SNDL Inc. (SNDL) AGP Annual Virtual Cannabis Conference

SNDL Inc. (NASDAQ:SNDL) AGP Annual Virtual Cannabis Conference October 4, 2023 9:45 AM ET

Company Participants

David Klein – Chief Executive Officer, Canopy Growth Corp

Zach George – Chief Executive Officer, Sundial, Inc.

Steve Ruffini – Chief Financial Officer, Village Farms

Conference Call Participants

Aron Govil – AGP

Aron Govil

[Starts Abruptly] Cannabis Conference. Thanks for joining us. A lot of exciting news happening in the cannabis sector over the past couple of weeks. Welcome to see and I’m great — thankful for us to have our panel here today. First one up, we have Canadian LPs opportunities within Canada, Globally and the U.S. So I’m very thankful to have our panelists today, we have David Klein, CEO of Canopy Growth; Zach George, CEO of SNDL, and Steve Ruffini, CFO of Village Farms. Thank you, the three of us for joining us today.

Before we get started, I’ll kick it off to you if you want to add any particular remarks on yourselves in the company. So David, I’ll kick it off to you first.

David Klein

Yes, Aaron, first of all, thanks for including me today. It is a really exciting time to be in cannabis and I look forward to the discussion we have today. So just quick background on Canopy. We’ve — we were one of the early LPs in Canada. However, we’ve recently transformed ourselves into brand-led asset light cannabis business in Canada. We also own the STORZ & BICKEL flower vaporizer brand, which includes products like the Volcano and the Mighty. We have an international business, which is more opportunistic in nature, taking advantage of opportunities in Poland, Germany, and Australia.

And then we have a U.S. structure where our U.S. business sits under a holding structure and our U.S. companies include Wana Edibles, Jetty Vapes, and Acreage, which is a multi-state operator.

Aron Govil

All right, great. Thanks, David. And Zach?

Zach George

Thanks, Aaron. And thanks to you and A.G.P. for hosting today. Sundial went public in August of 2019 and we have also dramatically transformed the business model over the last several years. After a deep restructuring in 2020, we’ve built out a model where we are now the largest private market distributor of both liquor and cannabis in Canada. We have all relevant product manufacturing capabilities in cannabis in Canada and we’ve also been able to build out a scale credit portfolio with structured and secured credit exposed to a number of large U.S. MSOs, a few of which are being restructured currently and we will end up with ownership of.

Aron Govil

Okay, great. Thanks Zach and Steve.

Steve Ruffini

Thanks Aaron, Thanks for inviting Village Farms. We appreciate your support and A.G.P. support over the last few years. Village Farms for those who don’t know us has been around 30-years. We’ve been public since 2006, been a large cultivator in the fresh produce space. We pivoted to cannabis when Canada legalized and have been in the cannabis space in Canada for the last five years and cannabis is roughly 45% of our revenues. And that does include our U.S. CBD business, which we acquired in 2021.

Question-and-Answer Session

Q – Aron Govil

All right, great. Thank you, Steve, and everyone. Looking forward to the discussion. So I thought a great place for us to start off is, you know, the fact we’re almost exactly five years from when cannabis was first legalized in Canada, mid-October of 2018. So a lot of ups and downs, but overall the industry is still seeing a lot of growth with low double-digit 13% growth year-to-date, despite the pricing pressure. So I think there’s some great underlying positive trends there that I want to get into today. But first five-years in now, adult use cannabis in Canada, what are some things that have surprised you on the upside and then maybe on the downside in terms of what you learned in terms of the evolution of this adult use category? David, I’d love to kick it off with you.

David Klein

Yes, I think what we’re seeing is a market that evolves pretty quickly. I think that staying nimble is super important. And so, you know, the quick growth, the pre-roll category, the strength of the vape category, I think are things that we look at as surprises to the upside that maybe we wouldn’t have seen coming a few years ago. I’d also say, you know, the strength in certain markets like Quebec, which has very few retailers and they’re all provincial controlled, but there’s a pretty strong adult use market there.

You know, from my perspective on the downside, the stickiness of the illicit market continues to surprise me and maybe the unwillingness of the regulatory bodies to try to do anything about that. But, you know, I think over time we’ll get to the place we need to be versus the illicit market. It’s just taking a lot longer than I would have expected if you were to ask me to predict that five years ago.

