Emerald Health Therapeutics, Inc., Village Farms International, Inc. - Special Call

Jun 07, 2017 AM EDT
VFF.TO - Village Farms International Inc
Emerald Health Therapeutics, Inc., Village Farms International, Inc. - Special Call
Jun 07, 2017 / 02:00PM GMT 

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Corporate Participants
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   *  Avtar S. Dhillon
      Emerald Health Therapeutics, Inc. - Executive Chairman
   *  Michael A. DeGiglio
      Village Farms International, Inc. - CEO, President & Director
   *  Stephen C. Ruffini
      Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director

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Conference Call Participants
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   *  Blake Pelham
   *  Daniel Pearlstein
      Eight Capital, Research Division - Specialty Pharma and Special Situations Analyst
   *  Gerard Ferguson

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Presentation
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Operator   [1]
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 Good morning, ladies and gentlemen. Welcome to Village Farms International and Emerald Health Therapeutics joint venture announcement conference call. 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 replays are available in either the news releases issued by each of the companies yesterday, which are available on their respective websites at www.villagefarms.com and www.emeraldhealth.ca. Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks, uncertainties is contained in our various security filings, including Village Farms and Emerald's respective current annual information forms and MD&As for the year ended December 31, 2016, and the respective press releases issued by Village Farms and Emerald announcing the joint venture, all of which are available on SEDAR. These forward-looking statements are made as of today's date, and except as required by applicable Securities law, the companies 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.

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [2]
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 Thank you. Good morning and thank you for joining us today. I am pleased to be joined today by Dr. Avtar Dhillon, Executive Chairman of Emerald Health, to discuss one of the most exciting announcements in the history of either of our companies. Joining me today on the call are Stephen Ruffini, Chief Financial Officer of Village Farms; and Bin Huang, CEO, Emerald Health Therapeutics. For today's call, I'll begin with some prepared remarks and then turn the call over to Avtar to provide Emerald's perspective. Yesterday, we issued a news release announcing the formation of a joint venture between Village Farms, an industry-leading greenhouse grower, and Emerald Health Therapeutics, a Health Canada licensed cannabis company. With this joint venture, the first of its kind in Canada, we have created a large-scale, high-quality cannabis producer using existing Village Farms' greenhouse assets in Canada and leveraging Emerald's experience and expertise in the cannabis industry with the stated goal to be the low-cost producer in the Canadian market. At the onset, I'd like to say that we are thrilled to be partnering with an organization with the pedigree of Emerald. This is a tremendously exciting and potentially very lucrative opportunity for Village Farms, one that we have only been able to take advantage of as a result of our long successful operating history, deep experience and established infrastructure in the greenhouse produce industry.

 Before I go on to discuss this new opportunity in detail and what it means for Village Farms, I want to be very clear that Village Farms remains steadfastly committed to our produce business and to provide our customers with the same quality, surety of supply and overall experience that they have come to know and expect over our 3 decades in business. In fact, we view this new opportunity as a positive for the long-term success of our produce business, as it will provide greater financial stability and resources to execute on the growth strategy for the produce business, including opportunity to take a leading role in a much-needed consolidation of the industry and for organic growth of capacity in the USA theater. Now I'm sure there are many on this call that are not familiar with Village Farms.

 So let me take a moment to provide a quick overview. I think it would be valuable, as so much of who we are today as a large-scale, technology-driven produce grower underpins our advantages as a cannabis grower. Village Farms is a vertically integrated provider of greenhouse-grown produce, primarily tomatoes and cucumbers, which we sell to large national grocers across Canada and the USA. If you shop for produce at Loblaws or Sobeys, you have likely seen our produce and our brand, and hopefully you put it in your cart. We are one of the largest greenhouse growers in North America, with 240 acres or 10.5 million square feet of state-of-the-art greenhouse facilities in British Columbia and in Texas. We grow high-quality produce at a very low cost and in the most sustainable, resource-efficient manner in agriculture. We are passionate about our greenhouse growing and about continuous advancing the art and science of growing.

 We have a combined 750 years of massive grower experience and pride ourselves on having some of the most technologically advanced greenhouse facilities in the industry. Greenhouse growing yields a higher quality, more consistent product. It's something consumers both demand and will pay a premium for. As a large-scale grower, we're also specialists in agricultural product safety, which is a very complex science. It's critical expertise that has been developed over decades. Importantly, we are one of the lowest-cost greenhouse growers of produce in Canada and the USA. Low-cost production is ingrained in our culture also the result of decades of experience and has been integral to our business as the produce market has increasingly commoditized. In terms of financials, in 2006, we generated revenues of CAD 206 million and an EBITDA CAD 12.5 million at a margin of roughly 6%.

