh Produce business.

The exercise is progressing well, and I'm encouraged by the process to date. We are currently involved in a deep review of the 2 separate independent consultant reports and that the consulting work is already starting to help us assess customer profitability and other aspects of our operation.

With last night's election results, we expect to have greater clarity in the future of cannabis regulation on both the federal and Texas fronts as well as any of the potential for regulatory processes during the so-called lame duck session, and I look forward to reporting on those outcomes of our review at the appropriate times.

I'll now turn over the call to Steve Ruffini.

Steve?.

Thanks, Mike. Let me begin with a quick reminder on the timing of our Balanced Health and Rose LifeScience acquisitions last year and their impact on our third quarter 2022 results. The contributions of each are consolidated in our financial results for the third quarter and first 9 months of 2022.

However, as we acquired Balanced Health Botanicals on August 16 of last year, our 2021 comparative results reflect approximately half a quarter's contribution from that business. As our 70% ownership of Rose was acquired in Q4 2021, there is no contribution for the comparative period in 2021. Turning to the results.

Consolidated sales for all Village Farms that includes our Canadian and U.S. Cannabis operations and our Village Farms Fresh Produce operations for the third quarter was $71.1 million, a slight decrease of 2% from the third quarter of last year due to a weaker Canadian dollar in 2022 versus 2021.

On a constant currency basis, our year-on-year sales were flat. Higher sales from the Canadian Cannabis business as well as the incremental contribution from a full quarter's result of Balanced Health were offset by lower sales from Fresh Produce.

Consolidated net loss for the quarter was $8.7 million or $0.10 per share compared to net income of $700,000 or $0.01 per share for the same period last year. The net loss was driven predominantly in the Fresh Produce business that Mike discussed earlier.

Consolidated adjusted EBITDA for the third quarter of 2022 was negative $2.2 million compared with positive adjusted EBITDA of $6.9 million in Q3 last year. The EBITDA loss in Q3 this year was driven almost entirely by Fresh Produce.

Corporate costs were $2.8 million compared with $3.5 million for the third quarter of last year, the decrease due primarily to lower SG&A. Looking at our individual business segments, starting with Cannabis. Net sales from our combined Canadian and U.S.

Cannabis operations grew 14% year-over-year to $35.6 million from $31.2 million, with the increase being driven by the growth in our Canadian Cannabis business, primarily driven by the addition of Rose brands in Quebec and the increase in Pure Sunfarms brands with the contribution from a full quarter of Balanced Health.

Total Cannabis sales comprised 50% of Village Farms, total consolidated sales in this quarter, up from 43% in Q3 last year.

Total Cannabis adjusted EBITDA was $5.4 million compared with $9.4 million for the third quarter of last year, with the decrease due substantially -- due to lower margin on our Canadian nonbranded sales due to price compression in the wholesale market and incremental SG&A spend in 2022 versus 2021, due to investment in brand launches and innovation, the addition of Rose as well as higher percentage of SG&A spend in our U.S.

Cannabis business. Within Cannabis, our Canadian operations delivered another solid quarter.

I will review our Canadian Cannabis results in Canadian dollars, which provides a more accurate gauge of our period-to-period performance in the face of exchange rate fluctuations as well as providing the ability to more accurately compare to the local Canadian market growth rates.

On that subject, I will -- I note that the reported results of our Canadian subsidiaries have been impacted by the strengthening U.S. dollar versus the Canadian dollar in 2022 as compared to 2021, which negatively impacts the results of the Canadian Cannabis segment when translated to U.S. currency.

On a constant currency basis, our Canadian Cannabis Q3 sales in U.S. dollars would have been 3.4% higher. Our Canadian Cannabis operations once again saw a healthy year-over-year growth, with net sales for Q3 of this year, increasing 15% to the same period last year to CAD 39.8 million, another new quarterly record.

Canadian Cannabis net sales were comprised of 82% retail branded sales, 16% non-branded sales and 2% distribution fees and commissions. As previously noted, non-branded sales may vary widely from quarter-to-quarter. Both Q2 of this year and Q3 of last year were stronger quarters for non-branded sales.

Q3 was a weaker quarter for non-branded sales in dollar terms as non-branded sales are demonstrating more downward price sensitivity correlated to the general retail markets pricing trends for this segment's customers. And we sold less bulk, high-quality flower in Q3 than in Q2 and more age and out-of-spec flower, which has a much lower price.

Our branded sales category also includes our export sales to Australia. Retail branded sales for Q3 increased 46% year-over-year and 26% sequentially, continuing our expected trend of quarter-on-quarter improvement through 2022, which we are forecasting to continue growing in Q4.

Gross margin for Canadian Cannabis for Q3 was again comfortably within our stated target of 30% to 40%, at 32%, which was down slightly from 33% in Q2. Our gross margin continues to benefit from gains in cultivation of efficiency and operational improvement, which was offset somewhat by pricing pressure in the non-branded market.

Our Pure Sunfarms and Rose branded gross margins remain above the range, both in the quarter and year-to-date. With our increasing market share driven by new brands, strains as well as our expansion in Quebec, is resulting in achieving branded sales demand volumes that are essentially fully utilizing our expanded supply capacity in the D2 facility.

We will monitor our expected demand and other market dynamics within Canada and in the export market before we add incremental capacity by expanding into the remaining 600,000 square feet in D2, for which much of the hard costs have been incurred. Our inventory levels have built up over the course of 2022.

