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

Good morning, ladies and gentlemen. Welcome to the Village Farms International Second Quarter 2023 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the second quarter ended June 30, 2023. That news release, along with the company's financial statements are available on the company's website at villagefarms.com under the Investors heading. Please note that today's call is being broadcast live over the Internet and will be archived for replay both by telephone and via the Internet, beginning approximately 1 hour following completion of the call. Details of how to access the replay are available in today's news release. Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call. Certain material assumptions are applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in the company's various securities filings with the SEC and Canadian regulators, including its Form 10-K, MD&A for the year ending December 31, 2022, and 10-Q for the quarter ended June 30, 2023, which will be available on EDGAR. These forward-looking statements are made as of today's date, and except as required by applicable securities law, we undertake no obligation to publicly update or revise any such statements. I would now like to turn the call over to Michael DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGiglio.

Thank you, Lisa. Good morning, and thank you for joining us for today's call. With me are Village Farms Chief Financial Officer, Steve Ruffini; Village Farms Head of Canadian Cannabis, Mandesh Dosanjh; and Gillin Lefever, Village Farms Executive Vice President of Corporate Affairs; and Patty Smith, Vice President, Corporate Controller. As per our usual format, Steve and I will review the operating highlights and financial results for the quarter and then open the call for questions. Turning now to Q2's highlights. We're very pleased with Q2 significantly improved financial results, which builds on a very solid start to 2023 last quarter. There are 3 noteworthy highlights. First, we delivered continued strong and consistent growth in our Canadian cannabis retail sales, fully aligned with our strategic goal to be a leader for the long term and the largest federally legal cannabis market in the world. Second, we have stabilized our U.S. cannabis business and in fact, returned it to sequential top line growth while generating profitability and positive cash flow. And our Fresh Produce business saw another quarter of significant year-over-year improvement. Importantly, with our Fresh Produce strength of our strategic decision to build upon our unmatched expertise and controlled environmental agriculture to deliver leading revenue growth, profitability and ultimately, cash flow in each of our businesses. To do this, we lean heavily on the breadth and depth of our multitalented teams capabilities, and we leverage our wealth of experience to succeed even in difficult market and regulatory conditions and unfavorable economic cycles, not to mention the artificial pricing environment in the Canadian cannabis industry due to the lack of enforcement of the illicit market. Addressing each of these businesses in detail, I'll begin with the continued improvement in Fresh Produce. Against a still challenging macro environment, most notably high interest rate and high inflation, we continue to see the benefit of the actions we have taken under our ongoing plan to return the business to sustainable, long-term profitability, including our significant progress in managing the brown rugose virus while increasing our planting of virus resistant strains. Fresh Produce delivered its fourth consecutive quarter of sequential improvement and generated positive adjusted EBITDA of more than $1 million. This is an improvement of nearly $12 million from Q2 last year, which brings the improvement in adjusted EBITDA for the first half of 2023, close to $17 million and moved our year-to-date EBITDA into positive territory, a committed effort by our entire fresh team. Execution on the multipart operational plan for fresh continues. We are committed to long-term continuous improvement to partner with our customers and win with consumers. We are strengthening our operations with investments in infrastructure and technology, including artificial intelligence for crop management, the initial results of which are very encouraging. We are planning more virus resistance strains, which will continue over the next few years. We have also been able to turn our attention back to important growth initiatives like product innovation, where we have had great success in the past with development of exclusive varieties that command higher margins. As an example, One of our newest products, Sensational Sara, a novel tomato variety that has a perfect natural balance of sugar and acid and has been a hit with both retailers and consumers. It also marks the debut of our new sustainable packaging solution for produce, biodegradable and recyclable that also addresses safety and shelf life. With the first half of 2023 in the books, Fresh Produce continues to track towards our goal of achieving positive adjusted EBITDA for the full year. Turning now to our Canadian cannabis business, which continued to deliver standout performance. Retail branded sales for Q2 grew 24% year-over-year and 8% sequentially, both well ahead of underlying market growth. We delivered our 19th consecutive quarter of positive adjusted EBITDA. And importantly, we were profitable on a net income basis. We have proven again that Village Farms Canadian cannabis business has the best organic growth story in the Canadian cannabis industry. Our growth has been achieved at a fraction of the capital cost of most other large LPs, and we have done so faster absent a first-mover advantage. The majority of that growth has been generated internally and not purchased. Our one and only acquisition in Canada, Rose LifeScience in Quebec has posted a 300% sales growth since acquisition, more than tripling market share as it contributes meaningfully to the growth of the cannabis industry in the very important partner, Province of Quebec. ROSE has proven without any doubt in my mind to be the best acquisition ever done in the Canadian cannabis industry to date, bringing with it invaluable insight and capabilities around consumer trends, product innovation and distribution as well as industry relevant management expertise. Our Canadian cannabis results are very much the product of our deliberate strategy to realign our business to continue to win in an environment that, as we accurately predicted would not see any relief from the challenging conditions I described earlier. We are managing our business for the realities of the market that we have today, which is a long way from a normalized CPG playing field. The expected thinning of both competitors and excess capacity has been slow and protracted, and there have been