 Now on to yesterday's announcement. Diversification of the cannabis production, again, using only Canadian greenhouse assets is a truly transformational opportunity for Village Farms. It allows us to apply our high-tech, low-cost growing and agricultural product safety expertise, more than 30 years operating history and investment in our existing facilities to a product that is substantially more profitable. Village Farms has initially contributed one of its existing state-of-the-art greenhouses in Delta, British Columbia, with 1.1 million square feet of growing space to the joint venture. Our partner, Emerald, will initially contribute $20 million in cash, and we will each have a 50% stake in the new entity. The opportunity for the joint venture is all about scale and speed to market. Demand in the medicinal market is forecast to grow tenfold by 2024, and if federal legislation passes next year, the nontherapeutic adult-use market is forecasted to be as large as $9 billion. That translates into rapid near-term growth in market demand to more than 600,000 kilograms by the year 2021.

 Supply, however, on existing and announced plant capacity will fall well short of this demand until the market is expected to equalize around the same time. Using our existing state-of-the-art 1.1 million square foot greenhouse, which will be converted to cannabis production by 2018, will substantially lower capital cost in greenfield construction. And with a conservative projection of 75,000 kilograms output at that single greenhouse, the joint venture is clearly well positioned to address the near-term supply gap and establish ourselves for the long term as a reliable, large-scale, high-quality producer. Importantly, the JV has options to lease 2 additional existing Village Farms greenhouses in Delta, which would add another 3.7 million square feet of growing space, for a total of 4.8 million square feet. Again using conservative projections, that translates into approximately 300,000 kilograms of production, half of the forecasted demand in 2021. That's half of the demand in 2021. Using exclusively greenhouse growing facilities, we are confident that we can be the low-cost provider in the industry and established the joint venture with that as our stated goal.

 Earlier, I spoke about low-cost production being part of our DNA at Village Farms. With respect to cannabis production, greenhouse growing has a number of cost advantages over conventional indoor growing. First, because greenhouse growing uses natural light, it requires significantly less energy. In addition, greenhouse growing doesn't require the use of energy to extract the heat generated by the complete need for intensive lighting required for conventional indoor growing. It also generates greater economies of scale, while allowing for greater scale overall. Based on our extensive modeling, we believe we can achieve a cost of production less than $1 per gram. For context, the average cost of production of the largest licensed producers in Canada is currently above $2. In terms of next steps, the joint venture will immediately begin the application process to be approved as a licensed producer.

 Concurrently, we will also commence a process to convert the first Delta operations of cannabis production, beginning with the security installation. We are targeting spring of next year to complete the conversion of the facility to meet licensing standards. And we could begin growing by late next year, subject to receipt of our cultivation license from Health Canada. And now I'd like to turn the call over to Avtar. Avtar?

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 Avtar S. Dhillon,  Emerald Health Therapeutics, Inc. - Executive Chairman   [3]
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 Thanks, Michael. Emerald is deeply proud to be partnering with Village Farms and bringing their world class greenhouse operational experience to bear on the dynamic Canadian cannabis industry. Let me begin my remarks with some background on Emerald. Emerald Therapeutics wholly owns Emerald Health Botanicals, which holds licenses under the access to cannabis for medical purposes regulation to cultivate and sell medical cannabis and oils out of its facility located in Victoria, British Columbia. While we are growing and will continue to grow very high-quality, novel strains of dried cannabis, Emerald's significant long-term focus is on extraction and downstream product development.

 What does that mean? Our team and the members of sister companies in Emerald Group possess extensive experience in medicine, pharmaceuticals and nutraceuticals. Many of us have dedicated our lives to health and wellness. Apart from the legalization of the cannabis industry and all the potential benefits that are expected to arise from this once-in-a-century type of initiative, what we are particularly excited about is the virtually untapped opportunity to properly advance the study, characterization and production of cannabis to serve the very legitimate goals of realizing this plant's benefits for health and wellness. These benefits have been observed anecdotally for centuries. It is time to apply the formal processes of pharmaceutical world, in particular, to shift these observations from anecdotal to clinically proven. Emerald has this expertise, and we are turning the wheels along this path. Physicians and patients are awaiting the benefits of cannabis -- cannabinoids in products with well-defined properties, dosages and formulations. They want to understand how to use these products consistently. While it is easy, common and obvious to think of cannabis as a smoke plant, the fact is that legalization of this industry represents giant steps forward for people to derive potentially life-changing benefits in a potentially more prescriptive and safe manner.

