Village Farms International Inc (VFF) Q4 2021 Earnings Call Transcript

Village Farms International Inc (VFF -3.82%)
Q4 2021 Earnings Call
Mar 01, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to Village Farms International fourth quarter and year-end 2021 financial results conference call. This morning, Village Farms issued a news release reporting its financial results for the fourth quarter and year end ended December 31, 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 achieved for replay both by telephone and via the Internet beginning approximately one hour following completion of the call. Details of how to access the replays are available in today's news release. Before we begin, let me remind you that forward-looking statements maybe 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-K MD&A for the year ended December 31, 2020, which is available on EDGAR.

These forward-looking statements are made as of today's date and except as required by applicable security laws, 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 at Village Farms International. Please go ahead, Mr. DeGiglio.

Michael DeGiglio -- Chief Executive Officer

Thank you, Annex and good morning everyone. With me for today's fourth quarter and year end call is Village Farm's chief financial officer, Steve Ruffini.,and joining us is president and CEO of Pure Sunfarms, Mandesh Dosanjh, who with the addition of ROSE LifeScience, is now oversees what we refer to as our Canadian cannabis operations. So I am going to open up with a few points. At the end of the third quarter conference call, I discussed how the future of Village Farms was rapidly coming into focus as a result of our consistent execution on our strategy.

The fourth quarter and really entire 2021 year were further evidence of that. Q4 like Q3 was another quarter of strong financial performance. And from my viewpoint, the headline of the quarter was again, profitability and growth. Positive consolidated earnings per share of $0.03, positive consolidated adjusted EBIT by $5.3 million for the quarter, which each business contributing positive adjusted EBITDA.

Importantly, one can see the consistency emerging from the business, consistency that underscores a rock solid foundation for our next phase of growth. So I'd like to take a few minutes to layout what I see as longer term benefits of what we accomplished in 2021, together with some of the headwinds which we successfully navigated, then Steve review our financial results in more detail, and I have some closing remarks. So 2021 in review, let's talk about that. It was a very successful year for Village Farms in terms of delivering on our growth strategy.

Consolidated 2021 sales grew 58% over 2020, reaching a record $268 million and adjusted EBITDA grew 89% to $14 million. 2021 was not only a year of significant growth, but also one in which we executed across the entire businesses to build for continued growth in 2022 and beyond. Let me start with what went well. Pure Sunfarms contributed and continued to maintain its profitable market share leadership in the direct cannabis category in Canada, especially impressive as we saw many of our peers lose market share, some massively, where they drastically reduced prices to try to recapture market share or mitigate share loss, clearly not a sustainable practice if they ever hope to become profitable.

Some have even mothball Canadian RAC to focus on other strategies. We launched 23 additional SKUs in the fourth – in four categories just in Q4 alone, taking us to more than 50 new SKUs in the back half of the year alone building on a momentum throughout the year. Notably, we introduced several high THC strains followed on the success of Pink Kush, which still remains the top selling strain in the country. And we significantly ramped our pre-rolled business, which continues to be the second most popular category of consumers after flower.

With outstanding market share gains, for example, in Ontario, we more than quadrupled our market share from January through December. And we saw a more than 200% year-over-year increase in sales of branded derivative products. Pure Sunfarms remains the top selling brand of dried flower in Ontario, British Columbia and Alberta for the fourth quarter as it did for the entire 2021 year and as it has for as long as we have been tracking data in each of those provinces, more than two years now in Ontario, and well over a year in BC and Alberta. And in every province, we grew share in almost every product category.

We are especially proud that the team achieved what it did in 2021, while still absent from the Quebec market for most of the year. And if you allow me to stay with Quebec for just a moment, the third largest provincial market in Canada, we follow through on our commitment to enter that market with the acquisition of Quebec-based ROSE LifeScience midway through the fourth quarter. And we are pleased to welcome the ROSE family to the Village Farms family. ROSE provides a substantial presence in Quebec, not only as a supplier and cultivator, but also as the largest third-party distributor in the province with some of the largest brands in the country, which is unique to Quebec and unique within Quebec.

It provides experienced Quebec-based industry leaders, with deep CPG, cannabis and local and regional expertise with two of the Co-Founders including its Chief Executive Officer remaining with the team. And it adds a Quebec-based 55,000 square foot indoor cultivation and processing facility. In addition to ROSE's own brands, which are Tam Tams, DLYS, Pure Laine and Elekt, I am pleased that the team has already expanded our Quebec portfolio with the recent launch of the Promenade brand, which will feature Pure Sunfarms genetics. The early read is strong for consumer acceptance and market share here.

Another area of strategic importance here in 2021 was the expansion about BC cultivation facilities. After receiving Health Canada approval for our second 1.1 million square foot production facility called Delta 2, which is adjacent to our 1.1 million square foot Delta 3 facility, we began planting in the first half of D2 in the fall. This brings with the addition of ROSE our total cultivation footprint to nearly 2.3 million square feet when D2 was fully planted. So, half of Delta 2 was now fully in production and we are now selling product grown in that facility.

We still get questions about why at a time when so many of our peers have shutted capacity, we are expanding. But be assured that we have always taken a measured approach to match capacity with anticipated demand and we continue to see great opportunities in the current $4 plus billion and growing Canadian recreational market and export markets to support this investment. Matching capacity to demand is part of our long-term DNA of our agricultural routes. Another highlight for 2021 was the purchase of one of the top companies in cannabinoid products in the United States, Balanced Health Botanicals.

Based in Denver, Colorado, Botanical – Balanced Health brings an accomplished management team with deep expertise in CBD products, with both the Founder and the Chief Executive Officer remaining with the company, proven success in the e-commerce channel with one of the best digital platforms in the industry, another potential pathway to participate in the high THC market when the legal landscape permits. And it adds another profitable business to our cannabis portfolio, one of the few in the sector. Internationally, we saw meaningful steady progress against our strategic goal of participating in select markets as they legalize. We are building out our European business and added senior leadership to head our business development operations there.