no tax relief and very little enforcement of list of trade, and I predict we will never see any real enforcement in Canada. To be clear, I'm not complaining. It is simply what it is, and we must manage accordingly. So on the production side of our mandate, under the production side, our mandate has been to manage output levels to match supply with expected demand. We have placed an elevated importance on the production protocols, building out our industry lead aimed at consistently generating efficiencies. Steve will speak more to this in a few moments. We are actively, prudently and continuously managing our cost structure for our growth forecast. And we have successfully increased our market presence and coverage transitioning from a branded house to a house of brands as consumer preferences evolve. Since the start of 2022, we have launched 7 new brands to address consumer trends and preferences, building on our original Pure Sunfarms brands domination in the core price segment of the flower category and added more than 300 new SKUs. Our Soar brand launched less than a year ago, quickly became the top-selling premium brand in the flower category in Ontario, meaning we now have 2 #1 flower brands in their respective price segments in Canada's largest provincial market. And Fraser Valley, which was launched just a year ago, is not only the third best-selling flower brand in the value category in Ontario, but also continues to be the fastest growing. Adding to this brand Triple throat last month, we launched SuperToast, which is uniquely focused on convenience and ready-to-go products and which is off to a great start. And further, in just a short period of time, Promenade has become the second largest selling brand in Quebec. At the top line of the Canadian share rankings with a number of the large early leaders having given way to smaller up and comers, we stand out as a consistent performer, maintaining a top 3 position nationally in Q2. In Quebec, ROSE became the top-selling producer by market share in dollars in Q2 and was the fastest-growing producer. We achieved this in what has been an increasingly competitive environment there. And notably, with the addition of HEXO's distribution in Quebec, ROSE now touches approximately 1/3 of every dollar of cannabis sales in that province. Soon, we will start preparing a portion of our world-class indoor facility in Quebec for supply to our growing export business for 2024 and beyond. There is clearly a lot going on very well and a lot to be proud of on our Canadian cannabis business. But there is also a number of areas that we are working on to deliver future growth, and I'd like to share those as I always do. Our data shows that in some markets, more than 70% of SKUs and products on the shelf today were not in existence a year earlier. We have seen some dampening of our overall market share as we under-index on newness in the core price segment. We have plans to return to being a meaningful contributor to the innovation and growth of the core segment, which is important for our retail partners. Q2 saw a marked increase in the number of our new product launches in the core price segment, with 4 new strains in flower and our all new high THC 1 gram bases with high-performance hardware. These are formulated to maximize potency and flavor with 7 flavors rolled out initially. We've added even more new strains in July with a very active launch calendar throughout the remainder of this year that includes more new strains, more new vape flavors and new infused pre-rolls across our brand portfolio. In Quebec, we launched 15 new SKUs under the first product call this year and targeting another healthy number of launches later this year. As we innovate, we are continuing to elevate quality, delivering bigger and better but through harvesting and trimming, enhanced bud sorting and hand packing, achieving better moisture levels through our drying process and offering humidity packs and store in Pure Sunfarms flower. And we are delivering quality on a more consistent basis with enhanced Q&A controls. Again, this is part of our commitment to continuous improvement in every part of our organization, even those in which we are excelling. This is our DNA. We have also dealt with some internal supply issues for our market-leading flower strain in Pink Kush as it exhibited longevity with consumers that is uncharacteristic of most products in the Canadian market. The good news here is that our Pink Kush has proven that Canadian consumers will stick with great products, and we have the ability to offer those great products. We have addressed those supply issues and expect Pink Kush sales to respond accordingly. Importantly, we do not believe that price increases we took on certain high velocity SKUs had any meaningful impact on share in Q2. We worked closely with provincial partners on the implementation and I'm encouraged by markup changes that the OCS is planning for the second half of 2023. It would make sense for other LPs to take opportunistic price increases as well. Village Farms is a 30-year-old company, which is executing successful organic growth strategy in 2 complementary and international businesses, Fresh Produce and cannabis. We have learned a lot about our capabilities, which we are consistently pushing the team to continue to exploit for future growth. We continue to pursue opportunities in those international cannabis markets where the rules are known and clear through both our rapidly growing export business from Canada and in-country market opportunities to come. Q2 was another strong quarter for export sales, which were up more than 200% year-over-year, and we expect future growth as we continue to monitor medicinal and recreational regulatory developments, particularly in Europe. Turning now to our U.S. cannabis business, Balanced Health Botanicals. Sales for the second quarter increased sequentially while generating positive net income, positive adjusted EBITDA and positive cash flow. The success of our innovative new products and prudent cost management have stabilized this business as the overall CBD industry has contracted. We continue to believe, however, that the U.S. market for CBD and other cannabinoids will be a high-growth multibillion-dollar opportunity with the benefits of regulatory oversight to open mass market opportunities. We remain encouraged by what appears to now be progress on the U.S. CBD regulatory and political front. We are compliant with current FDA rules for other food and drink ingredients and good manufacturing practice standards under the NSF organization, a track record of safety and stand ready to work with regulators to realize this industry's full potential. And we have been underwriting multiple studies that support the efficacy of our products. In other words, we are ready to go. At this point, I'll turn it over to Steve for a more detailed review of our financials.

