Village Farms International Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Village Farms International's First Quarter 2023 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the Q1 ended March 31, 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 rebroadcast live over the Internet and will be archived for replay both via 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 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 ks MD and A for the year ended December 31, 2022 and 10 Q for the quarter ended March 31, 2023, which will be available on EDGAR.

Operator

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

Speaker 1

Thank you, Bella. Good morning, everyone, and thank you for joining us on today's call. With me are Village Farms' Chief Financial Officer, Steve Bruffini Village Farms' Head of Canadian Cannabis, Mandeep Dosanj and Village Farms' Executive Vice President of Corporate Affairs, Anne Gillan Lefebvre and Patti Smith, Vice President and Corporate Controller. As per our usual format, Steve and I will review the operating highlights and financial results for the quarter then open up the call for questions. So let's begin.

Speaker 1

The Q1 was a solid start to 2023 with 3 particularly noteworthy highlights. First, our fresh produce business is tracking towards Algoa achieving sustainable positive adjusted EBITDA for this year. Fresh delivered its 3rd consecutive quarter of significant sequential improvement, approaching breakeven adjusted EBITDA with a Q1 EBITDA loss of Just under $1,000,000 That's a $5,200,000 turnaround from Q1 last year and a $2,000,000 improvement from Q4. While there's still much work to be done, I'm encouraged by the meaningful and steady progress over the past several quarters. 2nd, Despite what remains a very difficult environment in which to operate, our Canadian cannabis business continues to be one of the best and most consistent performers in the country.

Speaker 1

Retail branded sales once again significantly outpaced market growth and we expanded market share while continuing to generate positive adjusted EBITDA, which we did again this quarter. And third, we have added markets to our Canadian export channel, which is generating strong momentum in this part of our international cannabis strategy, where margins are much higher and taxation is rational. Let me address each of these starting with Canadian cannabis first. Village Farms' Canadian cannabis business keeps putting up big points on the scoreboard, which in a normal operating environment would be recognized. There are 3 key areas in which the team continues to deliver.

Speaker 1

1, our number one position in dried flower category nationally, which we have held consistently for 5 quarters now and which remains the largest product category and the basis for all product formats. 2, our strategic acquisition of Rose Life Science, which has been accretive to their growth in the important Quebec market and thus a contributor to our overall growth and 3, our execution, commercialization and investment in innovation, which propelled us into the number 2 market share position overall last year and which we maintained during Q1 of this year. Notably, we are one of just 3 of the top 10 producers that meaningfully grew market share over the past year, and we outpaced the 2nd biggest gainer by more than 2 to 1. Our low cost production capabilities and continued incremental gains And our efficiency enabled us to generate year over year growth in adjusted EBITDA, our 18th consecutive quarter in positive territory. Despite the proven and sustainable strategic advantages built into our Canadian cannabis model, we are operating in a structure that keeps much beyond our control.

Speaker 1

It feels like we are playing the game with one hand and both feet tied behind our back. The iconic federal legalization of cannabis in Canada is approaching the 6 year mark. It was a bold, courageous and progressive move designed to bring about the availability of a safe regulated product, create a new healthy competitive industry and convert in a listed market into beneficial tax revenue. As we speak with many other governments exploring legalization, we are asked about the Canadian model. There are many positives.

Speaker 1

The availability of a safe regulated product, innovation and emerging research to benefit the consumer and a partnership between operators and regulators where the rules are largely transparent or at least a means to discuss. Yet as we and other LPs have noted respectfully in our conversations with the regulators, the Canadian excise tax is strangling the economics of producers, and as a result, not generating the sustainable tax dollars the government expected. To put this in context, Q1 alone, we incurred CAD18.6 million in excise tax, More than our entire payroll expense on branded sales of $47,000,000 or 40% of our provincial sales in the quarter. This does not include payroll tax or property tax or licensing tax or income tax. If we were an alcohol tobacco company That nearly $19,000,000 in excise tax would be in a neighborhood of just under $5,000,000 Let me say that again.

Speaker 1

If we were an alcohol tobacco company, We'd have paid roughly $14,000,000 less in tax this quarter alone. It's ludicrous. It's not surprising that then as others have noted, the majority of LPs are not paying these taxes. We suspect the economics do not allow it. It has been well documented by industry experts that the government is solely the most profitable entity in the Canadian cannabis supply chain And we believe the illicit trade is likely the safest most profitable.

