Village Farms International, Inc. (NASDAQ:VFF) Q1 2024 Earnings Call Transcript

Village Farms International, Inc. (NASDAQ:VFF) Q1 2024 Earnings Call Transcript May 8, 2024

Village Farms International, Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $-0.02. Village Farms International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to Village Farm International’s First Quarter 2024 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the first quarter ended March 31, 2024. That news release, along with the company’s financial statements, are available on the company’s website@villagefarms.com, under the investors heading. Please note that today’s call is being broadcast live over the internet and will be archived for replay, both by telephone and via the internet, beginning approximately 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 may be made today during or 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 and MD&A for the year ended December 31, 2023, and 10-Q for the quarter ended March 31, 2024, which will be available on EDGAR and SEDAR+. These forward-looking statements are made as of today’s date and, except as required by applicable securities 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 of Village Farms International. Please go ahead, Mr. DeGiglio.

Michael DeGiglio: Thanks, Eric. Good morning and thank you for joining us today. And I’m happy to be here. With me are Steve Rafini, Chief Financial Officer, Ann Gillen Lefever, chief operating officer and Patty Smith, corporate controller. For today’s call, I’ll begin with some perspective from my point of view on what’s driving our strong start to 2024. Then I’ll share my thoughts on how we are leveraging, the unmatched capabilities we have built to lead in the global cannabis industry. My first topic will be Q1 highlights; how Canadian cannabis business once again achieved several sales records while delivering profitability and cash flow, and our fresh produce business generated net income on a solid year-over-year sales growth.

Together, these drove a 21% increase in consolidated sales and a six fold increase in adjusted EBITDA. Q1 was especially strong for our Canadian cannabis business. Retail branded sales grew 28% from Q1 last year, all of it organic, meaning we generated these sales this sales growth entirely in house, without acquisitions, which drove a record net sales of over $50 million in Q1. This strong growth, nearly four times out of the Canadian market on a year-over-year basis, is a result of our focus on delighting consumers with quality and innovation across a range of brands positioned for different usage occasions and price points. I can’t overemphasize how important or how difficult this is in any industry, but especially in the Canadian market with its highly restrictive marketing.

In my view, our operational expertise is translating into higher quality products, which in turn is translating into market share success, across all our brands. Of course, this growth would also not be possible without strong partnerships with our trusted provincial distributors and retailers. It was roughly a year ago that I challenged a Canadian cannabis team to find new opportunities for growth in our pursuit to be number one in the market to renew our market share momentum in flower and deliver share gains beyond the core flower category. During Q1, we were the fastest growing of the top five producers, further narrowing the gap to number one. Our share expansion, which has continued into April, our ninth consecutive month of market share growth, was driven by both the flour and pre roll categories.

We moved into the number two position nationally in pre rolls, the result of relentless focus on leveraging our high quality flower into products that consumers trust. We will keep doing this in profitable categories. Importantly, the entire team embraced this challenge, leadership, growers, innovation and branding teams, production and sales teams as well as our third party producers. We are proving that we are the leaders not just in cultivation, post harvest disciplines and manufacturing, but across all the competencies critical for our share growth, innovation, brand building and understanding the consumer, specifically where consumer preferences are going. Second topic, examples of capability beyond cultivation; I want to share three examples that demonstrate this.

The first is an innovation mindset across everything we do. This mindset means that we are laser focused on improvements to our existing brands and products. We do not launch them and leave them. We continually strive to improve them. These three quick examples of this first, two years ago, we invested to move our BC production to hang dry. The first, and probably only to do so at scale. That conversion was just the beginning of an all hands on journey to improve our flower quality in other ways as well. In total, I believe all these incremental improvements are contributing to our market share gains. Second, in Quebec, our team has innovated around deep and accurate data insights to anticipate consumer needs, which they met by commercializing existing products differently.

This has also contributed to our market share gains. And then finally, earlier this year, the team revisited packaging appeal like the Pink Bags we recently launched, which honors our iconic best selling Pink Kush products. Consumers in Bud Ten, their engagement was wonderful. We also are evaluating selective packaging opportunities to further elevate product quality and freshness. The second example is last month’s launch of our Hi-Def Pre-Rolls, a true game changer in the Pre-Roll category. These pure ground flour with THC of 36% to 44%, with no concentrates, no infusions, not even keef, just pure flour from pure sun farms. There is nothing else like it on the market initial response from retailers and boards are exceeding our expectations.

