Good morning, ladies and gentlemen. Welcome to Village Farms International Second Quarter 2021 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the Q2 ended June 30, 2021. 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 replays are available in yesterday's news release. Before we begin, let me remind you that forward looking statements may be made today during and after the formal part of this conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in the company's various securities filings with the SEC and Canadian regulators, including its Form 10 ks MD and A year ended December 31, 2021, on Form 10 Q for the quarter ended June 30, 20 21, which are available on EDLAAR.
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 Phillips Farms International. Please go ahead, Mr. Giulio.
Hey, thanks, Anas. Good morning, everyone. With me for today's call is Village Farms' Chief Financial Officer, Steve Ruffini. And I am very pleased to have with me Pure Sunfarms' President and CEO, Mandeep Dos Sancho is at our corporate headquarters here in Orlando for management meetings and will join us for Q and A at the end of the call. So I would encourage anyone who has some questions for Mandeesh to ask them on this Q and A portion of the call.
Thank you. For today's call, I'll spend a few minutes highlighting the key takeaways for the quarter, most notably the continued Strong sales momentum at Pure Sunfarms as well as the benefit to our bottom line of operating at scale. Steve will then review the financial results, and I'll return with some concluding thoughts about why, as Village Farms' largest shareholder, I continue to be So confident in our ability to drive continued value near term, medium and long term. And then we'll open the call for your questions. So starting with Pure Sunfarms, Q2 was a record quarter since entering the retail branded market for the Q4 In the Q4 of 2019, so almost 2 years ago, record retail branded sales were up 22% Sequentially, our 4th consecutive quarter of 20 plus percent growth and 135% up year over year.
Record total sales, net sales were up 38% sequentially and 70% year over year and a record adjusted EBITDA since launching our retail branded products in October 2019, up 165% sequentially and 2 64% year over year to CAD9.1 million. At the top line, the same two drivers that I've discussed on prior calls continue to propel our growth, which continues to outpace the broader cannabis market. Each of these drivers are the result of conscious decisions as part of our go to market strategy under the leadership of the Pure Sunfarms management team, which continues to prove itself to be the best in the industry without any doubt. The first is our decision to initially focus on the dried Our segment of the market in which we knew we would have a significant competitive advantage and could excel Out of the gate to establish our everyday premium brand with consumers and generate near term cash flow and profit. So using Ontario as a proxy, dried flower including pre rolled products still account for more than 70% of all recreational sales on a dollar basis, and that has been remarkably stable for the past several quarters.
But what's even more compelling is the continued dollar growth in these categories. Combined dry flower and pre rolls products grew $30,200,000 just from Q1 to Q2. That's 5 times of $6,000,000 in growth from the 3 largest 2.0 categories combined. Even on a percentage basis, dried flower and pre rolls meaningful meaningfully outpaced the major 2.0 categories. On top of this, industry profit returns in this category are still sorting themselves out.
All of this is not to diminish the importance of size of the opportunity in the point zero market, but these market trends support our calculated decision to focus first on flower, the biggest opportunity with the biggest return where we can believe we can dominate to build consumer and customer loyalty going forward and hit our 20% goal. The second driver of top line growth is the overwhelming consumer response to everyday premium products, the foundation of our market share leadership in the dried flower category. For the Q2 Pure Sunfarms was once again The top dried flower brand within the Ontario cannabis store and remain the top selling brand of dried flower for the 21 month period beginning October 2019 by both dollar and kilograms. And I'm very pleased to report that in the month of June, for the first time Pure Sunfarms is a top selling licensed producer of dried flower in Ontario by both kilograms and dollar value, a performance repeated in July as well. I'd like to say it again, Pure Sunfarms as a single brand So more dry flower in Ontario in June July of this year than any other licensed producer.
We know There has been plenty of discussion about consolidation and owning multiple brands to achieve market share in Canada. But as a Village Farms shareholder, I'd like the economics of growing market share organically, especially with these results and the valuations others are paying for the consolidation. I'm also pleased for the first time to comment publicly about the market share performance for Pure Sunfarms for both Alberta and British Columbia, our 2nd and third largest provincial markets. We are comfortable sharing that particular data, which is from A group called Buda, cannabis retail solutions provider, because it is compiled from actual sales data from a broad sampling of retail stores in each province, providing an accurate reflection of overall performance in each province. It is the same data we use to manage the business in each of these provinces.
The data shows that Pure Sunfarms is also the number one flower brand by dollar sales in each of Alberta and British Columbia, and not only for the Q2 of this year, But in every month going back to October of last year, which is as far as back as we have the data, Not surprisingly, our brand and product strategy, which has been so successful in Ontario, is also successful in Alberta and BC. Our Q2 results also benefited from a good quarter for non branded sales as we took advantage of a number of strong margin generating sales opportunity in the quarter. As a reminder, our non branded sales must meet a profitability threshold as well as make sense within the contents of our retail branded strategy and competitive strategy. As many Canadian cannabis businesses are still shifting strategies and trying to find their place in the ecosystem. We expect to continue to see more variability in our non branded sales from quarter to quarter, But we like how we are positioned and we like the returns from this business.
Perhaps most importantly, Q2 was also A quarter that clearly demonstrated the earnings power of Pure Sunfarms as we benefited from the Delta 3 facility operating at full capacity throughout the quarter In a quarter that I would remind you benefited from the longer spring and summer days in terms of yield and lower energy costs. But it's not just about economies of scale. With each quarter, we continue to get better and more efficient to continue to strengthen our everyday premium experience with consumers. In cultivation, we are engaging and enhancing bud sized flower quality through improved cultivation and processing techniques, And we continue to learn, refine and leverage our improvements. And around processes, we are doing proprietary work in key areas such as drying at scale as well as enhancing controls and consistency of execution.