Thanks, Mike. This quarter, I want to begin by reviewing our significantly improved profitability that Mike discussed earlier. Consolidated net loss for the quarter improved to $1.4 million loss or a loss of $0.11 per share compared with a net loss of $36.6 million or $0.41 per share in Q2 of last year. Our consolidated operating loss was close to breakeven at just negative $42,000, again, a significant improvement from Q2 last year's operating loss of $43.8 million, which included a $30 million goodwill impairment. Our results for Q2 this year was driven predominantly by the improved operating performance from Fresh Produce. Consolidated sales for the second quarter were $77.2 million, a decrease of 7% from Q2 of last year, with the decrease primarily due to lower volumes from our third-party growers in Fresh Produce and lower nonbranded sales from our Canadian cannabis businesses. which were dampened somewhat in our -- by reporting currency of U.S. dollars due to the weaker Canadian dollar in 2023 versus 2022. Consolidated adjusted EBITDA for Q2 came in at $4.5 million, our second consecutive quarter in positive territory and nearly a $15 million improvement from the negative $10.3 million in Q2 last year. Again, this was driven mainly by the improvement in Fresh Produce, but also higher EBITDA from our Canadian cannabis business as well as lower corporate costs, excluding stock compensation, which fell to just under $2 million. I will now review our Canadian cannabis results, which, as usual, I will discuss in Canadian dollars to provide more accurate comparative without exchange rate fluctuations. Retail branded sales, which represents a vast majority of our Canadian cannabis sales increased 24% year-over-year, once again outpacing the overall Canadian market growth by a wide margin. International exports from Canada of nearly $1.9 million from $600,000 in last year is nearly a threefold year-on-year increase. Non-branded or wholesale sales in Q2 were $3.9 million, which compares with $10.3 million in Q2 from last year and especially outsized quarter for non-branded sales. We are seeing renewed inquiries recently for non-branded sales, and we'll continue to operate our non-branded channel opportunistically being selective around our participation in the current market environment, always with profitability in mind. These channels netted out to total Canadian cannabis sales of $37.7 million compared with $38 million in Q2 of last year. Gross margin for Canadian cannabis of Q2 was 38% compared with our reported 39% for Q2 last year, which included a purchase price inventory adjustment in that period. Excluding last year's purchase price adjustment to our cost of sales, our Q2 2022 gross margin was really 33%. The year-on-year increase was primarily related to the higher portion of retail branded products sold in Q2 of this year versus last year. Earlier, Mike mentioned our redoubled focus on realizing production efficiencies, generating more output per dollar spent. We are realizing improved efficiencies through the optimization of growing space during the best-growing seasons and continued refinement of our cultivation practices as well as strategic pruning unintended of input costs. We are also -- we've also realized a 2.5x improvement in the overall -- in our overall pre-rolled production per hour as we move manufacturing entirely in-house, which we expect to have completed this fall. Selling, general and administrative expenses for Canadian cannabis for Q2 were $10.5 million or 28% of sales, down slightly from $10.9 million or 29% of sales in Q2 last year. As Mike highlighted, our Canadian cannabis operations delivered their 19th consecutive quarter of positive adjusted EBITDA of $6.7 million, which is up 97% from $3.4 million for Q2 last year and up 26% sequentially from $5.3 million in Q1 of this year. Notably, our adjusted EBITDA margin doubled from Q2 last year. Canadian cannabis also delivered positive net income, which came in at $1.7 million as well as positive cash flow after capital expenditures and all debt service payments. I will now turn to our U.S. cannabis business and revert to U.S. dollars. To reiterate Mike's comments earlier, we have stabilized this business from both a sales and profitability perspective. U.S. cannabis sales for Q2 generated entirely by Balanced Health Botanicals for $5.3 million compared with $5.8 million in Q2 last year and $5 million in Q1 of this year. I will note here that this year's Q2 sales were dampened by 2 factors specific to the quarter. First, we were out of stock in 2 of our best-selling gummy SKUs due to the bankruptcy of our supplier. We have begun shipping these specific SKUs from our own manufacturing facilities this week. Second, Q2, there was a change by a major online search provider and an algorithm, which affected our affiliate partner sales. U.S. cannabis gross margin for Q2 was 67%, up slightly from 66% from same period last year. Adjusted EBITDA for U.S. cannabis was positive $400,000 compared with negative $600,000 last year, a $1 million improvement and U.S. cannabis generated net income of $200,000 as well as positive cash flow in the quarter. Turning now to Fresh Produce. We delivered our fourth consecutive quarter of sequential improvement in the second consecutive quarter of significant year-over-year improvement. Product sales were $43.8 million, which was down 7% from $47.2 million last year. The decrease was primarily due to lower volumes from third-party growers as we lost 2 of our larger supply partners at the end of 2022, one of which left the Fresh Produce space but are picking up new growers in the forthcoming crop cycle and expect to fully recover to our former level of third-party sales by the end of 2023. Sales from our own facilities are up year-over-year due to higher prices in a better market environment, more than offsetting our reduced production footprint in 2023 versus 2022. As I noted in our last call, our average selling price is benefiting from our focus on more profitable customers with a higher percentage of produce sales going direct to retail accounts. I am pleased to report with the continued improvement in our operations, Fresh Produce achieved positive adjusted EBITDA of $1.3 million. That's an $11.6 million improvement over Q2 of last year and a $2.3 million improvement from Q1 of this year, which pushed adjusted EBITDA for the first half of this year into positive territory. With the stabilization of the macro environment, our ongoing improvements in managing the brown rugose virus and our focus on customer profitability, we continue to be confident in our substantially improved financial performance for this business in 2023. Our net loss from Fresh Produce improved to a negative $700,000 for the quarter. Turning now to cash and the balance sheet. At the end of Q2, we had cash of $31.7 million compared with $34.9 million at the end of Q1 of this year. and $84.9 million in working capital, up from $80.3 million at the end of Q1. Both are significant improvements from $21.7 million and $60.8 million at the end of last year. Total debt at the end of Q2 was $51 million, down slightly from $53 million at the end of Q1 on a stronger Canadian dollar versus U.S. dollar in Q2 versus Q1. The sales process for our Monahans facility in Texas continues to advance with expressions of interest expected during this quarter. Finally, I'm pleased to report that we are forecasting not only continued positive cash flow from our cannabis division but also positive consolidated cash flow from all operations for the third quarter of 2023. And with that, I'll turn the call back to Mike.

