Village Farms International Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Village Farms International's Third Quarter 2023 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the Q3 ended September 30, 2023. That news release along with the company's financial statements are available on the company's website at 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 1 hour following completion of the call.

Operator

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 Full 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 security filings with the SEC and Canadian regulators, including its Form 10 ks MD and A for the year ended December 31, 2022, and 10 Q for the quarter ended September 30, 2023, which will be available on EDGAR and SEDAR Plus.

Operator

These forward looking statements are made as of today's date and except as required by applicable securities law, we undertake no obligation to publicly update or revise I would now like to turn the call over to Michael Digilio, Chief Executive Officer of Village Farms International. Please go ahead.

Speaker 1

Thanks, Liz. Good morning and thank you for joining us for today's call. With me, our Steve Raffini, our Chief Financial Officer Ann Gillan Lefebvre, Vice President of Corporate Affairs and Patti Smith, Vice President, Corporate Controller. As per our usual format, Steve and I will review the operating highlights and financial results for the quarter and then open the call up for questions. So turning to the Q3, I am pleased with the contributions from each of our businesses, particularly the across the board execution On improved profitability and cash flow, which is a true test of a sustainable business model.

Speaker 1

We generated cash flow in each of our operating segments. That's bottom line cash flow, not just from operations, not adjusted pure cash flow. Each of our Canadian and U. S. Cannabis businesses also delivered positive adjusted EBITDA net income.

Speaker 1

And our fresh produce operations saw another quarter of significant year over year improvement, also with positive adjusted EBITDA. I'm also pleased with trends at the retail shelf, which are a true test of whether everything we do resonates with the consumer. I am proud to report that for the month of October, we regained the number 2 share nationally in Canadian cannabis, Recovering from the number 4 share at the beginning of the quarter and more on this in a moment. The consolidated results were a further narrowing of a net loss to just $0.01 per share, another quarter of positive adjusted EBITDA and positive cash generation On a consolidated basis, these results are not possible without the business acumen, commitment and contributions from each of our team members, And I am grateful every day for the Village Farms team's determination and I'm confident in our continued execution. Starting with our Canadian cannabis business, we are proving out what we believe is the most sustainable profitable model in the Canadian industry.

Speaker 1

There are a number of highlights for Q3. The first is another quarter of positive adjusted EBITDA and cash flow generation. These are the direct results of our unrelenting focus on operational efficiencies. This in turn enables us Fund organic reinvestment in both the Canadian market and international markets as they become accessible. For Village Farms, organic reinvestment is critical.

Speaker 1

Simply put, we strive to build competitive moats in the capabilities which will drive future growth. These pillars include cultivation and production, commercialization, branding and innovation, all with the consumer in mind. This quarter, our reinvestment wins include the launches of new brands and products as well as a continuous quality improvement, which are contributing to our top market share rankings and more importantly profitability. It also includes the development of our international business, both export and in country, which are based on our profitable Canadian business model. The second highlight for the quarter is that our strength and focus on newness is showing up where it matters, profitable market share gains.

Speaker 1

As a reminder, we don't chase unprofitable market share and sometimes that means foregoing top line growth for profitability and cash flow. The increased pace of newness that I discussed on our last call continued in Q3 with a number of noteworthy launches. These included A new super brand, Super Toast targeted as a consumer preference for convenience and added strains for all three of our flower brands. We also saw the continued success of our Soar brand, which quickly became a top 3 premium dried flower brand nationally after its launch 1 year ago. During Q3, 1 of SOR's exclusive cultivars, Pineapple God, was one of the best selling premium dry flower products nationally.

Speaker 1

Also on the product side, our launch of Fraser Valley Strawberry Amnesia, which was the largest in BC history And launched as the number one SKU in Ontario. These are just a few examples of the new strains we had on an ongoing basis as part of our innovation calendar. Recently, we also expanded our category offerings, including an entirely new vape offering with our first shipments rapidly selling out 2 product calls a year with launches timed during Q2 and Q4. So working with our existing portfolios in between these product calls is as important as new launches themselves to ensure sustainable growth. Our success in doing so is evidenced by our continued from the Q4 product launches, which are currently underway.