We acquired an irrevocable option to purchase majority ownership in one of the 10 expected participants in the Netherlands for what is likely to be the first major European rec market. To our knowledge, we will be the only North American company with a majority ownership position in the Netherlands. It's a market structure in which we have already proven our success and it represents a springboard to additional emerging European markets. And we have deep ties in the Netherlands going back four decades and great respect for the growing industry in the Netherlands, which makes our participation there quite unique.

Additionally, in the international arena, Pure Sunfarms continues to advance toward EU GMP certification, a bit slower than expected. And Altum International, which we own 12%, added Taiwan to its commercial launches for CBD and launched in the Australian high THC medical market exclusively with Pure Sunfarms grown products. Finally, in our Village Farms Fresh Produce business, we saw a return to positive EBITDA in the back half of the year after the demand and supply and balances had negatively impacted pricing early in the year. Yes.

When I look back on 2021, there were a number of things that we have liked to have seen play out differently. Macro headwinds that held us back from doing even better than we did. First, Canadian cannabis, I will first acknowledge that the Canadian government and Health Canada in particular for their foresight in being the first major country to legalize recreational cannabis and support development of a market that now has a run-rate of $4.6 billion and which grew a phenomenal 50% in 2021. Let me repeat that, the Canadian market grew 50% year-over-year, with Pure Sunfarms growing its retail branded sales at nearly double that pace at 99% last year.

That's really quite an accomplishment. There are very few sectors that have this kind of macro growth underpinning the growth of the top operators. That said, even at the projected size of this market of $7 billion or $8 billion and more, Canada has too many suppliers and too much supply. This has led to the irrational behavior which holds back the entire industry from developing into a more mature consumer and customer-centric one.

There are other headwinds, which we hope will be addressed as the industry starts to mature, an excise tax that sits on top of an already high corporate tax rate, strong restrictions on the marketing of brands and products, restrictions on the use of common agricultural tools, even certain biologicals are non-permissible, and still a very active black market, which has none of the regulation, taxation, mandated government run distribution channels, and no product safety standards to adhere to. This is why having the right model, the right cost structure and with a focus on profitability is so important. And I think we have proven that. If we can be successful in the tough Canadian market, we believe we can be successful anywhere and I have said in the past where we compete, we are the competition.

Also in Canada despite progress on Pure Sunfarms' EU GMP certification, it has taken much longer than expected due to COVID-related international travel disruptions. Initial plans were to sell into the European market by now, yet we are optimistic and are now working on a target of Q2 for receipt of our certification and are confident we can be exporting to Germany in the second half of this year. And we are also progressing on plans to export to Israel, which does not currently require GMP certification and expect sales to start there also in the second half of this year. Among headwinds in the United States, we have been very disappointed with the lack of regulatory progress.

The lack of clarity from the FDA on the use of CBD is holding back valuable development of plant-based wellness products to benefit consumers in a regulated manner. And in the high THC category, the lack of political leadership to push forward federal legalization despite bipartisan support has left this great country with a patchwork of state regulations. And frankly, we could, should, and hopefully soon will do better. Finally, as I noted earlier, our Fresh Produce business had a tough first year due to market dynamics, which did turnaround significantly in the back half with the normalization of pricing for those two quarters.

For the most part, the headwinds in 2021 were external in nature. It has been and will be our job to keep our focus on our long-term growth strategy. Some of these headwinds will persist into 2022 of course. For example, we believe the Canadian LP landscape will undergo further restructuring.

And the new year has started with another – macro challenges for all of us, geopolitical unrest, inflation, supply chain holdups, it's a lot to manage through, but the team at Village Farms has persisted through disruption before. So now on that note, I am going to turn it over to Steve to review our financials and I will return with some final closing thoughts. Steve?

Steve Ruffini -- Chief Financial Officer

Thanks Mike. Before I begin just a reminder read the timing impact of our acquisitions over the past two years. Our Q4 2021 results reflect the full consolidation in Pure Sunfarms, of which we increased our ownership to 100% in November 2020. For Q4 2020, Pure Sunfarms was consolidated for approximately half of that quarter.

Q4 2021 reflects the full quarter consolidation of Balanced Health Botanicals, which we acquired 100% in the third quarter of 2021 and in Q4 2021 reflects the full consolidation of approximately one half of quarter's contribution from ROSE LifeScience which we acquired 70% in mid-November. Turing to results, consolidated sales Canadian and U.S. cannabis and Village Farms' Fresh Produce for the fourth quarter increased 55% year over year to $72.8 million from $47.4 million in Q4 of 2020. The approximate $25 million increase was primarily the result of the consolidation of Pure Sunfarms in this year's results for a full quarter versus a partial quarter last year, which of course this year, of course includes the – as Mike mentioned the year-on-year growth of Pure Sunfarms as well as the addition of sales from ROSE and the first full quarter contribution from Balanced Health Botanicals as well as the increased sales in Q4 Village Farms' Fresh Produce this year versus last year.

We generated consolidated net income for the quarter of $2.1 million or $0.03 per share compared with a net income of $7 million or $0.12 per share in Q4 of 2020 when we benefited from a one-time $23.6 million non-cash accounting gain from the full acquisition of Pure Sunfarms in that quarter. Consolidated adjusted EBITDA for Q4 swung to a positive $5.3 million from a negative $500,000 in the same period last year. Looking at our individual business segments, starting with cannabis, our combined Canadian and U.S. cannabis operations saw a sales increase of 169% year over year, with growth driven by the factors just mentioned.

Our Q4 cannabis sales were 47% of our consolidated sales compared to 27% for the same period of 2020. In all probability, cannabis will be in excess of 50% of our consolidated sales in 2022. Cannabis adjusted EBITDA increased 183% to $6.8 million from $2.4 million. Canadian cannabis operations delivered another strong quarter driven predominantly by continued strong performance of Pure Sunfarms and benefiting from a partial quarter contribution from ROSE.