Aron Govil

Okay, thanks. And Steve, at Village Farms, you guys always had a focus on cultivation, low-cost producer, pricing pressure, you know, has been a big theme over those five years. So what’s kind of surprised you or kind of been in line and on the upside of what you thought would happen with ability [civilization] (ph) in Canada?

Steve Ruffini

Well, the upside, I think it’s proven out our business model. When we jumped into the space, converting existing assets. We always identify the illicit market as the existing market and booked up their pricing and determined that, you know, can we be competitive in the landscape with all the regulatory issues thrown at us in Canada, as well as the high excise tax, which a lot of investors may not be aware of. So we’ve proven that we can be very competitive top three LP in a very competitive, open — very open market, lots of supply, and had generated positive cash flow and EBITDA over the last 19 quarters. So, we — that’s — and continue growth as you mentioned, we continue to slowly, but surely as David mentioned, the illicit market has hung on for a long time. But I think slowly, but surely we’re converting that. And it’s going to be the same in other countries. The illicit market exists in all countries around the world. And slowly, but surely the legal market will eat away and take more market share.

Aron Govil

All right, thank you, Steve. And Zach, for Sundial, you talked about some of the pivots that you made at the company over these five years. So what are maybe some things that happened within the industry, you know, on the positive/negative side that caused you to make those shifts and what you’ve seen over the past five years with adult use here in Canada?

Zach George

Sure. So, Aaron, I would say that like, there’s not too much that I would label as surprise. It’s really important to recall that the industry in Canada was basically born in a bubble. And so for the last several years, we’ve been calling for this reckoning in the space and rationalization. In the earliest days, Canada’s landscape really was a virtual zero profit environment and that caused us to pivot away from pure indoor — a reliance on pure indoor cultivation assets to reduce our costs and also get closer to the consumer. And so in this — in the current environment, we believe that the best way to own the consumer relationship is actually through retail exposure, given the regulatory framework and the means by which consumers can access THC.

But certainly agree with my fellow panelists, there have been some really bright spots, including certain provinces, such as Quebec, the growth of certain segments we’re seeing in our retail networks, the combination of conventional and fused pre-rolls, now at about one-third of the market, creating a lot of opportunity for efficiency and scale. And I would say another surprise is the length or the duration of survival of certain companies that have been on fumes for a very long time, but continue to find ways to gain efficiencies and fight every day to continue to deliver great products to consumers.

Aron Govil

Okay, great. Thank you for that. So one of the things a lot of operators and LPs were talking about the onset of adult use was, you know, building the brand, building the brand. They saw this new CPG category that had been existing in the illicit market, coming into the legal market. So that’s been something a lot of operators were looking to do. Fast forward five years, a lot of operators are still looking to build that bigger brand. Flower still makes up the biggest category today where there’s been a lot of still chase for THC and price. So curious to know, how do you see brand equity, the chase for what many consumers are doing THC and price and how that might evolve, particularly within the flour category? Steve, I’ll kick it off to you on this one.

Steve Ruffini

Yes, I mean, it’s an agriculture-based CPG goods from our perspective, that’s where we shine, it takes years. We’re all familiar with Chiquita bananas and Dole pineapples. It’s going to take years to build brand equity in this space, but we are encouraged. Our Pink Kush strain has been the number one flower strain in Canada now for three years straight. So encouraged, we’ve actually got a price increase across all the boards earlier this year and have seen consumers continue to acquire that strain.

But in this — in the Canadian market, building a brand when you can’t market to the consumer, the packaging is very generic. It’s tough, but we are encouraged as long as you can deliver a consistent quality product at a good price and consumers get the same effect upon consumption. We think you can build a brand, but it’s going to be tough in Canada to do it the traditional way.

Aron Govil

All right. No, it makes sense. And Zach, speaking to that, not having the same marketing, obviously at the retail level, that’s really where you can probably do a lot with the bud tender and otherwise. So, you know, having more, you know, exposure to the retail distribution, you know, how are you seeing, kind of, the ability to build brand in equity, particularly within the flower category?

Zach George

Look, it’s still early days. Certainly agree with Steve that brands at the product level will start to catch the consumers. But we’re, sort of, in the earliest years here, and without the ability to market, it makes things very, very difficult. I can make the argument today that there’s actually more brand recognition amongst scale retail banners than there are at a product level. And I do think that will change over time, but it would be true today. We are seeing a strong degree of commoditization across many of the product segments in cannabis. So while there are a few brands that are known for their consistency or nuanced innovation or convenience. Those today are few and far between. The data that we have from consumers at our point of sale network would suggest that the likelihood of switching is very, very strong right now. So that loyalty is just not there today in a way that you would expect in more mature CPG categories, but we’re getting there.

