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Expert Interview: Michael A. DeGiglio, President & Chief Executive Officer, Village Farms

Expert Interview: Michael A. DeGiglio, President & Chief Executive Officer, Village Farms
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Michael A. DeGiglio co-founded Village Farms in 1989. Village Farms leverages decades of experience as a large-scale, Controlled Environment Agriculture-based, vertically integrated supplier for high-value, high-growth plant-based Consumer Packaged Goods opportunities, with a strong foundation as a leading fresh produce supplier to grocery and large-format retailers throughout the US and Canada, and new high-growth opportunities in the cannabis and CBD categories in North America and selected markets internationally.

How has Village Farms managed to maintain their bottom line while other Canadian firms struggled? What do you do differently?

Our business model leverages more than three decades of low-cost, controlled-environment agriculture (i.e. high tech greenhouse growing) with building brand(s) that meet consumer needs.

A key part of our learnings over our long history has been the necessity to operate at low-cost, including prudent capital investment. Our legacy produce operations (tomatoes, cucumbers, bell peppers) have been under pricing pressure from imported Mexican grown product for well over a decade. Managing our costs has become part of our DNA. We pursued a unique business model among the Canadian licensed producers –greenhouse cultivation – also informed by our deep experience. We converted existing facilities with existing operations, which enabled us to transition expert growers, trained labour forces and maintenance teams in facilities they knew very well to growing cannabis. And we have the benefit of decades of climate data at our facilities, which is essential. It typically takes five years or more to ramp up a new greenhouse operation and benefit from efficiency.

The greenhouse we converted to cannabis had been operating for 20 years. Finally, we assessed consumer needs. Quality matters, and we target specific cannabis cultivation expertise to grow premium quality at scale. That, combined with our deep understanding of cannabis as a product, as well as the cannabis consumer, enabled a differentiated approach to the market. Our “Everyday Premium” strategy has resonated very well with consumers and has been core to our market success – we have been the number one flower brand in Ontario over the last two years. And we have been EBITDA profitable literally in every quarter from our first full quarter of commercial sales in late 2018.

Regarding Village Farm’s recent investment in Leli Holland: What is your impression of the adult-use market in Europe and how much more attractive is it to your company than the medical market there? What do you hope to achieve in Europe in the mid to long term?

To start, mid- to long-term is the way we think about Europe. It’s our belief that, ultimately, a legal medical market that pre-dates a legal recreational market will to a large degree be subsumed into that legal recreational market. A legal recreational market will be far larger and have a much greater opportunity for profit. As we have proven in Canada, the recreational market is where we shine. Netherlands is poised to be the first legal recreational cannabis market in Europe with the implementation of what is known as the Dutch Supply Chain Experiment, which is intended to legalise the production and supply of high-THC cannabis in that country. It will be a highly regulated market, an environment in which we have proven we can not only succeed but thrive. We view the Dutch Supply Chain Experiment as a critical step toward the broader legalisation of recreational cannabis in Europe.

Our majority ownership of Leli is both an opportunity to participate in the first recreational market in Europe but also a potential springboard to becoming a major participant in a broader recreational market in Europe. Pure Sunfarms is currently awaiting EU-GMP certification. Once EU-GMP certification is awarded, we could begin shipping product to Europe or Israel soon after.

Do countries like Netherlands and Germany currently look like the market pre-legalisation in Canada, why/why not?

As you would expect, each country is unique, with some similarities and some differences to Canada. The Netherlands, like Canada, will be a highly regulated market – likely even more regulated than Canada – at least for the initial period of the Supply Chain Experiment. The Dutch appear to be even more concerned about the potential for additional criminal activity, as well as zoning matters related to such things like the potential for odour, and concerns around potential contaminants.

Perhaps the most notable uniqueness to the Dutch market is the fact that the recreational distribution and consumption of cannabis in what are known as “coffee shops” has been tolerated by the government since the 1970s – it is an accepted part of Dutch culture that exists in the open through an established retail channel – the coffee shops – even though the supply is from illicit legacy suppliers. Once the production side is legalised, suppliers under the Dutch Experiment will sell directly to those retailers. The legacy customer that existed illegally in the shadows in Canada has existed out in the open in the Netherlands. Suppliers will have much greater insight into their preferences out of the gate. With respect to production, under the Supply Experiment, there will be a very limited number of producers – no more than ten – which obviously creates opportunity for those with licenses but also concentrates the risk amongst that small group of suppliers. And with the licensees having been selected by lottery, it remains to be seen how many of those awarded licenses have the capability and the funding to successfully follow through on their plans. Germany perhaps looks a little more like Canada pre-recreational legalisation. Currently, there exists a fairly robust medical market in Germany, although most of that supply is imported (from Canada and the Netherlands), whereas Canada supplied its medical market from within its own borders. Also similar to how things unfolded in Canada, the incoming government has publicly committed to federal legalisation of recreational cannabis use, although it is expected that addressing all the details up-front will take time. These details include the distribution system and importation versus domestic cultivation.