Speaker 1

Importantly, in addition to cash flow generation, Our efforts are proving out on the retail shelf. Year to date, we are the number 3 ranked licensed producer nationally. And as I noted at the onset, We reclaimed the number 2 spot in October as we were the 2nd top selling producer of dried flower nationally for the Q3, sitting only behind a competitor Who attained the top spot by purchasing market share via acquisitions. I've challenged the team to retake the top spot in flower, again, Through organic efforts. To their credit, the latest data shows that we are now neck and neck with our competitor for that number one position.

Speaker 1

And I will note here that as at the end of October, we had achieved 5 consecutive months of expansion in our share of the dried flower market nationally. What's especially noteworthy here is the increasing breadth of contribution to our market share By brand, by product and by geography. With respect to geography, I want to recognize the contribution of Rose Life Science. Rose holds a number 2 market share position in Quebec and is the fastest growing producer in the province. Rose has been one of the most, If not the most successful acquisitions in Canada, largely due to our relentless strategic focus on driving shareholder value And the strong partnership between the Pure Sun, Farms and Rose teams.

Speaker 1

During the Q3, We also highlight the increase in bulk non branded sales reflecting a purpose driven decision to return to this channel Our supply dynamics improve the profitability of these sales. We achieved this alongside our return to the ranking nationally in branded sales proving out the benefit of our leadership in cultivation, commercialization and innovation for multiple growth opportunities. International sales contributed less in Q3 than it did in the 1st 2 quarters of the year, A variance which reflects the start up nature of the industry in our business. Year to date, international sales are up more than 2.5 fold from last year. And I admit it's a small base, but it does not but it does underscore the growth potential and long term trend we expect from these markets, Which I will remind you typically have higher margins in the Canadian market.

Speaker 1

As we add customers in new We expect growth in this business to be more steady and predictable. Speaking of which, the Netherlands government recently issued a favorable final update to the rollout of its legal recreational cannabis program. This has provided clarity for our plans for Lely Holland, Which is just one of 10 licenses that allow participation in the program. We are moving forward and excited about the opportunity what now looks to be a fully integrated supply model. Turning now to U.

Speaker 1

S. Cannabis, Balance Health Botanicals demonstrated another quarter of stabilized performance once again generating positive net income, Adjusted EBITDA and positive cash flow. Last month, we launched a new visual brand for CBD distillery, including A revamped website focused on wellness and attributes of its products. Even in the challenging U. S.

Speaker 1

Market for CBD, we are focused on and we are Now moving on to fresh produce, our Q3 performance took another step forward, our goal of our goal in achieving Sustainable long term profitability. We are effectively managing the higher cost environment, which we now operate, And we continue to make strong steady progress in managing the brown rugosa rye virus. This is not only through enhanced operating procedures across all operations, But also the implementation of virus tolerant and increasingly virus resistant strains and minimizing the potential for future impact. We are also benefiting from higher pricing. As a result, Fresh Produce delivered positive adjusted EBITDA adding to our positive total for 20 23 so far.

Speaker 1

That's a $5,000,000 improvement over Q3 last year and brings the improvement for the year to date to more than $22,000,000 This is a great start to a new chapter for fresh produce. Our next goals for fresh are sustainable profitability and ultimately cash flow generation. And I am confident we can get there. I will now turn the call over to Steve for a more detailed review of the financials. Steve?

Speaker 1

Thanks, Mike. As Mike noted, another quarter of solid performances from each

Speaker 2

of our businesses. Consolidated net loss for the quarter narrowed to $1,300,000 or a $0.01 per share Earnings per share from a net loss of $8,700,000 or $0.10 per share for the same period last year. Notably, each quarter this year has posted a sequential improvement over the prior. Consolidated sales for Q3 were $69,500,000 compared with $71,100,000 The 2% decrease was largely the result of slightly lower cannabis sales compared to the same period last year As well as a small negative impact on FX due to a stronger U. S.

Speaker 2

Dollar in Q3 2023 versus Q3 2022 as The USD is our reporting currency. We delivered another quarter of positive consolidated adjusted EBITDA in Q3 at $3,200,000 a $5,400,000 improvement from the negative $2,200,000 in Q3 last year. The improvement was driven mainly by fresh produce, but also higher EBITDA from our U. S. Cannabis business as well as lower corporate costs.