And the third success story is our Supertoast brand. Launched last summer, Supertoast was our entry into the milled flour category which we launch in Ontario, where milled over indexes compared to the rest of the country. Supertouris has taken share every month since launch. It’s now the second best selling milled brand in Ontario with more than 20% share and it’s still growing. This product is top-tier and competitively priced using the quality BC grown flour that we are known for. Quality is a theme here. It’s our DNA, including our premium brands, notably soar and tantams. Importantly, while growing our cannabis business, we also delivered healthy results in fresh produce. Our heritage business, which continues to build expertise we use in both produce and in cannabis.

Q1 built on a steady improvement throughout last year and saw our best financial results in several years. We not only generate year-over-year sales growth, but also another quarter of positive EBITDA as well as a profit. We look to build this through the rest of this year as we begin to benefit from our investments in cultivation, aided by AI, as well as implementing automation for labor savings and our unmatched world class growers and support teams. And the third topic is opportunity. The final topic I want to cover today is the global conversion momentum towards legalization of cannabis. First, my thoughts on Village Farm’s competitive advantages, our experience in Canada, which leverages our deep growing expertise and a stable core team every single day, and where we are the profitable market share leader with broad capabilities in branding, marketing, commercialization positions us very well to succeed and lead in emerging cannabis markets.

We are leveraging our brand and product success in Canada through exports to four of the largest legal medical cannabis markets outside North America, Australia, Germany, the UK and Israel, and where more as markets open. Notably, April 1 saw partial legalization in Germany, which will provide patients there with great access to high quality legal products. As an expected large market, Germany is an important focus for our international medical cannabis strategy. In fact, our EU GMP certification was obtained through the district government of Dusseldorf. We began shipping our best selling Canadian strain to Germany about this time last year and been adding both local distributors and sales since then. We are launching the first recreational cannabis market in Europe, the Netherlands, expecting to start production in Q4 with revenues in 2025.

We are not only that, we are the only North American participant in this limited licensed country which like Canada has a large legacy consumer base. Like Canada is a country where we have a long history, deep relationships and huge respect for their growing expertise. Indications are that the respect is mutual and then relative to Canada, has a significantly more favorable tax regime and supply chain and the program is designed to support our capital investment. We also think it can be a springboard into other EU markets as they emerge. Our experience also bodes well for the cannabis opportunities here at home in the United States, but first over to Steve for a more detailed review of the financials.

Stephen Ruffini: Thanks Mike. Some details on the quarter total sales grew 21% year-over-year to $78.1 million, with strong growth in both cannabis and in produce. Net loss improved to negative $2.9 million or negative $0.03 per share, a $3.8 million improvement from last year with adjusted EBITDA improved by $3.1 million to $3.6 million. Looking at the individual business segments, Canadian canvas delivered record sales, record retail branded sales and another quarter of positive adjusted EBITDA and cash flow. As Mike noted, net sales were up 49% year-over-year to CAD50.5 million. Reminder that all Canadian cannabis figures are in the local currency. Within this total, retail branded sales grew 28% to CAD39.2 million. In our non-branded channel, we continue to take advantage of the improved wholesale market conditions to monetize non-branded spec biomass inventory not designated for our branded and our growth areas.

Non-branded sales were CAD 8.7 million, which was 181% higher than Q1 last year and 10% higher than Q4. International export sales for Q1 were CAD 2 million, roughly in-line with Q1 last year which included a load in order to Australia ahead of a change to market regulations Q1 2024 export sales were nearly double that of Q4 2023, led by repeat orders to the UK and Germany. While we expect export sales to remain lumpy quarter by quarter, we are on track to deliver a solid year-over-year growth. In 2024, Canadian cannabis gross margin improved from Q4 to 25% but was still impacted by the lower margin non-branded spec biomass sales. Excluding these sales growth margins was 31% at the low-end of our annual 30% to 40% target range, a reminder that cost it cost more to grow in the winter months.

SG&A expenses as a percentage of sales for Q1 improved to 21% 27%. We continue to expect the SG&A to sales ratio for 2024 to be a couple of points lower than last year. Q1 adjusted EBITDA for Canadian cannabis of CAD 5.5 million was at 4% increase from Q1 last year. Finally, for Canadian cannabis, we generated nearly CAD 5 million in total cash, right in line with adjusted EBITDA, and it was another quarter of strong free cash flow of CAD6 3 million, up 20% from last year. Turning to our us canvas business, Q1 sales were CAD 4.5million with a gross margin of 59%. Adjusted EBITDA loss was 600,000 and for a net loss of 700,000. The business is being challenged by two factors, prevalence of synthetic hemp based products, primarily delta eight, which the consumer is not differentiating from naturally occurring hemp based THC.