 And while we are focused on being in the forefront of offering these benefits, what goes hand in hand with delivering the benefits of these products is the ability to apply intellectual and financial capital in a manner that achieves these results and provides the potentially notable returns to investors. That is what Emerald is all about. That is where we are going. To make an important point, the majority of these types of products for therapeutic benefit will be consumed in forms based on extractions from the cannabis plant. CBD and other beneficial cannabinoids can be reduced to forms that can be formulated into not just oils but pills and other methods of delivery. The plants that best serve this focus are not necessarily the same plants but are traditionally considered to represent the best-quality cannabis. While cannabis for nontherapeutic use are often best grown in indoor facility, high-quality cannabis best suited for extraction and downstream products can be readily grown in greenhouse facilities.

 So connecting of the dots becomes clear. To propel Emerald's vision and aspiration to serve the market, we require a mix of different cannabis strains and growing environments. We have the strength; we have a fantastic portfolio of strains with diverse cannabis genetics. The next step was to ensure we could fulfill our production goals with the right type of facility. We had already embarked on creating a high-tech indoor greenhouse production facility on 32 acres in Lower Mainland in BC to grow unique strains of cannabis with intention of treating medical conditions and developing consumer products. We are moving forward full speed on this facility. For extraction-based product supply, however, our strategy also includes the purchase of cannabis from high-quality, low-cost producers using greenhouse facilities. We are very pleased to now put in place another major component of our production and supply strategy by entering into this joint venture.

 As Michael said earlier, this joint venture is transformational for Village Farms. Clearly, this JV is also transformational for Emerald. Let me be clear, while Emerald to date may appear to not have the same presence as our peers in the Canadian cannabis industry, our vision and ambition are no less. We have been moving patiently and methodically to take the right strategic steps to position Emerald to be a prominent player. We wanted to do this at the right time and in the right way. This JV is a quantum leap for Emerald to secure the right supply, low-cost and quality cannabis for markets we are focused on. Importantly, it allows us to do this in a manner that is most optimal with respect to time and capital. The Emerald team and I are extremely pleased with this strategic step and its implications. We have set the foundation to be highly competitive from a cannabis production and supply perspective, and this in turn strongly positions us for the next steps of our vision.

 I want to congratulate Michael and the Village Farms team for their foresight and adaptability to recognize the significance of the emerging legal cannabis industry in Canada. Experience and a high bar in terms of growing efficiency controls and safety is an invaluable asset to bring to this industry. And I believe the ambition and strategic decisions to become leaders in the space is well founded. We also believe, of course, that their decision to work with Emerald is also well founded. We look forward to sharing our expertise and aligning our visions to serve customers and to benefit our respective shareholders, as we build an impactful presence in this industry. I'd now like to hand the call back to Michael to wrap things up.

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [4]
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 Thank you, Avtar, and congratulations to you and the entire group of Emerald companies as well.

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 Avtar S. Dhillon,  Emerald Health Therapeutics, Inc. - Executive Chairman   [5]
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 Thank you.

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [6]
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 As it is clear from Avtar's remarks, Emerald is a very complementary partner to Village Farms. Avtar and his team bring significant cannabis experience to the JV, including their portfolio of high-quality genetics and refined standard operating procedures, with a flawless record of operations under Health Canada's stringent regulatory regime. What does yesterday's announcement means in terms of financial contribution to Village Farms? At this time, we're not going to provide projections on the revenue or EBITDA impacts. It's simply too early in the development of the cannabis market to know where market pricing will land. What we are comfortable sharing at this time is that based on conservative pricing assumptions conversion of one of our greenhouses in cannabis production could generate revenues 10x to 15x that of produce, with EBITDA margins north of 50%. To conclude, diversification into cannabis production with its very attractive economics is a transformational event for our company. The use of existing, large-scale greenhouse facilities in Canada provides the advantage of speed to market to capitalize on the projected near-term shortfall of supply, and the JV has the ability to do so at the lowest cost in the Canadian market. We have a step-function growth opportunity through options to lease additional greenhouses that could expand the JV scale more than fourfold. Finally, Village Farms' 750 years of massive growing experience, expertise in agricultural products safety and decades of operating history in the greenhouse industry, that combined with our partner Emerald's specific experience and intellectual property in the cannabis industry can -- firmly positions our joint venture for long-term success. There's been a lot of hype around this market. We want to be clear from day 1 that we are positioning the JV for the long term. We are approaching this opportunity with a capital-efficient, low-cost model that is based on sustainable, resource-efficient production with a focus on product safety. It's something we've been doing successfully for decades in a commoditized produce industry, and we will bring this know-how to our new venture. We'll now be pleased to take any questions. Thank you.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Your first question comes from Daniel Pearlstein from Eight Capital.