But as a result of our ever increasing market share, we are now in the process of using this inventory for our winter demand and look to bring our inventory working capital down in Q4 and into Q1 of 2023, which is likely to impact the availability of biomass for our Canadian wholesale customers in 2023.

Selling, general and administrative expenses for our Canadian Cannabis operations for the third quarter were CAD 10.5 million or 26% of net sales compared with CAD 6.9 million or 20% of net sales in the same period last year.

The increase in absolute dollars was a result of the addition of the Rose operations in this year's quarter, which accounted for approximately 60% of the year-over-year increase as well as growth-related expenditures at Pure Sunfarms.

Notably, SG&A for Q3 this year was down meaningfully from Q2 of this year in absolute dollars and for the second consecutive quarter decrease as a percentage of net sales to 26%, down from 30% in Q2 and 32% in Q1. We remain on track to bring SG&A as a proportion of sales back into the lower 20% range for the fourth quarter and into 2023.

Our Canadian Cannabis operations delivered their 16th consecutive quarter of positive adjusted EBITDA of CAD 6.7 million compared with CAD 11.1 million for Q3 of last year, with adjusted EBITDA having increased sequentially in each of the last 2 quarters. I will now turn to our U.S. Cannabis operations and in doing so, will revert to U.S. dollars. U.S.

Cannabis sales for the third quarter were generated entirely by Balanced Health Botanicals, were $5.1 million, which generated a gross margin of 68%. Adjusted EBITDA was essentially flat at $10,000, but it did include one-off cash expenditures that will enhance future period EBITDA.

This compares with the half quarter's contribution in Q3 last year of $3.9 million with a gross margin also of 68% and adjusted EBITDA of $700,000. Turning now to Fresh Produce.

Q3's financial performance was impacted by not only the inflationary pressure on input costs, especially freight, but also by the production challenges due to the brown rugose virus that has impacted tomato growers globally, which creates incremental cost, but more importantly, has a significant impact on the production volumes.

And as you may recall in prior presentations, like most agriculturally based businesses, a substantial portion of our costs are fixed. So if volumes are down, there is less revenue to cover those costs.

Sales were $35.5 million compared to $41 million for Q3 last year, with the decrease due primarily due to lower tomato volumes and selling prices at both our own greenhouses as well as those with our -- for our growing partners.

Volumes were impacted both by the brown rugose virus at our Delta 1 greenhouse as well as the delay in the 2022/'23 crop cycle in Texas due to an operational change in our U.S. H-2A worker program.

On the cost side, freight spend in Q3 was approximately $1.2 million higher compared to the same period last year, due almost entirely to the increased cost of diesel and trucking rates on lower year-on-year volumes for the reasons stated, effectively increasing our freight per pound cost by 30% over Q3 in 2021.

The brown rugose virus had a significant impact on yields and thus revenues. This resulted in a negative gross margin for Fresh Produce of $3.3 million compared with positive gross margin of $2.1 million in Q3 last year.

What was a meaningful improvement from the negative $8.9 million in Q2 of this year, the negative gross margin drove negative adjusted EBITDA for Fresh Produce of $4.6 million compared with positive $1.3 million in Q3 of last year.

The negative $4.6 million in Q3 this year was also a significant improvement over the negative $10.4 million in Q2 of this year. Turning now to cash flows and the balance sheet. At September 30, we had approximately $23 million in cash. We had approximately $45.2 million in working capital, excluding cash.

During the quarter, we had operating cash outflows of $6.8 million net of working capital adjustments.

In August, we announced at-the-market offering of up to $50 million, which we believe, given the continued state of the broader capital markets, and more specifically with respect to the cannabis sector is an efficient and flexible means by which to assess additional capital should we choose to do so, especially in light of our Fresh Produce challenges and growth opportunities in cannabis.

During the third quarter, we generated proceeds of $800,000 from the issuance of 292,000 shares at an average price of $2.84. In October, we generated gross proceeds of $3.9 million from the issuance of 1.862 million shares at an average price of $2.11. And now I turn the call back to Mike..

Thanks, Steve. Before opening the call to questions, I want to take an opportunity to touch on a couple of popular Canadian market discussion points that centered around the theme that it is a difficult market for LPs, investors and lenders.

One theme is to be decelerating total sales growth, price compression is real, although there are signs it may be stabilizing. However, from a volume perspective, the market continues to grow at twice the rate of dollars, 40% year-to-date. We are well aware of the on the Canadian market oversupply that has led to price compression and slowing growth.

We agree, but you also see many regions to remain committed to the Canadian market. First, the market is growing, led largely by volume, which is growing at twice the rate of dollar sales. Price compression has helped convert legacy consumers to the legal market, which is continuing. New users are also attracted by the growth in the category options.

Second, capacity is coming out of the Canadian market, while painful for operators and investments, this will improve category dynamics. Third, with the right strategy, one can be profitable and drive strong growth as we have demonstrated for 16 straight quarters.

This ties directly to our global cannabis strategy, which is driven by 3 centers of excellence in 2018 -- since 2018. Cultivation execution at a cost advantage that yields consistent high-quality product, consumer-led insights to build brands and innovation and strong commercial partnerships with our customers.

So while others abandon this continued Canadian growth, we continue to take every opportunity to expand our leadership position in a market that is still forecasted to double from current levels to $8 billion in this consumer product industry, which is why this week, we are proud to have made 2 major announcements that result from our investments.

