Village Farms International, Inc. (VFF) Earnings Call Transcript & Summary

All right. Looks like we are all set. Thank you, everyone, for joining in to the Cannabis Chronicles Series by Alliance Global Partners. My name is Aaron Grey, senior cannabis analyst here at AGP. Joining me today, we have the pleasure of welcoming CEO and President of Village Farms, Michael DeGiglio. Michael, thanks so much for coming on.

Good morning, Aaron. My pleasure.

All right. So before we get started, I want to put your attention to our disclosure slide. The format of today's discussion will consist of a 45-minute Q&A discussion with myself and Michael. During that time, you can submit questions you'd like me to ask, Michael. If you have a question, go ahead and type it down to the chat room or you can e-mail me at a [email protected]. And with that, I think we're all ready to get started. So Michael, thanks again for joining me today. I think a great place to kind of start off for maybe some investors or people on the call who are new to the story, so maybe if you'd like to give a high-level view of Village Farms to kind of get everybody off and level set.

Sure. Good morning, everyone. So Village Farms, we've been around north of 30 years, 32, 33 years, one of the longest and oldest operating companies in a controlled environmental agricultural space, underlying its agri -- high-tech agriculture operations, what we do using high-tech greenhouse facilities. We started with cut flower, and the cut flower industry migrated over to the high-value, hydroponic vegetable industry where we were for many years. And we always look for what is new and innovative within both the crops we are currently growing, and in the case of cannabis, a whole new crop. At the end of the day, based on our experience, every crop is unique, but cannabis in a way is just another agricultural crop. They're all difficult. They're all hard to get there. They all take time. And for us, that was an exciting move for us to go start cannabis in Canada for many reasons. And one is we didn't have to compete like we do on vegetables under NAFTA where we're competing against Mexico that has a cost structure just incredibly lower than Canada or the United States. So we weren't first to enter the market. We have looked at the medicinal market in Canada back in '14. It just wasn't right for us, and recreation arrived and that's where we decided to go, but we moved that quick, kept doing our homework, understanding what it would take to win at the end of the day, understanding the competitive landscape. There were so many companies moving at the speed of light. So we took our time and we always -- being first sometimes is an advantage. In this case, we didn't think it was, just being last and winning was. So the approach we took is to understand what is required. And based on our 3-plus decades, our DNA is you always want to be the low-cost producer, produce the highest quality, safest and best product broken down by what the consumers want in terms of attributes, which always have to do with the lowest cost. So we built that model out. We did that by converting 2 of our 1 million-plus square foot greenhouses that were in British Columbia, just outside Vancouver. That gave us based on our know-how of ramping up 7, 8 very large-scale mega projects over decades how difficult that really is. It takes about 5 years to ramp up. And unless you don't -- if you don't have seasoned labor, the training processes, the attrition rates, understanding the climatological data historically for 10 or 20 years is an advantage. We had all that going for us. So we just had to shift to a cannabis crop from another. And that approach, I think, proved very well for us. In fact, later when we talk about the U.S., we'll leverage that same strategy up as well. However, in Canada really proved that well. We were able to get into the market very quickly. We received a wholesale license. And in the first quarter, we sold only wholesale to the marketplace, we were EBITDA positive and we've remained EBITDA positive for 10 additional quarters. So we're on an 11th straight quarter EBITDA positive. And about a year later, we were awarded a retail license to sell retail by Health Canada. And I think we've made great inroads there. So today, we are a produce company. Although those revenues are going to start being overshadowed by our movement in cannabis, we are looking forward to creating more opportunity for us both domestically and internationally. We were founded as a U.S. company, I'm the Founder of Village Farms and still the largest shareholder. All right?

All right, Michael, thank you very much for that introduction there. So I think first question to kick things off, some news this morning coming from you guys, voluntary delisting from the TSX. You remain being listed on the NASDAQ. So I would love some color on the thought process behind that decision for you guys to make that move.