How important is it to connect with the legacy market in terms of production, staff and consumers?

It is very important. One of the reasons we like the recreational cannabis market is that you start with a large existing customer base. In fact, when we met with the Canadian government as it was considering legalisation of recreational cannabis in 2017, one of their top objectives was conversion of the legacy market to the legal market. From day one, we have considered the legacy market, as the top competitor. That was the impetus behind Pure Sunfarms “Everyday Premium” strategy – providing premium quality products that has been so successful in Canada. We recognise and embrace the deep lineage and history legacy growers have in cultivation. That’s why we supplemented our deep experience in cultivation with the experience of legacy growers in our greenhouse. It’s foundational to everything we do in cultivation. We’ve taken what we’ve learned from legacy growing and scaled it for our operations. With respect to consumers, especially in our early days we considered what was happening in the legacy market, how people have consumed in the past, and what they were looking for in their cannabis products – and we have used those learnings as a frame of reference for our product strategy and offerings. And of course, we have been able to do this, and be profitable, because of the business model and capabilities that I described earlier.

Are there other international markets that Village Farms is looking at right now such as Israel or Australia? 

Let’s come back to the US, but I want to note here that we don’t consider it to be an international market. Village Farms was founded in the U.S. by myself, an American, the vast majority of our executive team is based in the U.S., and more than half of our greenhouse footprint is in the U.S. So, we really look at the U.S. and Canada as jointly being our domestic market.

Beyond the U.S. and Canada, and Europe and Israel, we are pursuing the broader Asia Pacific CBD and cannabis markets through our investment in Altum International. Altum is a platform for large-scale importation, distribution and marketing of cannabinoids, as well as medicinal cannabis opportunities in certain geographies. Altum already has commercial operations and has launched CBD products in Hong Kong. And they have launched their first high-THC flower products into the Australian medical market, with Pure Sunfarms as a supplier. Altum provides us with an early mover advantage in a region with a population of more than 3 billion, and a long, long runway of opportunity, which includes countries like Greater China, Japan, South Korea and New Zealand. That said, we are at the beginning of what is a global industry for many years of growth ahead. We will continue to pursue selected, strategic international opportunities for the long-term where we can combine our cannabis experience with local expertise through investment that meets our thresholds for return on investment.

When do you see federal legalisation occurring in the US? And when this happens, would you think about the possibility of exporting cannabis from the US or would production there be solely for the domestic market for the foreseeable future?

The timing, as well as the composition of federal legalisation is difficult to predict, as is anything that is ultimately rooted in politics. Certainly, we are encouraged by what we see and are building our business, and are ready to participate, when regulations will allow us to do so. With one of the largest greenhouse footprints in the US – certainly the largest of any existing cannabis player – in one of the best growing environments for cannabis, we are as well positioned as anyone for a federally legal cannabis market, especially with the benefit of our experience and success in Canada. And our recent acquisition of Balanced Health Botanicals out of Colorado, adds another potential path to a legal cannabis market.

With respect to potential exports from the US, at this point we are focused on the opportunity within US borders. The US is likely to be the largest legal recreational market in the world for some time and we expect to be a significant player. The most recent bill proposed by Rep. Mace would allow for the importation of cannabis from Canada, where we are a market leader in cannabis, and from where we have been successfully shipping our Canada-grown fresh produce to the US grocery and big box market for over 20 years. With the ability to more than double our cannabis capacity in Canada through our 2.6 million square foot Delta 1 facility, such an outcome in US legislation would have tremendous upside for our cannabis operations.

While the likelihood of that bill passing is probably somewhat low – it is a possible outcome at some point in time. Even in a market with only domestic production, we believe the future US cannabis industry looks very different from the somewhat artificial construct under individual state legalisation. Most notably, the current requirement for vertical integration, including production, within state borders, is very inefficient. In addition, we expect larger retailers will want to participate. Thus, the most successful companies in a federally legalised industry will be those like Village Farms that can combine large, centralised, low-cost production with the ability to build great brands and the experience to meet the high standards of large retail customers.

To find out more about Village Farms, visit the company’s website here.

Village Farms are sponsors of The Global Cannabis Report: Second Edition, which provides an overview of the development of cannabis markets at the international level, and considers how they might develop in the near future. It also covers some of the most interesting and pertinent global trends in the industry.

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