First, we are the first licensed producer to a drop hang dry processes at scale. Hang drying minimizes direct handling of the flower to preserve natural bud structure and aromas while delivering a high terpene potential. I am pleased to say these products are now broadly in the market.

It's an achievement in years in the making with the combined contribution of engineers, scientists, cultivators and dollars invested across our entire organization. Second, this morning, we announced the launch of our third BC-grown brand, Soar.

Soar complements and further expands our Canadian portfolio with a brand that is designed to deliver an elevated cannabis experience via limited quantity batches of select cultivars chosen for their exotic and unique genetics that are hand harvested [indiscernible] and of course, hang dry.

Products will be available in Alberta starting this week and in Ontario and BC in weeks to come. With that, we'll now turn the call over to questions.

Operator?.

[Operator Instructions]. The first question comes from Tamy Chen of BMO Capital Markets..

I wanted to start off with the flower category, actually -- a bit of a follow-up actually, Mike, to your closing comments there. First, I think a couple of quarters ago, you mentioned that there were a couple of slower moving SKUs in your flower portfolio. I was wondering if there was still some of that or you've kind of cleared through all of it. .

And the second part is noticing from the HiFyre data recently that the 28-gram large pack has really continued to grow for the industry, whereas the smaller pack sizes are really declining. And there is a concern that it's a signal the category is just getting more and more focused on value and being commoditized.

So I just wanted to understand how you're viewing the flower category's evolution at this point?.

Yes, Tamy. Okay. I'm going to let Mandesh take that question. Go ahead, Mandesh..

Yes, absolutely. Good question, Tamy. So first on the SKU assortment, I mean we're always constantly evaluating the categorization of our performance of our SKUs, kind of AAA, AA, A and so on and so forth, very common in category management. We feel strong in our approach and our philosophies there.

So at this time, we don't really feel there's any kind of backup of any slow-moving SKUs in our portfolio or sitting at the boards.

The commercial team has been doing an incredible job of making sure we're cycling out, kind of ramping down and out of any SKUs that we might think are no longer kind of achieving the success we want as we bring in innovation behind it on the flower side. And I think you've seen that a lot with some of our different launches over the last quarter.

We've been very active on innovation with new flower SKUs, milled offerings as well as pre-rolls on the flower side and cycling that in and through. So we feel very confident that our exposure risk there is minimal, and we're doing a great job of executing. On the format size, you're absolutely right.

I mean we see the consumer preference between small and large format deviating. People want to really get value. I think we really nailed that with the launch of our Fraser Valley Weed Co, which is specifically an only in large-format, 28 grams, so a very specific offering to drive efficiency at the SKU level.

We still like the 3.5-gram format as well though on Pure Sunfarms. And then now with the launch of Soar cannabis, which is going to be in 7-gram exclusive, which we find is over-indexed in the premium sector. So we like how we're positioned across the different format sizes, Tamy.

We think the team has done an incredible job with category management and nailing down assortments. So we're as efficient as possible on our SKU -- number of SKU count side and large format is where we live and can really dominate given our size of cultivation, our cost advantages and our brand awareness.

So we're going to still be in both sides, 3.5 g and 28 g. It really allows the consumer to trial and test a new SKU, especially on the innovation side at a much lower price point. So we continue to observe the market trends, and we'll act and react accordingly, but we still see a real healthy mix and we're positioned to kind of pivot as needed..

Got it. Okay. And my follow-up is, wanted to get an update on how you're thinking about the rest of your Delta 2 expansion? You sort of touched on it. It sounded like you were saying the current demand you see it is fully utilizing the online production capacity you currently have.

So I presume that means no change in your plan, you are going to continue to bring online the rest of that facility..

Well, I can answer that, Tamy. I mean when we position a year -- about a year, 18 months ago to expanding the Delta 2 at half of it, although as Steve has mentioned, most of the cost have been spent to complete the other half of Delta 2. We based that on the belief that we would continue our market share.

Then of course, with the acquisition of Rose in Quebec and their performance, and supporting them as well on top of their production facility in Quebec and the anticipation of our sales ramping up internationally, which they have so in Australia now, hopefully, momentarily to Germany and Israel.

We felt it was prudent to get ahead of it with the expansion of Delta 2. We're just about at full capacity now. So as Steve mentioned, we're going to look at that very carefully and then make a decision.

We haven't made it yet to move forward in completing the other half based on the confidence level we have for continued market share penetration in international exports..

The next question comes from Aaron Grey, Alliance Global Partners..

Nice to see the results on the retail side there. So first thing I want to touch on is the SG&A, it down meaningfully. It seems like, you said, the bulk of it on investment spend and brand as well as some innovation being behind you. Just want to know in terms of -- it seems like that was an active effort on your side.

So as you're now kind of rolling out Soar and then you're still going to have Fraser Valley, now just being launched into Ontario, how do you think about the timing of kind of that SG&A? How much of it do you have to put before the brand and then have kind of as maintenance center continuing to have the brand selling through so that you're comfortable in your ability to maintain the share or even continue those share gains despite the SG&A pullback?.

Yes. And I think we're very comfortable with that. I mean we communicated last year that we were going to have increases in SG&A. It takes a lot to launch 3 brands with Promenade and the support to Quebec in their other brands. And of course, the 2 brands we just launched and plus the investment in hang dry at scale, we're 100% there now.

