Village Farms International Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Village Farms International's First Quarter 2024 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the Q1 ended March 31, 2024. 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. Details of how to access the replays are available in today's news release.

Operator

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, 2023, and 10 Q for the quarter ended March 31, 2024, which will be available on EDGAR and SEDAR Plus. These forward looking statements are made as of today's date and except as required by applicable security law, we undertake no obligation to publicly update or revise any such statements.

Operator

I would now like to turn the call over to Michael De Giglio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGiglio.

Speaker 1

Thanks, Eric. Good morning and thank you for joining us today, and I'm happy to be here. With me are Steve Ruffini, Chief Financial Officer Ann Gillan Lefebvre, Chief Operating Officer and Patti 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.

Speaker 1

My first topic will be Q1 highlights. Our 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 6 fold increase in adjusted EBITDA. Q1 was especially strong for our Canadian cannabis business.

Speaker 1

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 $50,000,000 in Q1. This strong growth nearly 4 times that of the Canadian market on a year over year basis is the 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.

Speaker 1

It was roughly a year ago that I challenged the Canadian cannabis team to find new opportunities for growth in our pursuit to be number 1 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 5 producers, further narrowing the gap to number 1. Our share expansion, which has continued into April, our 9th consecutive month of market share growth was driven by both the flower and pre roll categories. We moved into the number 2 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.

Speaker 1

Importantly, the entire team embraces challenge leadership, growers, innovation and branding teams, production and sales teams, as well as our 3rd 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. The second topic, examples of capability beyond cultivation. I want to share 3 examples that demonstrate this. The first is an innovation mindset across everything we do.

Speaker 1

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, 2 years ago, we invested to move our BC production to hang dry, the first and probably only to do so at scale.

Speaker 1

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. 2nd, 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 PinkCush products.

Speaker 1

Consumers and bud tender 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 high def pre rolls, a true game changer in the pre roll category. These pure ground flower with THC of 36% to 44% with no concentrates, no infusions, not even keap, just pure flower from Pure Sunfarms. There is nothing else like it on the market.

Speaker 1

Initial response from retailers and boards are exceeding our expectations. And the 3rd success story is our Super Toast brand launched last summer. Super Toast was our entry into the milled flower category, which we launched in Ontario, where milled over index is compared to the rest of the country. Superturks has taken share every month since launch. It's now the 2nd best selling mill brand in Ontario with more than 20% share and is still growing.

Speaker 1

This product is top tier and competitively priced using the quality BC grown flower 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.

Speaker 1

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 3rd 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 Farms competitive advantages.

Speaker 1

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 and 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 4 of the largest legal medical cannabis markets outside North America, Australia, Germany, the UK and Israel, and we'll add more as markets open. Notably, April 1st saw partial legalization in Germany, which will provide patients there with great access to high quality legal products. As an unexpected 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.

Speaker 1

We began shipping our best selling Canadian strains to Germany about this time last year and have been adding both local distributors and sales since then. We are launching the 1st recreational cannabis market in Europe, the Netherlands, expecting to start limited license 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, Netherlands has a significantly more favorable tax regime and supply chain and the program is designed to support our capital investment.

Speaker 1

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.

Speaker 2

Thanks, Mike. Some details on the quarter. Total sales grew 21% year over year to $78,100,000 with strong growth in both cannabis and produce. Net loss improved to negative $2,900,000 or negative $0.03 per share, a $3,800,000 improvement from last year with adjusted EBITDA improved by 3,100,000 dollars to $3,600,000 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 $50,500,000 reminder that all Canadian cannabis figures are in the local currency.

Speaker 2

Within this total, retail branded sales grew 28 percent to $39,200,000 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 $8,700,000 which was 181% higher than Q1 last year and 10% higher than Q4. International export sales for Q1 were $2,000,000 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.

Speaker 2

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, gross margins was 31%, at the low end of our annual 30% to 40% target range. A reminder that cost it costs more to grow in the winter months. SG and A expenses as a percentage of sales for Q1 improved to 21% to 27%. We continue to expect the SG and A to sales ratio for 2024 to be a couple of points lower than last year.

Speaker 2

Q1 adjusted EBITDA for Canadian cannabis of $5,500,000 was a 4% increase from Q1 last year. Finally, for Canadian cannabis, we generated nearly $5,000,000 in total cash, right in line with adjusted EBITDA, and it was another quarter of strong free cash flow of $6,300,000 up 20% from last year. Turning to our U. S. Cannabis business.