Speaker 1

This is perverse. The illicit market has ample room to underprice the legal, Safe market, a major reason why the illicit market remains strong and underground for the industry. It's questionable, Ben, if the legal industry will be able to convert the remaining 40% or so of all Canadian cannabis sales That is still a listed product under the current excise tax regime. This is clearly inconsistent with the industry's It's a desired contribution in that it challenges local enforcement efforts. It challenges profitability.

Speaker 1

Just look at the lack of corporate income tax Contributions, the thousands of job losses and impacts on ancillary businesses and local communities. And it challenges future investment. Innovation cannot be out of continued capital injection. I feel this is another area that illicit trade can surpass More relative to the tax structure, flat per gram tax takes the absurdity to another level in the contents of the rapid expansion of the value segment of the market, including our own Fraser Valley with them. All of this is one reason we are attracted to the opportunities in international markets, the second highlight for our Q1.

Speaker 1

Leveraging We're experiencing Canada for international opportunities with their attractive profit profile as a core part of our cannabis strategy and we are seeing very good momentum. Year over year export sales were up more than tenfold and now contribute nearly 7% to our Canadian cannabis segment sales. Most of the export growth to date, including this quarter, has come from our 1st export market in Australia. Earlier this year, we added a second export market with the launch of And last week, we announced our launch in the German medicinal market. After successfully completing all testing protocols, a testament to our team and local partner, IUVO Therapeutics.

Speaker 1

While the lead up to both market launches had its delays, I'm pleased that we have received follow on orders for both countries and we are thrilled to build our business with local partners. And then finally, my third takeaway for Q1, a significant turnaround in our Fresh is an important strategic business for Village Farms. We are committed to de risking it and returning it to Profitability as part of our long term growth strategy. Q1 was another very encouraging step in that direction. The macro environment has improved, Oversupply is getting under control and we have made adjustments for inflation.

Speaker 1

We continue to work on our improvements across all Our operations from Greenhouse to customers receiving docs, including best in class operating protocols to manage plant Viruses, as you know, that's been difficult the last few years. Our fresh results for the Q1 continue to support our confidence in sustainable improvement, improved financial performance for our produce business this year and reinforce our belief in the value of this business. Fresh and cannabis are synergistic. Each benefits from the other's expertise, assets and deep rooted experience. We have capitalized on these synergies in Canada and have long eyed the United States.

Speaker 1

As such, we have formally applied for medicinal license in Texas, With the lead use of medicinal cannabis may be greatly expanded to include chronic pain. While the number of potential licenses and timing Of when the state will make a decision are unknown. We are encouraged by the potential to contribute our cannabis expertise, Objections of investment in the state of Texas and our deep agricultural roots to any future plans by Texas to award additional licenses. Should we receive a license, we will work with the stock exchanges towards an acceptable ownership structure that would enable us to participate in the market. With respect to our current CBD business in the United States, Balance Health Botanicals We continue to benefit from the success of Synergy Plus and its line of products last year.

Speaker 1

So far this year, this business is operating more or less on plan and with the continued focus on costs Supporting near breakeven adjusted EBITDA. Regulation of the CBD business would be a meaningful game changer for this business and we eagerly await the outcome of the Farm Bill 2023 this year, the potential review of the category. In the meantime, the team is operating under the highest production And it's both from our current customers as well as the opportunity to expand when food, drug, mass retails are ready and open.

Speaker 2

So with that, I will turn the call over to Steve for a more detailed review of financials. Steve? Thanks, Mike. Consolidated sales for all of Village Farms for the Q1 were $64,700,000 a decrease of 8% from Q1 of last year, with the decrease due to lower sales from fresh produce and U. S.

Speaker 2

Cannabis, which were partially offset by Canadian cannabis sales. On a constant currency basis, sales declined 5% with the stronger year over year U. S. Dollar reducing our reported number by 2.6%. On a constant currency basis, our cannabis business sales were 48% of our consolidated U.