As noted on our last call, any period-to-period comparisons of our Canadian cannabis results in our reporting currency of U.S. dollars should take into account the fluctuations in the Canadian U.S. dollar exchange rate. All such information is provided in our MD&A.

For ease of comparison on this call, I will review our Canadian cannabis results in Canadian dollars, which provides a more accurate gauge of period-to-period performance. Our Canadian cannabis business once again generated strong year-over-year growth. Net sales for Q4 increased 114% year over year to $34.5 million, which were up 53% year over year and down 2% sequentially. Q4 net sales included $1.4 million of net sales from ROSE representing its contribution from our acquisition on November 15 through the end of the quarter.

Pure Sunfarms retail branded sales for Q4 rose 75% of its net sales of $32.4 million, which was up 56% from $15.6 million in Q4 2020 and up 7% from $22.8 million in Q3 of 2021. With 3 full years of sales data, we are now beginning to see seasonality emerge in the Canadian retail branded sales. As was the case in 2020, we saw a somewhat modest growth in orders from the provincial distributors from Q3 to Q4. It appears that provincial buyers purchasing patterns are to stock up for the holiday season in Q3 and early Q4 and then scale back on orders in the later part of Q4 and early Q1 as they manage their own on-hand inventories for their fiscal year ends at March 31.

I will also note that for each of the last 2 years, approximately 40% of our annual sales were in the first half of the year and 60% in the back half of the year. We expect this trend to repeat in 2022 and be even more skewed toward the back half as we expect a number of growth initiatives such as product launches, export sales and expanded provincial distribution to ramp up throughout the year. Retail branded sales comprised 85% of our – was comprised of 85% dried flower and pre-roll products with derivative products comprising the balance of 15%. Non-branded or wholesale sales for Q4 were $8.5 million compared with $7 million for Q4 in 2020 and $11.7 million for Q3 2021.

As I noted on our last call, Q3 was particularly strong quarter for non-branded sales and we continue to expect that this revenue stream will vary from quarter to quarter. I will again take this opportunity to reiterate that we assess wholesale sales based upon product availability and always in the context of making economic and strategic sense for our retail branded business. Gross margin for the Canadian cannabis business for Q4 was a very healthy 42% excluding the impact of the purchase price accounting and 48%, including the impact. In the interest of time, I will refer anyone who needs a full explanation of the PPA impact to read our MD&A.

Gross margin again came in above our stated target range of 30% to 40% as Q4 benefited from improved production efficiencies, which translated into lower cost of production and a higher proportion of higher potency flower and trim, which benefits our selling price. As noted last quarter, we expect our gross margin to trend back to our 30% to 40% target range in 2022 as our sales mix shifts to higher proportion of lower margin derivative products and pre-rolls. We have lowered our sales price slightly on some of our more mature flower strains, but continue to hold our selling price on our newer flower strains. SG&A for the Canadian cannabis operations in Q4 were $9.2 million, representing a 57% year-on-year increase and a 37% sequential increase.

As a proportion of net sales, SG&A was 27% for Q4 compared to 26% in Q4 of last year and 19% for Q3 of 2021. Approximately $400,000 or 16% of the increase in Q3 was attributable to the acquisition of ROSE partway through the quarter. Otherwise, the elevated SG&A to sales ratio reflects our continued investment in our Canadian cannabis operations as we add people in sales and marketing brand spend to support our branded revenue and operations. We also have seasonality in our brand marketing spend.

In Q1 2022, we will not be spending the incremental holiday brand spend. So, the market should expect a lower SG&A figure in Q1 2022 versus Q4 2021 and with the all important 420 falling in Q2, we planned on an incremental brand spend in Q2 as another example of seasonality of our cannabis business. As Mike mentioned, our Canadian cannabis operations delivered its 13th consecutive quarter of positive adjusted EBITDA at $6.1 million, up 99% over Q4 of last year and down 44% from Q3, with a sequential decline due mainly to lower non-branded sales and higher SG&A cost. I will now review our U.S.

cannabis operations and in doing so will revert back to U.S. dollars. Our U.S. cannabis operations, which are comprised of Balanced Health Botanicals and some SG&A, the hemp continued to perform in line with our expectations during this first full quarter of contribution.

Sales were $7.5 million compared with $3.9 million for the half quarter's completion in Q3. Gross margin was relatively unchanged at 71% and adjusted EBITDA was $1.9 million compared with $700,000 for Q3 of 2021. We recently launched a new synergy line, which has gone really well. And from the early brand recognition feedback, we expect future product launches under the synergy line.

Due to the ongoing indecisiveness of the FDA which Mike mentioned, we have no plans of growing hemps in calendar year 2022. Turning now to Village Farms' Fresh Produce, Q4 saw continuation of the positive trend we repeated in Q3 with the normalization of market pricing. Fresh Produce sales for Q4 increased 11% year over year to $38.4 million primarily due to higher volumes. For the second consecutive quarter, we achieved positive adjusted EBITDA of $1.1 million.

This division's EBITDA is primarily driven by market pricing. As Mike mentioned, there is increasing pressure on input costs that need to be passed on to our customers in order to maintain a positive EBITDA fresh division. These conversations are underway. Finally, some comments on our balance sheet and cash flow for the quarter.

At December 31, we had approximately $58 million in cash and equivalents compared to $84 million at the end of Q3 and we had $52 million in working capital, excluding cash compared to $40 million at the end of Q3. During the quarter, we used $16 million to fund the cash portion of our purchase price of the 7% interest in ROSE and approximately $6 million in capex expenditures in our production facilities, primarily the expansion of Delta 2 in Canada and an incremental lighting project at one of our Texas facilities. And the balance of our cash is related to increases in our working capital, primarily in cannabis and tomato inventory. Operating cash flow from our business operations for the quarter, excluding working capital for Q4, was $5 million.