Yes, certainly. So I mean it was a difficult decision, but in the end, we made the decision because we think it's best for the company and best for the shareholders. And we did tremendous due diligence, tremendous time with our stakeholders, our attorneys, the funds we represent. I think we have one of the highest institutional filings of any cannabis company either in the U.S. or Canada, talking with them. So a lot of due diligence looking at the history. But in the end, there were a couple of things that we felt in looking at the pros and cons, the pros clearly outweighed it. For example, this year, just our fee to the NASDAQ was north of $0.5 million, NASDAQ's 100,000. Both exchanges prohibit us from operating in the United States in high-THC cannabis, still it's fairly legal, which I understand, but then one has to think why are we supporting 2 exchanges. And when you really look at compliance with both exchanges, just the legal in Canada and supporting the TSX, especially acquisitions and whatnot, is very demanding to support to. We're an international company. So there were a lot of reasons. And by the way, I have nothing but the greatest thanks. We've been on TSX north over 15 years. So it's a long run back in 2006, and it's been a great partnership. The time's changed, the company is changing, much more international. And really, as we start approaching costs with management, time and legal of $1 million, I think that money is better spent going somewhere else. Our liquidity is very solid on NASDAQ way up over. And then I would be remiss if I just didn't express that in watching the capital markets, some of the decisions in Canada on the capital markets, especially with naked shorts as opposed to the U.S., I think it's problematic and it's concerning. So we've seen that going on for a while. It's just a different philosophy between the 2 exchanges, and we felt that the time was right for us to move on. And that's really the reasons behind it. There are other reasons, but that's the main catalyst. And for anybody who has shares on the TSX automatically will just trade onto NASDAQ. So that's not a concern at all.

All right, Michael. Thank you very much for the color in terms of the decision to delist TSX, remain listed on the NASDAQ, Village Farms. So I want to go back into the fundamentals now. One of the things we talk about often, Michael, right, Village Farm versus some of the other LPs. You talk about often times being a second mover. But would love for you to kind of set the stage here in terms of how you view Village Farms being differentiated versus other LPs. Something I think about, you talked about profitability, you guys have more of a focused brand strategy, being prudent in your M&A. I'd love to kind of kick it off to you to kind of talk about how you're differentiated from some of the other LPs out there.

Well, I think a lot of ways, actually. I mean we're always looking at the competitive landscape, trying to understand why our competitors make certain moves just as a learning curve and then coupling that with our 30 years experience, how we approach the cultivation side of the marketplace. We understand how difficult it is to ramp up huge facilities, millions of dollars a square foot. Today, when you're building a new facility, closing on 2 million, maybe more, per acre on a 25-acre facility, it's a huge cap of investments. These assets are special-use assets. You can't convert them. So you really have to know what you're doing. And we learned that over many years, so we were able to apply a lot of what we learned to not mistakes here. And as I mentioned, we've decided to do a conversion of existing facilities that gave us a huge advantage. In turn, we were able to ramp up very quickly. Originally, we had seen -- we modeled our business over and over from a sensitivity point of view, and we based our business that, at some point -- all regardless of how strong the brand is and brand is very important, we think eventually brands will be built in cannabis, both in the U.S. and Canada and other places. I don't really think anybody could say today brands are where they need to be or our brands, it's more strains. But that will come, and it's very important. And we've always been vertically integrated, and that's an important part. But the foundation has to be tied to cost because in agriculture and it still is, this is a vertical industry today. There's not a lot of light-asset models yet because it still has to be proven out at the cultivation side that we looked at revenues coming in, we got also wholesale, non-branded, branded at $2 at maturity. That would be our income. And Health Canada -- competing account is very difficult. We're paying $1 of excise tax, licensing tax, property tax, payroll tax. And then, of course, we distribute through the provincial governments, the margins for provincial governments in the 30%, 40% range. And the fact that we're competing against the illicit trade, that's really established pricing out of the market. One thing good for us and all the other LPs is we did have a built-in customer base in Canada in converting to legal. However, there was a pricing out there, and you have to take that into account. So all those understanding the playing field with Canada and the regulatory issues, all that, that we would have to have a cost of production of X and this would be the income of maturity. We've built the cultivation model on that. Once that was built, designed and worked, then we were able to go out and hire just an incredible management team led by Mandesh Dosanjh. He just did a phenomenal job in bringing in people, deep CPG experience, and they were able to take that per tonne and now go out and build brands, understand and hone what the consumer wants, being able to design products for the consumer and meet that need. And I think the model worked because we've never looked back on being EBITDA positive at least until today, and the market is getting more competitive as we go. So I think that just gives you a little bit of color on how we approach things.