So — but for example, I would say that the flower specs, the quality, and we’re still in a bit of a potency-chasing market to some extent. And what that means is what we’ve seen in terms of velocities in the flower category, which by the way also continues to get challenged by other segments that are starting to take share, is that if there’s an ounce selling at roughly CAD100 to CAD110, it may actually sell much better than a CAD70 ounce in terms of unit velocity, if the potency and specs on that flower are right. So there is a discerning consumer out there, but we are still in a market with significant excess supply where at the wholesale level, marginal product is being sold below cost of production. And so that’s impacting pricing and a number of producers are still trying to find their footing in terms of hitting those specs and having the right suite of offerings, whether it be strain or brands to bring to market.

Aron Govil

No, I appreciate that Zach and talking about kind of hitting those specs, you know, Dave, you talked about, you guys are doing more of an asset light model now at Canopy. So how have you been able to try and build brand equities, particularly in the flower category, relying more on the asset light model? And where do you feel like brand equity is today within flower category?

David Klein

No, look, we still grow most of the flower that we need internally at our facility in Concord in Ontario. And the view is almost like experience that I had in the alcohol industry and the wine business in particular, where you have certain brands that you want to fulfill internally, and then other propositions that are maybe more price sensitive that you can use third-parties for. And so, I think it all starts with, as both Steven and Zach have said, it really starts with the quality, the consistency of the flower you put in the package. You can’t disappoint consumers one time and expect them to come back with the choices they have available to you.

So, we just continue to focus on getting consistency. Even in a brand like Tweed, which was one of the early brands in the market, it’s one of the more recognized brands in the Canadian market. We’ve dramatically repositioned that brand in terms of quality and consistency, and we’re seeing it in consumer takeaway results. So I think it starts with what you put in the package.

Aron Govil

Right. And one thing we’ve seen within the cannabis category is kind of shifts both in terms of what’s hot, in terms of product format, sometimes brand as well. It’s been hard to kind of have that staying power, which you’ve kind of all kind of alluded to in some way, you know, in terms of equity. Most recently, we’ve seen, you know, a big rise within pre-rolls and infused pre-rolls more specifically, some of you guys have already referenced that earlier in this conversation. So in terms of the pre-rolls and infused pre-rolls category, do you feel like that’s more of just a trend? Do you feel like that’s here to stay? So we’d love to get your take on that because that has been one of the biggest, you know, hot formats that we’ve seen within the sector today. So Zach, I’d love to kick it off to you to see what your thoughts on infused pre-rolls and where that stands with the growth it’s in?

Zach George

Absolutely. So I would say, look, there’s still a lot of change going on in the industry generally. We’re going to see more shifting in terms of these various product categories in their share of market. But there’s no question that the category as one of the largest and most important is definitely here to stay in our opinion. You’re seeing really strong innovation across the board, some of which is working, some of which is falling at the wayside. But you have an interesting evolution in the conventional pre-roll market. You have a whole bunch of options in the sub-half gram category and you’ve seen straight edge pre-rolls garner a lot of attention from consumers. We point to — we have a product like that, the [Indiscernible] offering for example, which was — which is an early entrant, has continued to maintain really good share in the marketplace and is requested regularly by consumers.

The interesting thing about the infused category is the optionality that comes with it in terms of being able to really build a somewhat highly engineered product that through careful formulation, you can really put specs almost on a dial to target an exact level of potency and experience for the consumer. So there’s a lot of really interesting formulations and balanced offerings that have come to market in all types of weights and potency levels. So very interesting there.

But I would say overall, you know, why is the — in terms of why is this category expanding, there’s one key theme that we think is a really important primary driver of consumer behavior, and that’s convenience. And so what is offered, particularly in these multi-pack pre-roll and infused pre-roll offerings, is convenience at a great price point that delivers a consistent experience to consumers and that’s really what’s driving the category today.

Aron Govil

Okay, I appreciate that. And David, I want to dive a little bit deeper now to some of the other derivative formats via edibles or beverages. You guys over at Canopy growth obviously made a big pathway into the beverages. You also have your edibles as well with Wana, which has been — is a leader within Canada. So how do you think about building brands within some of the other categories? Zach just kind of referenced convenience. Those other different formats can also offer that as well. So how do you think about brand equity with some of the other derivative formats within the Canadian adult use market?