Our capital position and ongoing operating cash flow have us in an excellent position to self-fund our ongoing operations in budgeted 2022 growth initiatives. As shareholders ourselves, we are prudent and strategic about capital raises, dilution investment, and the health of our balance sheet reflects this. Although we remain very optimistic about the growth of the cannabis industry, we recognize the value of prudent and patient investing during periods of capital market dislocations like we are in currently. We thank you for your patience as we work hard to continue to differentiate Village Farms as a profitable leader in the global cannabis industry.

And now I will turn the call back over to Mike.

Michael DeGiglio -- Chief Executive Officer

Thank you, Steve. In closing, Village Farms has built a rock solid foundation for long-term sustainable, profitable growth. This has been our focus for the last several years, Pure Sunfarms, ROSE LifeSciences, Balanced Health Botanicals, Leli Holland, Altum and Village Farms Fresh. Recently, senior leaders across our organization met to evolve and refine the next phase of our growth strategy and with the recent additions of Balanced Health Botanical, ROSE LifeSciences soon Leli Holland that will take Village Farms into next level.

While I won't go into specifics for obvious reasons, here is what I am willing to share. We are building a best-in-class international leader in plant-based consumer products. We will leverage our 30-year plus DNA to seize opportunities in selected markets around the world. We will not chase every country, but we will hold certain principles.

A focus on legal, adult use recreational markets, where we enter the medicinal market it will be as an entry point of the future recreational markets. Long-term, we believe the rec market will dominate in size, growth and consumer innovation. Producing and marketing value-added products that are consistently consumer and customer preferred. Prudent capital deployment with a focus on return on invested capital and that makes strategic sense to capture growth in the global cannabinoid market.and as an investor I know, I would ask why should I have confidence that Village Farms can be successful? The answer to that question lies in our track record over three decades, but especially in the past several years.

We founded and built the premier cannabis business in Canada. We established multiple footholds in selected international cannabis markets, most notably planting a flag in Europe now. And we entered the U.S. cannabinoid market with a leading brand and platform.

And we did all this adhering to our core principle of minimal dilution and raising capital for growth-related investments that meet our return objectives, while steering clear of financial methods such as ATMs and convertible debt that we view as less than shareholder-friendly. The result since 2018 we have grown sales 80% driving a fivefold increase in adjusted EBITDA. We have more growth potential before us than at anytime. Growth and expansion in our existing Canadian markets is number one, including Quebec and growth in exports.

And don't forget that, we still have a 2.6 million square foot facility called Delta 1 in the adjacent footprint in Canada. Secondly, the Netherlands rec market and expansion in Europe and elsewhere, growth in the CBD market in the U.S., and the potential to be a leader in high THC cannabis in the U.S. or Texas or both, where nearly 6 million square foot of controlled environmental production capacity provides us with an undeniable advantage. Plan to stay in these lanes as there is plenty of opportunity.

With that, I will start taking questions. And between Steve and Mandesh and myself, we hope to answer that. So operator, turn it over to you.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] First question comes from Tammy Chen with BMO Capital Markets. Please go ahead.

Tammy Chen -- BMO Capital Markets -- Analyst

Thanks. Good morning, everyone. First, I just had a housekeeping question. I was wondering if you could possibly give approximate breakdown of your retail flower sales this quarter, like how much of that was your new flower strains, like the Jet Fuel Gelato versus your legacy strains like the Pink Kush?

Michael DeGiglio -- Chief Executive Officer

Good, Tammy. Mandesh, would you like to take that question?

Mandesh Dosanjh -- President and Chief Executive Officer

Absolutely. Thanks Mike. So Tammy, we have not specifically broken out our overall sales into the key segments for you guys publicly. Right now, when I look at our overall branded sales for the year, obviously, flower continues to dominate that.

In Q4, we are definitely kind of north of that 60%, 70% range of our total flower sales. Specifically, I think the heart of your question is how are the new strains performing? Jet Fuel Gelato, Black Cherry Punch and some other limited time available strains were only relatively launching in Q4. So, the percentage of those sales is still relatively small in the Q4 number. What we are seeing right now in Q1, I know we don't give full guidance is that Jet Fuel Gelato is in some markets starting to perform at the same level as some of the [Technical Difficulty], in Ontario, we have even seen it starting to outperform? So again, to reiterate in Q4, the new strains were not a significant component of the Q4 numbers and we are starting to see them become a bigger share so far this part of the year.

Tammy Chen -- BMO Capital Markets -- Analyst

OK. Thanks. That's helpful. And then I noticed in the Canadian cannabis segment, the EBITDA is lower than the last two quarters and you talked about the SG&A.

So was that primarily the driving factor for the lower EBITDA that you have invested in your sales force or were there any other factors? Thank you.

Steve Ruffini -- Chief Financial Officer

It's Steve. Also, the other factor is lower non-branded sales. I mean, we do make a nice margin on those sales. So, the lower top line non-branded revenues also impacted our EBITDA on the quarter-on-quarter comparison besides SG&A.

Tammy Chen -- BMO Capital Markets -- Analyst

OK. Got it. OK. Thank you.

That's it for me.

Michael DeGiglio -- Chief Executive Officer

Thanks, Tammy.

Operator

Thank you. Your next question comes from Scott Fortune with ROTH Capital. Please go ahead. 

Scott Fortune -- ROTH Capital Partners -- Analyst

Good morning. I'd like to focus a little bit on the international markets. I know the timing of the EU GMP is coming on board, but can you provide a little bit cover on the opportunity there? From a production standpoint, what are you guys readying for Delta 2 the GMP side of thing? And is there a focus on specific flower or with a certain THC level or derivative products to serve those export markets as you look, you have mentioned Germany and Israel going forward here?

Michael DeGiglio -- Chief Executive Officer

Sure. Mandesh, you want to take that – your – this regards our export potential out of Pure Sunfarms, correct? Scott?