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 Daniel Pearlstein,  Eight Capital, Research Division - Specialty Pharma and Special Situations Analyst   [2]
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 Guys, congrats on the announcement of the transaction. Just to start off, wondering if we could reiterate the timing and steps in the Health Canada licensing process. It's my understanding that Village Farms has not applied for a license as of yet. But given the limited number of expansion licenses that happen to be out there, how do you guys kind of figure is the best critical path? Or what's your expectation for getting the application in, getting Health Canada to come and visit and so on? Basically, can you provide some granularity around the regulatory steps and time lines towards getting this part of the facility licensed?

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [3]
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 Certainly we can. Avtar, would you take that question?

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 Avtar S. Dhillon,  Emerald Health Therapeutics, Inc. - Executive Chairman   [4]
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 Yes, certainly. Daniel, thanks for joining us today. As you rightly mentioned, Daniel, this would be an expansion license. What we would be leveraging is the fact that Emerald Therapeutics is a licensed entity and we would be expanding its capability through this joint venture on this additional space. And as you know, there is a different time line that Health Canada has for dealing with such expansions. So as such, we would commence the licensing process immediately to be able to submit an application that outlines our strategy for expansion, and we would like to do that in stages and cover the entire 25 acres in progressive stages. We expect to be able to submit an application in the next few weeks, and we expect to engage Health Canada in the process subsequent with that particular application. And we expect that the process should go fairly quickly, as Emerald is an established licensed producer with staff that have been security cleared as well as have respected SOPs. As a quality, known entity to Health Canada, we expect to leverage that and to be able to get through the process quickly. You being an observer of the industry know that the time line has been changing significantly over the last months. And we've seen in the industry that the process has been shortened in some cases to a few months, and that's what our expectation is.

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 Daniel Pearlstein,  Eight Capital, Research Division - Specialty Pharma and Special Situations Analyst   [5]
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 All right. That sounds great. And then as a follow-up, maybe for Michael. Can you talk about some of the -- what exactly need to go into the retrofitting of the building in terms of some of the infrastructure, software, hardware, everything in between, in order to get part of the facility ready to be inspected and licensed?

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [6]
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 Sure. Thanks Daniel. Well, our capital is in place. So immediately we're embarking now. We started the process actually yesterday in moving forward to get all the security protocols in place. That will start with securing the facility with fencing, starting to get our software, camera systems in place, building our vault and all these essential items in the process to start the licensing process. The final steps once that's complete will start with the indoor conversion on the growing. Now cannabis to us is just another agricultural crop. So whether we are growing tomatoes or roses or carnations or cannabis, the growing systems need to be tweaked and somewhat adapted. But overall, it's not a major component. We will be adding greater technology that at this point we're not going to discuss in the growing process. So to answer your question, twofold: immediately start with the external parameters in meeting the license requirements followed by the internal conversion on the growing system.

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 Daniel Pearlstein,  Eight Capital, Research Division - Specialty Pharma and Special Situations Analyst   [7]
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 Okay. Okay, great. And then maybe last one for you as well, Michael. Can you talk to some of the retail relationships that you already have and how they might translate to possible distribution agreements once the legal regulated regime is in place here in Canada for the cannabis industry?

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [8]
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 Well, we have relationships with marquee customers in Canada and the U.S. and we have for many years. And there's been an indication from some of the Canadian grocers that they're looking at the distribution side once that legislation is detailed out, especially on a provincial basis. And we think we would have a great opportunity to work with those retailers since we've had a long-established relationship. So we're sort of waiting and see what the final distribution requirements will be, and then we'll move forward on seeing where we go from there.

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Operator   [9]
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 (Operator Instructions) Your next question comes from Jason [Bibaquist] from [Cascorp].

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 Unidentified Participant,    [10]
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 Gentlemen, congratulations on the transaction. Just wanted to understand some more specifics of the option agreements. Are there additional payments associated with those? Or after this $20 million payment, the additional options, are those just getting funded pro rata?

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [11]
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 I'll let Steve answer that. Steve?

