Q1 2022 Village Farms International Inc Earnings Call

Good morning, ladies and gentlemen, welcome to village farms International's first quarter 2022 financial results Conference call. This morning village farms issued a news release reporting its financial results for the first quarter ended March 31 2020 to.

That news release, along with the company's financial statements are available on the company's website at village farms Dot com under the investors heading.

Please note that today's call is being broadcast live over the Internet and will be archived for replay both by telephone and via the Internet beginning approximately one hour following completion of the call details of how to access the replays are available in today's news release.

Before we begin let me remind you that forward looking statements may be made today during or after the formal part of this conference call.

Certain material assumptions were applied in providing these statements many of which are beyond our control.

These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements.

Summary of these underlying assumptions risks and uncertainties is contained in the company's various securities filings with the SEC and Canadian regulators, including its Form 10-K M. D&A for the year ended December 31st 2021, and Form 10-Q M. G&A for the quarter ended March 31st 2022, which are available.

Well on Edgar 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 any such statements.

I would now like to turn the call over to Michael J <unk>, Chief Executive Officer of village farms International. Please go ahead. Thanks.

Thanks, Chris Good morning, with me for todays first quarter is village Farms', Chief Financial Officer, Steve Ruffini, and joining us president and CEO of pure sometimes mad at each dose and Jeep and for the first time, our recently appointed executive VP Corporate affairs and given the fever. The first quarter of 2022 saw continued.

Strong execution and performance from our Canadian businesses, which was unfortunately somewhat offset by the macro challenges facing village farms' fresh produce business. So let me start without protest business.

Those who have followed our quarters recently.

And for the last several years will know that a number of macro factors have impacted our produce business both positively and negatively since the onset of Covid in Q1 of this year. Several additional negative factors collided first it's been a very good growing season for the industry, both greenhouse and field growth.

Which contributed to an oversupply and all of our products across the market.

At the same time inflationary pressures and freight labor packaging growing and put such as fertilizers as well as ongoing trucker shortages contributed to a very challenging cost environment. These cost increases were both profound and swift.

The strong growing season actually hurt the industry the pricing power of our customers were further strengthened by the supply demand imbalance.

We have been trying but have not been able to realize any material pricing increases with our retailers. This is a very difficult dynamic.

Then cannabis produces a commoditize free trade market with product that ships across five to six international Board as daily.

As long as these inflationary pressures and oversupply continues.

We will experienced pressure on our produce results.

<unk> seen this before multiple times in the agricultural industry and we will respond we are evaluating new initiatives, including marketing partnerships to build more distribution scale spread out cost and diversified product offerings and is likely to be.

Proudest grow attrition, which will help supply and balance longer term, we understand that reaction. However, even in the currently negative EBIT down environment for we maintain the highest conviction that our U S cultivation footprint, our assets alright powerhouse opportunity for legal recreational cannabis.

Our Texas assets have a replacement value of $350 million to $400 million with the capability of generating at least $1 billion or more cannabis revenue.

We are working to get our fresh business back on track as we assess our options to use our unmatched experience and assets for success in the U S cannabis market when we can participate.

In the early days of the Canadian cannabis.

<unk> business, we were the only ones that had a strategy the same strategy to leverage existing assets and cultivation DNA having done. So successfully we are convinced of our ability to replicate that success in the U S.

Which brings me to the good news for the quarter each of us each of our Canadian and U S. Cannabis businesses continued to perform very well operationally and financially and improve their leadership in their respective consumer markets, even as they invest in future growth.

Both Canadian and U S. Cannabis again contributed positive adjusted EBITDA in Q1, as we continue to see the underlying power of the business <unk>.

Our Canadian cannabis operations, you have some farms and rose life science delivered its 14th consecutive quarter of positive EBITDA unmatched in the industry.

Jeff Sandbox contributed continued to maintain its market share leadership in a dried flower category remaining the top selling brand in Ontario, British Columbia, and Alberta during the first quarter.

And in Ontario in March we achieved our best ever share and dried flower by volume sold at just under 16% and why it was Ontario's best sales month in its history.

We are most grateful to the consumers and Bud tenders to support our brands and give us ongoing feedback to continue to build market share and kudos. Once again, just superb management and sales and marketing teams over the past several quarters. They have invested strategically to ensure that we are supported by our retailers across the country.

Our investment is clearly paying dividends.

Success has also generated attention among our peers last week <unk> announced it has partnered with no idea to bring cookies Sun ground flower to Canada.

But you have to send funds will grow and processed cookies high quality whole flower genetics for a range of skus with pure sell farms as the L. P of record with the provincial boards. This partnership with one of the few global cannabis brands as further validation of the quality of operations and the expert.

Key sapir, some farms and its team the first cookie send ground products are now available for purchase in Ontario with more to follow.