Scott Fortune -- ROTH Capital Partners -- Analyst

Correct.

Michael DeGiglio -- Chief Executive Officer

OK. Mandesh, why don't you take it?Mandesh DosanjhThanks Mike. Appreciate the question, Scott. So just to reiterate, on our EU GMP certification, that certification is occurring in our Delta 3 facility, obviously stated our total annualized capacity facilities, conservatively 75,000 kilos and we don't have plans to extend the EU GMP certification to Delta 2 at this time, don't think that's needed.

So we will be focused on our Delta 3 production capacity. As Mike mentioned in the earlier comments, we are making great traction toward that certification. It's obviously a little bit delayed with some of the COVID delays in traveling and just getting the supply chain sorted out, but we feel really bullish on the timing of that. And as soon as we get that certification, we do expect that shipping could commence as early as the quarter after that certification.

So we are definitely on track to see that later this year. When you ask about specific product types, our EU GMP certification at this time is limited to whole flower SKUs. And working with our partners in Germany, we have obviously selected certain strains that are part of that certification process. However, getting in advance of that actual certification coming through, we have expanded that offering, getting ready for certification of GMP, while it's focused on the processes at the facility, you must also register the products that you intend to sell.

And typically, that process starts kind of once you get the certification and you have to register those actual SKUs given flower strains with the specific potency ranges that you will be using to test against and make sure those products qualify. We have actually in advance as we've seen the market mature here in Canada and looking at what's happening on the medical side in Germany is we have actually gotten ahead of that and started to prepare other offerings and strains as well. And they will predominantly be high THC offerings, but there are some moderate THC that we believe will be part of that kind of whole offering to the GMP market. So it's a multifaceted product strategy working with our partners in the German market to understand what consumer needs are on the medical side and making sure we can hit the heart of the market and really generate strong sales as we open that up this year.

Scott Fortune -- ROTH Capital Partners -- Analyst

I appreciate that color. Thanks. That's pretty good opportunity for you guys. And then just coming back on the competitive landscape in Canada, as we have seen the larger LPs losing market share and their response it seems to be on pricing to lower pricing to continue to capture back market share, how are we – how should we look at kind of the pricing environment in Canada kind of in the first quarter as these LPs, larger LPs look to gain back market share with you guys offering in the different provinces will be great?

Michael DeGiglio -- Chief Executive Officer

Sure. I mean, Mandesh, go ahead, you can answer them.

Mandesh Dosanjh -- President and Chief Executive Officer

Thanks Mike. Great question, Scott. And Mike again alluded to some of that in the opening comments. Look, at the end of the day, Pure Sunfarms, we are going to continually make decisions that balance market share and profitability.

And we look at the growth of our business on a top line and profitability perspective. And we are going to prioritize medium and long-term success versus short-term. You hit the nail on the head is that larger LPs are losing market share. A large part of that is the way that they have setup their operations, how they haven't focused on the right level of detail in terms of their brand and product awareness and even creating the right brands and the right products.

And it's really kind of cannibalizing their business. Pure Sunfarms continues to grow and pickup market share. So Scott, I think quarter-over-quarter, month-over-month, you are always going to see puts and takes in market share. LPs are going to invest in pricing and try and be desperate.

We are going to play the medium and long-term game. We are going to do – we are going to look at what the right thing is for our shareholders and continue to grow profitably. We definitely see areas of opportunity in certain regions. We love the pickup that we are seeing in our other non-flower or non-whole flower SKUs, pre-rolls, vapes.

We have launched milled flower and have started to ship in late December and sort of really hitting the market in January, that was a segment that we weren't in. And when I look at margin right now, and again, I know we don't break it out. And Steve mentioned being north of that 40% target, we actually grew margin on our flower SKUs given our productivity in our cultivation and manufacturing facility. So, I mean, that is in such contrast to what we are seeing in the market given that we have also invested in price in Q4.

So I think the ability for us to compete on price if we choose is there. We have not weighed in heavily into that tactic. We don't feel that we have to, but we are going to continually sharpen our pencil. We have made some investments in pricing and the key market is Alberta.

And Steve mentioned in some of our – what we refer to as our medium life and end of life strains, strains that were maybe not growing as much of we are going to start to exit the market, whereas we come in with new strains like Jet Fuel Gelato, we have kept that kind of higher pricing tier, because it is a new strain, a new offering and is getting great success.,So we are continually evaluating kind of our price strategies given where our products are in their lifecycle. And then taking that intelligence and understanding when the right time is to launch say other products, in parallel, verticals and even looking at brand extensions for 2022. So, we think the price activity is going to continue as LPs continue to get desperate. We love our positioning, our brand awareness, our adoption with the bud tenders and our penetration in stores and continuing to see strong sell-through numbers year over year are all signs of success that we are doing the right thing and we believe that we are positioned for a really strong growth in 2022.

Scott Fortune -- ROTH Capital Partners -- Analyst

Thanks, Mandesh. I will jump back into queue.

Michael DeGiglio -- Chief Executive Officer

Thanks, Scott.

Operator

Thank you. Your next question comes from Rahul Sarugaser with Raymond James. Please go ahead.

Rahul Sarugaser -- Raymond James -- Analyst

Good morning, Mike, Steve, and Mandesh. First, congratulations on a really strong 2021. Well done. And of course, thank you for taking my question.

So, just following on from Scott's question, in terms of the Canadian context, and looking forward in 2022, where should we be looking for sort of the most high torque gains? Would it be continued markets, market taking from your peers, would it be Quebec? Would it be sort of new SKUs? How should we really be thinking about sort of that next phase of growth into 2022 in Canada?

Michael DeGiglio -- Chief Executive Officer

Yes. I mean, I think all three, but I will just turn it over to Mandesh to give you more color on that.

Mandesh Dosanjh -- President and Chief Executive Officer

Thanks Mike. Great question, Rahul. And just to reiterate what I said, it's definitely in all areas. So, while we continue to hear that large LPs are losing share, again, don't sound like a broken record, we continue to pick up in key regions and in key product formats.