Speaker 2

S. Dollar Sales. Consolidated net loss for the quarter was $6,600,000 or $0.06 per share compared to a net loss of $6,500,000 or $0.07 per share for the same period last year. The slight increase in net loss was mainly due to our improved operating loss of improvement of $2,500,000 being offset by a higher year on year And our income tax expense of $2,300,000 as we are booking a valuation allowance for our U. S.

Speaker 2

Tax losses, which we started in Q4 of 2022. Operating loss before tax for Q1 improved 27% from Q1 last year. Improvement was mainly the result of the improved operating performance from VF Fresh. Consolidated adjusted EBITDA for Q1 was $519,000 This is a significant year over year improvement from negative $6,100,000 for Q1 last year. Is mainly the result of the $5,200,000 Fresh Produce EBITDA turnaround Mike discussed earlier, as well as higher EBITDA from our Canadian businesses and a 13% year over year decrease in corporate cost to $2,200,000 excluding stock compensation.

Speaker 2

Turning to our Canadian cannabis results, which I will discuss in Canadian dollars provide a more accurate gauge of period to period performance without exchange fluctuations. Net sales for Q1 grew 23% year over year to $34,000,000 with retail branded sales growing 40%, once again outpacing overall Canadian market growth by a wide margin. Beginning this quarter, we are breaking out our international export sales in our Canadian cannabis business as they are becoming a larger part of our sales mix. And as Mike discussed, with more favorable margins, it is an increased focus for us. International sales were $1,700,000 which was a 7 50% increase over Q1 of last year.

Speaker 2

Non branded or wholesale sales for Q1 were $2,300,000 compared with $4,900,000 in Q1 last year. As already low spot prices in an oversupplied market were further eroded by large inventory liquidations. As we have discussed many times, the wholesale market is opportunistic for us and we have been selective around our participation in the current market environment with the expectation of improved pricing when supply is more aligned with the need. Gross margin for Canadian cannabis in Q1 was 33%, essentially in line with our 34% in adjusted gross margin we reported in Q1 of 2022, which excluded the purchase price Inventory adjustment in that period. The slight decrease in margin was primarily related to U.

Speaker 2

S. Sales mix With a higher portion of lower margin Fraser Valley sales as that brand continues to have success in the value segment of the market And it was not launched until the back half of twenty twenty two, being for the most part offset by the higher margins on our higher international sales. Selling, general and administrative expenses for Canadian cannabis for Q1 were $9,300,000 or 27 percent of net sales, Unchanged from $9,300,000 in Q1 last year, but down as a percentage of sales from 34% in Q1 2022. On a sequential basis, SG and A costs were down on a dollar on dollar basis from $9,800,000 in Q4, an unchanged as a percent of sales. I will note that Q1 is typically elevated on a percentage of sales basis due to seasonally lower sales.

Speaker 2

SG and A cost efficiency remained an organizational wide focus. Our Canadian cannabis operations delivered their 18th consecutive quarter Positive adjusted EBITDA of $5,300,000 which was up 95% from $2,700,000 for the Q1 of last year. We continue to generate solid positive EBITDA in a tough and uber competitive pricing market. Moving now to our U. S.

Speaker 2

Cannabis operations for which I'll Revert back to U. S. Dollars. U. S.

Speaker 2

Cannabis sales for Q1 2023 generated entirely by our CBD business, balanced health were $5,000,000 generating a gross margin of 65%. This compares with sales of $7,000,000 and a gross margin of 67% for Q1 last year. The sales decrease is primarily due to the industry wide challenges, which we have mitigated with new product Introductions including our Synergy Plus line of hemp derived THC products. Adjusted EBITDA for U. S.

Speaker 2

Cannabis was just under breakeven at negative $151,000 compared to a positive $580,000 in adjusted EBITDA in Q1 of last year. Based on the information we have, we continue to believe that we are outperforming the majority of CBD focused peers. Turning now to fresh produce. Although our financial performance continues to be impacted by inflationary pressures, we achieved our 3rd consecutive quarter of sequential improvement in this business, which resulted in a considerable year over year improvement. Produce sales were down 16% year over year With an increase in sales from our own facilities being offset by lower produce sales from our other suppliers due to lower year on year volumes as we transition our partner growers during 2023.