In the coming months <unk> farms to free up some farms team will begin announcing specifics of the next leg of strategic growth. The plan calls for a transition from a branded house to a house of brands.

<unk> brand expression has been asked of US many times, we stood by the single brand approach for our first three years as we firmly believe in the everyday premium positioning in the first stages of the last that legal cannabis market in Canada, we wanted us to prove our number one position.

Built organically with a single brand it's been an incredible success as the legal market develops consumer led segmentation and their ability to differentiate is evolving.

We believe that there are distinct opportunities to address these consumer preferences with additional brand positions. We are extremely excited to share more details as these launches are unveiled to customers and consumers in the very near future.

Another area of near Chairman long term growth as export markets. Following receipt of EU GMP certification. During Q1 of this year just send funds has been preparing for its first shipments to Europe and Israel.

I'll note here that there are different paths to EU GMP certification, we intentionally chose to pursue certification in both the jurisdiction and country, Germany with the very highest standards and we were successful and to our knowledge. We are the first greenhouse operation of world to be EU GMP certified a best in class facilities had been bill.

<unk> trials and invested in to support both legs internationally and domestic about growth expansion.

Production wise in Q1 pure self operated at full capacity throughout the first quarter.

That includes both Delta three and the commission first half of Delta two totaling $1 6 million square feet.

Quebec based rose Lifesciences, which we acquired a 70% majority interest in November last year and an outstanding.

And to the year 2020, and Thats continued into the first quarter of 2022.

With new product Rollouts throughout the first four months to meet the emerging demand for Kraft locally grown product and strained variety, including 14 Skus in Q1 of this year Rose has steadily gained market share in Quebec.

During Q1 rose launch its new brand in Quebec, Promenade, and its Orange Gelato three five Gram SKU quickly became a top seller based on its excellent quality to price ratio.

All of this drove an 85% increase in Rose's Q1 shipments of their own branded products compared to the fourth quarter of 2021.

And based on third party data, we estimate that rose is now a tap III licensed producer in Quebec.

Net Roes is 55000 square foot indoor facility in Quebec has expanded to meet this demand.

And as a reminder, in addition to its own brands Rose just also the exclusive distributor for a number of large third party Lps, including till Ray sundial entourage. This momentum has continued into Q2 and we expect it to continue for the balance of 2022.

In our U S. Cannabis operations Q1 was the second full quarter of contribution from balance health Botanicals.

And a quarter in line with our expectations. The quarter was once again highlighted by strong gross margin and positive adjusted EBITDA contribution of particular note operationally for Q1 was balanced sales launch of its hemp extract with leading pet supplement brand zesty pause.

Our extract is now in more than 1000 petsmart stores in the U S via this partnership.

So the integration of balance out into village farms family is progressing very well over the next several weeks the team will be gearing up for some innovative cannabinoid product launches.

Before I turn the call over to Steve a couple of additional updates.

In the Netherlands. The government has again push back the launch of its legal cannabis production program I'm too early 2023 as it finalizes all of the 10 license holders. We are continuing to advance our plans and expect to be ready to go when the program starts.

One final note, which relates to village farms clean energy, which I don't have the <unk> to speak about often you'll recall that in November 2020, we announced that we were transitioning this business to a more attractive long term business model based on the conversion of landfill gas to renewable natural gas and partnership.

With U S base mass energy since that time, we've been working diligently to bring this product to fruition and I am pleased to say that we expect to have some positive news in this front very shortly.

Now ill turn the call over to Steve to review the financials, and then I will return with some final thoughts.

Steve.

Thanks, Mike first the reminder, on the timing of our acquisitions and their impact on our first quarter 2022 results Q1 of this year reflects the full quarter's consolidation of valence health Mechanicals.

Acquired 100% partway through Q3 last year.

In the first quarter consolidation of Roes by Sciences, which we acquired 700% as in November of last year.

Consolidated sales for all of those farms Canadian and U S candidates.

And village Farms' fresh presence for the first quarter increased 34% year over year to 72 million from $52 4 million for the first quarter of 2021, the near 18 million dollar increase was driven by higher sales from both Canadian cannabis in fresh produce as well as the incremental contribution of the U S Canada.

<unk> from the balance health acquisition.

Consolidated net loss for the quarter was $6 7 million or <unk> <unk> per share compared to a net loss of $7 4 million or <unk> 10 per share for the same period last year.

This quarter's net loss was driven almost entirely by the very challenging macro environment.

Produce business consolidated adjusted EBITDA for the first quarter of 2022 was negative $6 1 million compared to a positive adjusted EBITDA of 400000 for the same period last year.

The EBITDA loss this quarter was driven by fresh produce partially offset by positive EBITDA contributions from both our Canadian and U S operations.