Second, not surprisingly, these products are also being challenged in states where legal cannabis is being sold. Unless and or until we get FDA clarity, these challenges will remain. We believe the future of the CBD market is a viable alternative to the higher THC products and continue to hone our capabilities, including internalizing our gummy production, a category which continues to have strong growth. We are also acting on a number of strategies designed to optimize revenue in the current environment, including building on our strong subscription based sales and adjusting our price structure as we continue to manage costs. We’ve already seen some encouraging improvements in the velocity of purchases by our subscribers. Moving to fresh produce, Q1 sales increased to $36.1 million, with positive gross profit for the third straight quarter of $3.3 million.

Adjusted EBITDA was also positive $2 million. That makes three out of the last four quarters in positive territory, with a trailing twelve month total of more than $3.5 million, and Q1 was our best quarter since Q4 2021 and I’m pleased to report we achieved profitability for fresh produce in Q1, with net income improving more than $2.7 million to a positive 100,000. Turning to our consolidated cash flows in the balance sheet, cash flow from operations for the quarter improved by $3.6 million. To breakeven, we ended Q1 with total cash of $31.7 million and working capital of $78.2 million. Total term debt at the end of Q1 was $46 million, composed of $22 million for fresh produce due in May 2027 and $24 million of cannabis debt with matures starting in February 2026 remain comfortable with our net debt level of $18 million, which includes our $4 million produce operating line.

Finally, note that in early April, our clean energy subsidiary saw the startup of operations at the renewable natural gas facility adjacent to our grow operations in Delta BC facility, which was financed and built by our partner to Riva renewables converts landfill gas under our contract with the City of Vancouver to natural gas. We receive a royalty from the facility’s revenues and you will see resulting profitability beginning in our Q2 results and now I turn the call back to Mike.

Michael DeGiglio: We’ll, thank you Steve. So, like most in the industry, we were disappointed that we did not see a change to the excise duty in April’s Canadian budget. We are, however, encouraged that the topic has the attention of a number of federal agencies, including a review by the finance department. We will continue to work and partner with government and peers on this important initiative that will support the industry long term, which is not only contributing to local economies and safety for consumers, but supporting a product category that has increasingly shown to have a range of health benefits. In the interim, we remain uniquely positioned in Canada and the Canadian market to deliver market share and sales growth with profitability and positive cash flow.

The momentum towards cannabis legalization in the United States appears again to be getting its rightful priority with those who can affect needed change in Washington. We applaud the many leaders who are pressing the conversation into action. It is critical for those who are still unjustly criminalized and for the safety of those currently working in the industry. Full federal legalization has been proven in Canada to reduce assets to illicit product, particularly for underage users, ensure a safe, consistent product for all consumers and contribute to both the employment and tax revenues for local communities. The United States needs to remove all criminalization inconsistencies, open access to capital markets for the safety and viability of the industry, and realize the benefits of full federal legalization, and we deserve nothing less than that.

Then, finally, we are often asked how we translate our leading Canadian expertise into a US strategy once we are permitted to do so as a Nasdaq listed company. Much of the detail depends on how far Washington proceeds towards legalization, but we will either find a way or make a way. Our preferred option is to deploy assets in Texas which are very similar to and larger than the Canadian assets from which we built our leading profitable cannabis business. As we access all options, be assured we will take a measured approach to optimize any investments for our shareholders. Let me be clear, we remain as focused on the US market as we were before entering the Canadian market. I have every confidence we will succeed and we are even more cannabis experience with five years in Canada.

As Frank Sinatra once said, if you can make it there, you can make it anywhere. So with that operator, I’ll turn it over to you for Q&A.

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Q&A Session

Operator: [Operator instructions]. Your first question comes from the line of Aaron Gray with Alliance Global Partners. Please go ahead.

Aaron Gray: Hi, good morning and congrats on the quarter turning. Really nice there, so, first question for me. Just want to talk a bit about wholesale. You’ve had a couple nice quarters of wholesale growth, CAD9 million in the queue. Can you speak a little bit more to how you see the segment evolving over the year? Provide more color in terms of maybe the customer base and contract structure for that business today you mentioned some spot within it which was lower margin. Is there also some contract mix within that? Just how we can maybe provide some more color in terms of what’s involved within that number and how we can think about that evolving? Thank you.