And we are extending our competitive advantage Through innovation, we recently made technology advancements in pre roll production, enabling us to significantly increase output, which contributed to a 3 fold increase in our Pre rolled sales within the Ontario cannabis store from Q1 to Q2. And then we had a record month in July as well. And I will note, with expanded margin due to production efficiencies, we have developed a new proprietary vape formulation through Extensive sensory evaluation work to specifically address consumer wants, and we are consistently focused on strain development Through pheno hunting in our 1.1, simply 2,200,000 square foot of greenhouse area with a particular focus on high THC strains, some of which We launched in the coming months. All in, Q2 is an outstanding quarter for Pure Sunfarms, not only for its continued strong operational, Financial and market share performance, but for the investment groundwork that this performance means for the quarters to come. So before I turn to our produce results, I want to take a moment to be clear about the importance and value of those operations to the future of Village Farms, especially in light of the variation in the produce financials over the past 18 months.
Our U. S. Produce operations include 4 high-tech Controlled environmental greenhouse is more than 5,500,000 square feet with a replacement value greater than $300,000,000 and exceptional, Experience growing team and labor force and years of operational experience with the specific facilities, not dissimilar to our Canadian assets. They are located in one of the best growing climates for cannabis in the continental United States. They can and I firmly believe will become one of the largest and lowest cost cannabis This is right out of the strategic playbook and you can see how we are executing this strategy in Canada.
With the benefit of our Canadian experience, Our internal modeling forecast that these 4 U. S. Facilities are capable of generating at least $1,000,000,000 in annual revenue for Village Farms in the high THC product category. Strategically, we like the underlying value of this option and manage the produce business targeting breakeven to preserve this optionality. Turning to Proto's performance.
Q2 was another strong quarter operationally, and we continue to see the benefits of improvements that we have made in the past year and a half or so. We are also benefiting from our experience and learnings we have gained, Also so important in agriculture, managing the brown rigusavirus that has impacted tomato crops worldwide, which has negatively impacted our production in the last 2 years. And multiple breeding programs are underway by multiple seed companies to build in resistance in the short Term ahead. Still we are we continue to see some of the weakest tomato pricing for certain key categories in the past decade as grocery store traffic dwindled and the reopening of away from home dining. Industry wide demand dropped off while supply reflected planning decisions made during the lockdown period.
There are signs, however, that tomato pricing is trending back towards normalized pre pandemic levels. And with our operational improvements And additional leadership, I remain confident that the produce business will achieve its targeted breakeven EBITDA contribution and maintain optionality to leverage this Business for higher returns in cannabis in the future. Recently, we had a new leadership in our produce business appointing industry veteran Eric Janke as Executive Vice President of Sales and Marketing. Eric will be responsible for overall productivity and effectiveness of the Proto sales and marketing team with a We'll focus on driving overall sales performance and will also support the corporate team in capitalizing emerging opportunities in the broader Controlled Environmental Agriculture Sector. Eric brings to us more than 4 decades of experience in fresh produce and grocery industry, including more than I'm thrilled to have Eric on board.
I'd now like to turn the call over to Steve and talk through financial results and summary. Steve?
Thank you, Mike. Before I begin discussing results, I would like to remind everyone that our Q2 2021 results reflect the Full consolidation of the Pure Sunfarms business, which we fully acquired in November 2020. As we did in Q1, we have provided Segment reporting historical 2020 and current 2021, too. Reminder that As we have done in prior quarters, we have provided the Pure Sunfarms results on a stand alone basis, which is helpful context as we discuss current business trends throughout this call. Turning to results.
Consolidated sales for the quarter were US70.4 million dollars which compared to US $47,600,000 in the year ago period. The 48% increase in sales was primarily driven by the addition of Pure Sunfarms revenues offset by a slight decrease in produce sales. Net loss for the quarter was $4,500,000 as the positive contribution from Pure Sunfarms was more than offset by ongoing pricing pressures in the produce business as well as a 1 point 1 time incremental electricity charge resulting from the Texas ice storm in February, which I will discuss in more detail shortly. Adjusted EBITDA of $1,600,000 was driven by a close to 200% sequential increase in adjusted EBITDA for Pure Sunfarms to US7.4 million dollars for the quarter. Our adjusted EBITDA loss of US3.9 million dollars in the produce business fell short of our breakeven EBITDA target and mask our more positive trends in cannabis.
Turning to business segment results. As Mike has previewed Pure Sunfarms had an excellent quarter. Q2 sales were US24.7 million dollars or CAD30.4 million dollars which were up 136 percent from Q2 2020 and up 38% versus Q1 2021 using Pure Sunfarms functional currency, Canadian dollars. For the 4th consecutive quarter, Pure Sunfarms retail branded sales grew more than 20%, actually 22% sequentially. So in 1 year, retail branded sales more than quadrupled to US18.3 million dollars or CAD22.5 million for this quarter.
The increase in retail branded sales between sequential periods was largely attributable to continued demand for our everyday premium products. Additionally, many provinces began their COVID-nineteen reopening plans and capacity restrictions decreased, particularly in Ontario, which helped spur demand in the later part of Q2 2021. Large format comprised roughly 52% of our flower sales in Q2 versus large format of 48%, Essentially, the inverse percentages of Q1, which in part is the reason for our improved quarter on quarter gross margin as small format has a higher gross profit than large format. Wholesale or non branded sales also increased this quarter to US6.4 million dollars or CAD7.9 million dollars 121 percent sequential increase versus Q1 2021. As we have noted before, As Mike has mentioned, wholesale sales are opportunistic and must make economic and strategic sense for our branded business.