David Klein

Yes, look, in some ways, those other formats are almost simpler to address from a consumer standpoint than flower, because you can differentiate on innovation. I just jump on Zach’s point around convenience. There are people like legacy consumers that enjoy the ritual of cannabis consumption. And then there are a lot of people that just want something on the way to a party. And so we need to make that available as a business that can be in the form of a pre-roll or an edible or a drink.

An interesting thing you can do with all three of those categories is you can add functionality to them or functionality as it exists in the cannabis space in terms of you can create products that create specific effects through the formulation, which you can kind of get through flower, but flowers more of a blunt instrument versus you can get more specific in some of the other categories. So it’s really exciting to see the differentiation that a lot of people are trying in the marketplace and we think that’ll continue. But what I like about it is the ability to create, at least in the mind of the consumer, some kind of separation. And we’ve seen that with Wana in particular in some of the states in the U.S. where the consumers view Wana as their go-to edible product, that’s the holy grail, I think, for all of us as we’re looking to build brands across cannabis.

Aron Govil

Okay, great. I appreciate that, David. And Steve, for Village Farms, how do you guys think about potentially looking to build brands outside of flower, either within pre-rolls and infused pre-rolls? I’ve seen a lot of growth in the category as well, some of the derivative formats?

Steve Ruffini

Yes, I mean, I agree with what’s been said. Pre-rolls are here to stay. Consumers are moving more and more to convenience. We look at pre-rolls as essentially being a subcategory of flower. Obviously, that’s the primary input and I agree with the comment that it can be dialed in. We were probably to David’s point, you know, infused pre-rolls probably took us a bit by surprise as an organization and we probably weren’t first of the party, but we weren’t first of the party in flower either. We weren’t the first LP and we’re not going to be the first in pre-roll, but we have launched infused pre-rolls across all our brand portfolio of late and they’re performing very well and we’re increasing our market share there. So we definitely think pre-rolls are here to say.

In Canadian market with respect to beverages and edibles, it’s tough due to the Health Canada standards. I agree with David in gummies, I think in edibles, longer term we’ll be there, but in Canada we’ll need to see some regulatory change. With respect to — but we’ve been very successful with our full spectrum Synergy Plus gummies with our U.S. Hemp business. It’s been the best product that we’ve launched in BHB’s history. So, longer-term, gummies, edibles, I think will be a convenience farm factor that consumers want and that can be branded, but that may be, you know, the success like one is a great example, you know, the success of that really is primarily driven by the U.S. consumer.

Aron Govil

Okay. Alright, great, thank you. And then, kind of, continuing on convenience now let’s talk about you know how the consumer can get the product, and particularly through retail and how that helps with your brand building initiative. So, given the current retail and distribution landscape, how do you feel that either helps or hinders your ability to build out a CPG brand, right? It’s relatively fragmented, there’s a few bigger players out there that Zach referenced before, but even there, there’s some limitations given retail caps and promises such as D.C. and Ontario. So given the current retail and distribution landscape, how do you feel that helps or hinders your ability to try and build out that brand equity. I’ll go ahead and start that off with you, Steve.

Steve Ruffini

We’re certainly seeing, I think, improved interaction with retailers. There was a rush to get licensed, and you get the good with the bad and I think through attrition we’re getting it down to a smaller footprint and being able to build partnerships with both some, you know, some small regional players, as well as some of the national players. I think, you know, it’s been mentioned by Zach, you know, with the POS data, I think people are getting more sophisticated, both on the production side and the retailer side. The challenge for both the retailer and the product manufacturers, the provincial boards, they’re getting better, but you know it’s frustrating to see when they’re out of stock and tell you they don’t have any dollars to purchase. And the retailers are on us for more Pink Kush. And we have Pink Kush, but the wholesaler in this case, the prevention boards aren’t purchasing it to fill retailer demand and — at the provincial level, so…

Aron Govil

Okay. Well, thanks for that. And David, given your background, how do you feel is kind of the best analogy for where cannabis is today? So it’s only be sold in the cannabis stores. Do you kind of liken that to more of a liquor only state like Pennsylvania, right? Where it’s only through state controlled stores, you can’t get out your local convenience store. You know, how do you liken the current retail and distribution environment in Canada? And how do you feel is the best way to play it, to look to build brand equity?