Stephen Ruffini: Thanks, Aaron. This is Steve. The sales in Q1 were primarily spot. We have a few small contracts with a couple of the smaller LP’s on supply side, but no material supply agreements in place. Again, taking advantage of what we perceive to be a lower supply availability, as either the supposed excess supply is either aged out or, quite frankly, wasn’t good quality. So we have been able to take advantage of that. It is agriculture and not everything we grow is brand quality. So based on size or potency, but there is good demand out there and we’ve been able to take advantage of that.

Michael DeGiglio: Yes, and I’ll add to that, I mean, nowhere in the script that we talk much about B2B business, we’re very focused on building our brand globally. That’s number one. That’s what we talk about. However, we have a large footprint, and every time we expand that footprint, the B2B business is important to us as we develop new products, new innovation, to penetrate the branded categories more so. In addition, we do have relationships with some other LP’s and I think that’s good for the industry working together. So I think it’s going to be, to your question, probably part of the future, but it’s not our primary focus and we’ll leave it at that.

Stephen Ruffini: And the other thing I just say is the way the Canadian structure is set up is with the tax structure, and we’re very cognizant of dilution and we’re investing as a growth company, heavily in Europe. We’re gearing up for the US. We know it’s eminent. And the B2B business without the excise tax, just like our international business, is great business for us from a margin perspective. So that’s important right now.

Aaron Gray: Okay, great. Appreciate that. That was really helpful. Color. And then second question. Did want to turn to retail branded sales, which have continued to trend upward for you, and seeing some nice share gains, which it’s correlating with just in terms of overall strategy on the branded side. You guys started off under more of a single brand. With Pearson Farms, you’ve expanded out right Fraser Valley as well as most recently with Supertoast and soar. So can you speak today to how you feel your comfortability in terms of where the House of brands stands today? Do you believe there’s still opportunity to launch additional brands, particularly as you look to increase share in some of the novel format categories that you’re still under penetrated today in terms of overall strategy, in terms of how you’re feeling about entering these new categories, or were you underpenetrated via new brands versus existing brands and how that’s evolved?

Michael DeGiglio: Yes, well, I think we’ve done a great job. I mean, we purposely stayed with that one brand till we developed our experience in the marketplace, understood the consumer very well, and then slowly watched as the market was having separation to value and premium. In fact, we’re very proud about premium penetration. it’s often said if you can get 5% to 10%, and I think we’re on track to do that. We have a couple products, as with soar and Tantam. So it’s going well on the. We’ve seen the consumer, especially starting on the west coast and then traveling further east looking for value. We have solid value with our Fraser Valley brand and super toast as well. So I think where pretty much in the total range of price, different categories tied to price as well.

And now we’re very focused on innovation of products within those brands. It’s not to say we won’t launch any brands in the future, but there has to be a reason to launch another brand and we have to make sure it will be profitable. We’re also looking at how these brands will work for us, extending them globally, as we penetrate international markets, and very excited about what we’re going to be doing in the Netherlands with our brands there as well. So for now, I think in Canada, we want to maximize the penetration and the profitability of our current brands. We have a number of brands coming out of our Quebec businesses there that are doing very well. As I mentioned, Quebec is just. They are the pillar when it comes to understanding the consumer, and that translates across all our cannabis business in Canada and abroad.

Operator: Your next question comes from the line of Frederico Gomes with ATB. Please go ahead.

Eric Livshits: Good morning, this is Eric Livshits in for Frederico Gomez. Just in regards to your produce segment. So, over the past several quarters, we’ve obviously seen some nice improvements there, especially on the profitability front. Could you just give some more color into what’s driving these improvements and how sustainable you think they are? Thank you.

Michael DeGiglio: Well, as we’ve communicated over the last couple of years, ourselves, as well as every tomato grower, not that we just grow tomatoes, but it is our largest category in fresh produce. But worldwide, all suffered from a devastating virus that was incurable till resistance was being bred in the genetics by the seed companies, which took about seven years to get where we are today. So that was pretty devastating for the industry. Many companies didn’t make it, and we weathered that storm. So I would say, number one, that change has been tied to going from tolerant varieties to now fully resistant varieties. And we can see that change. The produce business is a mature commodity business, as it’s a NAFTA business that competes with Mexico and Canada.