Corporate costs were $2 5 million compared to $1 5 million, which was driven by incremental audit and Starbucks costs, partially due to the addition of valence health and Roes as well as the.

The expansion in support cost for our development projects in particular, the Dutch coffee shop endeavor in.

The Netherlands looking at our individual businesses, starting with candidates net sales from our combined Canadian and U S. Cannabis operations grew 65% year over year to $28 8 million from $17 5 million.

Just over half of that growth driven by the acquisition of balanced health and the remainder driven by growth in Canadian cannabis.

Our Q1, Canada sales comprise.

41% of village farms total consolidated sales up from 33% the same period last year.

Hello.

Adjusted EBITDA increased 5% year over year to $2 $7 million grew $2 $5 million with a slight decline in Canadian Canada suggested EBITDA being more than offset by the contribution of the U S cannabis two.

The decline in Canadian cannabis was driven by the incremental increase in SG&A as a percentage of sales related to two factors. The addition of Roes and the incremental investment in salaries consulting and branding costs.

The initiatives that have recently launched or have been announced.

Like our EU GMP certification, which Mike mentioned in his remarks.

Canadian cannabis operations delivered another solid quarter with.

With growth in sales and 25% year over year to U S $21 8 million driven largely by the addition of Roses branded sales and.

And distribution management fees as well as a year on year increase in non traded sales.

I'll note here that Pearson farms, and Roes are each benefiting from the mutual sharing of operational and market expertise.

I'll review, our Canadian cannabis results in Canadian dollars, which provides a more accurate gauge of our period to period performance as well as providing the reader the ability to more accurately compared to other Canadian Lps.

Our Canadian cannabis operations once again generated strong year over year growth what has emerged as a seasonally softer selling quarter for provincial sales in the first quarter across the industry.

The early part of the first quarter as well as the later part of the fourth quarter experienced a bit of a slowdown as compared to more normalized replenishment months net sales for Q1 increased 25% year over year to Canadian $27 6 million from Canadian $22 1 million.

Canadian net sales were comprised of 70% retail branded sales, 24% of non branded sales and 4% of distribution fees and commissions generated at rose 90% of our retail branded sales were dry flower inclusive of pre rolled products with the rig.

Meaning 10% being derivative products.

Gross margin for the Canadian candidates for Q1 were 34%.

Firmly within our stated target of 30% to 40%.

This is up from 29% from Q1 last the primary a result of the ongoing and strong cultivation efficiencies and production improvements at our delta facilities.

Even having started out with a low cost of production, we have realized year over year improvement in Q1, 2022 as compared to Q1 2021 with.

Which seasonally is a higher cost quarter for us due to our electricity use throughout the quarter.

The lower year on year cost per Gram as a result of our expanding footprint as well as improvements in yogurt potency.

And we achieved this amidst many of the same inflationary cost pressures that our protein businesses facing the operational results of our grow ops and manufacturing are impressive.

Production wise in Q1 <unk> operated at full capacity throughout the first quarter. That's both Delta three and the commission first half for Delta two totaling one 6 million square feet.

We continue to operate at full capacity today.

We remain comfortable with our current production levels, but we will remain flexible to adjust production if need be.

SG&A for the Canadian cannabis operations for Q1 was $8 8 million or 32% of sales compared with $5 5 million or 23% of <unk>.

At the same period last year.

Over half of the $3 $3 million increase was attributable to the acquisition of Roes.

The remaining increase reflects planned strategic investments to drive market share and sales growth in the Canadian market and the incremental costs associated with the preparation for the start of exports.

I am proud to continue to report that our Canadian cannabis operations delivered positive adjusted EBITDA, our 14th consecutive quarter at $2 1 million. This compares with $2 5 million for Q1 of last year with the decrease due primarily to our planned investment in SG&A that I've just described.

Turning to our U S cannabis operations, which I will now revert back to U S. Dollars sales for Q1 were $7 million with a gross margin of 67% and positive adjusted EBITDA of 600000. These results compare composed entirely of the operations of balanced health, which contribute continues to perform in line with our expectations.

Following the acquisition last year.

Turning now to the fresh produce as Mike noted Q1 was a very challenging quarter from a macro perspective, although sales increased 19% from Q1.

From last year, driven by higher volumes, we have made we have been unable to pass on the higher freight and other input costs might discuss it to our big box customers due to an oversupply of fresh produce in the market.

<unk> and a negative gross margin of $4 1 million, which drove negative adjusted EBITDA of $6 2 million compared to a negative adjusted EBITDA of 500000 in Q1 of last year.

Turning now to cash flows and the balance sheet at March 31, we had just over $41 million in cash and equivalents compared to $58 million at December 31 of last year and.

And we had approximately $60 million working capital, excluding cash compared with $52 million at December 31.

During the quarter, we had operating cash outflows of $9 $6 million as you may recall, our largest produce greenhouse delta one always has a large net working capital investment in our first quarter of every year as it does not harvests Tomatoes until late March early April .