So they will vary from quarter to quarter depending on available supply and demand from other LPs. Pure Sunfarms gross margin was a strong 40% in the quarter The top end of our target range. Benefiting from an increase in retail branded sales at higher margins due to a percentage increase in small format, The Delta 3 Greenhouse facility operating at full capacity for the entire quarter, which reduced our cost per gram produced and a nice gross profit on our non branded revenues in Q2 as compared to Q1. Since completing the acquisition of the entirety of Pure Sunfarms, We have been required to record a large inventory non cash write up in cost of sales for Pure Sunfarms in our statutory results in order to comply with acquisition related to fair value accounting rules. The Rydus impact was meaningful has meaningfully decreased in this quarter to $133,000 versus 2,800,000 In Q1 2021, essentially as we've worked through all the flower inventory that existed on the acquisition date in November 2020.
As we stated in prior quarters, this is a non cash charge that should be adjusted when analyzing the actual operational results of Pure Sunfarms. Adjusted EBITDA of CAD 7,400,000 or CAD 9,100,000 was the 11th consecutive quarter of positive EBITDA and also was a record since the launch of retail branded sales in late 2019. I commend Mandeesh and the Pure Sunfarms team as they drove this record profitability from the combination of higher net sales, a Stronger gross margin and good cost control management, as they say in hockey, that's a hat trick. Going forward, as our Retail partners return to more normalized selling environments. I would expect SG and A to trend higher in order to support our point of purchase sales And to continue our increasing market share, especially in flower.
Turning to produce. Mike has mentioned the difficult pricing environment for tomatoes, which certainly impacted results. In addition, in late May, we were presented with an extraordinary electricity bill related to the unprecedented Texas storm. You might remember that in February, these storms caused major problems with the electricity grid, leaving the Texas Regulator ERCOT to declare an emergency alert level. During the 5 day emergency period, the real time pricing for electricity was more than 100 times higher than normalize February pricing.
Our Texas operations use a small amount of power to run our operational systems, but the maximum pricing of 9,000 dollars per kilowatt hour resulted in incremental electricity expense of $1,400,000 over our normal electricity rates for this period. The original invoice, which we received in late May, was for a considerably higher amount, but after a complete audit and negotiations with our power provider, it was settled and paid in late in late June. We were we've included more background about this extraordinary expense, including our plans to mitigate future price instability in the MD and A filed today. As Mike mentioned, our Texas based operations are strategically important to us and we want to commend the team for maintaining and operating facilities during those 5 days, which was no small feat. During the quarter, produce sales decreased 4% year over year With higher production volumes offset by lower pricing as the tomato industry experienced 1 of the lowest pricing environments in the past 10 years.
While pricing is driving lower sales and profitability this quarter, we are seeing higher production volumes as a result of ongoing efforts to improve growing efficiencies. There are also indications that pricing is moving back to historical levels. However, year over year comparisons remain challenging through Q3 2021 As Q3 2020 pricing benefited from the 2020 COVID impact on tomato demand with retailers. That said, we are expecting to be back to breakeven produce EBITDA for the back half of twenty twenty one. Produce adjusted EBITDA was a loss of $3,900,000 which excludes the $1,400,000 incremental electricity expense in Texas.
While this is a wider margin than we target, the team continues to work on efficiencies, including increasing partner grown produce, which sets us up for I want to underscore Mike's comments relating to the significant cannabis Optionality in our Texas operations. These are assets that the team is managing with an ongoing target of breakeven EBITDA. Some periods by 2020 when demand and pricing were favorable will be better than breakeven. Other periods by Q2 2021 when pricing is at 10 year lows, it will be more challenging to hit this EBITDA target. That said, the team manages for production efficiencies every day, which continues to position both our growing capabilities and our Texas operations as one of the best options for us Finally, a few other highlights.
In May, we experienced We exercised the remaining option to increase our equity investment in Altum to just under 12%. The investment in Altum, one of Asia Pacific's leading CBD platforms represents an efficient means for Village Farms to participate in opportunities in this region. During the quarter, we purchased 428,000 common shares at an average price of US9.30 dollars Under our normal course issuer bid, which we announced in May, as a reminder, our decision to purchase shares under this program is opportunistic and consistent With our broader capital allocation strategy. As of June 30, 2021, we had $155,000,000 of working capital on the balance sheet, of which $114,000,000 is readily available cash. We've also extended the duration of our operating line of credit and filed a universal shelf registration to take advantage of benefits only available to well known seasoned issuers when strategically prudent.
The combination of a strong balance sheet, continued growth, operational efficiencies and a very committed workforce and management team puts Village Farms in position for a strong and prosperous future. And now I'll turn the call back over to Mike.
Thank you, Steve. Village Farms remains firmly on track to continue the successful execution of our strategies for near term, medium and long term growth and value creation, always in the context of prudent capital allocation decisions and a focus on return on investment. In the near term Pure Sunfarms business Clearly has momentum, sales, profitability, market share and has quickly established so as a leader in the Canadian retail cannabis market. But Pure Sunfarms is really just getting started. Importantly, our growth over the past year has been achieved without adding any new provincial markets.
Adding Quebec, the 2nd largest provincial market remains our top priority. And let me just say that we would not have added that So we turned on Delta 2 because we need to satisfy our customers day in and day out. And with all of our product moving from 2.0 products as well, and that category is still very small, but with exciting long term growth and profitability in which we are and will participate. It has been achieved in a very congested market in which marketing and advertising is not permitted and we have achieved our results against the backdrop of the most difficult retail environment in our lifetimes. All of this is what continues to give us great confidence in our decision to expand production.
To this end, during the quarter, we received approval from Health Canada to begin cultivation of Delta II. The license increases our capacity at nearly 1,700,000 Square feet from the $1,100,000 when we continue now with the second half of Delta As completed, we will increase our capacity to 2,200,000 square feet. We will begin planning the first half of Delta 2 next month with our first harvest targeted for November. As we ramp Delta 2 production up, as always, we'll be prudent in our production decisions, What we can sell to continue to effectively manage inventories. Now I'll take this opportunity to remind you That as we look longer term, we have an additional 2,400,000 square feet of production area on the same site as our Delta at our Delta 1 greenhouse, which we can rapidly convert to grow cannabis to meet future demand as the cannabis legal market continues to grow And as international opportunities continue to develop.