David Klein

But there’s been some really good evolution over the past few years. But it really, for me, it comes down to the retail experience. Because there are, you know, you walk around a city like Toronto, there are cannabis shops everywhere. But most consumers, especially consumers that aren’t legacy consumers, won’t go into a lot of the shops that are available to them. They want a more welcoming environment that feels less like you’re doing something illicit and more like you’re just shopping. And I think retailers are really coming around to that.

I love what Zach’s doing with alcohol and over time, would love to be able to see cannabis available in all kinds of retail environments, but that’s, I don’t know and that’s probably 20-years from now. And so how do we make the environment more appealing to consumers? Because we know if you do like regression work on literally any CPG category, the biggest driver of growth is going to be distribution gains. And so, you know, having distribution that’s accessible to consumers, both legacy consumers and new consumers, is going to be the key to the unlock of the market size and the value that I think all of the players in cannabis across North America are looking for.

Aron Govil

I appreciate that. And Zach, distribution retail, something Sundial is directly playing in itself. You talked about you believe some of the larger retailers have some of the more brand equity within the space. So talk about how you believe the current system set up well, you know, for a retail distribution to really excel within the cannabis category?

Zach George

Look, it’s still early days, Aron. I wouldn’t say well there’s still challenges everywhere in this industry. When you look at the licensed producer side, if a given producer has a high single-digit market share, that’s actually outstanding in this marketplace. And so you look at Canada and whether — Canada’s an interesting marketplace. Again, second largest country on the planet, population’s akin to the state of California, so relatively small population. But this is an interesting microcosm, I would say. When — as a consumer, whether you’re shopping for financial services, airline tickets, or buying gasoline at retail, most major industries in Canada have taken the form of oligopolies. When we’ve seen that in adjacent regulated products as well. So I would expect that trend to really bind over time.

And to the points made earlier, I completely agree, there’s a whole bunch of challenges, everything from age-gating as it impacts e-commerce to window-covering requirements, which disable the ability to see great activations and the beautiful products that LPs are putting into the marketplace or the lack of marketing ability. All are our issues that need to get solved over time. And when it comes to the beverage and edible categories to address this, there’s material growth that’s going to come from accessing a consumer that is not necessarily enamored of inhalable formats, right? So it is still early days. There are a lot of shifts out there. And what’s interesting is you see some of these newer markets opening up, and New York would be an example. Many of those dispensaries that have opened up, they have a completely different mix than what we’re seeing in other mature markets where many of them have gone for example, in the edibles category straight to like a 30% share of sales.

So still a lot of change going on as we evaluate consumer preferences, but also a great opportunity for those such as Steve and David that are sticking it out and focusing on the fundamentals and delivering a great experience to consumers.

Aron Govil

Some great points there. And talking about a great experience for the consumer, a lot of people within the industry have been talking about changes that were needed by the government or regulatory agencies in order to create a better environment not only for the consumer, but also for business operators. So I’m calling for lower excise taxes. So what do you believe is needed in order to create an environment where you can compete with the elicit market? Give products that consumers want? And also make it economically viable for LPs. So Zach, I’ll go and kick back to you to start off with that one.

Zach George

Yes, we may have a bit of a unique perspective on this, but we have a specific approach and strategy as to how we think about it, want to execute on assisting in the process of regulatory reform and trying to show leadership along with our industry peers in that regard. I think it’s really important to keep in context some of the behavior and outcomes that we saw in the earliest days, whether that’d be poor corporate governance or challenged capital allocation and value destruction along the way. So we’ve built up, I think, a lot of credibility as an industry from that early start, where there were a series of missteps, I would say. And many U.S. investors, I think, look at Canada the wrong way. They’re effectively looking in their rear view and not what’s happening today and what the future will look like. The next two years in Canada are going to look very different than the last two years.

But you do see the loudest and most vocal side of this industry really focusing on excise tax relief. And we believe that while some of the assumptions that went into the excise tax structure and other tax and regulatory costs in this industry were flawed. And we actually don’t think that standing with our handout and asking the government to hand back our capital is really going to be that successful in the near-term. We’re really looking for areas where we can gain material ground and create wins for industry that will actually improve economics without taking dollars out of government coppers. I think that’s the area that will be most fruitful in the early days.