Canadian candidates historically, the provincial boards cash payments ramp up in the second and third quarter and back down in the fourth and first quarters. As a result of village farms cash flows are weighted to the second and third quarters.

The result of this the result is we have seasonality in both our Canadian cannabis and produce revenues.

During the quarter, we invested just.

Over $8 7 million.

We spent $5 3 million in capital expenditures on our existing production facilities, primarily for the expansion of our Delta cannabis operations and.

Another $3 4 million in the form of loans and the convertible note to benefit our initiatives outside of North America. The vast majority of the Capex required for.

Completion of the second half of Delta two is paid for and what the primary cost remaining being the labor cost to complete construction.

Our capital position and forecast for improving.

Four improving operating cash flows will allow us to self fund our ongoing operations and.

And budgeted 2022 growth initiatives and now I'll turn the call back to Mike.

Thanks, Steve. So Q1 is a solid start to a year that we believe turns of pages to village farms next chapter of success as we pursue high growth cannabinoid opportunities in North America.

And around the world from my position as CEO , but also is village farms' largest shareholder without execution each quarter on both our business operations and strategy opportunity.

We have more and more confidence in the future of our company to further extend our leadership in cannabis in North America and establish a leadership position in the international markets in which we choose to participate.

2022 promises to be a year of dramatic strategic initiatives across our businesses that will propel our growth and company to next level.

So with that we will now open the call to questions operator, and ask the operator polls questions from our analysts were going to take a couple of questions that came in via E Mail from.

Our shareholders ahead of the call question number one is housing deflation impacting your overall cost the impact of inflation in the U S is much greater than Canada for one labor shortages in labor costs are much more restrictive in severe in the U S and they are in Canada, the foreign labor Pro.

Graham in Canada is much more superior to the one in the U S and of course for transportation. We're shipping much further in the U S and we are in Canada.

That being said.

Pure sell farms continues to drive costs down through better growing techniques more advanced knowledge of cannabis crops and of course.

Strange development.

As a nascent industry, there's a lot of improvement there and you can see that in our numbers, we continue to lower our costs going forward. We're on produce the strains and variety is a much more mature hard to get a increase in yield growing techniques have been honed over 50 years. So that's a big difference. There second question are you currently selling them to go back under the <unk>.

Funds label, our current strategy is to help rose achieved the number one position in the marketplace. Once that's achieved then we'll reassess.

Pure some farms brands entering the Quebec market as well.

Operator turn it over to you.

Thank you ladies and gentlemen should you have a question. Please press star one on your Touchtone phone, you'll hear three tone prompt acknowledging a request in your questions will be pulled in the order they are received.

You are using a speaker phone please lift the handset before pressing any keys you.

Your first question comes from Aaron Grey Alliance Global Partners Aaron. Please go ahead.

Hi, good morning, and thank you for the questions and congrats on the cookies partnership.

So first question for me just on the training canvas business right. So I heard you guys talk about seasonality during the quarter.

Retail was down about 18% that included.

For quarter of ROE. So I just want to get some further color because you know the retail data from high fire does show pretty strong sales sequentially. So I didn't know whether or not it was just some of the timing and whether or not you see some more improvement now quarter to date, because it does look like the sell through at retail and remain pretty strong. So maybe just spend some of the potential buying so I just want to get some more color in terms of some of that.

Seasonality you are seeing and whatnot, that's picked up heading into two queue. Thank you.

Yeah, I'll start that off and then I'll get some color from the dish on it but we've reported in the past that there is seasonality and we consistently see that each year. The difference even between the beginning of the first quarter and the end of the first quarter.

Showed big differences as momentum was being gained the provincial boards are all at a different level of buying spending on housing a year's ending in their inventory levels.

I think that reinforces <unk> again, this year and now we see that momentum gaining Randy if you want to add.

Certainly I think that's a great setup, Mike and to your point Aaron There definitely is some some buying patterns specifically, what we saw in British Columbia. As an example is we had we had a really solid load in of inventory in Q4, which suppressed some of our shipments in Q1, but what you did see in your commenting on that has really strong high fire.

<unk>.

Sell through so obviously our sales are built on the sell in and then what you see on high fire sell through so we feel really confident on that sell through data and obviously the timing of the board is it going to impact any of the sell in which is our revenue, but again the momentum is great. We're seeing the share pickups and we feel really pleased on the strategies, we have in place to carry that momentum forward and as we start to see the buying.

Patterns normalize and stabilize over multiple quarters, we'll see that revenue pick up.

Alright, great. Thank you very much for that color.

Second question for me rates, you guys talked about moving now to more of a.

House of brands versus branded house.