So that's a huge spend, but we plan that spend. We knew we'd have to up it, and now it's about like Pure Sunfarms maintaining more. So you -- that's what we demonstrated the SG&A coming down now and continuing to come down to a level that it was in the past. It's acceptable at that percentage to continue maintaining our growth in the Canadian market.

So we feel very confident that, that will be at a good level, supporting what we need to do in Canada..

All right. Fantastic. That's great to hear. And then second for me, now you've had some time in terms of these new brand rollouts. Just kind of looking back with Fraser Valley, how do you think about cannibalization? Was it as you had expected relative to Pure Sunfarms? Pure Sunfarms is still the #1 brand.

So anything that ended up surprising you now that it's been up for a couple of more months? And then how do you think about that cannibalization going forward with Soar being rolled out as well?.

It really didn't surprise us at all, but I want to let Mandesh put some more color on that.

So Mandesh?.

Yes. Thanks, Mike. Aaron, great question. So just to reiterate, we've now seen a full quarter of Fraser Valley in British Columbia, launched in a little bit later in the last quarter in Alberta, and that we're seeing some 1 month of October, and I know we don't give forward-looking statements, but we've got a really good, healthy data set.

And Mike is absolutely right. There was nothing overly surprising. If anything, what we saw was that it's not cannibalizing at all. I mean we grew market share on the Pure Sunfarms brand in both those provinces, British Columbia and Alberta after we launched Fraser Valley Weed Co.

We also launched additional strains in Pure Sunfarms at that time, and there was no adverse impact.

When we came on the call a quarter ago, we talked to you guys all about when we were launching Fraser Valley that we really saw consumer segmentation deviating into the value segment, we really saw kind of an area that we were only exposed to through our non-branded wholesale sales, and we knew it was the right time to go in with a new brand that really attack that consumer.

And we were really confident that our data was showing us that the Pure Sunfarms consumer is not really playing in that space that we don't have a lot of risk. And that was validated as we went to market and now are seeing early results. So we're growing share and some of our best streams in Pure Sunfarms are doing better than ever.

And I think that's through a commitment of our commercial sales team and the efforts that we're seeing, the relationships we're building with the boards, the presence of all of our brands. And just a strong supply chain credibility that we have with the boards and the customers and stores all the way through.

So we're pleased we're going to continue to drive that home, and we think that trend will continue through Ontario as well..

The next question comes from Frederico Gomes of ATB Capital Markets..

First question is on pre-rolls. it's obviously a category that is growing and you are leaders in flower, but you are under-indexing pre-rolls right now.

So could you comment on how you view that segment? And what sort of efforts are you making to increase your market share there potentially?.

Mandesh, why don't you take that, Fred..

Yes. Great question. And absolutely, on the pre-roll side, I think it's one of the -- going to be one of the most important categories for the industry as consumers have adopted whole flower and really seeing kind of the strains and the formats that they appreciate and then getting a more convenient offering in pre-roll.

And again, our strategy was always about devising a planned approach on winning where we can and winning over the consumer with great quality, great cost and great brands. And now that we've done that, we want to make sure we're equally indexed on the pre-roll side of the business, and it's always been our plan and strategy.

So multiple brands nailing the assortment and expanding our pre-roll offering and making sure we're being as efficient as possible with our SKUs. So I think Frederico, what you'll see over the coming quarters as we continue our brand approach expansion into the provinces and go through the Board listing process is an expansion of pre-rolls.

So increasing capability internally is -- has been the focus over the last several months. Multiple shifts, increasing the capacity by about -- within the amount of pre-rolls we can produce as well as some additional co-manufacturing that we've brought online and continue to look for in the industry and more is becoming available.

So we're really high on that category on the pre-roll side. We think we're well positioned with our flower dominance, the resonance of our brands and strains in market, and we're excited by that. I think you'll start to see that in the coming quarters, our increased growth in that category..

Okay. And then my second question is on the wholesale side. Obviously, you had a good increase in branded sales and we're seeing that.

But could you provide maybe some color on how you're seeing the wholesale market right now, both in terms of demand and pricing?.

Mandesh, go ahead and answer that..

Absolutely. Thanks, Mike. So I think Steve alluded to it on the wholesale side. I mean our strategy, first, I'll talk about -- and something we've talked about on this call in the past quarters, has always been taking our destiny in our own hands, increasing and improving our market share through great brands and great products.

And I think you started to see us do that in years past being kind of whether it's 50% or 60% indexed into our branded sales and now seeing a steadily increase that.

Part of that is making sure we're getting more market share, driving more margin-accretive sales and the trend in the wholesale space has been as a result of price compression, wholesale customers wanting and needing a lower price, which obviously erodes margin.

And so we're not immune to that on the wholesale side, seeing a lot less pricing activity on the flower side, still seeing great opportunity to take advantage of spot demand where we can fill it and really on the extract side and some of the age side for extraction purposes or wholesale customers who are looking to make concentrates.

We're still seeing that a fairly active market. Our trim sales are strong wherever we don't need that biomass. But absolutely, Frederico, the wholesale side of the business on the domestic side is extremely competitive and very, very price conscious and very spotty.

And so as a result of going into multiple brands now, we've really decreased our reliance on that side. And Steve and Mike in both their remarks commented on the expansion and approach on the international side.

So really picking up good margins on the international side and making that more of our wholesale side of the business and not really having to rely on flower sales in the non-branded space..