No, that's very helpful. And yes, I've had the pleasure of meeting the team, including Mandesh over in Delta, BC, and I agree. So one thing you talked about in terms of the cost structure, the asset base you have over in Delta, BC with your greenhouse and converting that. And that's really led to a lot of your success, in my opinion, right? So flower, including pre-roll makes up about 70% of the market today. For you guys, your focused brand strategy has helped to make Pure Sunfarms the leading flower brand in cannabis. So can you speak to the brand proposition that you believe resonates with the consumer and has led to this success?

Yes. I mean that and many other reasons, I mean the management team was clear. Flower, as you said, still represents 70%, maybe 73%, 75% on a given quarter of the marketplace with pre-roll. And it's been pretty stable. And that's not to say that other products won't gain traction, they will over time. But we were originally focused on that part of the market, and let's try to have excellence in what we do there. And consistently, I think quarter-on-quarter, we've been the #1 flower brand in 3 of the largest provincial governments that we could sell, and now Quebec will be coming in. And that just didn't happen. That was worked at in both the brand positioning, the cost structure, and we'd be -- in this initial branding we've done since we came to the retail market, we wanted an everyday premium experience. And what that means is the very best strains, premium best strains. This is not every day alone. These are the best we can do, high in what the market wants, say, THC and potency, always improving, just being able to offer that as an everyday price. Because, again, if the illicit market is behind the scenes and anyone who thought you could sell for $15 a gram, I mean that's just going to open up the black trade and it's still very much there. So that whole positioning has gone very well, and we've now taken the same prudent approach into pre-rolls, and we're gaining market share there. I think pre-rolls will continue to expand, and it's an area we see ourselves being a leader in. Even though we started slow, it's gaining. And as far as the other products, edibles and vapes, very competitive. There's a lot of companies buying market share at a loss. We're not going to play that game right now. If we don't think -- in fact, as I mentioned to you, I really think 2022, going into early 2023 will be a watershed year in Canada and there will be a lot of changes. And so we're ready for it, we're geared for it. And I think you'll start seeing some of that penetration and those other products increasing very quickly.

And you talked about the brand position, right, premium quality within there, but it's a category within flower that's seen a lot of pricing pressure for some time now. So how do you feel about the competitive marketplace for flower, some of the pricing pressure and how Village Farms looks to position the Pure Sunfarms brand within this?

What's interesting, and I've said this and I think you know this, I mean we never changed our pricing pretty much, a little bit. But in general, the strategy we came out -- when we first launched in retail, we launched about 32% under the next highest LP to the retail market. And we've more or less tried to be in that area. It oscillates somewhat. But we didn't do that just to undercut the LPs. We did that because we wanted to offer an everyday experience and we have the illicit trade in the background. And that's really -- what Health Canada designed is a mechanism in legalization to cannibalize the illicit market to the retail market. That's the goal. That's what they want. And these are, as I said earlier, a playing field to do that. So we had to position that pricing. Now to do so, you have to have a low cost, so you can't do -- many companies can't do it. In addition, besides the LPs that are cultivated, you have a lot of other companies that are on the light asset model. So trying to build market share and these very competitive other spaces like vapes. So yes, so I think our strategy was right there, and we continue to innovate with strange improvements in cost of production because things will always get more competitive. And that's why brands are still important, but they're not everything because it takes a long time to develop brands, really effective brands and a lot of time and money. Keep in mind that in Canada, we really can't market. So it's a whole different market. You have to find very myopic ways to do that. And so that makes it even harder. So it's a tough place to compete. It's not for the weary of mind, I can tell you that.

Right. No, absolutely. And you guys have done a great job in flower, right, from Pure Sunfarms. You talked about your initiative to grow your market share within pre-rolls. It really seems like low-hanging fruit because a lot of similarities between flower and pre-rolls. So can you talk about how that process has kind of gone? You said it was kind of a slower start but you ramped it up now. What are some things you're noticing that's different maybe between the pre-rolls and the flower and how you're looking to ramp that up and gain market share?

Well, I think with flower, we want to continue to maintain a dominant position. Again, others may say that they're #1 across the board, but it's clear going on 4 or 5 quarters now that we're the #1 flower. And that can always change. A new strain comes in. There's differences. But we've learned a lot of what we need to do there and consistently innovate with our strains. We're putting a lot of effort into that. So we have some exciting launches coming up going forward. Pre-roll, I think that pre-roll in general is just a market that we see growing, as I said, and we're innovating there, putting in some of the world's most advanced machinery right now. I don't want to talk too much because I don't know who's listening, but we are investing heavily in some of this machinery for pre-rolls that will make us more and more competitive going forward. And we think that vertical -- being a vertically integrated company in this market in Canada is very important as opposed to just being a light asset model. So I'll leave it at that. And I think the proof being in the pudding going over the next few quarters as you see, I think you'll see that penetration rate for us increasing.