Well, thank you, Steve. I want to reiterate one point about what we are building at Bill as France, which I think it's lost in all the headwinds of 2022, 2023, some of which we got carton as well. The Village Farms model is a proven decade-long survivor of the intersection of a cyclical agriculture industry and a branded consumer products business. We understand both, and we are very focused on deploying our considerable expertise in each for industry-leading returns in cannabis and produce. We are not distracted by noncore businesses. We are not dealing with the legacy of poorly thought through investments made when capital was cheap and abundant. We have not gambled on a diversification strategy as the only path forward. We are equally focused on delivering profitable growth with a prudent capital mindset, investing where there is regulatory clarity. I keep hammering in the organization on focus because we believe it is the most important factor to drive organic top line growth and take an outsized percentage of category profitability. We are already doing this. We believe organic growth, leaning on partnerships, alliances and collaboration with very selective high-quality investments at this point of the industry life cycle is the right path to creating shareholder value. That is our ultimate focus. I'll now turn things over to the operator for analyst questions. And while the operator queues up for questions, I will comment on one question we've received regarding our NASDAQ status. So we received quite a few questions regarding that, and I'll address that here. We are currently on extension with NASDAQ, and we are extremely confident that we will be able to get another extension come to fall that will take us well into 2024. Equally, although we are very confident that we will remain on NASDAQ and want to, we are also investigating with some other MSOs in the U.S. have structured on the TSX and some Canadian LPs are even working with the NASDAQ to find a structure that will allow them to compete in the U.S. market. So not that will necessarily go down that path, but we are investigating it. Now as just a reminder, coming out of 2022, 2023 post COVID, I think around 25% of all NASDAQ companies are trading under $1 currently, it's just a sign of the time. So we're very confident that our share price will be increasing. And if not, our extension will go through into 2024. With that, operator, turn it over to you for analyst questions.

[Operator Instructions] And our first question today is coming from Aaron Grey of Alliance Global Partners.

First question I have is on Canada and the price increases, specifically around that and share performance. You mentioned, Mike, that you don't believe the price increases had an impact on share, which that's great to hear. Your sales outperformed the POS data. I fully understand, as you've cautioned a number of times, you will be careful about reading the POS data versus your sales because your sales are to provincial boards. But can you speak to the delta that we're seeing there because there was some share softness in the POS data that seemed to be somewhat aligned with the price increases, but you're not seeing it on year-end. So maybe you can kind of speak to the POS and kind of what's giving you that confidence that those price increases are not having an impact for you? That would be helpful.