I'll start with some farms everyday premium it looks like you're going to expand upon that I know more details are to come but just wondering if you could provide some color in terms of how youre thinking about it versus if particularly on the premium side I'm wondering do you feel like with the current cultivation you have in the greenhouse obviously done a great job in the everyday premium.

You guys have the capability to kind of move up to a more premium on the flower side.

Or would you look to maybe find that also on the cultivation or just how you guys kind of thinking about leveraging the current asset base to move in a different pricing tiers.

Or whether or not you would look to find something externally. Thank you.

I will answer the question the same way I started off so first I'm going to say that we're very confident and excited about the direction I personally am I have been brief very extensively and the timing is perfect for us the market is ready we have thought about this for quite some time and the timing couldn't be better going forward.

Don't want to give too much away. So I'll, let <unk> answer the rest of that question and give you some perspective as far as he can do.

Thanks, Mike and I appreciate that definitely don't want to give too much away for the consumer base.

And Mike alluded to everyday premium has been the core of what person firms.

Has started off with and now the opportunity is there to think about customer segmentation and launch additional brands. So we're going to be launching actually two additional THC brands. This year, one pretty imminently in the next couple of months and then one later on in the year and based on all the work we're doing across our growing as well as our processing.

I've alluded to before that we're converting our facility to full hanging dry and we're on track for that so when you think about implementing a full hanging dry on the whole plant drawing when.

When you think about implementing can manage hearing really those premier mise processes onto the flower.

In addition to the fact that we're launching cost over a dozen genetics this year across those three brands Pierce and firms and the two new ones, we really feel confident in our ability now to attack various parts of the various segments of the market.

Your son firms everyday premium was not reaching.

So I'm going to leave it there and just hopefully you can understand.

So we want to hold some back but.

Maybe it won't be very clear our ability to attack different parts of the segment of the market, whether it's premium or not we're definitely going to take advantage of that and youre going to see some really exciting things come out of fear sometimes in Canadian cannabis is here.

Alright, great look forward to hearing about it I'll jump back in the queue.

Thanks, Eric.

Question comes from Andrew part the New Stifel. Andrew. Please go ahead.

Hi, Good morning, Thank you for taking my questions.

Maybe just starting off on on the cannabis side of the business.

Could you discuss or give a little bit more color on where you are with your with your production expansion.

Understanding that you mentioned, you're comfortable with current production levels.

And.

A follow on to the question.

From Aaron.

You mentioned that you could expect to see.

Rebound in sequential Rec cannabis sales.

Where could we see this going and given where you are in your production expansion in and whats the potential here.

Well I'll answer the first part of that.

So we just.

No Delta three willing to spend in full production now since the end of last summer.

We started the conversion for Delta to put 50% of it in production at the end of last year. So by January is fully in production Thats, a $1 1 million square feet. So roughly another 500000 square feet that puts us at the $1 6 million fully in production.

Everything we're producing we sell as you know we don't grow we can't sell.

So as Steve mentioned on his remarks.

Everything has been paid for for finishing the second half the delta to except the labor to just install the parts everything so on site and we reserve doing that based on the delays we've seen due to COVID-19 on our EU GMP certification, we've talked about that last time that that was delayed.

Probably for about a year and a half so we wanted to be prudent with that now that we've received that and we're making headway to start out first shipments in the near future coupled with Israel and we started as we said shipping to Australia that combined with further market share penetration in Canada.

And working with Roes as well, we see our ability to gear up very quickly for another 25% increase in our current capacity.

Then probably some time in.

Early to mid 2023.

And for the second part of that mandate you want to take that second question.

Yes, Mike there's not a whole lot to add I think you framed it up really well and that we've always matched our supply to our demand.

And given what you just talked about with the European initiatives with the Roes business, where we're shipping in biomass with the expansion into other provinces.

You earlier commented on the partnership with noise.

And then we just answered Aaron's question on the expanding brand capabilities. When you think about all of those components coming together we.

We see.

Tremendous amount of upside and continued revenue growth.

I'll flip it over to Steve if there's anything he wants to add I know, we don't we don't give guidance, but we feel very positive on the momentum we're building within Canada and in some of these international markets and as Mike said, we'll time.

The other half of Delta two according to.

Two our plans and how that revenue growth gross goes.

Like we've said before our revenue plans for this year, we have all the capacity that we need to achieve those targets and delta three and five delta to.

Okay.

Is that good Andrew.

Sorry, I was on mute.

You very much for the detailed answer.

And maybe moving to a more holistic view.

<unk> produce.

Wondering if you could give a little bit more color.

On the outlook here.

Sure.

As as you mentioned Canadian candidates concern continues to contribute positively, but it seems to be offset.

Very challenging market in the produce segment.

You know you've been operating in this area for for a very long time and wondering what your thoughts are on.

When we could see some of these headwinds.

Hey, Dan.