And there are many opportunities in this regard that I think we should be focused on, including in this day and age with the level of technology we see across CPG and broader industries is a national excise stamp. To produce a product, stamp it for a province, it creates real limitations on flexibility. And you look at the gatekeeping and state of, sort of, the quality that many of these boards present in terms of their third-party logistics capabilities. There are a whole bunch of improvements there that can drive greater cost efficiencies for producers without any change in tax rates at all.

In addition, when it comes to government objectives and Health Canada objectives around harm reduction, providing opportunities to expand non-inhalable categories is also really critical. So for example, when you look at pricing for cannabis products in Canada relative to most U.S. markets, you’ll find that almost every category is cheaper. The one category that’s less competitive than the U.S., I would say, is actually the edibles category, and that’s because the standard format you’ll see in the U.S. is usually, say, a bag of 20 gummies with 100 milligrams and our 10 milligram restrictions in Canada create a real problem where we’re putting literally 1 gummies or 2 gummies in a bag in most cases. Highly inefficient, not good for the environment.

And additionally, the cannabis beverage segment is minuscule today, no more than 2% to 3% of the total industry. And we think there’s a real growth opportunity there. And then I think finally the marketing side which we’ve all referenced will really enable brands to responsibly market the great products and experiences that they’re offering to consumers.

Aron Govil

I appreciate that, Zach. A lot of insightful insights there. Steve, any thoughts on you in terms of excise tax regulatory environments help improve for LPs, as well as consumers?

Steve Ruffini

I agree with pretty much everything Zach said. I think an operational win would be that the craziness of these excise tax stamps, it does create a lot of operational inefficiencies and challenges with orders and ordering the excise tax stamps. And we all get them from a third-party and tobacco guys it’s very challenging, so standardizing that would be very helpful. That being said, you know, we’re surviving in the current excise flat tax of those that aren’t aware it’s a dollar program. I suspect we’re one of the largest payers, we paid $37 million in the first-half of this year. It’s by far and away our largest expense and just from a general business perspective, to me, it’s just kind of crazy that we’re paying the government more than we pay all our employees. So that’s just, you know, I — Canada is a high country and we can continue to survive in this and be profitable, but I don’t think a lot of people at a dollar program tax can be in this long-term unless there’s going to be a change and maybe there’ll just be four or five of us left at the end of the day, because of the excise tax unless the government does convert it to a percentage of sales, which is where alcohol is today.

Aron Govil

Thanks a lot Steve. And David, anything to add for you in terms of excise tax or regulatory structure for Canada?

David Klein

No, I think that most of it’s already been said and we agree with all of it. The thing that I’m seeing though in conversations that I’ve had with people in Ottawa is there are factions within the government that are coming around to cannabis as economic development versus just cannabis as harm reduction. And, you know, unfortunately, we got everyone’s attention when we shut down a preponderance of our Smith Falls operation. That allows us to be profitable in Canada, and so we can be here for the long run. But it was a difficult decision, and I think it served as a bit of a wakeup call. And so that flip to economic development versus harm reduction, I think is important for us. And it’s not saying that we can’t do both of those things, but the emphasis has been too much on harm reduction.

And by the way, it’s harm reduction focused on half of the market, because the harm reduction activities actually aren’t impacting the illicit market. So I think there’ll be really good progress made there over the next few years. And the only thing I would add about excise tax, because I agree with the national stamp in particular. We’ve taken some serious write downs over the past couple of years with excess and obsolete inventory, often caused by forecasting demand in one province only to find it’s in, you know, you actually get the demand in another province.

But the thing that I would add to that is we’d like to see provincial collection as well. It’s somewhat ridiculous that the producers are selling our products to the government and then we’re remitting to the government excise tax. We all sell to the government, let the government add the excise tax themselves. I know there are many LPs out there that actually aren’t remitting their excise tax to the government. And so I think this kind of industry shakeout happens a lot faster if we simplify and tweak some of the rules around some of the regulations that we have.

Aron Govil

No, no, all great points. I want to go outside of Canada for a second now. First, let’s talk international, so outside Canada, and we’ll leave you out as well for now. Maybe just give us a brief introduction in terms of your current international operations, what you might aspire and then where you see the opportunities in the current international market. So Dave, we can go back to you on that?