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 Stephen C. Ruffini,  Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director   [12]
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 Hi, this is Steve Ruffini. Yes, we -- there are options, and there is additional capital that will be contributed by Emerald if those options are exercised by the joint venture. And that capital specifically designed as the initial capital is to get those operations converted over to meet the licensing requirements of Health Canada for this crop.

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 Unidentified Participant,    [13]
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 Are we able to -- I'm not sure if you're able to disclose the total capital, or are we just able to kind of assume it would be similar amount kind of pro rata the square footage of the initial capital going in on the initial convergence?

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 Stephen C. Ruffini,  Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director   [14]
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 Yes. At this time, we're just not going to disclose that.

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 Unidentified Participant,    [15]
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 Would the assumption of kind of a pro rata be reasonable or...

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 Stephen C. Ruffini,  Village Farms International, Inc. - CFO, Executive VP, Company Secretary & Director   [16]
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 Yes, that would be a reasonable assumption.

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Operator   [17]
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 (Operator Instructions) Your next question comes from Gerard Ferguson from Jemekk Capital.

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 Gerard Ferguson,    [18]
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 Congratulations guys.

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [19]
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 Thanks Gerard.

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 Gerard Ferguson,    [20]
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 Can you kind of give me an idea of the replacement cost for the greenhouse that's being contributed here, kind of rule-of-thumb type measures?

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [21]
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 The replacement cost for the first greenhouse today would be in the realm of $40 million.

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 Gerard Ferguson,    [22]
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 Okay. And then do you have an idea of the equipment that's going to need to -- additional equipment that's going to purchase in order to allow you to grow cannabis?

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [23]
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 Well, we have a budget for that. It's not for the actual growing conversion; it's not material. It's probably the smallest part of the overall budget. The higher part of the budget is the security factors to meet Health Canada requirements but not so much on the growing conversion. Just so you know, we may -- we have a plan to increase our output as we go. So once we are producing, we plan to reinvest a portion of that positive cash flow back into continuing to hammer down our cost with higher yields.

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 Gerard Ferguson,    [24]
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 Okay. And then is there anything that will disallow those farms from doing other joint ventures in this space here or in the U.S. when that market opens up? Is this an exclusive arrangement for Canada?

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [25]
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 This is an exclusive arrangement for Canada between us and Emerald, and either of us are free to do what we may in the future on an international level. Not to say we wouldn't do it together, but we are free to do so independently.

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Operator   [26]
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 (Operator Instructions) We do not have any questions over the phone at this time. I will turn the call over to -- oh, pardon me, we have a question from Blake Pelham from Raymond James.

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 Blake Pelham,    [27]
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 Mike, just curious -- just to put things in perspective, what are your existing EBITDA margins on produce at the moment?

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [28]
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 Well, as I said, in Canada we are showing this past year 6%. And we're really not -- Blake, you've been following the company for a while, I'm not going to disclose what the U.S. margins are at this time. We have not traditionally separated those out.

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 Blake Pelham,    [29]
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 In terms of packaging requirements and those kinds of things, do you have all that in place that you can ramp things up there?

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [30]
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 Let me turn that over to Avtar to comment on. Avtar?

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 Avtar S. Dhillon,  Emerald Health Therapeutics, Inc. - Executive Chairman   [31]
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 Yes. As you know, Health Canada has very specific requirements for production, processing and sales of product in the existing market, obviously, the medicinal cannabis market. And in the future, we do expect changes as legislation is being debated for what nontherapeutic-use or adult-use market is going to look like. So there's going to be a lot and greater diversification of product. But right now, there is a fairly rigid structure about how things can be packaged and sold. So those are just geared towards being able to provide just the necessary information for patients in terms of what product is in the canister or in the oil form, and Health Canada ensures the safety of the patients by monitoring us closely on how that product is safely grown and processed. So where the market is now and where it will go, we expect some significant changes. And as Michael said earlier, we await for what the distribution channels are going to look like and how much autonomy there may be in being able to package our product similarly or differently from other competitors. So it's a difficult question to answer at this particular point, but of course, I would suggest that there is going to be much more broader opportunities for different packaging in the future as nontherapeutic products come into the marketplace.

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Operator   [32]
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 We do not have any questions at this time. I will turn the call over to the presenters.

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 Michael A. DeGiglio,  Village Farms International, Inc. - CEO, President & Director   [33]
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 Thanks, Sharon. I'd like to once again thank everyone for joining us today. And we look forward to keeping you appraised of our progress as we move forward with this very exciting venture. Thanks for joining the call. Goodbye.

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Operator   [34]
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 This concludes today's conference call. You may now disconnect.




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