Speaker 2

I will now turn to our Canadian cannabis results. As usual, I will discuss these in Canadian dollars to assist in year over year comparisons absent the impact of Exchange rate fluctuations. As Mike noted, our Canadian cannabis operations delivered another quarter of positive EBITDA as well as positive cash flow and positive earnings. Total Canadian cannabis sales were $38,700,000 compared with $39,800,000 for Q3 last year. Breakdown into its component parts, retail branded sales, which comprised about 80% of total Canadian cannabis sales for Q3 were $31,000,000 down slightly from $32,800,000 in Q3 2022.

Speaker 2

International exports from Canada were down slightly to $900,000 compared to $1,100,000 in Q3 last year. Export sales for the year to date were up 162% compared to the same period last year. I mentioned as I mentioned last quarter, we are seeing an increase in inquiries and sales for non branded or wholesale product Due to what we believe is less availability of consistent high quality biomass as many producers have been moving to asset light models or have sold through inventories to generate cash. That translated into higher non branded sales Q3 of $6,000,000 which was up from both $4,900,000 in Q3 last year and $3,900,000 for Q2 of this year. Pricing in this channel has improved.

Speaker 2

While demand is up, we continue to be very strategic and selective around our non branded sales. Gross margin for Canadian cannabis for Q3 were 35% compared with last year's 32%. Last year's gross margins figure of 32% Excludes the impact on our reported Q3 2022 margin of 27% due to the impact of acquisition accounting and inventory adjustments In our Q3 2022 results, the year on year increase is primarily due to a continuing lower book cost per gram as well as a slight favorable exchange rate fluctuation. As we've stated since our entry into the cannabis space, we will continue to improve our operational efficiencies As we learn, innovate and broaden our cannabis experience expertise. Selling and general administrative expenses Canadian cannabis for Q3 were $10,200,000 down from $10,500,000 both in Q3 last year and Q2 this year.

Speaker 2

As a percent of sales, SG and A for Q3 was unchanged at 26%. Canadian cannabis adjusted EBITDA was $6,200,000 compared with $6,700,000 for Q3 last year as well as Q2 of this year. As already noted, adjusted EBITDA for the year to date is up 37% for a 400 basis point expansion into EBITDA margin to 16%. Canadian Canvas net income was $3,800,000 up significantly from net income of $200,000 for Q3 last year and more than double the $1,700,000 for Q2 of this year. Cash generation after all capital expenditures and debt service payments was also positive at $5,100,000 Up meaningfully from $1,300,000 last year.

Speaker 2

As Mike noted at the onset, we have stabilized our U. S. Cannabis business. And as reflected in the financial results, U. S.

Speaker 2

Cannabis sales, which were generated entirely by Balance Health Botanicals, were $5,000,000 down slightly from $5,100,000 for Q3 last year. U. S. Cannabis gross margin was 64% Compared with 69% Q3 last year, primarily due to the ongoing transition of our customers from tinctures to gummies, partly due to the success of our Synergy Plus line. Adjusted EBITDA for U.

Speaker 2

S. Cannabis was positive $200,000 a slight improvement over what was essentially breakeven performance in Q3 last year. Finally, U. S. Cannabis generated net income of $79,000 as well as Positive cash flow in the quarter.

Speaker 2

Turning now to Fresh Produce. We delivered a positive EBITDA quarter, I had not projected but asked during our Q2 earnings call in August. This is a result of Improved pricing in the later half of our third quarter and better volumes from our third party supply partners as we slowly but surely regain our volume After losing 2 key third party suppliers to the end of calendar year 2022. Produce sales were up slightly year over year to 30 $5,700,000 with a strong increase in sales from our own greenhouses being substantially offset by a decrease in supply partner revenues versus last year. Sales from our own production increased 28%, which was driven by a 26% increase in the average selling price and an 8% increase in pounds produced.