David Klein

Sure. So we were maybe the fourth largest operator in Germany. We see, you know, there’s been a lot of talk about Germany and what happens in adult use in that market. We’re mostly focused on medical right now and we’ll see what happens elsewhere. Most of the products that we sell in Germany is produced in Canada under our EU GMP certified facilities. The same thing would go for Australia. We do a little bit of sales into Poland as well. So we view the international markets as just a bit of optionality where we’ll be opportunistic. Because I think as excited as you can get when someone talks about a market, like a few months ago, everyone was getting excited about Thailand and then the government came in and completely pulled the rug out from under any progress that was being made there.

And so I think we’re going to see this across the world where countries begin to open up and you start to see a medical environment and you start to get some public support and then maybe there’s a pullback. And it takes a lot longer than anyone expects. And so early on, Canopy invested heavily in overseas markets. We’ve mostly shut all of that down and we’ll be opportunistic more than aggressive in those markets at this point.

Aron Govil

All right. Thanks, David. And Zach, how do you at Sundial, look at international markets and the opportunities there?

Zach George

So we do have a multi-year history of some modest export of flower. So we do have a lens on international. We have not committed significant capital beyond North America. I really believe in, sort of, earning the right to take that risk. We have an enormous opportunity in both Canada and the U.S. in front of us today. So in terms of international exposure for us as a Canadian domiciled company that really looks like the U.S. today and the optionality both in terms of potential access and ownership of operations in the future and cash interest that’ll come to us from the over CAD0.5 billion credit portfolio that we built.

Aron Govil

All right, thanks for that, Zach. And Steve, you guys are ramping up your international business right now. So talk about Village Farms and its aspirations internationally?

Steve Ruffini

Yes, obviously to-date our cannabis business has been very focused on Canada. We continue to be very focused there on this. We look at all countries being international. Ultimately, we’re a U.S.-based company historically, but so Canada is our first international market. As much as we just bash the regulatory environment and changes that we’d like to see about Canada, you have to commend the Canadian politicians for going against the UN Convention and putting the entire industry. And Canada now I think in a strong position to supply the international medicinal market.

Yes, everyone’s excited about Germany, but Germany is not too excited about, you know, cultivation and as David has mentioned and other LPs are successfully exporting to Germany. Our international focus to-date has really been Australia, 10 times improvement in the first six months of this year versus last year to Australia. We are looking to expand our export sales, but one of the challenges besides, as David mentioned, the changes and the rules can also be a lot of the distributors in these countries are startups themselves. And getting them started and initiated with their distribution and supply chain takes some heavy lifting also on our part.

And the other international market, which hopefully will get more attention in 2024 will be the Dutch Coffee Shop experiment. The government has greenlit it will start in December. There’s 10 limited license so it’s somewhat similar to the U.S. on the limited license states, so we’re excited about that. We’re one of the 10 license holders and you know we think that may be the model — early model for the EU for adult use. We’ll see how that develops in ‘24 and ‘25.

Aron Govil

Okay, great, thanks for that, Steve. All right, so let’s kind of end things talking about the U.S., a lot of movement there over the past couple of weeks. So maybe take like a holistic question here. Let’s talk about some of the optionality you guys have spoken to and then you know how do potential changes that could come via rescheduling as we await the DA proposed ruling or potentially, you know, the passing of SAFER and a Garland memo. How could those impact you being able to capture those optionality on then capitalize on it? So Zach, I’m going to kick this off to you, I know you’ve talked about, you know, your U.S. optionality a couple of times. So talk about what you’re doing at Sundial, that optionality and maybe how these changes that could come could impact that ability to capitalize on it?

Zach George

I would say one of the most frustrating parts of working in this industry is the degree to which all of these players and investors hang on any whiff of material regulatory reform. When you look at equity prices over the last three years every single time there’s a bit in this market or any kind of rally it’s been on the hopes right of regulatory reform. Hope is usually not a great strategy, only to result in a rug pull, disappointment, and retracement. So I would say that we’ve carved a path. We do have exposure. We get asked when we’re going to be in the States. We are in the States. We have a material footprint today, and that’s going to evolve over time. We cannot engage in plant touching activities, but there are other means of getting that exposure and starting to build businesses in the U.S. and beyond.