The next question comes from Eric Des Lauriers of Craig-Hallum Capital Group..

Congrats on the nice cost management this quarter. On the Pure Sunfarms side, consistent growth there, especially in market share, has really been impressive. Obviously, these new brands are performing well. You got some more on the sort of pipeline there. You got hang dry coming in.

I mean it certainly looks like sort of blue sky, I mean, more share gains to come, especially over sort of beyond the next year or so. Maybe just kind of taking some of these questions and flipping them on their head a bit.

What are some of the biggest challenges or headwinds you see to continue share gains or maybe your longer-term share goals in Canada?.

Well, I think there's twofold. One, the industry-wise, I think what we're doing at Pure Sunfarms, we're sort of executing, as we mentioned, across the board and remain steadfast on our execution and penetration. Innovation, we've really kicked it up, as we mentioned, and that trend is going to continue long term.

We've always said it's a continuous improvement process on the cost side. You just get better as you go. We've always mentioned cultivation is a ramp-up business from the first time you convert the greenhouse, you get better every year, every crop.

And all those things will start showing up in small increments, but cumulatively, it will have a huge impact going forward. With the addition of Rose, that's been a great -- I mean that company now in less than a year at #2, it's going strong. We're now in the Maritime provinces. So pretty much everywhere in Canada.

And it's all tied to just execution, consistently hitting singles going forward. On the macro level, I think the industry is just -- we're starting to see companies desperate for consolidation or not making it.

And I think as we mentioned in the script portion, and I said this at the Benzinga Conference in March that I think it's going to be some [indiscernible] unfortunately, for many others going down the road. Companies are looking at consolidation.

That's really not in our wheelhouse right now in Canada, just we don't see any necessarily accretive opportunities. So as that market starts to dwindle and consolidate, I think it can only help us going forward. It's still a large market potential, as I mentioned, going to $8 million. So let's just keep doing what we're doing.

We will spend extra money when we want to drive key innovations, but that's been proven now with this launch of 3 brands in this year alone. So now it's a little hunkering down maintaining and going for strong positive cash flows in the future.

On the -- Mandesh, do you want to add some color at the Canadian Cannabis level on the operating side?.

Absolutely, Mike. I think you did a really good job of framing it up. It's sticking to our knitting. We've done a lot of expansion on the brands and in the markets. And Eric, I think, it's just we got to keep executing.

I think we've spent a lot of time building out our processes, our teams, our commercial strategy, our category management, our product innovation and we have really dialed in and just staying focused on that. And I think we're -- I feel really confident in our ability to do that. Mike commented, now 4 straight periods of sustained market share growth.

And people will come. Everybody is seeing that in the industry. So it's -- as you're growing, everybody is going to be attacking and you've got to figure out the next step. So it's this constant song and dance and evolution of executing, innovating and kind of just keeping focus on what you have in front of you.

So the market doesn't make it any interesting with all the different dynamics going on. So that's why having an agile, resilient team is really important, and we feel like we're well positioned to weather kind of the ups and downs that will happen over the next 12 or 18 months..

Yes. And the other thing, Eric, on the international side, I mean, Australia has gone very well for us. It's very frustrating.

When you're in a cannabis industry, it's a highly regulated industry and you're starting to do business internationally, there's always delays and we're very frustrated with the processes, Israel change, just the way their regulations midstream early in the year, we had to readapt to that and you lose time. So we have to be patient.

But where we've done very well in Canada, I think we can leverage that up internationally. We're seeing that trend in Australia, and I think we're going to see it, and we're going to be a very strong, strong competitor, both in Israel and Germany, and that's imminent. So that's just another positive for Pure Sunfarms on the export side going forward..

I appreciate the color and looking forward to continued execution there. Last one for me, just switching to the U.S. side of things. So BHP, you guys did a bit better than expected there.

Can you just remind us of some of the, I guess, key sales and marketing, blocking and tackle initiatives you got over the next year or so? And what's your line of sight into potential growth from the sort of Q3 levels going forward? Is this something where you see a meaningful share opportunities? Or is this a bit of a just kind of hunker down and preserve profitability amid this tougher macro environment? ..

Thanks for the question, Eric. We see the CBD business is in maintenance mode. We have launched the Synergy+ SKUs, which are our best selling SKUs from a historical perspective. They are full spectrum SKUs. So we're excited about that. That being said, CBD continues to be in jail.

We have seen a drop-off in consumer purchases of higher price point items going from, for instance, tinctures to gummies. So that's something we're continuing to keep and step with. But essentially, we see sales for 2023 as being flat until we get better visibility on the Farm Bill. Obviously, the Farm Bill will come up, it has to.

So with respect to that, we'll see where Congress is or how they try to force the hand of the FDA, hopefully, to get CBD and all the other cannabinoids out of the, as I call it, the FDA jail so that we're all residing at this stage. We would like to have a bigger impact of our sales, almost all our sales in our e-commerce.

We've done very well at that level. But obviously, we would like to get our products into retail, but most retailers are not touching our SKUs at this time since essentially they're digestible. But at any rate, we continue to do what we can. Same thing we're doing at Pure Sunfarms, looking at our cost.

Internalize, we're probably going to internalize gummies, do it ourselves and pick up some margin there and do what we can while we wait to see what happens in 2023 with CBD..

The next question comes from Scott Fortune of ROTH Capital Partners..