Speaker 2

Well, there's a lot of good operational news in our Q3 report. I do want to note that our BF Fresh gross margin was positive 1,500,000 For a 3 a 4.2 gross margin versus reporting gross margin losses in this business line every quarter since Q4 2021 When we reported a positive gross margin and gross margin percentage of 6.8%. Fresh produce delivered another quarter of positive adjusted EBITDA nearly $800,000 That's a $5,700,000 improvement over Q3 last year, which brings the year to date improvement to $22,500,000 As Q4 is typically a Seasonally stronger quarter for Fresh, we expect to achieve positive gross margin and EBITDA in Q4. I will note, however, that we are still dealing with some inflationary pressures on some input costs, which are challenging to pass on to our big box retail customers. Q3 net loss for fresh produce Also improved significantly to a loss of $950,000 from a loss of $4,600,000 for the same quarter last year.

Speaker 2

I am pleased to report a positive cash flow from Fresh Produce, which benefited from the receipt of a vendor settlement in Q3 that we reported in our earnings Q2. As we look ahead to next year, we have made the strategic decision to deploy half of our Delta 2 Facility not currently being used to grow cannabis to grow tomatoes, at least for the 2024 calendar year. Health Canada now permits other crops to be grown in licensed facilities, which was not allowed since the inception of the cannabis regulations. This pivot is due to a number of factors. 1, the change in the regulations 2, the continuing improvements in our cannabis yields, Hence, one of the key reasons for our cost of sales decreasing.

Speaker 2

And 3, historically, our tomato operations in Delta 2 were profitable. The additional production is expected to contribute incremental cash flow and profitability to our BF Fresh division. This change will have no impact on our ability to meet expected cannabis demand and is in fact a great opportunity for us to utilize what has been an idle area in our Greenhouses to generate profitable revenues in this swing space now that regulations allow us to grow cannabis with other crops within a licensed facility. Turning now to cash and the balance sheet. Cash at the end of the 3rd quarter increased to $40,500,000 Up from $31,700,000 at the end of Q2 of this year, while our working capital at the end of the 3rd quarter was relatively Unchanged compared to Q2 at $84,300,000 in working capital, which are significant improvements from $21,700,000 in cash And $60,800,000 in working capital at the end of last year.

Speaker 2

Total debt at the end of Q3 was $53,000,000 down sharply from $55,000,000 at the end of Q2, our quarterly principal debt service payments are close to $1,500,000 per quarter. And now I'll turn the

Speaker 1

Call back to Mike. Thanks, Steve. For 30 plus years, we have built Village Farms with a deep and reverent respect for cultivation as the core from which to build our business. Some refer to us as farmers. More recently, we were described as low cost or value growers who had no clue how to build brands.

Speaker 1

This quarter and in fact 2023 year to date challenges this simplistic viewpoint. It shows how deep our deep experience and resulting competitive advantage Cultivation is enabling, indeed funding leadership roles in critical areas that separate the best consumer goods companies from everyone else. Getting cultivation right as we are proving out is providing us with bandwidth to innovate and other critical functions, which are now driving Sustainable profitable market share and cash flow. Importantly, these are the same pillars of success That will be the foundation as we look to expand our Canadian model as new cannabis markets open around the world. It's a continuing growth opportunity.

Speaker 1

We farmers are very excited about. So, operator, I'll turn it over to you for call for any questions at this point. Thank you. Go ahead, operator.

Operator

Our first question will come from the line of Aaron Grey with Alliance Global Partners.

Speaker 3

Hi, good morning and congrats on the quarter here. Mike, I want to kind of jump off where you left off in terms of kind of proving out that CPG capability and going on beyond just kind of the produce that you had mentioned. So if you can speak to how you're viewing brand architecture today, Particularly with the launch of value brand Fraser Valley, which we understand was necessary to compete with some of the pricing pressure. Some of the third party does from Pearson Farms to Frasier. So just wanted some color in terms of how are you seeing the premium mainstream value mix evolving within the category?

Speaker 3

Then as well within your own portfolio as we continue to see the industry evolve here. Thanks.

Speaker 1

Sure. Thanks, Aaron. Yes, it's Somewhat is testing. I mean, we really focus on consumer insights before we launch our brand. So clearly with Fraser Valley, That was a segment, especially on the West Coast, but now resonates on the East Coast or at least in Ontario where we had sort of the number one Launched there with Fraser Valley.