When I look at, say, the top 10 LPs or the market share that exists outside of the top 10, there is still a healthy market share for us to penetrate and pick up not just in the flower segment, but in other product segments. And we said in the last quarterly call and through last year, and we will continue to say this year is, we believe there is a tremendous opportunity for us in products like pre-roll, where we tripled and quadrupled share from the starting points of the year. We believe that will come from some of the other top LPs as well as the non-top LPs. So, we believe there is a lot of market share there.

In other regions, where we say underperforming, Alberta is the key one, we believe we can continue to pick up again, by strategically looking at pricing, by looking at product offering, and continuing that brand reach with our sales team and trade marketing tools. And then there are still some other regions Atlantic Canada and some of the territories, although it's smaller, that we believe there is going to be some meaningful pickup. And then again, referring back to Mike's or their comments, and Quebec is such a large market that's untapped and really not reflective too much in our 2022 numbers. It's really geared toward the flower consumer given the fact that there are no vapes, no child from the edibles.

The ROSE LifeSciences team has done a tremendous job. And they only really received their sales license at the starting of 2021. So, their business on their own cultivation platform was really accelerating through the course of last year. And kind of back now with the Pure Sunfarms team, looking at their operations and how we can continue to grow, leverage that team to expand the footprint in Quebec, we think there is tremendous opportunities for us in the Canadian landscape.

Rahul Sarugaser -- Raymond James -- Analyst

Terrific, thanks.

Michael DeGiglio -- Chief Executive Officer

Yes. I will just add to that, one thing on taking a chair from other LPs, that's not been our focus. That market share is there, if they are losing it, it's going to be in the marketplace, the consumer will decide what brands he wants to go with. So, I think we are staying pretty close to our original strategy and moving forward.

So, next question.

Rahul Sarugaser -- Raymond James -- Analyst

Great. That's helpful context. So the next question is sort of now switching to the U.S. recognizing of course, well, recognizing the legislative uncertainty for cannabis.

And however, we do have some clarity given the U.S. CBD business. We have seen a few of your counterparts, peers sputter in terms of their CBD, U.S. CBD business.

So, how are you looking to insulate and continue to grow the U.S. CBD business?

Michael DeGiglio -- Chief Executive Officer

Well, I think the only-the biggest growth in the CBD business in the U.S. is going to come from clarity from the FDA. I mean that's the central theme. We have talked about that over and over.

And the real key is the big box side of that formula. And until there is clarity in the FDA rules, it's going to be difficult to have massive growth in big box. So, we will continue to grow our online business. That will probably have acceptable low-two digit growth year-on-year.

But we are going to be patient. We believe that clarity will come. That was the reason for the acquisition, not to mention the platform that the online platform that we think we can leverage up for higher THC as we go forward and as Steve mentioned in the introduction of a number of new products by BHP coming out. But we took that acquisition on to position ourselves once the FDA rules and provides that clarity.

Rahul Sarugaser -- Raymond James -- Analyst

Sure. If I can one last quick question in terms of the Netherlands opportunity, and we know the pilot program we see an immense amount of potential there potentially as they would roll it out across the country. But how should we also be thinking about given EU rules, the potential to use Netherlands as a launching point into Germany and everything that we are seeing in terms of potential opening up in Germany as well?

Michael DeGiglio -- Chief Executive Officer

Well, our viewpoint is that medicinal is usually a stepping stone for rec. You have seen it in Canada, certain states of the U.S. So, we like rec, because it's a built in consumer that we can target. I think with the medicinal side, when we look at Germany, for us, we think we are in a great position, being able to procure some farms to export to Germany.

We have a very solid partner there. But it's a very difficult market. There is a lot of moving parts on the medicinal side, each country will be different. With rec, it just opens it up.

And if you look at the Netherlands with 579 coffee shops that have been there for 30-plus years, it's a built in consumer and will be allowed to market and brand within the Netherlands. If that Netherlands platform does well we were convinced it will be sort of a model for other company – other countries that go pure rec or will take the stepping stone of medicinal Rec. So, either way, it's a two-prong approach export from Pure Sunfarms to medicinal markets within the EU, and the Netherlands being the first country to open up rec and us being one of the 10 license holders. And we are convinced that that will go to full legalization very, very soon, within two years to 2.5 years from the commencement in the Netherlands.

We are already talking to other countries that are looking at the Netherlands, for what their model is going to be for rec. So, we think we are in a great position, as I mentioned in my remarks, the only North American company that has a majority interest in that first emerging rec market. And we will be looking at generating revenues first quarter, second quarter next year. So, that's eminent and we feel really solid about our expansion into the EU.

Rahul Sarugaser -- Raymond James -- Analyst

Great. Thanks again for taking our questions and congratulations again. We will go back in the queue.

Operator

Thank you. Your next question comes from Pablo Zuanic with Cantor. Please go ahead.

Matthew Baker -- Cantor Fitzgerald -- Analyst

Hello, everyone. This is Matthew Baker on for Pablo. For our first question, we are wondering if you could provide more color on which of your non-North American markets you expect to contribute to revenue in 2022 and how much. Thanks.

Steve Ruffini -- Chief Financial Officer

As Mike just mentioned, we expect the first revenue from our Dutch coffee shop business to be in early 2023. So, there won't be any contributions for cannabis, other than what we are going to export from Pure Sunfarms. And we are not prepared to give any guidance on that yet.

Matthew Baker -- Cantor Fitzgerald -- Analyst

OK. Thank you for that. And for a follow-up question, outside of Quebec, it seems your market share gains in flower have slowed. Is this so? And if so, why do you think that is the case? Thanks.

Michael DeGiglio -- Chief Executive Officer

Mandesh, you can answer that please.