All right. No, absolutely. And going in some of the derivative product categories, you talked before about some of the 2.0 products, vape, edibles, highly competitive. So talking about from Village Farms or Pure Sunfarms perspective then, it sounds like maybe you're still putting more of a focus on some of the flower, pre-roll categories, keeping an eye on the 2.0 products but still have some innovation within that. So can you just talk about maybe some of the focus of the company? Because you talked about it being highly competitive but still probably see some opportunity there over time. So where are you kind of taking the time in terms of some of the 2.0 products?

Yes, but the data doesn't lie. I mean we look at that. We want to -- we'll be -- we'll do whatever we have to do. I'll give you an example in beverage. I mean beverage got a lot of hype. But we looked at it and say, even when you go to mature markets like Colorado, I mean flower still rules a decade later. And of course, it comes down and it will, and there'll be even more exciting innovations coming in the future. But we're an asset industry in Canada. And for us, we want to continue -- we're a growth company. We want to make money, reinvest that money, grow the company. So if we're looking at beverage, there are a couple of companies experimenting with it. We don't see traction yet, significant traction. If we do, there's nothing preventing us from entering that market. But when we do, we want to win there. So let us watch others. I mean we've learned a lot from watching others do things and then analyzing why. And the same thing applies to vape. So as long as flower is dominating and we excel in it and our margins -- if you look at our margins last quarter, I mean, we had a significant amount of nonbranded, including wholesale sales and our margin, and we're able to return in the low to mid-40s. So if you were to extract just, say, the retail side of that, I mean, interpolate what that number is, and that's a pretty strong margin. So we want to continue to build as long as we're north of 70% market share. It just makes the right sense for us now. Now we may look at other ways to brand and do other things with some of these products. And we -- one of the reasons for Quebec is to continue to expand our flower. Quebec, as an example, there are no edibles allowed or vape legally. So that it's a perfect place for us right now. But it's not like we're not going to innovate. Of course, we do, and we'll look at those markets. But a combination of all those markets, confectionery, beverage, edibles, vas, so on are still 25% of the market. And there's a large illicit competitor there as well. I hope that makes sense.

No, it does. And that's helpful, so appreciate that. You just kind of brought up Quebec and this is my next question. You guys just recently acquired ROSE. So can you speak to the acquisition, how ROSE will help you enter the Quebec market, right? So it's kind of a distributor there. So first, why don't you give some commentary of ROSE, what they do in the Quebec market and how Village Farms and the Pure Sunfarms brands will be able to leverage that to enter the Quebec market, which you guys have been made an initiative for some time and now have executed on that?

Yes. Well, I'm really super excited about Quebec. I mean even in the produce days, Quebec, I remember going up there early days. I love being up there, love the people, love culture as part of Canada. But it's unique in many ways, and it's exciting. And it's been on our radar screen, and we've looked at really what that market is, how is it different from the other provincial areas. So we had talked and a lot of our long-term shareholders know we've talked about Quebec a lot. So for us is how do we enter that market. There were a number of cultivators, how does the Quebec government see themselves different from other provincial governments. So there was a lot of homework to go in. And for us to do M&A -- we're not opposed to M&A. For us, dilution is only dilution if eventually your share prices go up, it has to be accretive. So finding the right situation, the way we structured the deal in Quebec proves to our shareholders that we value that team, that Quebec team, the local people in Quebec were a part of it. Any M&A we do, the DNA of the companies and the people we bring in has to align with Village Farms, Pure Sunfarms, the whole team. This team did. They have the same ethics, same values, hard working. It was a lot of CPG experience, finance experience, understood the market very well in Quebec and how it's a different. Example, you have to ship to each store. You don't have to do that in Ontario, so there are differences in what you can sell. So we did our homework, and we were fortunate enough that we got the ROSE family to come onboard Village Farms, we structured it 70-30. So we're all in this together as a marriage. And we are now integrating the 2 companies, Pure Sunfarms. So ROSE is on the Pure Sunfarms. They're integrating and coming up with a very sound strategy moving forward. ROSE has a very unique situation in Quebec, number one. Besides being a cultivator, they are the distributors for other LPs and many craft, I think 10 or 12 of the craft producers in Quebec go through ROSE with their brands or even some of the brands in Quebec. And there will be some information on some new brands coming out in Quebec shortly. I won't talk about it today. Secondly, on the LP side, ROSE is the exclusive distributor for companies like Tilray, Sundial and others. So they have a unique distribution conduit for those other companies. And so that's very unique in the marketplace in Quebec. So we're very excited about it. I think it was the right acquisition at the right time. And we tend to look at M&A where we can't organically do it. If we can't do it faster, better, cheaper, then we'll look to M&A. And this is an example where it's very strategic, not unlike the BH, Balanced Health Botanicals acquisition we did just 2 months prior to that as it illustrates how we do it. So we're not doing it to just have more revenue in the marketplace, but it has to be very strategic and show that's going to be very accretive going forward, and we believe it will be.