Speaker 1

And then the quality of Fraser Valley is just exceptional. So the quality and the pricing resonated well and it's become a strong player for us. But equally, We launched SOAR a year ago, which is in that premium category and we never expected the premium category to be more than 5% or ten With the current economic situation, but it's doing very well. And then 3rd, that's Put some pressure on our PureSO Farms brand. But I think it's an ebb and flow and the economy has a lot to do with it.

Speaker 1

So we continue to innovate. The other side of it is really newness within those brands. And keep in mind that Rose Life Science has a number of brands that are resonating very well, not just in Quebec, but in other provinces going forward. And now We continue to drive newness, innovation. We need to know where we're going to be in 2025 right now with our launches.

Speaker 1

And it takes a lot of energy, a lot of effort, a lot of time and money. You have to continue the trial. And we're actually working on some very unique things, which probably talk about it in the next quarter going forward, but I hope that gives you some color.

Speaker 3

No, it does. That's very helpful. And then second question for me on non branded sales. We saw a nice uptick sequentially. So was that driven more by a one off sale?

Speaker 3

There a new line of business you expect to generate from there on a reoccurring basis? You kind of alluded to that in the prepared remarks. So just fair to say some of that increase in mix? And then also on the other part of that on gross margin, Some of the pressure we saw in that sequentially, was that driven by some of the non branded mix? So just how we think about that sales going forward in terms of new generating business on a reoccurring basis?

Speaker 3

And then how any type of gross margin impact we have there? Thank you.

Speaker 1

No, actually gross margin, we're very satisfied with the gross margin on our B2B business, We made a strategic decision at the beginning of this year to sort of open up. We wanted to prove Internally to the company as well as to our consumers and distributors and the provinces that we can be a very strong branded Company, and I think we proved that out. We continue to prove it out. So that there was a big focus on just being very myopic On the branding side, however, we are focused on cash flow generation. Those were the marching orders early on and strategically we decided Let's open up our B and B business.

Speaker 1

We have capacity. The margins are good. That's not the reason we see margin change. And then we were watching the dynamics in the industry. There was a lot of flower available and slowly that seemed to be driving up.

Speaker 1

A number of companies changed their model to a light asset model. And if we can drive greater profitability, greater revenue, greater Sales, we're going to take that business on. And of course, for international, in a way that's B2B as well. So this just It parallels that very nicely and we're going to continue moving forward B2B.

Speaker 3

Great. Thanks for the call. I'll jump back in the queue.

Operator

Our next question will come from the line of Eric DeLongier with Craig Hallum.

Speaker 4

Great. Thank you for taking my questions and congratulations on strong results here.

Speaker 1

Thanks, Eric.

Speaker 4

I was hoping you could drill in a bit more into some of the changes in produce this quarter. So obviously, Some moving parts here. One of the profitability drivers here is the increase in volumes, it sounds like. I'm wondering if you could also just help us understand or perhaps just kind of drill in a bit more deeply into some of the operational improvements that you've made. I know recently you've kind of spoken about AI Investments for produce.

Speaker 4

If you could kind of just give us an update overall on the operational improvements that you have made in that segment and sort of How to think about perhaps the difference in operating expenses versus cost of goods sold kind of going forward? Where should we Look to see some of that improvement going forward. Thanks.

Speaker 1

Well, I think, look, last year was the worst year we had in produce in 30 3 years. So it was a very difficult year, but it was really driven by a number of factors. It was a perfect Inflationary pressures that really started post COVID that were astronomical. When you look at diesel fuel, Shipping 1,000 plus trucks a year, that's in our cost of sales. It was crazy.

Speaker 1

Everything went ballistic. Fertilizer costs were up 65%, 70%, corrugated costs for all the pack materials across the board and labor skyrocketed across the board. Even Based on our foreign worker program, Department of Labor continues to drive costs up 7% a year. So all that was happening while we were battling The virus and we are always in agriculture dealing with items out of our control, viruses, bacterias, insect, So on, but this was sort of one of the worst I've ever seen. Thank God, we're seeing we're putting in every day more and more tolerance, More varieties that are tolerant, which means they may get the virus, but they can tolerate it.