A couple of follow-ups. Real quick, maybe and, Mandesh, you've done a great job adding innovation, getting new genetics and strains to the market, adding the hang-dry technology and broadening your flower categories.

You mentioned a little bit on pre-roll but how should we look at the kind of the 2.0 product opportunities or specific categories that continues to kind of come off as a focus? But just kind of your thoughts for future for Pure Sunfarms moving into the different product categories there to position gain market share.

Just kind of a longer-term picture as you look at 2.0 here..

Yes. Good to chat. Thanks for the question, Scott. You're absolutely right. We've commented on 2.0 being important to us. And we've -- not to be sound like a broken record, we really devised the planned approach. It was all about starting slow, winning where we can and expanding it and that's sort of the flower strategy.

But we've always remained committed to the higher-performing categories and in this case, vape, on the 2.0 side.

I think as we -- our -- one of our first priorities in the last little bit has been ensuring we've built out a broader brand platform and really understood consumer segmentation and ensure we are managing SKU rationalization, assortment and profitability as we did that expansion with the consumer in mind.

And so on the vape side, we really have an opportunity to continue to focus on that.

We've done a few launches with more of a products under the Pure Sunfarms brand, and we'll continue to innovate and be looking at different ways to expand that offering either through various different hardware, through different formulations and now having multiple brands and the ability to kind of think about that consumer segmentation and rolling out more specific products in the 2.0 side.

And I think one thing you know about us is we never try -- we try and not let too much out of the -- we're trying to let the cat out of the bag too early. But you'll continue to see some really interesting things from us in the 2.0 space in the coming months and quarters. And really seeing us pick up share there.

But yes, 2.0 important, specifically vapes, infused pre-rolls, really, really important segments to us because we think those will be part of the future, and we want to win in those segments..

And then real quick, just kind of getting back -- you did a great job on the branded retail growth there, congrats. But I just want to get a sense for a long-term strategy on the whole wholesale opportunity. Seems there's still a lot of capacity out there.

Mike mentioned we're starting to see consolidation or more elimination, right? We need elimination of the oversupply. We're seeing pressure on a lot of these growers.

But how are you seeing incoming calls starting to look at as potential for longer supply -- long-term supply agreements with wholesaler? How are you looking at kind of the wholesale as we go kind of longer term here from that standpoint?.

Yes.

Mike, do you want to take that? Or do you want me to jump in?.

Yes, that's a great observation. And the answer is yes. I think just honestly, a lot of companies are retracting their position on cultivation, both hitting quality and elevation at the right price. So the phone keeps ringing off the hook. But as you can see, with the success on our percentage of sales to retail, that wholesale volume has shrunk.

Incidentally, we didn't -- the international sales that are gearing up will add to -- we don't put that in our retail numbers, but it's going to layer over it. So that percentage is very -- is decreasing in terms of the capacity available.

But we do get those calls every day from more and more companies that are looking to downscale or shut down operations, but want to continue to sort of as a branded company in some area, but they need quality product. So it's an interesting dynamic that's happening..

The next question comes from Doug Cooper, Beacon Securities..

Nice momentum in the Canadian business, as discussed. Just quickly because I'm sure we're running out of time. But year-over-year, Canadian growth revenue and cannabis, up 15%, that includes Rose. Can you give us an idea how much volume was up year-over-year? ..

A lot..

You mean on a kilogram basis?.

Whatever basis you want to talk volume..

Well, that's why I asked for a clarity on the question. I have the volume for non-branded, but I don't have the kilograms for branded. So I can't -- I don't have enough information to answer that question right now, Doug. I can get back to you..

Okay. I'm assuming it outpaces revenue though, right? So just on Australia, is that included in the CAD 39.8 million revenue number? ..

I misspoke it. We included in our non-branded. That being [indiscernible] we launched in some other territories, we are in discussions to launch the Pure Sunfarms in those territories. So -- and we may have some in the future in branded and non-branded. We'll have to break that out..

Okay. So the 30 -- okay. Okay. That's fine. The market -- go ahead, Steve..

Go ahead..

Go ahead..

I would just want to move over to market share. I just want to make sure I got these numbers right. BC, I think you said you were 8.5% in Q3, moving to 9.4% in October.

Is that right?.

Yes..

Okay.

Do you have similar kind of numbers for Alberta and Ontario?.

We do.

You want us to do that on a call later with you?.

Yes. Sure that's fine. That's fine. Okay. And I guess maybe just to continue on the wholesale conversation, I'm just curious, the number was low, which is great. Do you want to drive more of your business through the retail channel yourself.

But is this sort of just lack of people, those companies going into the business and how are they paying for it? I mean they just need less and less dollars to spend. So there's that. And maybe just a comment on that. And just in a final comment, Couche-Tard doing the deal with Fire & Flower and GTI, opening up co-locations here in Ontario.

I think just maybe a comment on how you think the retail market will evolve in Canada with convenience stores, do you think we'll be able to get in the business. I'll just leave it there..

Yes. I'll let Mandesh answer that one..

So Doug, you're asking, well, more convenience stores be able to get into cannabis? Is that what you're asking in Canada?.

Yes, just licensing.

I mean this -- is this legal? How will this work? And what will that mean for distribution of your products?.

Yes. I think that like everything happening in the industry right now, Doug, it's some serious inflection points as you think about profitability business is trying to say float. I mean we're obviously, as a producer, we're looking at it from that angle.