So I would say that the rescheduling opportunity is a huge one to the extent that relief comes when 280 is lifted. The inability to take ordinary business deductions against P&L is sort of an outrageous position to be in. So you’re going to see marginally profitable businesses generate better free cash flow, but also I think it’s important to not get too starry-eyed about this. The elimination of 280-E will impact different markets differently. And we’ve seen already that on both sides of the border, actually, those that defer tax payments. In many cases, they’re using those deferrals to invest in greater discounts in product. So in a market that has some degree of a mode around it, take the limited license environment of Florida, you’ll probably see a more sustained benefit to the elimination of 280-E.

And in a more competitive market, that may be fleeting and that benefit may be transferred in whole or part to the consumer. So we’re watching carefully, but again, we’re not expecting anyone to come and save us. We need to build a business that can survive and thrive in these challenging conditions with taxation, the likes of which really no other industry has to face. We’re prepared to fight that battle.

Aron Govil

Okay, great. Thanks for that, Zach. And David, over at Canopy Growth, you guys have obviously done a number of things within the U.S. via Acreage, Wana, DETI, TerrAscend and the Creation of Camp USA. So talk about how Canopy growth is looking at the U.S. market and how these potential changes do or do not impact your ability to capitalize on the opportunity with the U.S. via SAFER rescheduling or any type of Garland memo?

David Klein

Yes, so I would say the first thing that we like to make clear is that our U.S. businesses are already working together. TerrAscend has brought Wana into Maryland and it’s been super successful for both companies. We’re working together with Wana and Jetty to expand Jetty into Colorado. And so the businesses can work together today. The real issue that we have and I think most of the other players in Canada have, is that to comply with the Controlled Substances Act requires a lot of explanation to your investors to explain exactly how you own these assets and exactly how you benefit from these assets and how they’re performing.

And so one of the benefits of some combination of regulatory reform for us is really the ability to eliminate confusion for our investor community and explain to people that our U.S. Cannabis business is actually as big as our reported cannabis business. It’s a profitable business. It’s growing. Right now we don’t have a good platform or a good way of talking about that, because of the way we’ve had to structure these transactions, so that we’re Controlled Substances Act compliant.

And then Zach mentioned the 280E benefits has a massive benefit in terms of cashflow on say a business like Acreage, much less on a business like Wana, right? But it’s real and I take Zach’s point, we want to make sure that the industry doesn’t spend back that benefit, but you know, certainly it’s a real benefit that, you know, hopefully we get some good news on over the next few months.

Aron Govil

All right, great. Thanks a lot, David. And Steve, we’re going to have — close things out with you as we’re coming to an end. So the U.S. Village Farms, you guys have some assets over there in Texas. You’ve talked about utilizing similar strategy you did over in Canada. So can you talk about Village Farms exposure to the U.S., how you look to capitalize it, and how something like SAFER or rescheduling could change that?

Steve Ruffini

You know, as you mentioned, we have the team and infrastructure with our U.S. CBD business based in Colorado, a strong cannabinoid business based on hemp today, strong assets in Texas. We like to joke around internally. Texas may be the 52nd state, compared to cannabis. That being said, you know, operationally rescheduling is of super interest to us. The Texas constitution has to follow the U.S. schedule, that’s not to say, as David alluded to, politicians getting involved in cannabis. So we’re anxious to see what happens both with rescheduling at the federal level, which will force that they hand a tax, but also the Garland memo. You know, are they going to go far enough to allow interstate commerce?

So that could be a huge game-changer for us even if it’s just medicinal cannabis can cross state lines. The RCVD business, which really cannabinoid business is really an e-platform business and has done very well in a very tough CBD environment. SAFER would be great, I think that brings new institutions to the place. And as NASDAQ, we’re on NASDAQ, so we can’t be plant touching. Obviously that’s our expertise. We’re very familiar with the U.S. MSOs. We’ve talked to them, we’ve been to a lot of their growing operations. And I think we could have some great partnerships, but our employees in U.S. are not allowed to touch plants.

So all these federal changes, you know, could have a significant impact and allow us to execute in the United States, but a lot of it depends on the politicians and the regulatory bodies and what actually comes out of DC in writing.

Aron Govil

Okay. All right. Great. Thanks for that, Steve. And thank you all three for joining us and everyone in the audience. Again, hope you have a great conference over here with AGP’s Cannabis Conference. David Klein, CEO of Canopy Growth; Steve Ruffini, CFO of Village Farms; Zach George, CEO of Sundial. Thank you so much for joining today and hope you guys have a great conference.

Steve Ruffini

Thank you.

Zach George

Thanks, Aaron.

Operator

Goodbye.