Speaker 2

Q1 sales were $4,500,000 with a gross margin of 59%. Adjusted EBITDA loss was $600,000 and for a net loss of 700,000 dollars The business is being challenged by 2 factors: the prevalence of synthetic hemp based products, primarily Delta-eight, which the consumer is not differentiating from naturally occurring hemp based THC. 2nd, 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.

Speaker 2

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 $36,100,000 with positive gross profit for the 3rd straight quarter of $3,300,000 Adjusted EBITDA was also positive 2,000,000 dollars That makes 3 out of the last 4 quarters in positive territory with a trailing 12 month total of more than 3,500,000 dollars 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 $2,700,000 to a positive $100,000 Turning to our consolidated cash flows and the balance sheet.

Speaker 2

Cash flow from operations for the quarter improved by $3,600,000 to breakeven. We ended Q1 with total cash of $31,700,000 and working capital of $78,200,000 Total term debt at the end of Q1 was 46,000,000 dollars composed of $22,000,000 for fresh produce due in May 2027 $24,000,000 of cannabis debt, which matures starting in February 2026. We remain comfortable with our net debt level of $18,000,000 which includes our $4,000,000 produce operating line. Finally, note that in early April, our clean energy subsidiary saw the start up of operations at renewable natural gas facility adjacent to our grow operations in Delta, BC. The facility which was financed and built by our partner, Tariva Renewables, converts landfill gas under our contract with the City of Vancouver to natural gas.

Speaker 2

We received a royalty from the facilities revenues, and you will see resulting profitability beginning in our Q2 results. And now I turn the call back to Mike.

Speaker 1

Well, 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 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.

Speaker 1

The momentum towards cannabis legalization in United States appears again to be getting its rightful priority with those who can effect need a 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.

Speaker 1

Then finally, we are often asked how we translate our leading Canadian expertise into a U. S. 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.

Speaker 1

As we access all options, be assured we'll take a measured approach to optimize any investments for our shareholders. Let me be clear, we remain as focused on the U. S. Market as we were before entering the Canadian market. I have every confidence we will succeed.

Speaker 1

And we are even more cannabis experienced with 5 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 and A.

Operator

Your first question comes from the line of Aaron Grey with Alliance Global Partners. Please go ahead.

Speaker 3

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 of nice quarters of wholesale growth, CAD 9,000,000 in the Q. 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.

Speaker 3

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

Speaker 2

you. Thanks, Aaron. This is Steve. The sales in Q1 were primarily spot. We have a few small contracts with a couple of the smaller LPs on supply side, but no material supply agreements in place.

Speaker 2

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 are there is good demand out there and we've been able to take advantage of that.

Speaker 1

Yes. And I'll answer 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 1.

Speaker 1

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 LPs 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. And the other thing I'd 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.

Speaker 1

We're gearing up for the U. S. We know it's imminent 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.

Speaker 3

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 Pure Sunfarms.

Speaker 3

You've expanded out right Fraser Valley as well as most recently with Super Toast 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 is still opportunity to launch additional brands, particularly as you look to increase share in some of the novel form of categories that you're still underpenetrated today? Just in terms of your overall strategy, in terms of how you're feeling about entering these new categories or were you under penetrated via new brands versus existing brands and how that's evolved? Thanks.

Speaker 1

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.

Speaker 1

We have a couple of products, as you know, with Soarer and TamTamp. 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 we're pretty much in the total range of price, different categories tied to price as well.

Speaker 1

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 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 the Board.

Speaker 3

Okay, great. Thanks very much for the color. And I'll go ahead and jump back into the queue.

Operator

Your next question comes from the line of Federico Gomes with ATB. Please go ahead.

Speaker 4

Good morning. This is Eric Lipschitz in for Federico Gomes. 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?

Speaker 1

Thank you. 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 uncurable till resistance was being bred in the genetics by the seed companies, which took about 7 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 1, that change has been tied to going from tolerant varieties to now fully resistant varieties and we can see that change.

Speaker 1

The produce business is a mature commodity business. As you know, 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, cultivation segment, which is one portion of our success there, it is driven by our deep 35 year knowledge and DNA. And as we pursue the U. S.

Speaker 1

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. So 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.