But we're seeing rationalization and consolidation on the retail front, no doubt, right? We're seeing CCAA filings and acquisitions and takeovers on the retail front. So just as we talk about the dynamics on the producer front, things need to evolve and take a different shape on the retail side of the business. And you're starting to see that.

We're starting to see retailers reduce the amount of the square footage, thinking about rent control and cost controls and what's really driving their bottom line, reducing assortment, being very specific on the amount of inventory they're carrying.

I think when you think of those factors, Doug, it all leads to a smaller convenient footprint and ensuring kind of your dollars per square foot on the retail side is as efficient as possible. So I think those things kind of answer your question about do we see more convenience offerings? I believe so.

I think it's not always going to be the same in every province and obviously Quebec has government-run stores. So I think it's leading that way. So however, the regulations will allow for that convenience format. I mean there's nothing that I see right now that's going to allow cannabis to be co-located within a convenience store.

I'm not sure I'd necessarily see that happening anytime soon. But wherever somebody can get crafty within the regulations about putting a cannabis store on a footprint of an existing asset and leveraging real estate, I think you're going to start to see more interesting things emerge on that side. Hopefully, that answers your question..

Yes, we haven't gotten a call from if that's what you're inquiring about. But....

The next question comes from Andrew Partheniou of Stifel GMP..

Congrats on the good branded sales growth here.

Maybe touching on the hang dry that you guys are rolling out, could you comment on when you expect that to contribute to the P&L? Is this more of a Q1 '23 story? And how is that going to influence your gross margin? Could we expect higher or lower gross margin versus what you posted today, which I think you allude is around the low 30s?.

Yes. I think the hang dry is just our quest to continue to drive innovation, quality, better on product across the board. And I think it's an intangible to be able to say how that's going to equate directly to the bottom line or market share, but I think it's part of a whole package of how can we be best-in-class across the board.

And the product is just a superior product, and we'll see how the consumer resonates. It is 100% complete, and it is out there now. So if it starts to show anything material that we can talk about is it will start now and once you gain some traction, certainly going into the new year. And as we mentioned, it's across the board.

So it doesn't really matter if it's the very high-end products like Soar that we're launching now or our more cost-conscious products. It's all about having a high quality at every level.

So I mean I can have Mandesh, do you want to get some color on it from your perspective?.

Yes, I'd love to. Thanks, Mike. Thanks for the question, Andrew. Good to chat. So we rolled out product from the hang dry over the last several months. And like all things we do, we're really cautious before we make a press release.

So we've been putting this product out to market over the last several months, and we've been getting great feedback and response from bud tenders, from legacy store operators that converted.

And we're -- just the reviews on Reddit, consumer feedback and all the new strains and innovation as well as some of our class exchange like Pink Kush and Jet Fuel Gelato that were in market pre-hang dry. So that's pretty much readily available now, and you're going to see that and consumers have already been seeing that.

So that's a now story, not a next year story, Andrew, and we just wanted to announce it to the market. So everybody knew that's what they're going to see and we've been getting great responses on it.

On the cost side of things, we've been able to control margins and stay within that range even by putting in this kind of crop process at scale and really thinking about operationalization and effectiveness of our costs. So we're really happy about that.

When it comes to thinking about margins moving forward, and Steve and Mike have alluded is, we're going to keep staying in that 30% to 40% range. And a big part of this was, I think everybody, you got to be doing this.

You got to be thinking about the consumer and their preference and their desire for a great bag appeal and you always have to be innovating.

So for us, it was -- it wasn't a question of do we do it? It was like we're going there, and we're going to do it because the consumer is demanding it and we figure out a way to do it at scale and still be efficient. And it's allowed for us to start to play up and talk about things at a premium price.

And today, we announced Soar cannabis, which is a very specific tailored offering around specific cultivars, unique profiles, characteristics, improved terpene profiles. And we'll start to see kind of that pickup in the higher-margin categories.

So we're excited about it, and I think it's going to allow us to maintain being in that range that we've given guidance of between 30% to 40% margin..

And maybe zooming out and thinking about consolidation. Your consolidated financials, obviously, produce plays a big part in this and thinking about produce here.

In the past, I think you've alluded to Q4 being a better quarter on produce simply because the supply-demand dynamic? Are you still thinking about a potential to reach positive gross margin in Q4 on produce? And if you could provide a little bit more color, as we go into 2023, I'm not sure if I heard correctly, but I think you mentioned that the worst is behind us.

But you also mentioned that it's hard to pass on pricing.

So just trying to understand what's resulting in the better outlook on produce in 2023?.

Well, for the fourth quarter, yes, we're looking at positive margins. So I can say that. I just have to remember that when we talk about fiscal year first quarter, second quarter this year, from a crop cycle perspective, that was the fourth -- third and fourth quarter of our crop cycle, which started actually in the third quarter of 2021.

So we had to take the hit we had last year in that crop with the brown rugose virus in Texas. So the last 2 quarters of '21, that crop continued to June of this year. So we had to pay the piper in the first and second quarter, and that's why we had this tremendous loss in the second quarter.

So even though we're now in a calendar fiscal year, we're in a new crop cycle that started in Texas in the third quarter. And so far, we have a clean, solid crop. But -- and then last year, this year, that -- what made things worse is we never have the virus in Canada. And remember, it's a worldwide virus, and it did hit Canada.