And it’s never going to be a huge margin business, but it’s an important business for us, because all of our technology, when you really look at us as a leading cannabis company, and you just take the cultivation segment, which is one portion of our success there, it is driven by our deep 35 year knowledge in DNA. And as we pursue the US market, that’s going to be very apparent that we maintain those businesses, even if they work in parallel with each other. The technology changes, the way we grow, the knowledge, it’s very important. We’re happy where we are with the results of this quarter, and I think we’re on our way to have a decent produce business. But there’s other reasons why that business will continue to be part of our organization.

Operator: Your next question comes from the line of Mike Regan with Excelsior. Please go ahead.

Mike Regan: Thanks a lot. I guess in terms of — can you update us what you’re seeing regarding the supply and demand dynamics now that the CRA is starting to garnish the tax, the unpaid taxes from some of the LP’s that haven’t paid them and how that’s affecting the pricing at this point?

Michael DeGiglio: Well, I don’t. We haven’t seen that really, that’s not at a level where we can identify if that’s going to improve pricing going forward. I think it’s pretty lumpy with what the CRA is doing. In some cases, they’re taking a very tough stance. In others, they’re extending terms. So I think it’s too premature to say, but, and I also don’t want to talk for, for them, but we’re not necessarily seeing that driving the benefits in the industry as opposed to. I mean, there’s a number of reasons, just not companies owing to CRA. It’s companies that can have the right cost of production or the quality. And I think ultimately that’s the more important driver that will lead to better pricing going forward and more stable capacity in the marketplace.

Mike Regan: And then I think the press release that you actually expect harvest from the. Or I guess, production starting in the Netherlands is that, I guess, producing this year but then actually seeing sales next year, or could that actually generate sales in 2024?

Michael DeGiglio: No, we’ll go in production. it takes, when you look at the time, you need to go from, tissue culture or cuttings, which we’re actually starting to produce right now in the Netherlands, and taking that into production in a facility, growing the plan. And then, as there’s a tremendous amount of post harvest and manufacturing work that goes in. So we’re looking at being planted out in full production in the fourth quarter of this year with generating revenues in the first quarter ’25.

Mike Regan: Okay, I just one final question if I may. Like you said, the produce looks like it’s been one of the strongest quarters in a couple of years at least. And 1Q is typically sort of a seasonally slower quarter, so is this sort of like level of productivity we could see continue as then the volume starts to ramp up in the seasonally stronger quarters going forward?

Stephen Ruffini: This is Steve, over the historical results of the produce business, which we’ve been reporting publicly on since 2006. The seasonality definitely shows up quarter to quarter. Q1 has been a challenge — Q1 has been a challenge, as Mike alluded to, due to the virus. Q1 historically is one of our better pricing months, which does drive profitability. And Q2 tends to be a challenge because the Canadians, the Mexicans, and the US people are all producing in that quarter. So we expect to see positive EBITDA every single quarter. It will be nice, but typically, Q2 is our challenging quarter, and Q1, q three and Q4 are typically profitable EBITDA quarters for us.

Operator: Your next question comes from the line of Eric Des Lauriers with Craig Hallam Capital. Please go ahead.

Eric Des Lauriers: Great. Thank you for taking my questions, and congrats on the strong results here. Thanks. Another question on the non-branded Canadian cannabis dynamics here. Just wondering if you could sort of help provide some more color on the dynamics between the sort of secular trend of producers moving to more asset light models versus the impacts of seasonality here. I guess I’m wondering if the secular trend here is strong enough that you expect this sort of sequential growth that we’ve seen over the past few quarters to continue, or if there’s seasonality either in demand or perhaps in the quality of your supply, that might cause higher non-branded sales in the winter months and the summer months. Just looking for a bit more color on some of the dynamics that you’re seeing within non-branded in Canada. Thanks.

Michael DeGiglio: Yes, I think it’s hard to predict that on a quarter-to-quarter basis. We have to constantly measure that we have a large footprint there, and we can continue to expand our footprint in cannabis. It just depends what’s going to happen with our international division. We’re very steadfast on expanding internationally. And every time we expand the footprint to penetrate an emerging market, there is a product that would be available, as Steve alluded to, that we would look at the B2B partners to supply that product. In addition, we’re not opposed to working with B2B partners that may come to us and look for a program. If it makes sense for us, we’ll take a look at that. But again, I want to reiterate, we are a global cannabis company that’s going to, we’re on a mission to be number one globally with branded products and cannabis.