Under this scenario where input cost inflation remains sticky for the remainder of the year.

You know how you plan to conduct that to return to positive gross margin.

Well before you know I don't know if I want Steve.

Steve can comment specifically to what we see.

Coming up for produce in the future, but I want to take it back to sort of 10000 feet, we've communicated back as long as 2016.

That it was time to shift to the third generation of our crop selection cut flowers to produce cannabis.

That was the big pivot that village farms, we are going to make based on regulatory.

Changes and legalization, both domestically and internationally and that has gone extremely well and Canada I think we proved out the business model.

Good as anyone out there best in class in taking the approach of converting existing assets.

And the great depth of the management teams tied to those assets and then adding.

A great management team to take it into the end zone in Canada and internationally for shipments out of Canada, I think we've done that well so that optionality is the big enchilada for the company in the future now we probably sat here two years ago looking at the political arena and felt that changes we're going to happen in the U.

The us quicker they habit.

So I think we have to keep our eye on a ball that wherewithal entering the largest potential cannabis market now that may not happen. This year or next it's anybody's guess, but and I don't often want to talk about our competitors, but when I look at the amount of tens and hundreds of millions of hours that our competitors are spending for <unk>.

Optionality.

And there's many examples of that or just tens of millions of dollars in quarterly losses.

To try to hang in there.

This is probably been the worst quarter, we've had in protest for a while but ultimately it doesn't even compare to what our competitors are doing in order to navigate the current legislative.

Theater, So we will work hard and we have communicated years ago. I'll go what is the breakeven waiting for changes in legislation and thats not to say, we will be out of the produce industry, but we will balance that capacity with the emerging cannabis industry and in the meantime, we have to work hard.

To do what we can get to breakeven, but I will say that if you really look at what's happening today.

Top of Covid, as I mentioned, which kind of threw a monkey wrench in there the last couple of years.

We are in a commodity market inflation.

As a policy decision.

That has impacted us swiftly and everyone in agriculture, it's across the board and everyone is struggling how do you deal with 40%, 50% increases in fertilizer causes and three times diesel just hit the <unk>.

Highest record ever in the United States. So these items out of our control and we will continue to find a way, but at the end of the day.

As I mentioned in my remarks, we will be trance transferring assets and changing them as cannabis going forward at that time could be this year. It could be two years away and we will get there.

If you want more specific.

Turn it over to Steve to add some color on that.

Andrew we're not we're not projecting forecasting a positive EBITDA for produce until the fourth quarter of this year.

Thank you very much for that color I'll get back in the queue.

Thank you. Your next question comes from Pablo <unk> Cantor Fitzgerald Pablo. Please go ahead.

Hi, This is Matthew Baker on for Pablo Thank you for taking our questions.

How would you characterize your performance in flower over the last 12 months in general, but more specifically in terms of your dependence on paintbrush.

Mandy shall I take that.

Yes, absolutely.

We continue to be a top performer in the flower segment, which is the largest part and we feel very.

Confident in our ability to continue that pink Kush has been the number one selling strained since the legalization of cannabis.

As of today national market share just for that strained alone is <unk>.

The 4%, which is unheard of.

It has sold more than double the number two.

Best selling flowers SKU in the industry. So it's been quite a success story.

We've always maintained that we will give the consumer based products and specifically in this case flower products that they want and sell through.

And we definitely have seen pink Kush skyrocket to success last year, and then start to taper off as other products came onto the scene and we've adopted we've added jet fuel gelato, which was the number one innovation SKU in Ontario in terms of since it was launched in October through Q1 in terms of kilos sold of all new strains that were.

Launched in the Ontario cannabis store.

And we continue to develop that pipeline of genetics and strains.

<unk> son firms for additional brands as well as with our Roche partnership. So we don't believe we're overly reliant upon pink Kush, we have actually seen pink Kush come back and actually grow.

Over the last three or four months 20, 30% kind of in share and total sales were going to maintain that it's a phenomenally profitable SKU.

Phenomenally well liked SKU.

I mean, it's quintessentially BC, but so there's no need to pivot off of that however, with the large cultivation capacity that we have and all the new genetics that we've been trialing and experimenting we're going to continue to keep innovating and putting on putting out great products for the Canadian cannabis consumer. So we don't believe there's any over rely.

On Pink Kush, we feel we're absolutely right size to continue to.

B, the one and only pink Kush that consumers continue to want and go back to time and again.

Alright. Thank you for that answer for a second question. What would you say is a normalized gross margin on a percentage or per gram basis for your flower business.

Steve.

Yes.

Depending on the SKU itself, our gross margins for our pure flower.

Excluding.

Pre rolls is between 50% to 60% pretty consistently.

Yeah.

Quarter on quarter.

Alright, and just one last follow up.