All right. No, absolutely. And you talked about bringing some brands in the near term. Maybe just some color, that's been a high topic of discussion since the acquisition's been made. So maybe if you could provide some detail in terms of timing. Some people are coming in and done different brands, right, in Quebec and what they have in the other provinces. So just any color in terms of how you're looking to now go into the market following the acquisition, I'm sure, would be helpful to the listeners here.

Well, I think that ROSE, I don't want to take anybody's thunder from there because it's in the works, but I will say that there will be some new brands coming in that have very unique attributes within the Quebec marketplace, and that is being formulated and will be executed pretty shortly, probably within the first quarter and going on into the second quarter between the Pure Sunfarms leadership and ROSE leadership. It's very exciting to me when I look at -- Quebec is such a huge supporter of Quebec-grown product and a lot of these smaller, very influential and important craft guys. We can help them. We're really excited about helping them grow, looking at their strains, providing improvement. So it's sort of a really unique position where we can really do good for other growers in Quebec under that ROSE umbrella. So if you really look at other LPs, there aren't a lot of other LPs that have that capability to enhance, in a way, competitors, but competitors that are distributing through the same ROSE supply chain all the way to the store, all the way to the dispensary without going through a warehouse or anything. So even the logistics of that is something that's managed by ROSE. And we can bring a lot of grown knowledge and talent to those folks as well. We can look at very unique strains within our own cultivation site that we acquired now under ROSE. It's a very high-tech brand in our grow facility that provide some unique capabilities. And I don't want to mention today of what we can do tied to branding and unique strains. And then, of course, how Pure Sunfarms in conjunction with ROSE can help any other strains and opportunities for Pure Sunfarms together with ROSE. I'll leave it at that. So standby on that.

Standby and we'll keep an eye out for it. All right, well, you already provided kind of some color in terms of your overall kind of M&A perspective. So I'll go ahead and jump into the U.S. now, right? So you kind of talked about it earlier. You guys have some U.S. operations as well as some optionality there as well, both on the CBD and future THC opportunities. So why don't we start off with CBD and then we'll go into potential THC opportunities over time in the U.S.? So CBD in the U.S., you recently purchased Balanced Health which gives you access to the U.S. CBD market. It's a highly fragmented market today, but it certainly has potential over time. So can you speak to the strategy behind the acquisition and how you're -- fits within the Village Farms umbrella and you're looking to execute on the US CBD market?