Speaker 2

Lower year on year volumes were offset by a 27% increase in price due to both generally higher market pricing in early 2023 versus early 2022 as well as our success in having a higher percentage of ViaFresh sales Going direct to retail accounts, who generally pay a higher price than our wholesale accounts, which is one of the early wins in our operational plan. The higher sales price is the primary driver of our improved EBITDA. Adjusted EBITDA loss for Fresh produce took another step closer to breakeven with a loss of $995,000 which was a substantial improvement over the loss of $6,200,000 in Q1 of last year as well as the negative $3,000,000 for Q4 of 2022. Our continued stabilization of the macro environment and our work on improving yields and customer profitability continues to support our confidence And substantially improved financial performance from this business in 2023. Turning now to cash and the balance sheet.

Speaker 2

At the end of Q1, we had Cash of $34,900,000 $80,300,000 of working capital, which are substantial increases from the $21,700,000 and $60,800,000 respectively at the end of the Q4 of 2022. Total debt at the end of Q1 was $52,000,000 down slightly from $53,500,000 at the end of the prior quarter as our recurring loan amortization is close to $1,500,000 per quarter. I'm also very pleased to report we extended the Pure Sunfarms revolving non revolving credit facility, Which now expired in February 2026 from February 2024 under the same terms, conditions and covenants. In the current environment of tighter credit, higher interest rates, lower risk tolerance, financial challenges with many Of our Canadian cannabis peers as well as the regulatory focus on the health of our financial institutions, the extension is a strong indicator by our lenders in our cannabis business operations. And now I'll turn the call back to Mike.

Speaker 1

Thank you, Steve. So in closing, I want to reiterate two points. 1, We are pursuing return enhancing growth opportunities that line up with our expertise and core capabilities.

Speaker 3

This focus

Speaker 1

matters. We are still in the very early stages of cannabis markets in North America and around the world. There are many wrinkles in these markets still to be ironed out. 2, we are holding ourselves accountable for what is in our control. And finally, I appreciate listening to our reflections on the challenges in the Canadian cannabis sector.

Speaker 1

I Appreciate the partnership of many in this industry. Governments are making bold decisions to revise decade long entrenched stigmas about cannabis, And we applaud their strategic rationale to provide a safe regulated product. This is core to our DNA also. Village Farms will continue to work with all regulators to get the balance right to achieve these goals for the benefit of the industry, for the benefit of consumers and for the benefit of Village Farms and all its stakeholders. We'll turn it over for calls at this point.

Speaker 1

Operator, Bella, we're ready.

Operator

Thank you. Please stand by while we can pass the union roster. And our first question comes from the line of Federico Gomez with ACV Capital Markets. Your line is now open.

Speaker 4

Hi, good morning. Thank you for taking my questions. First question is on the produce side. Can you maybe provide some more color on what exactly drove the margin improvement In produce, how much of it you think is under your control to maybe continue driving those improvements over the remainder of the year and how do you see that segment performing for the next two quarters? Thank you.

Speaker 1

Well, I mean, as I said, we are very focused on what's in our control on margins. So that's going to be driven by obviously there's been price compression that continues out there offset by innovation. And we see about 30% of each quarter 30% of A product being sold, there are new SKUs that are entering the market. On produce, I'm sorry. Understood that.

Speaker 1

So on produce, one of the examples is we have investing heavily in artificial intelligence and autonomous growing systems. As an example, we put 1 in a year and a half ago and we've had great results from it and now we're expanding that to all of our Texas Facilities in our Canadian produce facility starting in 2024. Early results are Positive in helping to drive increased yield, more efficiency, lower cost. We're investing heavily in automated equipment That will be operational in the fall with the new crops out of Texas, significant capital expenditures there, Close to $3,000,000 that will drive greater efficiency in labor. So we're managing that at the So to level, as Steve has said, we continue to manage and evaluate our retail customers to So right size our business for our most profitable customers, regardless of what that may do to revenue up and down, which is going to drive So I think contribution of all those factors and more We'll continue to drive higher margins.

Speaker 1

But keep in mind, it is a commoditized business and we are competing with Mexico and there is a limitation on driving higher gross margins, especially derived from price.

Speaker 4

Okay. Thanks Mike for that color. Just maybe moving on about Your application for a medical cannabis license in Texas. Can you talk maybe a little bit more about the potential opportunity you see? And then what sort of timeline can we expect there in terms of not only a decision on the license, but also actually potential start of sales?