Importantly, for our future cannabis endeavors, Pure Sunfarms business has performed very much as we planned and expected it to. The results of our decades of experience in controlled environmental agricultural growing, leveraging our existing high performance operations and approaching the retail market in a prudent, thoughtful and strategic manner. Our unmatched performance in Canada provides us with an Undeniable advantage as we pursue our opportunities in strategically targeted markets around the world. In the United States, we are encouraged by the federal In the high THC cannabis market in the U. S.
As I've discussed on prior calls, we have identified potential pathways To participate in the high THC market in the U. S. And we continue to refine multiple strategies that will enable us to move swiftly and aggressively to leverage our success in Canada for the largest cannabis market in the world. These include specific strategies that will enable us We believe our capabilities and experience in Canada, the 1st federally legal recreational cannabis market in the world, will be invaluable as we Our Asia Pacific focused partner, Altium International, which recently increased our investment, continues to build its initial market in Hong Kong, expects to move it to new markets Europe, of course, continues to be a major focus area for us. And to support pursuit of that opportunity, we recently added Orville Bovincin to lead our European Cannabis business in the newly created position of Vice President of European Business Development Operations.
Warburg joined Village Farms Business Development Operations team with specific responsibility for new business and operational activities in Europe and the cannabis sector. Walvo was originally from the Netherlands, has deep cannabis experience including operational expertise honed in Canada through a large part of the Pure Sunfarms team. And he has extensive relationships in the sector in Europe as well. It is very early days for the European market. Returns are still challenging for the early players, but we do think this I'm also pleased To welcome Cynthia Zadoliello to our corporate team in the newly created position of Corporate Legal Counsel.
Cynthia has a critical role as we continue to grow and expand our business, especially as we pursue our U. S. And International Cannabis Act opportunities. She brings public experience both on New York Stock Exchange, TSX listed companies having overseen legal responsibilities for M and A, public financing transactions and joint venture agreements among others. Before I open the call to questions, I'd like to take an opportunity to properly introduce Mandeesh.
As many of you know, Mandeep joined Village Farms after working for the Ontario Liquor Board, where he played a key role in establishing Ontario Cannabis Store, which as you know, manage the distribution of cannabis for the retail market in Canada's largest province. I suspect he may have had many opportunities when he decided to join Village Which speaks to our mutual collaboration. We have a great deal of the success of Pure Sunfarms and Mandeetian is an exceptional team. Their knowledge of the Canadian consumer, the market, the competitive landscape are what we have enabled us to translate to the best growing operations in the country into the best I live by the credo that results matter and Mandeep and his team have delivered those results. So operator, we can turn it over to questions now.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. One moment for your first question. Your first question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good morning and congrats on the very nice quarter. And Mandy, it's great to have you on and congrats to your success over at Pure Sunfarms. So first question for me. So nice job with market share and increasing that with flower, especially with the growing Flower segment that we had been seeing. Now we're starting to hear a number of peers looking to increase their offerings of high THC strain specific products.
So through that lens, I want to get your input in terms of where you see the flower category evolving over the next 6 to 12 months and how you see your guys positioned as other people look to see your success and try to replicate some of those things? Thank you.
Okay. I'm going to let Mandeep to answer that call. Go ahead, Manoj.
Thanks, Mike. Appreciate it. Thanks for the question, Aaron. So where do I see the flower industry going? I think the trends you're seeing And consumers like newness and they like variety.
So I think what's important for us is to keep doing what we're doing. It's Probably not an overly glamified answer, but it's us staying the course, consistently executing, making sure our products readily available and we're getting national distribution and just continuing to work with our retail partners to make sure our product is on shelf and available. And so to give customers high THC everyday pricing, and then what do I continue to see is you've got to be in stock and you've got to have the product available And we got to follow that up with new strains and new availabilities and we've been doing that. We've launched a few new strain specific Products in the last couple of quarters, we just launched some things this past week and we're going to continue to do that. So it's going to be a mix for us of Being in stock every day with some of our leading SKUs, if you look at Pink Fish being the number one product in Canada, We've got to continue to make sure that's available, but then following that up with great strains that customers want.
So it's still going to be price and potency And all the factors that go into making a great product from terpene levels to moisture content to bud size and density, making sure you're really giving that bag appeal to customers. So those are the trends we're seeing. That's what customers are valuing and we're going to continue to be there. So hopefully that answers your question.
That's great. That's really helpful. Thanks for that. Second question for me, then just kind of continue on that, particularly for Ontario, Mark, what you guys are doing really well in. We heard a couple of weeks ago that apparently they're pushing out or delaying some where they'll be taking new products Some time, given your existing SKUs seem to be performing very well with your market share, can you speak to how that might put you in an advantaged position in the near term As Pearson Farms continues to have products out performing, there might be limited opportunity for others to introduce new SKUs?
Thanks.
Yes. Aaron, I'll turn it back over to me. Absolutely, OCS has adjusted their product call, which we know. At the end of the day, they're trying to run the business like a regular retailer and a regular CPG business. I think the amount of product calls and how Often they were looking at assortment and changing things in and out.
To be honest, it causes havoc, causes havoc with their systems and their processes, Listing things to the warehouse, even on the retailer side, their buy sheets, their order sheets, understanding what's available, what's not, what's new, It just creates a lot of havoc in the supply chain. So we fully expect it and are aligned with what the OCS is doing. And it's how regular CPG and regular retail works. I think looking at launching a bunch of new SKUs going into holiday just never works for anybody. It's just not the way Regular retail and businesses run.