Speaker 1

And that's very important. And we are now Starting to see the first of totally resistant varieties. So it's taken a long time. Even once the resistance Gene was ready to be spliced into the new varieties. It still takes 11 turns of growing parent after parent after parent until it's finally in there.

Speaker 1

So we had to be patient about it. So that's probably the biggest impact. Simultaneously, we talked about putting AI systems that were concurrent as a very strong co pilot with our growers that are monitoring thousands of data points Every second of the day, every day of the year. That is a big help. We've also invested this year Close to $4,000,000 in new technology to drive our labor costs down.

Speaker 1

As we speak right now, Most of that equipment is being installed, which will have a benefit going forward in 2024. You saw our yields are starting to be up and That's directly affected by both the less impact from the virus as well as Working with our AI system. That being said too, a big part of our profitability is working with our 3rd party growers. And due to the virus, We lost 2 of them, 1 switched into Berry's and 1 went out of business. So we're rebuilding that and we're very bullish.

Speaker 1

I was just in Mexico last We covered there in June. We're building our relationships going forward. So I think it's all accumulative. It's not just one thing that's going to drive it. And we'll continue to look at driving our gross margin higher.

Speaker 1

Pricing has been more solid. Finally, I think the industry had to realize This is not cutting prices against your competition, but trying to drive higher prices so the industry can survive and it seems to be resonating With a lot of our competitors. So we're bullish. That being said, it is a commodity and There is fluctuations quarter to quarter, but I think overall we're headed in a very strong direction. The $22,000,000 Turnover in 1 year is not easy to do, especially in agriculture.

Speaker 1

So I hope that gives you the color you need, Eric.

Speaker 4

Yes. No, that was very helpful and great to hear. If I could just kind of double click on that a bit more. So obviously granted that we are dealing With commodities here and no one's in charge of pricing, do you feel that perhaps once this new technology is Fully layered in, in 2024 that you sort of have what you need now to reach a sustainably profitable Produce business or are there other areas that you may look to kind of drive down costs going forward before you're kind of You feel sort of comfortable that at least from what's in your control that you're kind of out of the woods here?

Speaker 1

Yes, I do. The only thing the only uncertainty would be where inflation goes. And even our interest Our loans have skyrocketed over the years. So it's there's not been one area that hasn't been had a negative effect. And I think as for example, even though our interest rate that we pay On our produce business, it's not directly tied to operational efficiencies and excellence.

Speaker 1

It does matter. So I think 2024 is really a very strong pivotal year for us to get to sustainable profitability Going forward, I feel pretty solid on that.

Speaker 4

That's great to hear. And just last question for me, just looking for an update on the Potential sale of the greenhouse in Texas?

Speaker 1

I don't have anything to report. We're working it. We're not just sitting on our laurels, but I think with the economy the way it is, some other things that Happened in the industry, we just have to be patient. But as you can see, what Steve reported, where our cash position is and our working capital. So That will eventually go and it will be a nice nice day that we'll have to reinvest hopefully in 2024.

Speaker 4

All right. Thanks for the color and congrats again.

Speaker 1

Thanks.

Operator

Our next question comes from the line of Mike Regan with Excelsior Equities.

Speaker 5

Yes. Hi. Thanks for taking the question and congrats on a really good quarter. In terms of We've seen a lot of the capacity start to some of your competitors trying to shut down capacity in Canada. And it's interesting that some of that Swing capacity for cannabis will be planted tomatoes now.

Speaker 5

I guess, are you starting to see any impact on sort of The reduction in capacity then allowing you to potentially actually add to that capacity? Or is it just more that you're getting so much improvements on your yields You don't need to you can reduce that swing capacity and just generate some cash out of it.

Speaker 1

Yes, we're seeing we're finally seeing sometimes things never change and then there's a domino effect and Maybe 2024 is that year of reckoning within excess capacity that we've seen for so many years in the Canadian marketplace. So we are seeing, well, a lot of companies have publicly reported that they're either not going to participate in the Canadian cannabis retail market, Maybe focus on overseas or other cannabis markets. Some have indicated That they will be a light asset model and so on. And that's fine. We have nothing good or bad Say, but if they are a potential customer and we could work with them to the mutual benefit because our driver is positive cash flow increased revenues, While we're looking at our own expansion and profitable market share, we're going to do so.