Speaker 4

Thank you.

Speaker 1

Sure. So as you know, we've reported that even though we're expanding internationally in both on exports and looking at Operating in other countries, for us getting into the U. S. Market was always a priority. And we've undertaken that we will enter the U.

Speaker 1

S. Market one way or another. We have A number of different entry points that we're working on and Texas is 1. Now as you know, 4 years ago, the State of Texas Issue 3 licensed medicinal cannabis, which were incredibly restrictive. The only script the doctor can write was for one form of at least 13 different forms of epilepsy.

Speaker 1

So really had no traction there. And that's why 2 of the 3 license holders currently have really done nothing. 2 years ago in the last legislative session, they meet every 2 years in Texas, nothing was done in terms of additional licenses nor any improvement to the current restrictions. However, this session, what's happened now is both simultaneously Department of Public Safety for Texas has agreed to issue additional licenses. How many?

Speaker 1

We don't know. But we do know there were about 200,000 applicants, the cutoff date 200. 200, I'm sorry, 200 applicants. The cutoff date was the end of April. So that's a cutoff date.

Speaker 1

How many will be approved is uncertain. And there's a second round Of the ones that are approved by Texas, that will be up to the Governor Abbott to decide how many he issues. So that's One thing second thing that's happened simultaneously, which is incredibly positive is a bill that has already passed the House And the legislative session comes to a conclusion at the end of May. So there's about 15 actual working days left. And should the Senate pass this revised bill, the big takeaway is it includes chronic pain.

Speaker 1

And when you have chronic pain, which will include mental health issues, PTSD is already in. So it really drives Texas to be sort of a mainstream medicinal state and that chronic pain will give doctors a great opportunity to write So we're very excited if that passes. So that's why We've talked a lot about Texas and the Texas optionality. This is a great step in Texas. And as far as timing goes, We expect well, we'll know what the bill does very soon by the end of this month, as far as the legislative Session ending and passing, say, in advancement of the ability of chronic pain.

Speaker 1

As far as the licenses that will be issued and if We will get one. We should know that sometime in I would imagine by early fall, early to mid fall. So we're standing by for that.

Speaker 5

Thank you.

Speaker 4

Okay. Thanks for that. Maybe just a last question for me. Just looking maybe more big picture on your Canadian What we're seeing so far is, as you mentioned, a market that's very competitive, very fragmented, Suffering from pricing pressures and most of the value going to the government in pharma taxes. So What sort of catalyst or event should investors be waiting for this year regarding Village Or the overall industry that could change some of that some of those conditions.

Speaker 4

Thank you.

Speaker 1

Well, I mean the power of cannabis as a product is unbelievable. There was a New York Times article over the weekend that talked about Cannabis and what was a profound statement in that article was could you imagine if cannabis was invented for the first Time in this current day and age, it would be like the miracle plant of all time. But unfortunately, we're fighting these long stigmas Across the world, and that's part of the issue. I always look at it this way. We always talk that a cannabis investor Should be a long term investor.

Speaker 1

And I think if this is the type of investment where It's going to be an incredibly large global industry at some point. And for investors, what I would do is take a percent of my portfolio And invest it long term because it will pay off sometime and maybe for your kids, but that's okay too. It's coming. So for us, As we've reported, we are hunkering down. We are watching all our costs.

Speaker 1

We are trying to increase our market share innovation and be in a position that when there are these changes that will come that we want to be number 1 in the markets we enter. And I think everything we do and we've proven, if we get some relief on regulations and it's not just Taxes, it's other things as well. And we have to be patient, but it will come. And I think I don't know what other consumer product Currently has the potential of cannabis over the next 5 years. That's how I see it.

Speaker 1

Next question. Operator?

Operator

One moment for your next question. And your next Question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.

Speaker 6

Hi, good morning and thank you for the questions. So first one for me, just in terms of pricing in the Canadian marketplace, it seems There might be some early signs of stability from some of the 3rd party data, particularly in the flower category. So I appreciate Any color you might be able to provide in terms of what you're seeing in the marketplace on that stability, particularly given I know you took some price increases on certain SKUs. So What you're seeing in terms of flower pricing and how the price increases on those SKUs have been receptive in terms of the marketplace? Thanks.

