Doug Cooper: Okay. And what do you think the market share differential now is between you and here at number one? You said you’ve narrowed the gap. What do you think that gap is now?
Michael DeGiglio: Can you repeat that us and who? Oh, well, like, I think I’ll just comment this, that I think, we consistently striving to be number one. That’s our goal in Canada. And doing that, as I said in my remarks, organically, we’re not. each time we get very close, seems certain companies buy another company and then they jump up again. So we find that pretty amusing and like it because it challenges us. But we’re steadfast to be number one. And I don’t track exactly the points yet, but the momentum is there, and we’ll be celebrating when that day comes. I can tell you that.
Operator: Your next question comes from the line of Pablo Zuanic with Zuanic and Associates. Please go ahead.
Pablo Zuanic: Thank you. Good morning, everyone. Look, two big questions on the domestic business. So, of course, congratulations on the growth. The bidder margin now, it’s running around 10%, 11% in your cannabis business last year. First quarter was around 16. Is that something that we should think it’s a norm now going forward. And then related to that, in terms of the strong growth you’ve had in the reg market, expand a little bit. In terms of what you’re doing on pre rolls, is that just normal pre rolls, or are you working on infuse just what’s driving that share gain that brought you to number two in Pre-Rolls? Thank you.
Michael DeGiglio: Well, on the second question, I mean, as I said, with Hi-Def, we have a lot of innovation, very focused, laser focused on innovation across the board, but especially Pre-Rolls infused. We do infuse Pre-Rolls, all kinds of Pre-Rolls, and continuing to invest in our technology to produce them, driving our costs lower. But the Hi-Def is an example. No one else has it on the market. It’s sold out in a day. It’s done very well. So we are number two in pre rolls across the board. And that’s our goal, is to be number one there as well. So that’s a product that we focused very hard on over the last year on innovation and producing it in a profitable way. And we’ll continue to look at other categories going forward.
As far as margins, as we stated, algo still remains between 30% and 40% overall gross margin over the five years. As a ramp up NASA industry, we produce different products. If you take any agricultural commodity, it produces different products on the same plant. And in the case of cannabis, you have small. And if the preference is large, you have to do something with the smalls, whether you put that into a manufacturing process to create powder or mill product or pre roll, or you find a customer that wants smalls at a reduced price. So you have to deal with these issues. And sometimes when those inventories creep up before we can find another way to get that product in a market at a decent margin. We’ll take the hit on that compression for that quarter.
But overall, once we get back on step, right now, our goal is to not have any inventory beyond six months. And honestly, you really can’t sell a product from the time you harvest it under four to five months. It just goes through drying manufacturing. You have to jump through tremendous hoops to ship the product and test it, and it takes time to do so. So we’re getting back on step, and I think you’ll see those margins stabilizing in that range soon.
Pablo Zuanic: That’s good. And just to follow-up on that, I mean, for Steve, maybe, obviously, your non-branded business continues to be a relevant, very relevant part to the business of the cannabis business. What’s the price difference roughly? I mean, are we talking about a dollar per gram, $2 per gram? Just give some guide in terms of how diluted to margins non-branded is. Or maybe it’s not. Thanks.
Michael DeGiglio: Can you repeat the question? I’m not sure what the question is. Sorry.
Pablo Zuanic: No. The question is, if I look at, within cannabis, between branded and non-branded sales, how dilutive to margins is non-branded, or are we talking about a slight price difference? I don’t know if you can talk in terms of percentages, or you can talk in terms of dollars per gram for the lower price on non-branded versus branded in terms of your sales in cannabis.
Michael DeGiglio: Well, obviously, the non-branded margin is lower than the branded margin. Since we reported that we were at 31% for branded margin. The price point that we’re selling for the non-branded, it depends on who we’re selling it to. As Mike alluded to, the market price for smalls certainly has come up, but it’s not as good as the non-branded market price for larger bud, higher potency. As Mike said, that we have good relationships with certain LP’s, that product may be leaving Canada, going to foreign markets, and we get a very nice price and a very nice margin on those sales.
Operator: Your next question comes from the line of Scott Fortune with Roth MKM. Please go ahead.
Nicholas Hatzis: Hey, good morning, this is Nick on for Scott. Congrats on a good quarter here. First question for me on the cash flow. It was a good quarter in terms of profitability. Just curious how you view your potential cash generation while evaluating investments internationally in the opportunity in the US here with some of these markets moving forward. Just wondering how you plan to balance the profitability side versus allocating future growth capital. Thank you.
Michael DeGiglio: Well, we continue to report that with self funding, the Netherlands is a huge investment. This is the first of probably two production facilities that we’ll be building, and that’s 100% paid for out of our cash. We have no debt on it. We didn’t raise any capital to do so. So we may not have the balance sheet of other companies, but certainly we’ve diluted our shareholders quite a bit less. And we’re always very prudent, so. And of course, the return on our invested capital is what we always are focused on. So we think that, that there’ll be a short window on getting our return on investment in the investments we’re making. And I think the same thing for the US. Look, at some point, as I said, with the US, many times, it’s an experiment, because till there’s clear federal legalization, the whole production side is going to change.