How is the de listing the stock from the PSX and only having the NASDAQ listing helps you if in any way and maybe just remind us of the rationale of the deal that could be listening. Thank you.

Well, our short position I'll start and give it to Steve our short position as we manage it since January one has come down significantly you know Canada has the naked short policy.

We didn't like that.

<unk>.

We are happy with that decision overall long term, we think it will play off Steve.

Yes the challenge.

We had regulatory issues between the.

Let's say NASDAQ is from a regulatory involvement in your businesses as regulatory light believe it or not for the U S and taxes over bearing a very expensive. So in the first quarter alone. We saved 200000 by not being on on TFS, Yes, our trading volume is down there's no question about that.

In our short position as Mike mentioned is down substantially.

And we're fine with the decision we made and it was hard to justify the value proposition when we're paying four times more.

For <unk> in NASDAQ since we were listed there it was hard to justify that so.

And we're all about profitability. So that was the decision and I think long term, especially tied to use legalization.

That will pay off for us.

Thank you for the answer.

Thank you. Your next question comes from Rahul surrogate, Sir Raymond James Rahul. Please go ahead.

Good morning, Mike, Steve Munis, and thanks, so much for as always taking our questions.

So.

Mike asked a lot of my questions are around management of the projects business as you balance that against maintaining that maintaining those assets and providing optionality in the us.

I'd, just like to drill a little bit farther you mentioned those assets potentially.

About a $1 billion in revenue could you give us a little more color in terms of how are you.

You come to that number but also balance that optionality against.

The incremental cost that you are seeing for maintaining that asset.

Particularly.

Relative to your current cash position and maintaining cash burns such that you maintain sufficient liquidity.

Inflationary time.

Yeah, well I mean, if you look at the footprint of taxes, not saying that we would convert all but the $1 billion comes from the fact that it's three times the footprint that we currently arent production in Canada not more so if you do the math and we know what our projections for 2023 say in Canada are it's easily that 1 billion sustain.

Numbers secondly, what's really really interesting E taxes, we've said that before we look at it is.

Separately, the 49 states.

If we cant plan. Besides if we look at states, where we want to operate in assuming legalization happens I would say exit for the Florida at the top of the list, Texas, where we have these assets. There is no competition in Texas today is the second most populated state in the United States.

And growing rapidly.

I.

I've used this term before when when the gate self and it'll be a race to who has done who's dominant in Texas and we see ourselves after 30 years of operating there as being a major for us in Texas.

And that is the most difficult state, yes, but our assets are there and it's a price we have to pay to continue.

<unk>.

From a cash flow perspective, yes, it will be an investment in the future and that investment could be.

This year will probably be the greatest investment we made cash wise, but all overall the confidence we have in our other businesses delivering positive cash flow.

We've made a decision that we're willing to take that spend.

Not to lose that ability keep in mind, what's made us great in Canada. Among the terrific job that the management team has done is the DNA tied to the asset if we mothballed assets, we lose the talent and we're not willing to do that the other thing is revenues.

Pays a lot of the way here, it's still this year will see Canada surpassed produce as the number one contributor to revenue growth.

Going forward that will happen this year, but it pays a lot of the bills. If you look at these other competitors. We have that are pure plays and they're publicly traded theres a lot of cost associated with them.

Produce pays our infrastructure we have.

Best in class finance and accounting team.

This is at the corporate level the ability to operate in in Europe in the Netherlands.

Produce pays that underlying costs and it's not really reflective when you are so we look at cash flow EBITDA.

And with that that.

We will have a burn.

To support our growth efforts internationally.

So I hope that can provide sort of a.

A better understanding of why and what the strategy is.

Almost like the frustrating thing is I see competitors, losing 15 million a quarter of <unk> and its almost acceptable because they are a pure play cannabis company.

For Us that has this foundation legacy business that is a great contributor.

It's off.

Given year five or 10.

In the scheme of things.

Yes.

Heavily criticized for that that's my view.

All fair points.

Thanks, very much for that color Mike So.

No yes, congratulations on the continued performance of the Canadian candidates business and you had talked a little bit about international.

Historically, we've not seen international make much of it of a dent in many of your peers income, but really quite recently, we have seen it start making a material impact. So could you give us little more color in terms of how you are looking at international revenue playing out for the remainder remainder of 2022.

Well first of all we didn't jump into the international other then start the EU GMP prospects and by the way as I mentioned in my remarks, we took the most difficult jurisdiction country. The most difficult jurisdiction within the country because there are different levels of EU GMP certification, especially in Germany.

We're at the top of that food chain. So we can go anywhere we've taken our time to do it right. The only greenhouse we know of that has achieved that level and if you look at what we've been able to achieve with our everyday pricing and cost structure in Canada, and you were to incur relate that to the EU I think we're going to be sitting in a great position.

<unk> based on export when it starts.

And <unk>.