Speaker 1

So we are seeing some changes happening. I think what was out there for companies just trying to generate cash without being profitable, it's not very durable, so it's got to change. So we're definitely going to participate in that. Now keep in mind, we do have Excess capacity because as Steve reported, our yields have been increasing. We said that 5 years ago that Growing is a continuous improvement process.

Speaker 1

You get better at it. Hopefully, you get better at it and We could drive your yields up, which drives your costs down. So we're in a good position. We have excess Square footage we can put to use. We're very focused now.

Speaker 1

Now that we've reached sort of profitability and a market Share position in Canada. Now we're very serious about going international. I think some companies maybe When international before Canada was right, we had a different approach. Let's get Canada right and going and then go international. So we're really looking forward to Increased penetration in the international markets in 2024 and we have the capacity to do so.

Speaker 1

So I think we could service our own needs. We could be a B2B and we could definitely drive international capacity as well going into 2024 2025.

Speaker 5

And then as a quick follow-up, we've written about how Ontario has changed the pricing structure the licensed producers and the retailers there, the benefit of licensed producers and the retailers. And it's only it's still a bit early, but is there any commentary on how You're seeing those pricing changes and volume changes or any volume changes in Ontario at this point?

Speaker 2

Mike, this is Steve. Thanks for the question. Very good observation. As you point out, The market markup changed at the end of September, so really no impact on Q3 at all. We have great transparency with the pricing structure in Ontario and some of the other provinces.

Speaker 2

To date, so it's been a whole month, we have benefited from the change. We have decided as a company to keep our pricing the same at retail. So we effectively the way it works, we realize 100% of the margin decrease by OCS. So we'll see a 5% increase in our margins in OCS. What other LPs are doing or not doing, We think most will follow us, but it remains to be seen whether people will Chase prices down or we've decided to keep the margin to ourselves.

Operator

Our next question will come from the line of Eric Lipschitz with ATB Capital Markets. Eric, your line is now open.

Speaker 3

Hi. So given The positive cash flow generation this quarter. I'm just wondering, do you see this as somewhat of a turning point in cash flow generation for the company? Or should we expect cash flows to kind of just be more bumpy in the quarters ahead? Thank you.

Speaker 1

Well, I think they may be somewhat lumpy in the quarters ahead, but on the positive side. That's our focus is positive cash generation. If our market share slips, it's because we don't deem it profitable market share, we're just not going to chase it. Those days, I think, are over and we could see What that's done to a number of companies just chasing unprofitable market share. So with our Very parochial focus on profitable market share.

Speaker 1

I think we're going to stay positive. We're driving our costs down. Now it may not be steady every single quarter, but probably won't be. But I think overall on an annual basis, we can say we're going to be to the positive side.

Speaker 3

Great. Thank you so much.

Operator

Thanks. Thank you. I'd now like to turn the call back to Anne for another question.

Speaker 6

Thanks, Liz. Before we conclude, we wanted to highlight a question that came in via email related to the Canadian distribution model and the purchasing policies of large provincial buyers. Policies of large provincial buyers. It's a great multipart question from a clearly engaged Shareholder that we appreciated getting. What the question boils down to is whether we and other LPs are missing out on sales Due to ordering practices of the provincial buyers.

Speaker 1

Thanks Anne. And the question to that, short answer is no. We have excellent relationships with all the provinces and territories we supply. We know all boards are working hard to ensure market Mande has met with their supply and we're working closely with them to provide much more accurate forecasting and trying to maximize product penetration To meet their demand. So I think it's a synergistic opportunity for us.

Speaker 1

And it's still a nascent industry, so we're not always getting it right, but we're working together and getting better together To the benefit of us, but ultimately to the benefit of the consumer. So hope that suffices. So thank you, Liz, and thanks, everyone, for joining us today. We look forward to speaking to you And our next call going forward for year end and Q4. Thank you all.

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Earnings Conference Call
Village Farms International Q3 2023
00:00 / 00:00