Sure. Well, there's a couple of things that will come to mind. Number one is really the U.S. legislative process for both high-THC/cannabis CBD. We started Village Farms -- actually, we're an American company, started as an American company. So when I look at it from my lens, I have to shake my head and just wonder how this great opportunity for this great plant that can do wonders continues to just stumble within the legislative process. To say it's frustrating is an underestimate. So we sit here, always trying to see where clarity can be gained for the U.S. U.S. is #1 on our radar screen. And in fact, a lot of our decisions on the resources we use in other markets, both in other international markets like Europe, for example, is always going to be taking into account when we can move and move swiftly in the U.S. And I think one thing I will say as a side bar before I talk specifically about Balanced Health is, as you know, we have almost 6 million square feet in the High West Mountains of Texas, which we deem as an incredible optionality for us in the event of legalization, be it at the state level of Texas at some point, federal or however we can operate there. And keep in mind, even to your question about the TSX earlier, we're prohibited by NASDAQ predominantly as why we're not in the U.S. market. That listing is very important for us to maintain a major listing. So maybe there will be some legislation coming down the pipe that will change that. However, so when we look at what may happen in a unique market in the U.S. upon legalization of cannabis, the current model may change. It may really change because you look at it as a very sort of parochial state-level production within a state sales within a state. Could in a state commerce at some point come down the road? Can cannabis be sold at retail? John Mackey made the statement a couple of years ago that he will be selling at Whole Foods cannabis upon legalization. So we're constantly seeing where that model may change. And we believe it will change. So when you look at Balanced Health, one, is they're a very unique cannabinoid company that will probably be expanding into other health and wellness and lifestyle type of products in the future because consumers of cannabinoids like CBD and certain formulations do it for a lifestyle, they do it for health reasons. And I will say that we look at the medicinal market much different. Medicinal to us is another way of attaining cannabis in a nonrecreational legal state or country. And a lot of times, the history has shown this is a stepping stone to rec. So when we look at the medicinal side, we see that as very separate. I could talk more about that even when we look at the EU. However, coming back here, this is truly lifestyle but health and wellness and where can we go with that. However, it is under the cannabis umbrella, right? It's a cannabis plant. And it fits with our strategy going forward because, one, BHB even through their CBD Distillery, one of their brands, they do 30,000 orders a month. They are one of the top platforms for CBD distribution online, one of the top 5 brands. They're EBITDA positive. And they have a huge opportunity as other CBD companies do, to get into the retail bricks and mortar upon greater clarification by the FDA at some point. And that's -- should that come in the next year or 2, hopefully, it's estimated that, that cannabinoid market, that CBD cannabinoid market will be at $15 million, $16 million by 2025. So very exciting. We also see that as an extension to what may happen within the high-THC line. Not that it's an end all for us, we see other channels, as I just mentioned. But online sales, we think, will play a role. And this platform that they've built online, their reputation based out of Denver, Colorado has a great opportunity for us to build on that in the future. So we saw it as a very strategic opportunity to start thinking about how we're going to affect ourselves in the U.S. with our assets, leveraging up our knowledge and what we've done in Canada of the assets we have there. So we're excited about that opportunity for them as well.

Fantastic. And on the CBD side, you're talking about potential regulations from the FDA. We're all waiting for that. So in a major state, California recently passed the bill to allow for ingestibles containing CBD hemp. So can you talk about maybe how California might look to be an initial market for how the broader U.S. might look when FDA regulations come and maybe how it opens up the door for a bigger brick-and-mortar to start selling some major food CBD products?

Yes. I mean, look, we wouldn't have done it if we didn't think at some point that regulation will happen, whether it's going to take a congressional decision to foresee FDA to look at it from a supplemental side or whatnot. And the FDA has been pretty rigid. I'm looking at it any other way but coming through Congress. So whether that is going to be part of another cannabis bill in the future, that's yet to be defined. And then maybe this coming year, it may not. But I think it will come. We just can't hold it back. So we're going to be patient on that. But that's an area when you look at our produce business where our customers are all the largest big box and retail customers. We can lend a lot of support to try to move that into retail as well. So there's a synergy there that we think can help BHB maximize their gains upon that. But it's so hard on the regulatory to say when that's going to happen and how it will. So we thought there would be some traction there this year, just like we thought there would be some traction on the higher THC side, and there's not. So it's really anybody's guess what next year looks like. It may -- hopefully, it doesn't become a lame duck type a year after the midterm elections, but it's anybody's guess. But we're happy with that investment. And as I said, that can be a great platform -- one of the platforms we use in the U.S. And I do believe this model in the U.S., unlike Canada that came out with a federal legalization, the U.S. is a little different. We have all these states doing it but not federal. And I think you'll see some changes there. I don't think the model will be the same. And so we're going to be ever watchful and prudent, but I can assure you upon the ability to go forward, we will be there, and we will take an aggressive stance. And of course, Texas, if it happens, when it happens, that's something we feel that nobody has an advantage of. Texas is huge. It's second populated state, almost the same population as Canada. It's growing rapidly. And at some point, that's going to be a very exciting. It's almost -- we call it the not so much a state as a country in a way within a country, so...