So we commend them. We are working in lockstep with them. How does it impact us? For sure, I think you made a comment, Our SKUs that perform well there are going to remain performing well and we're going to keep them in stock. So there's our base business isn't affected by it.
It doesn't limit opportunities for new SKUs to go in. I mean, we always think 6, 12 months out. We're continually looking at the pipeline and communicating with All of our customers, all the provinces about what's coming. So for us, it's just keeping that communication and dialogue open. Alberta and BC have different in Saskatchewan Manitoba obviously have different protocols on how you list products.
So for us, it's just Planning correctly and making sure we're in lockstep with how Ontario is doing their product calls and when those new dates are. But we don't anticipate any impacts to our business and there's definitely some benefits in that our base SKUs will continue to perform and sell through.
Thank you. Your next question comes from Andrew Parthenio with Stifel GMP. Please go ahead.
Hi, good morning. Congrats on the great quarter and thanks for taking my questions.
Good
morning. Maybe just to start off on the home province of Quebec here. Could you talk a little bit more about how that conversation is going? To the extent that you can, maybe provide some timing on when do you think that you could enter being it's your top priority? And lastly, Assuming you do enter, could you talk a little bit about your strategy maybe both on products and pricing?
Will you Do you see yourself doing anything differently in Quebec than you do in your other provinces?
I'll start out, then I'll ask For some color from Mandeep as well. So look, Quebec has been a top priority and clearly the only reason we haven't pursued it Prior was that when we want to sort of dominate the areas we're in. We want to provide our customers with all the products They need and never be short. And with the Delta 3 greenhouse, you can see in the numbers that across Canada, including Ontario, Alberta, British Columbia, that really takes the bulk of our capacity. So to go into Quebec and not really have that horsepower behind us, so to speak, with Delta 2 It's just been premature.
Now that Delta 2 is up and running, we start planning out next month. That just doesn't make Quebec a priority. It makes it a reality. And I would just say, we're going to coincide being in Quebec as our plan with the 1st, cultivation of Delta II, and I'll limit it to that. As you know, Quebec is a limited market Compared to the other provincial governments as far as product about the products that can be sold, there's no edibles and so on.
So flower Really dominates in Quebec and it dominates with us as we just discussed. Mandeep, you want to provide some color?
Yes. So if I can answer the second part To your question, which was around what would be our strategy and approach. Our approach has been very national and so parts of it won't Change for Quebec. However, we also need to be very cognizant that Quebec is a different marketplace. And before we do anything, we'll work Obviously, we've established a plan and what our plan is and Mike has given some color around that.
But whenever that time comes, we'll then work with our partners, The Board, whoever we decide to work with there in the province and making sure that we're right sized on assortment, on price, on offering And branding, of course. So lots to come, but I would tell you not to expect something drastically different, But we want to make sure that we connect with consumers and do the right thing for the customer, in this case the SKDC, and have the right approach there.
Thanks for that great color. And maybe just Switching gears on the existing market that you guys have now. We've heard recently from other producers that there's In a trend towards more flower recently, how do you see that going forward? Do you think that's sustainable? And obviously, perhaps tying that back with your production increase, You mentioned that a big part of that strategy is with Quebec, but obviously there There's ongoing market expansion in Ontario as well with the stores coming online.
Just a little bit of color there, please.
Well, one with ramping up to another one. So we're doubling our capacity by this time next year, we'll be at 2,200,000 square feet 1.1. So and for those saying that flower is selling more, I don't understand that. I mean flower has always been dominant. These numbers have always been there.
So I'm not sure what others are saying. Those numbers have been north of 70% nationally all along. So we are in we have an array of 2.0 products, as I mentioned on my remarks, And we will and are participating and we see some traction. But regarding Ontario specifically, Mandeep, Want to make some comments on that? Yes.
And I just want to make a comment on the statement about flower. I think where Andrew Wade potentially going is, We are seeing more people, more competitors offer flower SKUs. And you are asking us what do we view on that. I mean, I think people are just realizing what we've always known that this game, cannabis, this industry, it's all about flower. Cannabis is flower.
And we've looked at mature markets across North America and seeing that, yes, concentrates and these other 2.0 products, they make up some sizable Amounts of the business, but flower will always be king or queen, however you want to term it. So I'm not surprised that other companies and people are moving into the flower space because it's where the puck has always been and will be. And so that's always been our strategy. So for me to for us to see other people doing more things around flower, it's not surprising. And it's I think also proving that There's not enough money to be made in some of those other derivative based products and pricing will commoditize out on those as well.
In Ontario, absolutely. Seeing the store growth, seeing the store count go up, it's very promising, continues to put give us good wind in our sales. And at the same time, there's still a huge opportunity in Ontario. There's still significant swaps of what I call regional deserts. Mississauga has not opened stores, Von Markham, Millions of consumers still don't have access to stores in their areas.
So we're excited. We're excited to continue to see what's happening in Ontario and the ongoing store growth. And we think that a lot of those stores will heat with flower and will continue to see pull through and sell through of our products. So excited for what's ahead.
Yes. And Mandeep was smiling as he was making those remarks on flower because that's providing validation to us that we always knew and others may, I guess, Just didn't have their model right to begin with. So thanks, Andrew.
Thank you. Your next question comes from Rahul Faragazer with Raymond James. Please go ahead.
Good morning, Mike, Steve, Mandash. Good morning. So thanks so much for taking my question. And Manesh, great to have you on the call. And congrats to all of you gentlemen.
Terrific, terrific quarter. So
Yes, I'll start take the opportunity
to ask Mandesh a question. So a few of my questions have already been asked, but really now With the 40% gross margins, this flower that you're talking about is really dominating the market. And as competition starts to really build, Even though they are behind you, they will sort of try to nip at your heels. How are you planning to really be defensive in the space, keep your elbows out, defend your market Particularly given, Mike, you mentioned that many of your competitors are growing by acquisition, whereas you have opted to do the more Valuable organic growth. So I guess my question really is how are you planning to really defend your space, particularly as retail opens?