Sure. As I said, we're not seeing it, but I'm going to give more color to you, Aaron, from Mandesh. Go ahead, Mandesh..

So Mike touched on a lot of the topics, but what we're seeing in the quarter, we're very consumer-driven insights driven looking at our product innovation strategy, and we know newness drives a lot of that growth and maintenance of sharing and growth of share. And we did have quite a bit of newness in this quarter and more coming. We did see some of that newness come late to the quarter, specifically around our vapes or a new rates are performing ahead of our expectations and we're -- you're going to continue to innovate and push on that. And then with some of our flower strains, some of our high-performance high-potency strains seeing really good uptake. A couple of them index kind of medium to lower end on the potency scale. And we know that right now in the industry, there's just really hyper competitive factors at play. The never-ending chase for potency. We're seeing really poor dynamics in terms of how people are pricing their products to try and gain share. We don't believe it's profitable share. So we think that the time and the roll the runway will run out for those folks on how they're trying to come to market and gain that share in the short term. So we see that competitiveness there on the potency price equation. And then what we're also seeing is because there's still this abundance of supply. People are really taking premium product and throwing it into value pricing. So that creates some unstable dynamics in the industry, and I think everybody was impacted a little bit by that. So hopefully, that gives you the right color around kind of what we're seeing in the industry. And then your second part of your question was around what gives us confidence. And again, Mike alluded to something very important is that specifically around Pink Kush and some of our longer-term strains and Kush being the first focus and then Fraser Valley being an entire brand in the value space, we see great resilience and performance. And when I'm in market, myself and with the team, we talk to storage and consumers, they love our products. So there's a lot of noise right now. There's a lot of units every quarter, every month, and we just got to keep fighting that battle and keep doing what we're doing, which is launching great products, great strains, bringing amazing brands to market, not just in the cruciform portfolio, but also in the ROSE portfolio and picking response to win and improving our margins, as you saw what we did this quarter with continued cost reduction and executional focus because for us, it's a build profitable share. So we took it a little bit on the chin here and there, but we like where we're positioned, and we like our positioning for growth in the upcoming quarters.

Second question for me. I don't want to shift gears a bit. We don't always talk time about CBD, but you mentioned some things in your prepared remarks, Mike. So I wanted to get your perspective on line of sight of how the Farm Bill might potentially drive change at the regulatory level for CBD and other minor cannabinoids. I think you have a unique perspective at Village Farms because you've obviously had a lot of interaction with the farm builds from the legacy business over the years. I'm sure. So anything you might anticipate in terms of changes for regulations in the 2013 Farm Bill? And then what impact it might have on minor cannabinoids such as Delta states have taken various actions, some banning some putting regulations and age limits on it. So any implications you might have for the Farm Bill and how that might change the dynamics and impact the business?

Well, the past Farm Bill was so profound really kicked off the whole CBD industry as a start. So there's not a lot of leakage coming out of the USDA and what they're looking for. We don't expect to see some tangible color on that to probably October, November. But we are bullish that there will be some changes like on Delta. I don't believe Delta is going away. I don't necessarily believe in it, but I think it's here to stay. But I just don't think there's going to be tremendous change. But on the CBD side, I mean, we're encouraged that the Farm Bill may help us, but we're also encouraged that we're starting to see a big number of congress spend that are now putting pressure on the FDA, and I think that's even a more important development because really the FDA controls the person, so to speak. They are the ones that are being sort of negative towards any movement forward. And that's what we as a group and the industry are working towards. So I think the bigger win is what's the FDA going to do in 2024. So -- but we'll probably have some better color when we talk to you in November on that, Aaron.

And our next question will be coming from Frederico Gomes of ATB Capital Markets.

Mike, on your comment about these MSOs of listings and how you look at that. I'm just curious if you have any update on the Texas medical cannabis application. And when you look at the U.S. market, is it really about taxes for you? Or would you consider other potential markets as well?

Well, overall the U.S., look, it remains a huge market for us, and we've done a tremendous amount of homework internally. And we don't think we're disadvantaged to enter the U.S. market upon decriminalization or legalization because we believe that there are some great companies out there that are executing very well today. However, I think the game is going to change really coupled to interstate commerce and where that's going to go. And I think that's where we'll shine. I mean our Texas assets, again, are we believe are probably the best assets and best location for high-quality, low-cost cannabis that can be delivered throughout the United States. And that will make us compete, we believe, at any point in the future. But we're not going to sit here and just waste time waiting for that to occur. We've heard so many promises on the U.S. front. It's really kind of ridiculous when you think about 35 or 36 states that are legal for a medicinal or recreational just being in New York, there's 1,400 legal dispenses operating in cannabis on every corner, but yet the federal government is really not moving forward. So before I answer about Texas, that's why we're very focused on international, especially Europe, where the clarity is there. The decriminalization is occurring. We believe it's going to be a huge potential market, and we believe we can leverage everything we've done in Canada, in Europe and win there along with collaborations and alliances, as I mentioned. Regarding Texas, it just blows our mind here with all the effort we put forward in Texas, how it really comes down to one individual that controls north of 30 million people, the size of the Canadian market in Texas to not move the medicinal program forward. That was a real disappointment during this last legislative session ending in late May. The next round is 2 years away. However, Texas is granting additional medicinal licenses we've applied for one. So we'll probably move that forward. We're hoping we'll know if we've been a lot in one in the fall, and that will help position us step forward to the future. So I hope that gives you some color, Frederico.