Mandesh Dosanjh -- President and Chief Executive Officer

Absolutely. So I would counter that a little bit. And we have said it that we feel we have picked up share. And it's definitely there when you look at the Ontario data, which is definitely the most fulsome and wholesome data and consistent data that's published within the industry.

And so when I look at where we started the year to where we ended, we gained share. There is no question of a doubt on every key product segment. And when you look at the key product segments, we think about flower, pre-rolled, in vape and that constitutes close to the north of 80% of the total market in Ontario. We have said that in some markets like Alberta, we have seen some loss due to some of the competitive natures in terms of pricing, and we are sharpening our pencils.

The other piece there is we continue to look at how the market unfolds and making sure we are delivering products and specifically flower strains that are on point with consumer preference. And we definitely believe in 2022, we will continue to see pickup in those segments given how much innovation we are doing. And just to take a little sidestep for everyone's understanding, when we launch a new flower, and I think about Jet Fruit Jelato, which is really only launched in last year, and we are starting to see really good headway to open up 2022 with that strain. It takes close to a year, from the time you innovate, trial test, go through sensory and really make sure that what you are going to be delivering to the consumer is going to resonate.

And so 2021 was a big year of innovation for us around flower strains. And we are confident that not just in addition to Jet Fruit Jelato and some other ones that we have launched, but we are going to have a handful of offerings each quarter come out, and things that have been in the pipeline. So, it's not necessarily that we have gotten anything wrong. I think it's just been ensuring that we are acting and reacting to what's happening in the market.

And we know what we need to do, and that's continually innovating, staying sharp on price, getting strong sell-in and sell-through with our amazing sales force out in the market, doing great trade activation, supporting bud tenders, and making sure we are top of mind consumers. And we are doing all those things. So, the macro numbers show that we are picking up share. But absolutely, there is areas that we need to improve on, as it relates to innovation and making sure we are being as steady as we can in every region.

Matthew Baker -- Cantor Fitzgerald -- Analyst

Thank you for taking our questions.

Operator

Thank you. Your next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

Aaron Grey -- Alliance Global Partners -- Analyst

Hi. Good morning. Congrats on the quarter. And thanks for the question.

So first one, I want to dive back to Quebec a little bit, so you guys have done a great job in some of the major provinces like Ontario. Now, on Quebec post the ROSE acquisition and issue offering some color earlier, but just want to get some additional detail, a few months under the hood now post closing, can you speak to how you plan to leverage some of your key learnings in other provinces as you target Quebec maybe incremental color on the timing and how much contribution you see there? I know you mentioned not too much faith in the 2022. But obviously a lot geared toward flowers consumer. So, the initial content of how you looked at targeted potential branding as well will be helpful.

Thank you.

Michael DeGiglio -- Chief Executive Officer

Sure. Yes. Well, go ahead, Mandesh. The only been really two months.

But things can happen not quickly. Mandesh, you can put some color on it.

Mandesh Dosanjh -- President and Chief Executive Officer

Yes, for sure. And I will give some color around what we are seeing with the Quebec market and the ROSE team. And then I will let Steve jump in if there is any sort of components he wants to give around roll-ups or how some of the numbers piece together. So early days, but definitely few months under the hood, we obviously spent a long time assessing that business unit.

And just to reiterate what Mike said, the ROSE LifeSciences team led by Davide Zaffino, CEO, Founder, Brian, another founder and a phenomenal management team that are there, have a really strong understanding of what makes the Quebec market pick and have a handful of brands that really offer consumers different products at varying price points, everything from their micro cultivation strategy with the DLYS brand to their in-house cultivation on Tam Tams and then offering other brands such as Pure Laine and Elekt to really think about what consumers need. And part of their business model on their own brands, has been sourcing product that they have been doing that from before the acquisition and roll-up by Village Farms. And so now that we are part of the family, we have really opened up the ability for them to source from Pure Sunfarms. And we started to see that in Q4.

And we continue to expect that to rec. The other piece that Mike mentioned in his earlier comments was the ROSE team has launched a net new brand Promenade, which will really offer that product to the market and that will leverage. So, the opportunity now to take their deep understanding of the Quebec market, powered by some Pure Sunfarms horsepower, I think will be very strategic and advantageous for us as an organization and making sure to deliver what consumers want while working collaboratively with that market. I mean they touch through their own business and their relationships, almost a third of the market in terms of market share.

So, their understanding of the consumer in Quebec is about as deep as you can get. And their pickups in terms of how they have been performing, well, we don't give specific details on the Quebec markets and shares any data like Ontario or some of the other provinces, it's been impressive. And so we think that we are – the ROSE team does a phenomenal job of building out that market and now backed by Pure Sunfarms. And specifically you asked what are the learnings, what are the keys is we are sharing.

We are sharing what we are learning about reactions of consumers at varying price points. We are sharing technology on the back end of their pre-rolls, packaging, leveraging the synergies, even sending them some of our genetics to trial and see how they perform in an indoor environment. All of those learnings about what works, what doesn't work, we are having deep conversations and really kind of cross-pollinating our strengths with each other. And I think it's we are already starting to see some – sort of gains in terms of how their teams are learning from us and how we are learning from them.

And so we continue to see – we expect that to continue to evolve and deliver really good performance for us in that market through the ROSE brand new products. Steve, I am not sure if there is anything else you want to mention that I hadn't covered?

Steve Ruffini -- Chief Financial Officer

It just did top it off. And we are expecting by the end of 2022, Quebec to be our second largest flower market. So, there is tremendous growth and upside for us in Quebec. Remember, it's predominantly a flower market.

We have got very strong brands, both between Pure Sunfarms and ROSE and our forecast, our second largest market behind Ontario.

Aaron Grey -- Alliance Global Partners -- Analyst

Very helpful color there. Appreciate that. Second one for me real quickly. A question really on SG&A and EBITDA, so definitely appreciate the need to invest in the sales force, particularly as consumers potentially get into more brick-and-mortar shopping, so when has people kind of in front of bud tenders.