Speaker 4

Great. Thank you. I'll hop back in the queue.

Operator

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

Speaker 5

Hey, everyone. Thanks a lot. I guess in terms of can you update us on 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 LPs that haven't paid them and how that's affecting the pricing at this point?

Speaker 1

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 and some they're extending terms. So I think it's too premature to say, but and I also don't want to talk 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. It's just not companies owing the CRA. It's companies that can't have the right cost of production or the quality.

Speaker 1

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. And

Speaker 5

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? Could that actually generate sales in 2024?

Speaker 1

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 the facility, growing the plant. And then as you know, 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 Q4 of this year with generating revenues in the Q1 of 20 25.

Speaker 5

Got it. Okay. As one final question, if I may. Like you said, the produce looks like it's been one of the strongest quarters in the couple of years at least. And 1Q is typically a sort of seasonally slower quarter.

Speaker 5

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?

Speaker 1

This is

Speaker 2

Steve. Over the historical results of the produce business, which we've been reporting publicly on since 2006, The seasonality is 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.

Speaker 2

And Q2 tends to be a challenge because the Canadians, the Mexicans and the U. S. 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, Q3 and Q4 are typically profitable EBITDA quarters for us.

Operator

Your next question comes from the line of Eric DeLongier with Craig Hallum Capital. Please go ahead.

Speaker 2

Great. Thanks for taking

Speaker 4

my questions and congrats on the strong results here. Thanks, Bill. Another question on the non branded 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.

Speaker 4

Just looking for a bit more color on some of the dynamics that you're seeing within non branded in Canada. Thanks.

Speaker 1

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 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.

Speaker 1

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 would be 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 1 globally with branded products in 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.

Speaker 1

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.

Speaker 4

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.

Speaker 4

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. I'm just wondering if you Yes.

Speaker 1

I mean, I would I'd rather address that with you in the Q and A, Eric, than talk openly on the phone. I mean, these are trade secrets and secret sauce that we have. That's what we've always talked about our 35 years of DNA and knowledge. I think it's fair to say, and I'd 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 is a reason for that.

Speaker 1

It's not pure luck, but I'm happy to address that 1 on 1, 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.

Speaker 6

Hey, good morning gentlemen. Nice quarter. Just a couple of quick ones for me. Michael, in your wholesale, is there any sales destined for the international market in that number or is that all Canadian testing for the Canadian market?

Speaker 1

What was the question Doug? I'm having a hard time hearing you.

Speaker 6

Just wondering on the wholesale side of your business, can you hear me now? On the wholesale side, is any of that you think does in pretty international market or is that that for domestic consumption?

Speaker 2

Wholesale, the wholesale market includes.

Speaker 1

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.

Speaker 6

Okay. And what do you think the market share differential now is between you and I'm going to reiterate here at number one. You said you've narrowed the gap. What do you think that gap is now?

Speaker 1

Can you repeat that us and who? Well, I think I'll just comment this that I think we consistently striving to be number 1. 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 1.

Speaker 1

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 Zwanech with Zwaneck and Associates. Please go ahead.

Speaker 7

Thank you. Good morning, everyone. Look, 2 quick questions on the domestic business. So of course, congratulations on the growth. The EBITDA margin now is running around 10%, 11% in your cannabis business.

Speaker 7

Last year, Q1 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 rec 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?

Speaker 7

Just what's driving that share gain that brought you to number 2 in pre rolls? Thank you.

Speaker 1

Well, on the second question, I mean, as I said, with high def, we have a lot of innovation, very focused, laser focused on innovation across the board, but especially pre rolls, infused because we do infused pre rolls, all kinds of pre rolls and continuing to invest in our technology to produce them, driving our costs lower. But the high def is an example, no one else has it in the market, it's sold out in a day, it's done very well. So we are number 2 in pre rolls across the board and that's our goal to be number 1 there as well. So that's a product that we focused very hard on over the last year innovation and producing it in a profitable way. And we'll continue to look at other categories going forward.

Speaker 1

As far as margins, as we stated, Algo still remains between 30% 40% overall gross margin. Over the 5 years as a ramp up nascent industry, we produce different products. If you take any agricultural commodity, it produces different products on the same plant. And in 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.

Speaker 1

And sometimes when those inventories creep up before we can find another way to get that product in the 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 6 months. And honestly, you really can't sell a product from the time you 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.

