Pablo Zuanic: Given that you brought it up, Mike, and I don’t want to take up to long here on the call, but — so are you saying that you would consider like kind of grow the listing from NASDAQ and just lifting the TSX to be able to enter the U.S.
Michael DeGiglio: Well, I will say this, that there was a quote by Hannibal hundreds, thousands of years ago that said we will either find a way or make a way. And I’ll leave it at that.
Operator: Our next question will come from Michael Freeman of Raymond James. Your line is open.
Michael Freeman: Congratulations on making material steps to tighten up the Fresh Produce business. This is really encouraging. My first question is on international business. You started shipping into Israel during the first quarter. I wonder if you could describe the — give us a picture of volumes and how you expect cannabis segment revenue to be impacted by international sales during the first quarter and then looking to 2023 in general?
Michael DeGiglio: Well, I think overall, we feel pretty good this year. We budgeted probably about sub 10% of our revenue going international for 2023. And specifically, Australia, Israel, Germany and England. So we think that’s kind of where we’re looking at. It could be more, but we want to be a little more conservative because again, it’s a regulatory process. Getting things done for this product as far as having each government working together import permits and so on is achieving its product takes a tremendous amount of effort. But that being said, the margins and the tax structures are excellent everywhere we’re going. So it actually — it actually will return our highest margin over our domestic sales anywhere in Canada.
So that’s sort of our plan this year. And we have a team that we’re building specifically to look at the entry points in a number of different countries over the next 2 years. That’s again outside of our participation in the Netherlands. I’m very bullish on the Netherlands. It’s really our first footprint with physical production assets in the European theater. And we — our roots stem out of the Netherlands, greatest respect of the greatest producers of food in the world, best agricultural operators, and we think we’ll have a great point to leverage up, a great opportunity to introduce brands even from Canada and look at brands in the Netherlands, understand consumer insights across Europe for really a lot of growth over the next decade.
Michael Freeman: Okay. Great. This is a nice new chapter. And then just quickly on the Canadian cannabis side. I wonder if you could comment on the inventory write-down and whether we should expect further write-downs heading into 2023. And then very quickly, when were the price increases implemented on certain products in Canada.
Michael DeGiglio: Okay. So Steve will answer the first point, Mandesh the second part.
Stephen Ruffini: Michael, it’s Steve. With respect to the inventory write-down, we felt it was older inventory, aged inventory at year-end, roughly greater than 15 months old, lower potency and smaller buds. So we essentially wrote it down to what the current market pricing is because that’s what we’re trying to do. We have been selling that product. It’s not that it hasn’t been selling. We just wrote it down to the market price, and some of that will go into — like the smalls will go into pre-rolls. So it will be sold over the course of time, and it’s more just driven by the current market pricing for our comparable biomass inventory in the Canadian marketplace today.
Michael DeGiglio: Yes. And I would also say that if you look historically in Canada, our write-downs on inventory have been, I think, very low compared to most of the other part — the other part of the industry. Mandesh?
Mandesh Dosanjh: Yes. So Michael, your question was around the timing of the price changes. So we’ve started to roll those out now and depending on region that’ll be executed over the next quarter or two.
Michael Freeman: Okay. So to be clear, did you implement these at the start of March?
Mandesh Dosanjh: They will start rolling out this month. That’s correct. Sorry, you cut out for a second. So yes, they’ll be starting to roll out this month and then ongoing depending on the region.
Operator: Our next question will come from Andrew Partheniou of Stifel GMP.
Andrew Partheniou: Maybe going back and diving a little bit deeper into something talked about previously, first on the Permian divestment and how that could impact your cross profile in Produce. You talked about its one-third of your footprint there, but you also have Delta one. On the other hand, understanding that Produce is a very heavy fixed cost business. So putting it all together, could you give any kind of color on returning to positive gross margin in any quarters in 2023? I know Q4 is typically the highest margin quarter if you talk about a seasonal basis. So without the Permian dragging on results given that you were almost achieving positive gross margin in this quarter, could we see positive gross margin at some point next year?