Yes. And you're talking about Texas, right? You talked about the current state-by-state environment. Right now in the U.S., there's big MSOs that are operating in that state-by-state environment, having to have a supply chain with a new state, [indiscernible] or otherwise. So how would you plan to leverage your Texas assets once, let's say, federal legalization occurred or either a Texas legalized sale of cannabis? It had to be federal for you to participate in that because of your listing. So how would you look to leverage it more at the federal level once regulations allow?

Yes. So if you look at us today, I think with our Texas cannabis assets, we're probably one of the top largest in the world in terms of footprint for an indoor greenhouse facility, not looking at outdoor, and that's gone very well, large scale, low cost, high quality. So if we said we've been successful, which we have in that and we leverage that same thing, same strategy in Texas where we have nearly 6 million square feet, incredible growing area, high 5,000-foot elevation. We don't even need supplemental lighting there at the latitude we are. And granted, we believe that there will be interstate commerce. Now that may take a few years to get there. There's no doubt. I'm not saying it will be out of the gate. But where we are, we can focus on Texas. That, potentially for recreation is a $1 billion market based on the same population as Canada. 60%, 70% of Texas want to see legalization. So when that happens -- it may not happen for a while. But when it happens, that's a huge internal market that we have with assets right there ready to go, just like in Canada. And if that is even going to start out as a dispensary model, then we'll do whatever we have to do to compete and win there. And we'll be competing with other MSOs, but no one has a start in Texas yet. It's going to be like the Kentucky Derby, the final large state left, gates open, horses racing and we're going to go after that. However, if you really look at the mass of scale we have there, upon being able to export out of Texas, then it's going to come down to who can bring the highest quality at the lowest cost. And freight is not that big of a factor with cannabis in any form, even flower. So that affords us -- if we were going to -- if we didn't have the Texas assets and we wanted to build assets for the U.S., Texas would be on the top 3 locations in the continent of the United States that we would look at to go in that area. So I think that's something we really don't get a lot of acknowledgment but no other Canadian LP has that position. And remember, as I said, how important it is to have a great grower management team and employees and all those attributes that can be readily available on a conversion as opposed to a whole new build. So we like that position. Now that doesn't mean that's the only place we're going to operate and we won't look at other opportunities, including M&A once we're capable to do that. And you could see changes already in the U.S. landscape. You could see pricing pressures in certain markets already starting. We think the restriction -- it's very difficult for a lot of MSOs if they have 30, 40 different production facilities, different technology spread out, hard to manage that. We've been through that in our tenure. And it's very hard. If you look at the Canadian footprint with the 3 greenhouses on the same property, we've converted 2. If we convert the third one, we can actually do over 35% of the total Canadian capacity from one footprint. That's how you manage large scale. And that's what we have in Texas as opposed to having 20 locations and managing that, very difficult to do. Now that's down the road, but like what we do at Village Farms is based on short, medium and long term, we take that all on account in our strategies.

Okay. And we'll wait and see if some federal legislation changes things for how cannabis is viewed here in the United States. But want to shift from the United States over to international. Village Farms looking to receive its EU GMP certificate that allows to sell to medical markets such as Germany. Germany is a market that's currently dominated by Canadian LPs as well as Bedrocan. So can you talk about once you receive the EU GMP certificate how you plan to maybe go into the German market or other similar medical markets?