Speaker 1

Sure. Mandeesh, why don't you take that question?

Speaker 7

Yes. Thanks, Mike. Thanks for the question, Aaron. So on pricing in the market, Yes, your data at Intel is pretty accurate. We're starting to see that flattening out and that stabilization specifically around flower And it kind of leveling out and not seeing a lot of major price activity.

Speaker 7

So you're spot on there and we're seeing the same thing. 2nd point on our general price increase that we started to take across the country. It started in late Q1, as I mentioned in the last earnings call in March. And so very positive reception. And what I mean by that is that retailers understood it.

Speaker 7

The boards were very supportive of it. And I think we started to even get some really good commentary from our competitive LP set that we were doing that. And I think it shows We're seeing good momentum behind it and we're not seeing any backlash from any of our customers. So all in all, Right move, positive for us, positive for the industry and it's being viewed as such.

Speaker 6

Okay. That's great to hear. Second question for me. You talked about artificial intelligence and how that Can I help the produce business? Sure.

Speaker 6

Anything you can leverage in that potentially for cannabis as well? Talked about helping drive increased yields, higher efficiency, lower cost, All things are helping produce, I would also imagine would help cannabis as well. So anything that you might be able to leverage in terms of artificial intelligence on produce and bring into the cannabis side? Thanks.

Speaker 1

Yes, absolutely. So we wanted to start with produce and then start in Texas. And now as I said, our Delta 1 facility, which One of the largest footprints in produce in the country will move forward there into the new year. But after that, we want to we're learning as Much as we can from it and then bring it into the cannabis side. So these are autonomous it's an autonomous growing system That is sort of having a co pilot with you 24 hours a day.

Speaker 1

So there'll be a tremendous amount of synergies, I think, in our cannabis business, not just in Canada Or Quebec or even especially in the U. S. Going forward. We've been looking at this technology for years and waiting for it and we're really excited. We're Sort of on the front burner of doing it.

Speaker 1

And so I think it will be very synergistic there. And remember, as we've always said, one of the key Pillars of excellence that we have is on the cultivation side. And besides building brands and being innovative and all the things you need to do to be a Successful consumer products company, especially in

Speaker 3

the

Speaker 1

cannabis space. We are still in agriculture and the most prudent thing is low cost production, Highest quality, low cost. So this is part of our overall continuous improvement process, and we're excited to look at that as the next step.

Speaker 6

Okay, great. Thank you very much for the call. I'll jump back in the queue.

Operator

One moment for your next question. And your next question comes from the line of Eric DeLongiere with Craig Hallum Capital Group. Your line is now open.

Speaker 3

Great. Thank you for taking my questions. First one for me, just wondering, now that you're breaking out international and your reported financials. If you could just comment on the expected pace of sales or perhaps timing of sales that you're expecting This year for international. Thanks.

Speaker 1

Yes. I mean, we're we think we feel very confident. I mean, first of all, Australia has really done well for us, very consistent.

Speaker 5

It

Speaker 1

takes a long time to really get Through the whole testing procedures and protocols, it's really unbelievable both domestically and in Canada as well as the other countries. So that's number 1. But the good news is like for Israel where we shipped in January in Germany, We've already received our secondary orders, so we're excited about it. But we want to be a little conservative going forward. We're looking for a 10 Increase this year, I think that can rise to 10% this year And then increasing the 15% going forward.

Speaker 1

We are working on other Countries which I'm not going to put out now. We never announced a new country, too. We've actually made a sale and it's been accepted. So I hope that answers your question.

Speaker 3

No, that's helpful. I appreciate that. And the next question from me, I apologize if you touched on this already, but just looking for an update to the Texas greenhouse that you guys have For sale, just if there's any progress to comment on there. Thanks.

Speaker 1

Well, it is officially for sale and that's all we know at this point.

Speaker 3

We have a long list

Speaker 1

of So, 260 possible folks receiving the package on it, and we want to move very quick. It is in production partly. So it is a little bit of a cost drag on us because we're not in full production. But hopefully, by the time we report in August, we'll have some good news on it. Thank you.

Speaker 5

You're welcome.