Stephen Ruffini: Yes. Andrew, this is Steve. Yes, the fourth quarter’s gross margin was primarily impacted by Delta 1 with the brown rugose. As you said, it’s fixed cost business, and that crop is now over. So those crop costs flush through in Q4, which was the main driver. The Texas operations that were in production, Permian Basin was not in production in Q4. It was due inspection in Q1, but the Texas operations did have positive gross margins in Q4. So the negative gross margin is 100% due to the brown rugose impact on the Delta 1 facility.
Andrew Partheniou: Sorry, I was on mute there. And then maybe going back to your production on the Canadian cannabis side and understanding that you guys pride yourselves on having amongst the lowest amount of write-downs in the industry here. Could you talk a little bit about where your Canadian cannabis production is at right now? Remind us, are you producing at 100% capacity of the facilities that you’ve already converted and you’re selling at all? Have you thought about adjusting your production either upwards or downwards? Because it seems like there’s 2 different things happening, right? You’ve got a little bit of an inventory write-down here, but you also have the choice that you’ve taken to increase prices versus maybe balancing that out with increasing production. So just trying to put it all together and get a big picture here.
Michael DeGiglio: Yes. So Andrew, the inventory write-down was not our inability capacity-wise to sell. It’s the market has changed. Like if you look at THC levels that consumers want in the last 5 years, they’ve changed dramatically. So as consumers are changing their needs, we have to adapt to that. And it’s still agriculture. So if you look at the perfect strain and the perfect THC level in the perfect shape and all those attributes just doesn’t happen in growing a crop. So again, if that’s not a product that we want to put our name behind retail and as Steve said, we can put that — those products into other offerings, we’ll do that. So it was really writing down the price in that regard. As far as capacity, we started with Delta 3, 1.1 million square feet.
And then we started with our next greenhouse Delta 2, which is a mirror image of Delta 3, and we went to 50% capacity, never greater than that, and we still stand here today at full capacity on Delta 3, 50% on Delta 2, and we purposely did not increase that. But we felt comfortable where we’re at because of our international our goal to expand internationally. And the reason we felt confident is because when we look at our ability to — our production costs domestically in Canada, and our ability, as you know, when we launched retail a couple of years back, we launched a 31% under the next highest LP for the retail market and not to undercut them but to compete with the illicit trade, that was the price point. And we think it’s — we think we have a huge advantage in our cost.
So we’re going to use that same philosophy internationally because again, as Mandesh alluded to, we’re not always first to the market. We weren’t first to the export market, but we want to ramp it up. And we think that additional capacity happening in ’23 and ’24, we feel very confident where our current production levels are. Mandy, do you want to give any color on that?
Mandesh Dosanjh: Yes. Andrew, good question. So the — every month we assess kind of 5, 6 months out because of the crop cycle, what we want to do on inventory plantings and how we run the facilities. And that’s an ongoing conversation where we’re trying to dial in the best we can. It’s not the way you can grow, it’s about what you can sell and you want to align those 2 as best you can. And so right now, we are running, like Mike said, the facility in half. It’s running at full operation, full tilt right now. We’re heading into some of the best growing conditions all year. Just kind of given the spring summer months, it’s arguably some of the best conditions we get in terms of yield and results. So we’re hitting that peak right now.
And then we’re constantly evaluating it. And we’re looking at our outlets and what our sales and demand cycles are. So we feel confident in our approach and our ability to match the 2. And we like where we sit now. And the pricing adjustments, yes, we’re driven by how we’re seeing demand go and we just believe there’s an opportunity for us to improve our margin profile. But it’s not really meant to kind of stunt any demand or sales growth. We’ll take advantage of our ability to operate and leverage our capacity to look at opportunities on the domestic side and then use extra production planning capabilities for international sales that are starting to ramp up.