Thanks for the question, Rahul. I think it's a good question. How do we defend what's ours and how do we continue to grow? At the end of the day, we look at what the consumer wants and to us, it's we got to make sure we're continuing to execute on product quality. So all the things that Mike mentioned in his opening dialogues about things we're doing around drying, looking for new strains, trialing those strains, We have a great quarter.
We're happy with the macro results, but we never stop pushing ourselves and Looking at what's possible. So quality, strains, products, we have to continue to do those things and we will keep doing And giving the consumer what they desire. So that's the first part is around product and product quality. We'll never stop innovating and looking at what consumers want. Think that other piece is on retail sell through.
So we love the position we're in. The brand is getting a ton more traction than it ever has. I spend as much time as I can in stores and going into dispensaries and talking to bud tenders, you say Pure Sunfarms and their eyes light up and they smile Because they love the brand, they love the product. Where I think we have some opportunity is making sure that brand awareness and product awareness is in more stores, But also making sure stores are taking advantage of our full product offerings. I think we have opportunities to make sure The stores know what's coming, what's available, but also just recommending some products and making sure they get more of our offering in stores.
And so our win our next steps are more on the micro adjustments and making sure we're following up with those stores, Really working with the Board to make sure we're getting distribution and following up with the stores to make sure they're ordering the right inventory levels. The brand, the product quality, the price, everything is there. Steve talked about hat tricks. I think we're checking all the boxes in the eyes of the consumer and the Because of our strength of supply chain and our strength in product quality, we just got to keep executing on that and following through. So our build and path Forward is much different than our competitors, but it's just continued execution in our supply chain.
So now my second question is sort of panning out and looking sort of Canada, U. S. Particularly, one thing we try to do is really to our clients how the cannabis business is really the growing business. For those less familiar with the story, the produce business can be a little confounding. Steve, you talked a lot about how those costs this quarter are likely to settle over the next Half of the year.
So I guess one important factor or inflection point will be when cannabis sort of trends and cannabis revenue transcends Produce revenue, do you have an estimate approximately when that will be? And I'll squeeze in a Part B to that question. Given that Your produce business has really, really strong retail connection in the U. S. At Trader Joe's, Walmart, Whole Foods, leveraging those relationships as and when the U.
S. Opens up to be able to drive and drive into both channels?
Well, so as I mentioned, We've been working diligently on entering the U. S. Market, which is not going to wait for the conversion of the Texas assets. We see that as a huge advantage for us. We don't think we're behind because unlike Canada, the U.
S. Market has Itself without being federally legal and we think that's going to drive a change in the supply chain. And when that happens, We truly believe large scale, low cost, premium quality, shipping it interstate We'll eventually rule in that market and that won't happen overnight, but we're patient about it. Not to mention, as I said, Texas It's behind by far the other states, but it still represents a market as large as Canada in and of itself. That said, Upon legalization, there will be other ways that the supply chain will work, including Online commerce and cannabis to us is as much a segment of health and wellness where we want participate in as well as high THC, all under the cannabis umbrella.
So for us, we will be looking at how we get ready for that Sooner than later, and I'll leave it at that.
Thank you. Your next question comes from Scott Fortune with Raft Capital Partners. Please go ahead.
Good morning and thank you for the questions. Great to have you on the call Mandeesh with Mike And Steve, Mandeep, maybe you can provide a little more color on the 2.0 products and maybe the slowness The rollout there and update by consumers in Canada and their uptake there, is it more than the provincial board side of Thanks. Or specific 2.0 categories that have not accelerated quickly a thought. We know that the flower obviously High quality flowers and demand has been tough to get up in Canada, but your thoughts on how 2.0 products roll out and your initiatives and product categories moving forward for Pure Sunfarms?
Sure. Thanks for the question. So specifically on 2.0, let's backtrack slightly. Our view has always been it's not about being first, it's And so like all things, we weren't the first to the party and we weren't the first on 2.0. So there's definitely some optimization in work.
So when we think about 2.0, obviously vapes, tinctures, As well as edibles, those are our 3 main products. And some of our biggest work lately has been around and Mike I commented it earlier about some reformulation on our vape side of the business. So our first entry was on the full spectrum side, strain specific full spectrum offerings, Really flavorful related to the product. That proved to be a smaller segment of the vape market. Full spectrum is only about 15% or so.
The bigger part of that vape market is on the distillate, which gives you a higher THC percentage. And we launched one of, if not the highest Vape product is a 0.5 gram distillate high THC close to 90%. So following that up with a larger format of 1 gram, very simply what we did there. And then we're looking at some reformulations of and on the distillate side to continue that momentum. So for us on vaping, Consumers are still looking at the same things that they look at the flower side, which is high THC, best price.
So we are launching Three new formulations and those should get out to market in the coming months. And so we'll see how those do. It's Nothing super complicated, but just continue to look at those formulations and seeing how we can start to win better on the vape side of the business. Our tinctures are performing well. We've always done well with our high CBD tincture.
We've launched a balanced product as well and we're happy with where those go. On the edible side, our all natural BC fruit chews are vegan, their gummies are doing really well for us and we're going to do some kind of adjustments there with There with formulation of flavors and size and offering. But listen, Scott, it's not this huge endeavor that we're doing. We're going to continue to right size those Product categories, we like how we're positioned there and we think there's some opportunity for us to grow in each of those segments. We don't have the same market share In tinctures and vaping and edibles that we do on flower, but that doesn't mean we're giving up on it.
We're continuing to dial those in with formulations and product offerings. But it's not going to become a massive part of our portfolio and but we're going to see where we can take it. It's the same thing, high THC, great price, good offering of product and working with customers and consumers to make sure we get the pull through at stores.