Operator

One moment for your next question. Your next question comes from the line of Michael Freeman with Raymond James. Please proceed with your question.

Speaker 5

Hey, good morning, Mike Steepa, and thanks very much for taking our question. And congratulations on a terrific turnaround in the VFRESH segment. That effort is quite fantastic. I Wanted to talk about BF Fresh and about some market cost of sales reductions year over year. Seeing Significant reduction in greenhouse costs, which I think I understand, but I wonder if you could touch on supply partner costs.

Speaker 5

It looks like they reduced $4,800,000 this quarter. Wonder if you could share some color on that.

Speaker 1

Well,

Speaker 2

this is Steve. The reduction in supply partner cost is direct Related to the reduced volume. So less volume, obviously less payments, so the 3rd party. So We generally work, we take possession of the produce they produce under our labels, various Village Farms labels And brands sell them to our retail accounts and essentially take a percentage off the top and remit the balance to Our supply partner. So less volume, less payments.

Speaker 5

Got you. That makes a ton of sense. Now, the next question, year over year for Pearson Farms, there's been a Big EBITDA margin expansion. Wondering if you could just describe the improvements What factors have been driving this massive year over year expansion?

Speaker 1

Mandy, do you want to take that call?

Speaker 7

Yes, I can shut it off. And if there's anything, Mike or Steve, that you want to add, he can chime in. Michael, thanks for calling that out and pointing it out. Mike alluded to some things earlier about it's always about Looking at your costs, making sure you can compete, and set yourself up for long term success. So We're always going to be looking at things around our cost structures, how we improve yield, how we look at our operating costs and you've seen our SG and A Fall as a percentage of sales.

Speaker 7

We know that it when we talked about it last year, it's going to continue to be a competitive environment. And so we're continually looking at where we can drive better margin on our SKUs, rationalizing our assortment, Getting better performance out of our products and then looking across all of our cost yield efficiency line items To continue to maintain our ability to drive through EBITDA performance and overall margin performance, The pricing component that I touched on earlier didn't have a large impact in Q1 because it was at the tail end of that. I did just want to call that out. So again, it's looking at assortments, looking at costs, understanding how we can continually Improve our overall operating structure and make sure we're setting ourselves up for that success and knowing that it's going to continue to be a tough time in 2023. Not sure if there's anything else you want to add Mike, Steve.

Speaker 1

No, I think that's good, Andy.

Speaker 5

All right. Thanks very much. I'll jump back in queue.

Speaker 1

Okay. Thank you.

Operator

One moment for your next question. And your next question comes from the line of Ben Kleinberg with Stifel GMP. Your line is now open.

Speaker 3

Hi there. Good morning. Philian, Tore, Andrew. Thanks for taking my question. So you guys, I'm flipping over a bit to operating cash flow.

Speaker 3

You guys had an operating cash burn of $3,700,000 this quarter. Wondering, given that Q2 is seasonally a lower margin period, wondering if you can provide some color as to where you expect Operating cash flow to be for the next few quarters and for the full year.

Speaker 2

This is Steve. So generally, the Q1 is a tougher cash flow quarter for us. As Mike mentioned, the Delta 1 facility in Canada is one of the largest, if not the largest Greenhouse in North America, that generates 0 cash for us in the Q1 and obviously it's farming. So It's a significant cash outflow for us. That facility, knock on wood, doesn't have Brown and That facility will generate positive cash flow for the next three quarters.

Speaker 2

And with respect to our Cannabis business, generally, we see higher sales in particularly with branded, And we're expecting higher sales in international. So I think our operating cash flow will improve as the quarters Progress this year, operating cash flow.

Speaker 3

Sounds great. All my other questions were Answered. So that's all for me. I'll jump back in.

Speaker 5

All right. Thank you. Okay.

Operator

Operator, let's take one more question. Yes, and we have a follow-up question from Ben Kleinberg from Stifel. It looks like he has withdrawn the question. Okay, great. Yes.

Operator

We now have further questions in the queue. I will now turn the call back over to Mr. De Guilio.

Speaker 1

All right. Thank you, Bella, and thank you to everyone for joining us today, and we certainly look forward to speaking to you at the time of our Q2 announcement and conference call in August. Have a great day. Thank you. Thanks, operator.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Village Farms International Q1 2023
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