While it hit Texas 3, 4, 5 years ago, we didn't have it. So this year, we suffered in Canada. So that added to the end of that crop cycle in Texas starting again last year and through the second quarter of this year. So you have to kind of look at that. So why the fourth quarter, okay? We're tracking well on a positive march in fourth quarter.

Again, one of the things we see in the U.S. as we compete as a NAFTA company against Canada and the United and Mexico, you have to understand, Canada has a terrific foreign worker program. Bottom line is in America, people don't even want to cut their lawn, let alone work in agriculture. So we're very dependent on the foreign worker program.

In Mexico, there's abundant labor. In Canada, the foreign worker program is a 5-year program. And the United States is 10 months on, 2 off. So think of any business where you have to let your employees go for 60 days a year and then restart it, just it's crazy, but that's what our system is in the U.S., so it's had a huge disadvantage.

And this year, with these changes in the foreign worker program, we delayed some of our crop scheduling that normally would have happened earlier. So even with that, the fourth quarter should improve. And then going into next year, hopefully, with all the protocols we have on virus is working well.

I've often said is, if you compare AIDS in the 1980s, it was a death sentence. Today, nobody dies from AIDS because you've learned the therapies and the protocols to deal with it.

Now on the positive side, the gene has been found and is now being put into all the new varieties of tomatoes worldwide, and we're actually testing some of these new varieties that are resistant to the virus now. And I think by the end of '24, all the seed companies will have all their varieties resistant.

So looking at sort of a little blue sky that's going to start happening in 2023, it should be solid by 2024. In farming, in these types of environments, these things happen in the cyclical form. It's no different than COVID was for humans, and we'll get through it. So -- and then the inflationary issues, like we said diesel fuel has been up.

Is that going to come back down? So we're feeling more confident going forward. But again, it is a difficult business. Think of cannabis under NAFTA, where Canada has to compete with Mexico and the U.S., it's a different world. But again, let's not lose sight that our optionality for the U.S., and that's our home turf.

We want to be very involved in the U.S. industry. We're waiting to see when we can, again, enter the market based on NASDAQ allowing us to and then move forward. So we want to continue to keep our optionality in the U.S. and in Texas. So that's my answer to that, Andrew..

Your next question comes from Michael Freeman at Raymond James..

So I want to focus on Quebec. This seems to be an area of real outperformance for Village Farms through Rose over -- especially over the last 6 months.

So I wonder how you would describe sort of the changes -- any changes that have taken place in the Rose business and how Village Farms has supported the growth of that business in Quebec?.

Sure. I mean look, we haven't done any acquisitions other than Rose in Canada. We look at them all the time, but Rose was one very strategic for us to be in Quebec. Quebec, one of the largest markets, as you know. It's a different approach, in that the SQDC and Quebec owns all the retail stores. It's not independent.

Quebec is about very patriotic towards Quebec. So we had to be there in a different way of penetrating market, and Rose was the selection. So of course, then it's the Rose team. We really love the Rose team there. So brilliant, they got great CPG. the leadership there is very solid.

And in acquisitions, you have to have a lot of synergies and be on the same page. And that's been working.

Rose has continued to be innovative on their own, but working with Pure Sunfarms, we were able to help support them in the launch of the Promenade brand, which is the third brand we've launched this year, sort of as Canadian Cannabis, which is doing very well. And it's not even been a year.

It will be a year next month, and I think you continue to see great market penetration by them and moving forward in the Quebec market. And they are also participating in some other provinces as well in conjunction with some of the programs with Pure Sunfarms.

The other thing that's very unique is one of their brands is based on all the craft produces in Quebec, and that's very important to the government of Quebec to support very small craft growers. I think we have 11 or 12 that we consolidate and market for under the brand, and that's working extremely well.

Not big numbers, but it just is another avenue of synergy across the board, and we may roll that out in some other provinces going forward. So that's where we are today. And we look at now as Canadian cannabis and the teams are all working pretty solid as well.

Mandesh, do you want to add some color?.

Yes. Thanks, Mike, and great question overall. Look, the Rose team are experts at commercialization in the province of Quebec. And there was many different assets that we really enamored with in partnering, teaming up, making the acquisition of Rose.

And we talked about that earlier in the year that it was going to take some time because every Board has a product call cycle, you just can't immediately implement products. And the Rose team is so adept at understanding customer segmentation, looking at pricing, what the SQDC needs.

And with the last call that was happening this year, I mean, we really knew that summer fall was going to be really important for the integration of Village Farms Canadian cannabis to kick off in a very effective way. And the Rose team knocked it out of the park.

I mean the amount of listings we got, Promenade is a brand fueled by Pure Sunfarms' biomass. So I think now, this is probably the first full quarter where you're really starting to see the integration of Village Farms Canadian Cannabis taking shape and showing what we can perform and do.

And yes, I'm pleased to hear that you're seeing it as well, and we're really optimistic about it. And continuing to work covertly with the team to get more listings, really think about continued domination and market presence in the province of Quebec. We're excited..

There are no further questions. Please proceed..

I want to thank everyone for joining us today. We're very excited about our direction in cannabis, not only in Canada but extending out internationally and standing by to see what the legislation changes will be for the U.S. as we gear up for the penetration in the U.S. market in the future.

Thanks for joining us today, and we look forward to talking to you in the future when we report our year-end. Thank you. Thanks, operator..

Ladies and gentlemen, this concludes your conference for today. We thank you for participating and ask that you please disconnect your lines..