Just want to know, in terms of the big increase sequentially, you saw this quarter, do you feel like you now have that infrastructure in place like not, or do you expect potential more incremental investments going forward? Maybe not the same degree, just any incremental color, will be appreciated? Thank you.

Michael DeGiglio -- Chief Executive Officer

Yes. Obviously, we are ramping up headcount in the sales force, as we have mentioned. But as I alluded to in my comments, there was – there is some clearly seasonality in our point of sale brand spend. So, there is – the holiday season is and you can see from our POS data in December and January, we have done really well.

And again, part of that's driven by our brand did what we are allowed to do with point-of-sale, a brand marketing. So, you will see that decrease and as I mentioned in Q1 and obviously before '22 falling in Q2, you will see us investing some brand POS spending.

Aaron Grey -- Alliance Global Partners -- Analyst

OK, great. Thanks for the color. I will jump back in the queue.

Michael DeGiglio -- Chief Executive Officer

Thanks.

Operator

Thank you. Your next question comes from Andrew Partheniou with Stifel. Please go ahead.

Unknown speaker -- Stifel Financial Corp. -- Analyst

Hi. Thanks for taking the questions. This is Aidan speaking on behalf of Andrew. Yes, in the quarter just curious, the floods that had recently happened in BC, have they – did they have a significant effect on your business in Q4?

Michael DeGiglio -- Chief Executive Officer

No. They didn't have no affect on our business at all. Maybe some logistics, but that's about it.

Unknown speaker -- Stifel Financial Corp. -- Analyst

OK. Thank you. I will jump back in the queue.

Michael DeGiglio -- Chief Executive Officer

Thank you. Next question.

Operator

Thank you. Your next question comes from Eric Des Lauriers with Craig-Hallum. Please go ahead.

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

Great. Thanks for taking my question and congrats on another strong quarter guys. So, you guys laid out lots of your growth plans here. You got continued share gains Quebec and international, I think the upside is pretty clear here.

One of the issues that we have kind of come across in the industry at large is just the outlook is sort of get ahead of itself. So, I am going to kind of ask you a question, sort of, from a different angle here. So, I am just kind of wondering how you think about the Canadian market, I guess, international starting in '23, but just the overall market's ability to absorb your production from Delta 2. And I guess it's kind of asking pointedly, like, is there any potential for Delta 2 to not come to sort of full production capacity by the end of '22.

Just any kind of color on how to think of the overall ramp at Delta 2, and its ability to get to full production would be very helpful. Thank you.

Michael DeGiglio -- Chief Executive Officer

OK. So as I said in my remarks, we are at about a $4.6 billion run rate in Canada, the estimates are $7 billion to $8 billion. So, that's a huge potential going forward. And I also mentioned, we look at this year as a restructuring year for our competitors in Canada, which will have a big impact.

One of the questions Raul have asked is, do we see taking market share from our competitors, but I think the bigger way – another way to look at it is it seems every time there is an acquisition assets are shuttered in those acquisitions and more and more we see closures and shutdowns. And I think as the market continues to grow, capacity for us will increase at our cost of production. And that's really where the difference is. At some point, you just can't keep selling product and cutting costs and survive without being profitable.

So, we feel – we looked at that very deeply and coming on with the investment of Delta 2 as we mentioned. So, I think there is no doubt Delta 2 will come to full capacity. But the way we have designed our facilities is to give us the ability to not plant them out, to back off, to match our capacity with demand and Delta 2 will – is a good chance, we are going to slide that maybe it's in the first quarter of 2023, just to be sure. But ultimately, we feel very strong, that by mid-'23, it will be on a full run rate.

And there is always a nuclear option too for Canada. And that means putting Delta 1 in production, and taking a different viewpoint on selling price versus our cost structure. But I won't go further into that at that point. But I did want to mention it.

Steve Ruffini -- Chief Financial Officer

Yes. And Eric, just a little bit of color, our 2022 budget is based on the Delta 3 and half of Delta 2. And we can achieve that even without bringing the other half of Delta 2 on in this year's. We could accelerate Delta 2 and increase our internal forecasts.

But we have mentioned both Mandesh and I the efficiencies that we are seeing in Delta 3 and Delta 2, and we have ample capacity to achieve our 2022 numbers with our existing footprint.

Michael DeGiglio -- Chief Executive Officer

Yes. And keep in mind, the international export out of Pure Sunfarms is in our numbers for this year. We are already shipping to Australia. And as we both mentioned, somewhere in the second part of this year, two additional countries with Israel and Germany, and how those ramp up.

We have assessed the competitive landscape there in terms of what their products are, their margins, we think we can do very well in those markets. And we mentioned some COVID-related delays, but they will come. So, I think somewhere between the last two quarters of this year and the first two quarters of next year, would all those things come into fruition will be fully ramped up in Delta 2.

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

That's very helpful color. Thank you, guys.

Michael DeGiglio -- Chief Executive Officer

You're welcome. Operator?

Operator

Thank you. There are no further questions at this time. Mr. DeGiglio, you may proceed.

Michael DeGiglio -- Chief Executive Officer

Thank you everyone. And we look forward to reporting each quarter in this 2023 year. We are excited about what lies ahead for us and we certainly appreciate and respect everyone's contribution today. Thank you, operator.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Michael DeGiglio -- Chief Executive Officer

Steve Ruffini -- Chief Financial Officer

Tammy Chen -- BMO Capital Markets -- Analyst

Mandesh Dosanjh -- President and Chief Executive Officer

Scott Fortune -- ROTH Capital Partners -- Analyst

Rahul Sarugaser -- Raymond James -- Analyst

Matthew Baker -- Cantor Fitzgerald -- Analyst

Aaron Grey -- Alliance Global Partners -- Analyst

Unknown speaker -- Stifel Financial Corp. -- Analyst

Eric Des Lauriers -- Craig-Hallum Capital Group -- Analyst

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