Yes. And then just on international, you mentioned how should we think about growth in that segment? I know that you had a good increase there this quarter, but in terms of the ramp and how volatile those international sales can be? And just tied to that, any updates on the Netherlands.

Yes. I think the international side, I mean, you could see it will be lumpy at times because it's very native to get going. So I wouldn't have an expectation that the growth curve is going to be sort of steadily increasing. But it will year-over-year increase. We are very bullish on that. And you'll maybe see some compression at times like Israel due to some political issues going on there and others. But really, the EU is the market we're focused on. Germany is leading the way, but France, Italy, Poland, all these other countries are looking at the German regulatory process that they went through. And it's happening. So there's a number of competitors looking at that market. Some are in some have spent just eons of money without the clear path. We've been prudent with that as we've reported to wait until the clarity was there. It is there. We're going forward, increasing our sales and our effort going forward. And this is all medicinal. We anticipate that the majority of the European market will just operate on a medicinal platform for at least the next 3 to 5 years with the exception of certain countries, Luxembourg and specifically the Netherlands, where we're 1 of the 10 license sold. As you know, we've secured 2 our license with 2 locations and there was some slight change in the government recently. I don't think it's going to impact our ability to move forward, which we hope that will commence in the fourth quarter of this year. But we've always prudent before we push the funnel button to make sure that the political situation is solid. So I think we'll be able to update you clearly by November on our progress there.

And our next question will be coming from Eric Des Lauriers from Craig-Hallum Capital Group.

All right. I apologize if this was addressed already. I'm joining on the call, but I was wondering, first, if you could expand on the guide for a positive consolidated cash flow in Q3. Just wondering if you could just expand on that a bit and help us understand the primary drivers of that.

Primary drivers of that are management of our current assets, some of those current assets are going to flip from receivables to cash. So it's going to be a very strong cash collection quarter across all our business lines. So it's pretty straightforward. We're obviously -- we're a good bid in 6 weeks into the quarter, so with confidence that we're very confident that that is occurring in real time. As simple as that.

All right. Great. And then my next question is just on the investments in produce and our overall infrastructure and AI technology, et cetera. I'm just wondering if you can help us sort of frame the either expected CapEx involved or expected timing of this? You characterized it as continuous improvement. So I'm assuming it's not necessarily just like there's a sort of set day where everything will be completed. But just if you can help us kind of frame that in terms of either timing or dollar amount, that would be very helpful.

Yes. So Texas operates predominantly not on a calendar year, but on a crop cycle, which commences -- starts the beginning of that crop cycle depending on which asset we're talking about commences in June and sort of as a full plant out mode by September and then runs through the following summer. So we have done 2 years of experiments with the investment in AI, one of our facilities over the last 2 years and have rolled it out completely now in all Texas facilities. And in fact, we're rolling it out in our Canadian Delta facility and plan to roll it out next year as well in cannabis. It's proven to be a great partner to our growing operations. Secondly, this year alone, we've already spent in the last 4 or 5 months, approximately $3.5 million in capital improvements in packing technology sorting and grading for efficiency, cutting labor costs as well as shading systems and new technology across the board from irrigation, CO2 capture and whatnot. So yes, so we -- all of it is about continuing -- continuous improvement to cut our costs and increase our quality and yield going forward. We already have plans for 2024 CapEx improvement in all our facilities as well. So is that enough, Eric?

Yes. So I mean -- so you spent the $3.5 million in CapEx thus far. Do you have a figure for us, either in sort of second half or '24 that you're willing to share now?

Not for '24 because we haven't finalized that, but possibly in November.

And our next question will be coming from Douglas Cooper of Beacon Securities.

A couple of things. I'm just looking to get your comments on -- let's start with the Canadian industry as a whole. I mean we talked about obviously the competitive nature of it and continues to be competitive out lots of players. Do you think -- how do you think this will play out over the next 12, 24 months? It just seems to me that a lot of these smaller guys are not going to be able to get capital to survive, A. B, some of your major -- or historically major companies have sort of left the adult use space, either a, for the medicinal market or be pursuing an afoul strategy. How do you think this will play out to me? It seems to me that ultimately, this will end with 3 or 4 companies. And obviously, you've been the biggest of those.