Speaker 7

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 a very relevant part of the business, the cannabis business. Are we talking what's the price difference roughly? I mean, are we talking about $1 per gram, dollars 2 per gram? Just give some guide in terms of how dilutive to margins non branded is or maybe it's not?

Speaker 7

Thanks.

Speaker 2

Can you repeat the question? I'm not sure what

Speaker 7

your question was. Sorry. 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?

Speaker 7

Thanks.

Speaker 2

Well, obviously, the non branded margin is lower than the branded margin since we reported that we were at 31% for branded margin. So 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 small 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 LPs and 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.

Speaker 8

Hey, good morning. This is Nick on for Scott. Congrats on a good quarter here. First question for me on the cash flows, a good quarter in terms of profitability. Just curious how you view your potential cash generation while evaluating investments internationally and the opportunity in the U.

Speaker 8

S. 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.

Speaker 1

Well, we continue to report that we're self funding. The Netherlands is a huge investment. This is the first of probably 2 production facilities that we'll be building. And that's 100% paid for out of our cash. We have no debt on it.

Speaker 1

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 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 U.

Speaker 1

S. Look, at some point, as I said with the U. S, 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 will go large scale low cost.

Speaker 1

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. But the territory, we're the territory man, not the hair. So in the long run, we're going to get there.

Speaker 1

And I think we'll have the best quality, lowest cost production. Look, there's a model in the U. S, 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.

Speaker 1

So as far as capital, it's the same in Canada. We used existing assets. We were able to convert them, remain in the produce business while we convert it 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.

Speaker 1

And I think we're excited about the day we can enter the U. S. Market and be a major player. I know that may not answered exactly your question, but I wanted to put some added color to it.

Speaker 8

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 COGS 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?

Speaker 8

And just how you expect COGS to trend throughout 2024 on the cannabis side? Thank you.

Speaker 1

We're not going to give our cost set 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 now expanded our Delta 2 facility and half of it and again scale drives costs down.

Speaker 1

So we're pretty bullish that over time, we'll continue to drive our costs down going forward. And this is Steve. There is some seasonality on the cannabis side. Obviously, we have

Speaker 2

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 per gram.

Speaker 1

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 Zuaneck with Zuaneck and Associates LLC. Please go ahead.

Speaker 7

Thank you and 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 XMDL or you see Canopy Growth, apparently take control of U. S. Assets, right, relevant sizable U.

Speaker 7

S. 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, right? And I know that your it's not so simple because of a regulatory issue, but you have examples of 2 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 U.

Speaker 7

S. Assets, by then it may be too late, right, because the U. S. Assets will have repriced. So how do you think about that?

Speaker 7

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 1, 2, 3 years? And just to remind

Speaker 1

you on scale. Thanks, sorry. 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 6,000,000 square feet there.

Speaker 1

And what we as I said many times, I believe it's the best location in the continental United States to grow cannabis. And that takes into account friendly states versus non friendly states, not just climological issues. That being said,

Speaker 3

you know

Speaker 1

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 thank God that they're finding these pathways to do it. And both those companies you mentioned are approaching it differently, whether it's a stress assets or rolling up. Now, we're on that every single day.

Speaker 1

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.

Speaker 1

We haven't seen a lot of these things. And we've always said that we're not going to make any moves to 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 has been around, but you can look in the U.

Speaker 1

S. Market, not just 1st tier or 2nd tier, there's a whole host of 3rd tier companies. These companies have a lot of friends and family money now for 6, 7 years. They're not going to be able to do an IPO. So I think there's a lot of opportunity.

Speaker 1

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 of 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 U.

Speaker 1

S. And we're very we're pretty clear on where we want to operate it, at least initially that we think we can win. I would never 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 and quality where it needs to be.

Speaker 1

And that's why I've said all along, it's still an experiment until there's full comprehensive legalization in the U. S. And Mike, final comment is we'll find a way and we'll make our own way, but we'll be there.

Speaker 7

That's great color. Thank you.

Speaker 1

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.

Speaker 1

All right. Well, 1st and foremost, I want to thank the Village Farms 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.

Speaker 1

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.

Speaker 1

And with that, thank you for participating in today's call. We look forward to getting back together in August for our Q2 results. With that, we can conclude the call.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.

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Earnings Conference Call
Village Farms International Q1 2024
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