Great. I appreciate the color. And then maybe just overall circle back on Ontario or what are you seeing on the competitive front, especially after kind of the provincial boards have gone through their rationalizations here. Are we starting to see less SKUs, less LPs now on the shelves and that's positioning Pure Sunfarms for obtaining its 20% market share over longer term. And then just maybe a little bit color on this quarter as far as Ontario with The store is really ramping up the rollout.
How are you looking to maintain your share on the shelf space or even growing that from a market share standpoint?
Yes. This is Scott Mandish again. I think I'll take it in 2 parts like you asked. Are we seeing the impact? Not quite yet.
I mean there's still Over 100 LPs and thousands hundreds if not thousands of SKUs there. I think that it's going to take some time for that to sort itself out. Every week Health Canada continues to send out licenses because people are able to get more operations going and that's up to them. So I don't think we'll see an immediate reduction of LPs and SKUs. I think the OCS will take their time on assortment and these product calls.
We're not quite seeing that impact yet. Definitely hopeful that it goes there because I think there's too many to begin with and it creates a lot of noise in the supply chain And how the OCS buyers need to manage it, the warehouse, even the stores, like I mentioned before. So we're not quite seeing that yet. On the how do we continue to grow and win it In OCS, I had mentioned before in one of the previous questions that for us, it's all about supply chain execution and pull throughout the stores. So we've continued to expand our Ontario sales team.
We're still not crazy big like some of our competitors. We really calculated How much spend and how many heads we hire in the province, but we are expanding our sales team that's on the ground, that's working with retailers day in and day out. And like I said, it's about making sure they understand our full product offering. Last quarter, we launched the Blue Dream SKU, which everybody said we were crazy to do because it's been in the market forever. Yet it was never done our way at our price point with our quality.
And now people are realizing that the Blue Dreams That we offer is fantastic. But as a good example, some retailers didn't know that. Pure Sunfarms has a blue dream. Well, everybody loves your Pink Kush. Let me start ordering that.
So those are the type of conversations and dialogues that we continue to have with retailers to make sure they know what products they can find from Pure Sunfarms. So it's execution on the ground to get that pull through and get that sell in because we know that once their customers have tried our products, we continue to be a repeat purchase for them. And then the other piece is just with some digital paid media pieces that we've done. We did the Score app takeover. We saw some great traction to our website, Attraction and support from our consumers.
So it's little things like that as well, Scott. It's on the digital side, but it's also still in store making sure bud tenders And the people that are responsible for ordering know what's on the product sheets and that we get the pull through.
Thank you. Your next question comes from Doug Cooper with Beacon Securities. Please go ahead.
Hi, good morning guys and Mandeesh welcome. A lot of stuff has obviously been covered, but I apologize I dropped off for a few minutes. Premium pricing, can you talk about premium pricing or everyday pricing, excuse me, everyday premium, excuse me, or that category. Can you talk about how the whole industry has moved? How that's impacting the industry and how much of the market is moving towards that everyday pricing or value price, however you want to classify it?
Yes. So I'll start off and then Mike and Steve can chime in. Thanks. Everyday Premium, that's what this is about. I've been banging the table with the Board and my team about people think premium just because you price something doesn't higher, doesn't mean it's a premium product.
So what I like to call this is, this is the normalization of pricing. Cannabis pricing was way over inflated from the beginning. And so everybody is talking about Price commoditization, I call it price normalization. And so I think people are really starting to wake up to the fact that if you want to give customers A product that you're calling premium, it better be worth it. You better have some defining attributes that are highly differentiated To substantiate a price that's above normal pricing and cannabis has been around for decades, centuries.
People know what eights and ounces should be They've been buying it from their dealer, Alyssa Lee, and sort of come in with pricing that was completely abnormal, I think was a slap in the face for many consumers. So you're seeing this price normalization. I think some people are getting a bit carried away and crazy with it and trying to buy market share and they're doing it unprofitably. So we like how we're positioned. We've always been leaders in kind of that price quality ratio that we coin everyday premium.
And I think you'll see more of it. I think you'll start seeing a lot less of people trying to push the boundaries north on pricing. But we know it's coming. We know that there's certain products that will always command a higher price per gram, but we're starting to see this normalization and we're leading the charge and we love how our results are
I was just going to wonder
if maybe not for your pricing in particular, but if you're seeing the industry, what is the average price From the consumer's perspective, what is the average price per gram done over the past 6 months?
Yes. Doug, I don't have the exact average, but I mean, when I look at our 8 pack of 3.5 grams format, which is a really important SKU for everybody. We've always been in OCS kind of in the mid-20s for an 8. We've done some small micro price adjustments. And I think what you were seeing a year ago was everybody kind of being in the upper 20s, if not in the 30s 40s on the 8 pack, on the 3.5 gram pack.
And now you're starting to see people move down into that mid-20s, Upper 20s as opposed in the 30s 40s. And then on the outside, we have always been in the kind of $119 to $130 depending on whether it was strain specific or not. And that's another price point that I think LPs are reducing to kind of being south of 150 on an ounce pack. So whatever that works out to on a per gram basis, that's what we're starting to see is kind of more people play in the $20,000,000 to $30,000,000 $35,000,000 on the $3,500,000 and then everybody kind of be in the $120,000,000 to $150,000,000 on the ounce pack.
And then profitability is a big part of that, Doug, Can you be profitable doing this?
Yes. In other provinces, we've seen people get really aggressive. I mean, Alberta is a great example where You're seeing ounces kind of be in as low as $80 or $90 and I just it blows me away when I see that Because Alberta is actually one of the least profitable provinces because they have additional provincial excise taxes. And so it's crazy That I see people dropping price that low. I mean, we can we make healthy margins at all these price points.
I know our competitors do not. So people are out there buying market share and unprofitable in the results of doing it.