Certainly. So I mean, first, I would say that the team did brilliantly in gearing up, by the way, with some German, let's just say, partners we have in getting ready for EU GMP certification. It was a big undertaking. I think we're one of the first greenhouses to do that. So excited. The test was concluded back in October, September, October. We had to wait a year because of COVID. The German authorities couldn't travel. So we're very hopeful by the end of the first quarter into the second, we'll have our EU GMP certification, and we're ready to go exporting to Germany. As you know, we already started exporting to Australia for the medicinal market there a couple of months ago. And it's a learning curve gearing up for it. So we're very focused on that export market. I would say -- I don't know like when you mentioned Bedrocan, I think they're an exporter from Holland to Germany. I think there's only 3 cultivators in Germany, 2 are Canadian LPs, 1 is a German company. We looked at cultivating in Germany extensively for the medicinal market. And in the end, we decided not to pursue it and wait for recreation. Almost the same as Canada because in all the due diligence we were doing and all the modeling, there was talk at some point that Europe would start to move and maybe Germany first. And as you know, a lot of times as Germany goes, the rest of the EU goes with the exception of the Netherlands, and I'm not talking about that because they're already there. But when we really looked at pricing in Germany, restrictions on being a large scale, we had some concerns of profitability there. You have to develop the consumer much more than a rec consumer. If you look at the Netherlands, where you have 590 coffee shops of 30 years, you already have a built-in consumer that you just have to bring over. So it's a big undertaking in Germany medicinal, and we decided that we could be much more competitive in Germany with our German partners exporting out of Pure Sunfarms. So that's our plan there as it is in Israel as well and Australia. And that's not biting off more than we can chew because that's part of the Pure Sunfarms' 2022 and beyond strategy to increase exports to these countries. Israel is not yet EU GMP certified. It may go as may Australia, but right now, it's Germany. So we're really looking forward for what that can be. And I think we're going to do well. I mean these numbers are not huge yet in Germany, but they're growing. So some of our competitors think they're doing very well at $8 million or $10 million export. So those are good numbers, and we'll start there. That said though, one of the reasons we didn't pursue it is we saw what was happening in the Netherlands, and we're super excited. We have huge deep roots in the Netherlands for 40 years. A lot of our people here are from the Netherlands. Love it, and the fact that the Netherlands government has taken the initiative for the legalization. For those of you who may not know, the coffee shops in the Netherlands for 30-something years have been legal is about 579. This experiment is for about 70 or 80 of the coffee shops, which have to buy exclusively from the 10 license holders of which we believe will be one. And you have to cultivate. It's not an export market to the Netherlands, so we have to cultivate there. We're gearing up for that cultivation. Initial looks as we may even be able to generate some revenue first quarter 2023, which is not that far away, a year. So we're really excited about that. We think that could be a stepping stone to our ability to compete in other markets as they open. So this is sort of -- the Netherlands, I would start saying is becoming a short-term -- always medium term and short, but some of the other opportunities in the EU one may consider medium term. But we have to be there today to compete long term. So we're really excited about that as well.

Okay. And just one more, I want to dive into from the last question. Israel, you mentioned it there, EU GMP not currently required. You said on your last earnings call, that was at the top of your list. So given GMP is not a requirement, a lot of Canadian LPs are selling into it. Can you talk about the timing and when you expect to begin sales, find a partner for the Israeli market? Because it seems like that's been one of the hottest markets for Canadians to export to as of late.

Yes. Well, we're working on that now. So we're talking to a couple of potential partners there. So that's in the works. And -- but we want to make the right decisions, and we're not pushing hard on it. But I would say, these initiatives we just talked about, Netherlands, Germany and Israel, are imminent, meaning we should be active into the second quarter with the Netherlands. This will be a constructing year of an asset there. So that's a build. And hopefully, as I said, by the beginning of 2023, we start. But the export side, I would say, start looking second quarter and third quarter as we go forward.

All right. Fantastic color. Thank you for that. All right. Well, that's the end of my questions. Mike DeGiglio, before I end things, I want to kick it off to you if you have any closing remarks.

I like where we stand today. I mean we've done everything prudently. I'm aligned with our shareholders. We're not afraid of M&A, but it's got to make all the sense in the world. We're not going to make decisions and do things just for the sake of doing them. I think we've demonstrated that we are prudent in our capital spending. We kind of do our raises very surgically, take on what we need. And this decision this morning with the exchange we've been on for over 15 years, we didn't take lightly, but we think it's the best decision for the company. So we're very excited about the future. We've started to pivot to a lifestyle CPG company. Health and wellness is a big part of it. And I think when I compare how we're doing to others, at least at the seat I am, I'm pretty satisfied. Again, it's an asset industry, highly regulated and very -- and to be very competitive. So the fact that we've done most of this organically really from the beginning, I think, is a tribute to the team we have here, and we really look forward. I think 2022, especially in Canada, is going to be an exciting year, pivot year. And we like how we're positioned for that, and excited and hopeful about the U.S. So I'll leave it at that. And thank you for participating today.

Absolutely. Again, thank you, everyone, for joining in. Michael DeGiglio, CEO, President of Village Farms, ticker VFF, now just trading on NASDAQ, no longer on the TSX, my top pick among Canadian LPs. So again, Michael, thank you so much for joining. Thank you, everyone, for tuning in, and I hope everyone has a great day and happy holidays.

All right. Happy holidays, everyone. Thank you.