You just can’t operate 35 production facilities across 20 states. It’ll go large scale, low cost. That’s where we shine, that’s where we lead. We have assets. And, Yes, we’re in Texas, and it’s probably one of the most conservative states. The turtle. We’re the turtle man, not the hair. So, in the long-run, we’re going to get there and I think we’ll have the best quality, lowest cost production. Look, there’s a model in the US. I won’t mention the company, it’s not one of my favorite states, but I will say that they see what we see, and I think that’s where we’ll end up one day, and we’ll see who can manage it. So, as far as capital, it’s the same. In Canada. We used existing assets. We were able to convert them, remain in the prototype cannabis business while we converted at a fraction of the cost.
And in the end, I did. Scott mentioned many times that that was the least, most important. What was more important was the 30 years of knowledge of growing, regardless if it was different crops and cannabis. And I think we’re excited about the day we can enter the US market and be a major player. I know that may not answer exactly your question, but I wanted to put some added color to it.
Nicholas Hatzis: No, I appreciate that color. Thank you. And then second one for me, just on the cultivation costs, wondering if you could provide any puts and takes on the cannabis cog side. You mentioned hang drying and other initiatives to improve product and lower costs. Can you maybe quantify any improvements you’ve seen over the past couple of quarters and just how you expect cogs to trend throughout 2024. On the cannabis side. Thank you.
Michael DeGiglio: We’re not going to give our cost out anymore. We made that mistake early on, so we’re not going to do that again. But I can tell you that it is a continuous improvement process. It’s really, the strains you develop, not just tied to meeting the attributes of the consumer in the case of high THC levels and whatnot, but also in terms of yield profile, of course, where you grow them, how you grow them. The other thing is scale. As we, we now expanded our delta two facility and half of it. And again, scale drives costs down. So we’re pretty bullish that over time, we’ll continue to drive our costs down going forward.
Stephen Ruffini: And this is, Steve, there is some seasonality on the cannabis side. Obviously, we have to run the lights in the winter. There is a higher cost on those grams. And obviously in the summer, we don’t run the lights. So there is some seasonality quarter by quarter to our cost program.
Michael DeGiglio: Yes. And that’s why we always say in sort of agriculture operation, you really need to look at your cost on an annual basis. For those reasons Steve alluded to, not on a quarter to quarter basis.
Operator: Your next question comes from the line of Pablo Zuanic with Zuanic and Associates, LLC. Please go ahead.
Pablo Zuanic: Thank you for taking the follow up, Mike. Look, this is just more a big picture general question, and I think I disconnected before. When you see SNDL or you see canopy growth, apparently take control of us assets, relevant, sizeable us assets, and are able to keep their Nasdaq listing, does that make you think that maybe you have to do something sooner rather than later? And I know that it’s not so simple because of the regulatory issue, but you have examples of two Canadian companies moving in. Right. If we get to a point that we have full legalization or it’s easier for foreign companies to buy us assets, by then it may be too late. Right. Because the US assets will have repriced. So how do you think about that?
And then the second question, which is related to this, of course, just a reminder of the scale of your Texas greenhouses. How long will it take you to flip them to cannabis? Is it a matter of one, two, three years? And just to remind them of scale? Thanks. Sorry.
Michael DeGiglio: Well, we have a huge footprint in Texas, so we would probably be, we would probably never flip all of them. If we were, we would probably be controlling a strong percentage of the Texas and adjacent states. But so we have a very large footprint, approaching 6 million sqft there. And what we, as I said many times, I believe it’s the best location in that continental United States to grow cannabis. And that takes into account friendly states versus non friendly states, not just climological issues. That being said, you know what? We always look for the pathways of other companies. So if some of these companies you mentioned have decided to take different pathways, I’d imagine if I looked at their legal bills, it’d probably be about our, same as our revenue.
And but I, thank God that they’re, they’re finding these pathways to do it. And both those companies you mentioned are approaching it differently, whether it’s a stress, assets are rolling up now, we’re on that every single day. I mean, I can tell you openly, there was a conversation that lasted 1 hour with Nasdaq yesterday. And at the end of the day, we are not convinced right at this table, this hour, that those, that’s being allowed. We will know sooner than later. But I can tell you right here, we’re waiting to get confirmation, and I don’t see it yet. So as much as there’s a lot of news out there and press releases, we haven’t seen it. We haven’t seen the DEA, we haven’t seen a lot of these things. And we’ve always said that we’re not going to make any moves till we understand clearly the playing field and be measured in our approach going forward.