Yes, I'll answer part of that, and I'm going to turn it over to Mandesh because he's in the trench every day fighting those battles on the front line, so to speak. But from a macro perspective, I'm not going to comment on other LP strategy. I think what's -- what makes the industry unique and incent cases fun, being this massive legal cannabis industry is that every LP in Canada seems to be looking for what that magic path forward is, whether it's a diversified strategy, a focused strategy as opposed to the U.S., even though it's not fairly legal, when we look at the U.S. MSOs at least I do, they're very focused on cannabis. They're not diversifying. They're wanting to win in cannabis in the U.S. So it's very different. In Canada, for the reasons we have companies are looking at different ways. So I don't know which is a winning formula, but we know that we want to focus on being #1, not just in Canada, that's our goal being #1 internationally as well. It sounds bold, but we know the only way to get there is a total commitment and focus on the industries we're in and not dilute our ability to operate them. So that's sort of the macro level. As far as my comments were we've talked a lot of quarters about the industry in Canada that there's overcapacity. There still is overcapacity. And that's from a number of LPs that continue to linger on. The capital markets are closed. Interest rates are through the roof. So at some point, I think this is an inflection point coming. We thought it would be here by now. But I think once the Domino's really start to fall, they'll fall away. And in the end, I do believe there will be 3 to 5 companies that are meeting the Canadian and the Canadian export industry going forward. Now for the frontline, Mandesh, do you want to add color on that?

Yes. And I think you've hit most of the pieces, thanks for the question, Doug. We've been consistent, right, on our business strategy and how we've deployed everything from being a branded house and on to a host of brands and with the ROSE acquisition and kind of what they've been able to show and do and they're agile, their ability to be agile and nimble. And we still have a lot of opportunity in Canada, I think, I know, based on what we have in the pipeline and the work we're doing with ROSE and Pearson firms across the Canadian landscape. And hopes on a strategy. So we're not saying or hoping, waiting that other people will go by the wayside, Mike articulated it very well that we believe that, that's going to happen. But underneath that, we just continue to operate and execute, generate cash, generate profitability, create great products through innovation with a really strong assortment strategy that attacks the market from different consumer profiles and segments, and we think that's going to continue to allow us to be successful. And if the industry breaks open and people do go by the wayside because on the trenches, we see it, we see cracking the foundation. We see products that are constantly hitting the market, great 1 week, not great pull-through or sell-through in the following weeks. We see the relationships we have with stores and budtenders. We value those. We have built a solid reputation across this country in Canada, and we continue to want to execute on that. So we like how we're positioned. We think things will evolve, but we're going to continue to find ways to win and outperform where we can.

That's great. Any comments on the Fire & Flower and what do you think is going to happen there and the impact that is having or may have on the actual retail sale of product?

Not really, Doug. I think we want to just be cautious about commenting on others. So probably going to pass on that question. But if you want to ask another one, we'll take it.

Okay. And just a last one for me. Just from a balance sheet perspective, maybe, Steve, do you feel -- how do you feel about your balance sheet right now? And any color on the potential sale of the assets in Texas. I think you mentioned, Steve, that you expected some expressions of interest this quarter. Do you expect something to play out before the end of the year? And is there a minimum threshold at which you will not consider something below?

Yes. We feel good about our liquidity and our balance sheet at this stage of the year. Obviously, Monahans is an active process, probably taking a bit longer. Capital markets have tightened up, and I think that hasn't impacted the speed of which the process is taken, but we have interested parties actively looking at it, and we'll see how fast it plays out like in the other real estate transaction. It's capital -- the buyer will have to bring capital to the forefront, and we are -- capital markets are tightening. So we'll see how it plays out. Will it happen by year-end or not, will remain so. And yes, will we have some minimum, yes, we will have a minimum price. Absolutely.

And our next question will be coming from Scott Fortune of ROTH.

This is Nick on for Scott. First question for me, just on the new product side. You mentioned launching 7 new brands in the last 18 months. Can you just give us a rough sense of what those are contributing now kind of in terms of mix? And are there any specific product categories you feel under indexed in that you're looking to address in the future?

Mandesh take that one, please.

Yes. So we don't really break it out totally by brands. I mean Pure Sunfarms is still our main state brand and contributes the most amount to our share. Some of the other brands have just noted to launch, and we think that they'll play very positively in certain consumer spaces and index with innovation behind it. But we don't really give out the components underneath that. Your second part of your question was around where do we feel our next infused pre-rolls has been probably one of the -- probably has been the biggest story over the last 8 to 12 months in the in the industry, and we're significantly under-indexed there and then continuing to grow our pre-roll share, just our base pre-roll share. So when you think about how strong we are in flower and how we have over-indexed on the flower side. We believe through our great brands and products and our specific grade strains, we can use those as extensions to play in spaces where we're under-indexed and that's what you're going to start to see. So specifically in pre-rolls and infuse pre-rolls. And then with the launch of our new vapes, we're starting to really regain some of the share where you lost and we think there's some upside there. So vapes, pre-rolls and fuse rolls.