That's why they have ATMs.
Thank you. Your next question comes from Eric DelOriere with Craig Hallum Capital Group. Please go ahead.
All right, great. Thanks for taking my questions. Congrats on the Continued organic market share gains in Canada and really impressive to see incremental EBITDA margins exceeding 70% with Delta 3 now at full capacity. So as we look towards the coming quarters, you guys Delta 2 coming online, you got those regulators delaying new product Call that we've talked about, and you guys are still looking to enter Quebec. From my view, these should all act as tailwinds to sales and market share gains, but Perhaps Delta 2 and Quebec will cause some margin volatility along the way.
So I was just wondering if you could help us understand how you see all these factors impacting your profitability in the near term?
Steve? In The impact of Delta 2 in the near term will have no impact as it gears up. The efficiencies of Delta II longer term will actually drive down our cost of production in the interim period. We don't expect to have any negative impact on our cost per gram with the addition of Delta 2. With respect To our gross margin profile, going forward, as we said, 40% is the high end of our target range.
We try to operate Pure Sunfarms Between 30% 40%. A lot of that is driven. We had a very nice gross profit on our non branded wholesale Sales in this quarter materially higher than the Q1. So that will also be a driver of the blended gross margin for any particular quarter. So We do expect to continue to operate in the 30% to 40% gross profit percentage every single quarter.
Great to hear. Appreciate that color. Drilling into your comments on the U. S. A bit more, so I appreciate you guys calling out The sales capacity of over $1,000,000,000 with the assets you already do have and no need to buy your way into the market like your peers.
But you also mentioned that you're looking for additional ways to enter the U. S. Beyond these impressive Texas assets. Mike, you kind of mentioned some online commerce, But I guess first, if we could kind of drill into that a bit more, which parts of the supply chain would you guys look to get into in the U. S.
Considering you do already have such significant assets in Texas. Is it on this sort of infrastructure side, maybe something e commerce Or would it be focusing on brands? And then secondly, would any investment there be in the form of Some of these convertible notes are sort of triggering event deals that we've seen or are you guys looking at ways to perhaps get more aggressive than that?
Well, I think, look, Mackie from Whole Foods is a great example. Part of legalization, he will be selling cannabis within Whole Foods at the cash out register. So he has made that comment. And every day, the online commerce of movement of cannabis is Tremendous. I mean, here in Florida, what comes in Colorado every day.
So that's like that's going to be a huge component of the market. I don't know if the current model of dispensaries will eventually be that will be around for a while, but In the end, will that be the surviving supply chain and retail presence? So for us, We've often said if Texas based on the 2nd largest most populated state when and if it goes 30,000,000 consumers there, Would we go the normal dispensary route and try to be vertically integrated within the state? Yes, absolutely. And that's game on for everybody.
Nobody has an advantage there today. So that's why we call it the Republic of Texas and that's a unique situation for Village Farms. But I think, interstate commerce, as I mentioned earlier, being able to ship outside of Texas at some point in the future is exciting to us. That said, we are looking for another way to enter the market right now While we're still restricted on high THC. And how we do that, I don't want to elaborate on that yet, but stand by on that.
Thank you. Your next question comes from Adam Backum with Scotiabank. Please go ahead.
Hey, good morning guys. Thanks for taking my questions. I'll try and be brief because I know it's been a fairly long call. I wanted to touch on the wholesale market in Canada, particularly with a focus on Q2 commencing or sorry, Delta 2 commencing production. Now it sounds like your decision making there in terms of spot purchases and sales are more geared towards individual decisions, right?
Now, as you sort of gain production and this market continues to develop, Do you think you'll slowly transition to more sort of take or pay sort of contracts with less volatility or can you maybe you can give us some color on that front?
I'll let Mandeep answer that.
Hey, Adam Mandeep here. Thanks for the question. I mean, we're always open to different forms of contracts, whatever works Well and favorably for us as well as our customer in this case. We have done some take or pays in the past. I think what we've seen on the wholesale side, Adam, is that a lot of other LPs not really certain of what their path looks like.
And I think as we're talking earlier with Doug about pricing and where that's going, I think as the market starts to stable out and stabilize a little bit on the flower side, So we view it. LPs are realizing that their current cost of production just won't meet the demands of where the customer want And so we're actively we're always actively speaking to certain customers about take or pay contracts or How we can support them through sales. So I think there are certain folks that would like consistency in their supply chain, So that as they launch a SKU and they go to shelf that they're not left without any supply. And in those cases, take or pay work really well. So we're not opposed to those type of contracts, Adam.
And if they work out and it makes sense for everybody involved, we'll look at them.
Okay. Yes, yes, that's great color. Then just if we think about where the market is sitting currently, You noted that July was a record month for retail. Have you also it seems like it's also a strong market for wholesale Currently, is that the right sort of or what you're seeing at least?
Yes. And it is It's a strong market right now and we knew that this would come as soon as COVID restrictions opened up and stores started selling. I mean there was a lot of stores in Ontario that we saw They got approved and licensed, but didn't want to quite open their door in the middle of COVID kind of think about March, April, May and invest all the retail, All the dollars into inventory and then have to just be solely doing click and collect and not having an in store experience. So we knew that there was dozens upon dozens of We're just waiting for restrictions to open up. And so obviously that helped on the sell through side of our retail products, but we also knew that meant that there would be Customers looking for product or product to source immediately.
So yes, Q2 was strong for that and we continue to see kind of We expect some of that strength to remain in the market, maybe not as strong, but we continue to see we'll continue we expect to continue to see some real good Strength on the wholesale side moving forward.
Thank you. There are no further questions at this time. You may proceed.
Hey, we just want to thank everybody for participating today and the support For Village Farms, we're working hard here and we look forward to our next conversation on the Q3. Have a great day. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.