But the cultivation side of our business, we don’t have a machine making cannabis where it’s a farming operation, and there are variations in size and other attributes in the product. So working with partners that may take product for their manufacturing purposes that are positive for us, we will continue to pursue that. But it’s hard to say for sure, since it’s not our primary focus, what that will be on a quarterly basis at this point.

Eric Des Lauriers: That’s helpful. I appreciate that color, next question for me. So you’ve mentioned some of these technological improvements in the produce business that have helped improve productivity and profitability here. You also mentioned that you’re sort of taking some of those insights and bringing them over to the cannabis business as well. Could you just provide either some more color or some tangible examples of some of the technology that you’ve sort of tested out in produce and are now bringing to cannabis as well? It seems like, a source of this potential innovation that you are highlighting as one of your strengths going forward. And I’m just wondering if you…

Michael DeGiglio: Yes, I mean, I would rather. I’d rather address that. I’d rather address that with you in the Q&A, Eric, than talk openly on the phone. I mean, these are trade secrets and secret sauce that we have that. That’s what we’ve always talked about, our 35 years of DNA and knowledge. I think it’s fair to say, and I say this in the most humble way, that the results and the proof is in the pudding in what we’ve done in Canada versus our competitors. And there’s a reason for that. It’s not pure luck, but I’m happy to address that one-on-one. But I certainly don’t want to put that information out publicly.

Operator: Your next question comes from the line of Doug Cooper with Beacon Security. Please go ahead.

Doug Cooper: Good morning, gentlemen. Just a couple of quick ones for me. Mike. Was any in your wholesale, is there any sales destined for the international market in that number, or is that all Canadian? Destined for the Canadian market?

Michael DeGiglio: What was the question? Doug, I’m having a hard time hearing you.

Doug Cooper: We’re just wondering, on the wholesale side of your business, can you hear me now? On the wholesale side, is any of that, you think, destined for the international market or is all that for domestic consumption?

Michael DeGiglio: [indiscernible] Yes. I mean, there’s certainly a lot of our wholesale business, probably most of it is going internationally. Just be transparent with that. And we sort of know where it’s going. And we’re okay with it going internationally We’re probably not as okay with it domestically, depending on the type of product it is. So I’d rather not get too deep in that, but I will. I don’t think that’s right to talk about it publicly, but there is a chunk of it going internationally for sure on the B2B side.

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.

So, but if it happens, we will look at those pathways and we will go forward. As far as acquisitions go, I think there’s a whole host. I mean, some of these acquisitions are sort of the darlings of the industry and the company’s been around. But you can look in the US market, not just first here or second. There’s a whole host of things, third tier companies. These companies have a lot of friends and family money now for six, seven years, they’re not going to be able to do an IPO. So I think there’s a lot of opportunity. The question is, where do you want to play? Where can you succeed? Where can you be profitable? So I think M and a strategy would play into our plan as much as ramping up our Texas locations and looking at opportunities where we can cultivate in other states.

We already have and worked on option A, B, and C for the US. And we’re very, we’re pretty clear on where we want to operate, at least initially, that we think we can win. I would never, probably not say never, but endorsing cultivation in the northern part of the United States for us is just not on the table. It won’t, in my opinion, our opinion, it won’t pencil long term. You just can’t get your cost of production quality where it needs to be. And that’s why I’ve said all along it’s still an experiment until there’s full, comprehensive legalization in the US. And, my final comment is we’ll find a way and we’ll make our own way. But we’ll be there.

Pablo Zuanic: That’s great color. Thank you.

Michael DeGiglio: And I didn’t make that up. That was from Hannibal. Yes, operator?

Operator: I will now turn the call back over to Michael DeGiglio for closing remarks. Please go ahead.

Michael DeGiglio: All right. Well, first and foremost, I want to thank the village farm team. For all the incredible hard work to drive these great results. We have such a motivated, great team. And one of the things is our team has been in place a while. That says something about our organization. People want to be here. They love what they do. And I think it shows in the products we produce. And without good people, no matter where your assets are, how good they are. You really don’t have a business. So heartfelt thanks to them. And with that, thank you for participating in today’s call. We look forward to getting back together in August for our second quarter results. With that we can conclude the call.

Operator: Ladies and gentlemen, that concludes today’s conference call. Thank you for joining. You may now disconnect.