And then second one for me, just I wanted to follow up on the international side. Germany specifically, you launched products through IUVO in May. Just kind of any early puts and takes on that side. I'm just wondering if you had any color on the competitive landscape and maybe the pricing environment there? Any color would be helpful.

Yes. I think the competitive environment is going to be -- I think it's going to be pretty solid going forward because for the Canadian LPs that are all dealing with sort of the macro issues in Canada tax and others, which a number of companies are not able to get cash flow positive. They're looking at the international markets, of course, where there is no tax. So -- but I think to win in that market, it's going to take the same vision we had in Canada that's going to be high quality, low cost. And there is price compression already happening in that market, just like we've seen in the U.S. very quickly, price compression. We predicted that early on even in Canada, and I think the same will happen in Europe. But that being said, we think we can win there. It's still much more lucrative from a gross margin perspective. And we're bullish on it. And I don't think everybody -- it's not as easy. Shipping internationally, especially trying to be under the EU GMP banner is a very difficult process, and not everybody can do it. There are some green washing and there are some ways you can circumvent the system. And ultimately, that will play out. But again, for us, we believe we stand a great chance of leading in Europe as well. And as regarding IUVO, yes, IUVO we've made multiple shipments. And then we have many other alliances that we're working on throughout the whole EU that we haven't put out yet but probably give some more color towards the end of the year on that, Scott.

And our next question will be coming from Mike Regan of Excelsior Equities.

Real quick on the Canadian cannabis side, can you sort of give us your perspective on how Ontario reducing their distribution margin is sort of going to work from your perspective in terms of how they decide the retail pricing versus the wholesale price they're paying you?

Sure. Well, I'm going to turn that over to Mandesh, Mike, before I do thanks for launching on Village Farms this week. We appreciate it, Mandesh?

Yes. So earlier this year, the OCS revised their markup pricing kind of strategy and approach where they were much more variable and they went to more of a fixed approach. They weren't playing around with how they're marking our products into various segments, and they kind of realigned everything to go to a fixed model. So for -- in some categories, i.e. flower actually are giving margin back to the producer. In other cases, such as concentrates, where the infused pre-rolls come in, they're going to be taking a greater margin. So they're kind of balancing everything else in kind of a certain percentage will be fixed. So for a producer, we'll now know clearly, like we do in other provinces, when we submit a product, how the market will play through the supply chain and how that will impact end pricing. So from a producer standpoint, some real big wins, better margins for us, more visibility to end consumer pricing. And given where Pure Sunfarms sits on the Canadian cannabis side, those will be positive for us, given where we play and how we play. What we're also hearing in the industry is that there is ability now for producers to pass along that margin to consumers and reduce their pricing, but that's not what we're hearing. With our GPI increase we took earlier this year, we were a leader in kind of maintaining price -- improving price. And now we're hearing that the industry is going to follow us behind that. So it's a good new story we believe, for the industry, shows leadership in the Ontario market to look at their margin structure and making sure they're doing the right thing when it comes to pricing. And we think it's great for the industry, and we're excited about it.

I know that sounds great. especially you can thread the needle of wholesale price increases and end-user prices flat to down to drive even higher volumes. And then quickly on the produce side, I guess you sort of guided to the goal of positive EBITDA for the year in produce, and you've achieved that by June 30. Is there any reason to think going forward that you wouldn't at least be breakeven? Or could we keep having -- continue seeing that positive EBITDA on the produce side going forward?

This is Steve. So the produce will be quarter-to-quarter. So we would expect that in the third quarter, we will not have positive EBITDA, and we'll have strong positive EBITDA in the fourth quarter, and that's due to the seasonality of demand and supply. There's less supply of essentially see controlled environmental ag tomatoes in the fourth quarter and demand is usually pretty steady, and we usually see improved pricing such that we're profitable in Q4 and struggle a bit with pricing in Q3. So -- but for the full year, we are expecting to land in positive territory.

And our next question will be coming from Ben Kleinberg of Stifel.

I'm filling in for Andrew. I just want to turn back to international sales. There was some news out of Israel this week where the health ministry announced some reform that could provide patients with easier access to medical cannabis. I'm wondering, is this something that you're watching closely? And if so, how should we be thinking about future shipments to Israel going forward given that these changes are supposed to come into effect at the end of this year?

Yes. We are watching it that and the political issues going on there that has sort of dampened some exports there. So we're in touch with our partner there, and we're encouraged, but that may not start back up until the fourth quarter or first quarter next year. So I don't have much more color on that at this point.

This concludes the Q&A session. I will now turn the call back over to Mike DeGiglio for closing remarks. Please go ahead.

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

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