I would say that we didn't want to move into the EU too, we had Canada sort of down and we feel that Canada. We have a long way to go in Canada, but we are very confident in what we've accomplished so we didn't take on the EU or Israel.

For an export for the export part of our business out of pure Sunflowers Vancouver too. We were assured we were doing it right in Canada, we are and we hope to now start that process is exporting this year hopefully in the next quarter.

Going into the third third quarter fourth quarter with both Germany to start in Israel as you know, Switzerland now is starting a wreck experiment in France, starting medicinal.

We think we're going to be winners by far in the EU and very excited.

To start that process.

Thank you. Your next question comes from Doug Cooper Beacon Securities Doug. Please go ahead.

Hi, Doug.

Doug Your line is open.

Oh, sorry, but that I was on mute.

Thanks, guys. Most of my Stuff's been asked me about ready, but maybe.

Maybe just Steve if you haven't already can disclose that what was the contribution of rose in the quarter of the 21 points.

I guess $8 million in the U S cannabis revenue in Canada, how much of the world.

It's not how we're running the businesses as <unk> alluded to Theres biomass going between Pearson farms in routes and so on.

That's all in are related in one of the drivers of Roses success getting too.

Based on the data that we see that I know, Quebec doesn't publish but we see ourselves as the number three brand in that eventual board. So it is hard to know.

That's not how we're running the business is what I would call Canadian candidates, there not too distinct separate businesses between Rosen Pearson.

Okay. So when you say top three producers how do you quantify that through sell through of your own brands or are you have you have.

Yes sell through.

Okay, and I was in the quarter, where there was a march period.

Got it.

Within the quarter.

Yeah.

Just looking at the Canadian cannabis sales just in general in retail that are published.

They're obviously down in January versus December and they were down in February versus January . So I guess, that's just seasonality, maybe you're referring to but generally across certain provinces such as Alberta.

Revenue has been essentially flat for a year now.

Ontario is probably the only place that showing growth.

And maybe Randy you have to just have any comments about.

How are you.

The market is not growing particularly anymore, obviously, it becomes a market share game. So.

The cookies and these other partnerships.

Maybe you can just talk about the strategy to gain share.

Just maybe to comment on.

The pricing environment out there is it still continuing to decline average pricing.

And that'll be it for that.

Yeah, all good questions, Doug and I'll start with your first kind of hypothesis, we still we believe very strongly in the Canadian market, we think.

The conversion from illicit legal sources.

We're confident in our work.

The signals, we're getting from all levels of government on stamping out the illicit market, we think there's a huge opportunity there in Canada.

He'll desert still exists when you look at British Columbia, some major municipalities as well as Ontario, We think some of those factors will definitely drive overall growth.

When I look at the market and the market share gains absolutely everything we've done with anoia team on the cookies launch.

As we alluded to earlier in the call our additional brands that attack customer consumer segments that Christian farms does it Holistically plan.

Our ability for continued assortment expansion and what we're seeing now more than ever Doug is that across the supply chain, whether it's our provincial board or a regional operator, they need consistency and reliability in.

In the supply chain in the product and in the pricing in order to keep winning.

At the retail front in a very dynamic and competitive market and I think one of the many bright spots we have as Canadian cannabis appears on farms as we are that reliable partner.

So what I'm always feel really confident when I walk into stores and really pleased talking to Bud tenders. The affinity to have for our brands through our products when I'm in Quebec, and I see how the Roche team is continuing to make amazing gains in that in that market.

All of that gives us the ability to take market share.

And then on your pricing component.

We continue to see competition in pricing people are continuing to.

Invest in pricing to their own detriment, we actually improved branded margin.

Quarter over quarter year over year, even as we took price reductions.

Can we improve branded product margins.

In Canadian cannabis, even as we took price reductions I think that speaks volumes to the points that Mike was making around.

Our ability to grow our history and cultivation, but also the prowess, we're bringing to the table on manufacturing.

Are you seeing costs, reducing our wastage on pre rolls getting better efficiency in our vape lines and edible lines and some of the other components. So I believe over the next couple of quarters Youre going to still see some erratic behavior on pricing.

Again, one of the reasons why we're launching two new cannabis brands.

The attack either side of the everyday premium segments out there.

Pricing will be competitive I've always said I love, our levers and our ability to compete and I think youre going to see us come out real real strong with market share gains.

And pricing movement to attack various parts of the market.

Hopefully that answers your question Doug.

Yeah. Thanks members.

Thank you. Your next question comes from Eric Deloria, Craig Hallum Capital Eric. Please go ahead.

Great. Thank you for taking my questions.

Could you provide a bit more color on potentially quantify some of the rebound that you're seeing either in.

From provincial buyers from kind of late Q1 into Q2.

Or.

From the spot wholesale market as well just any kind of indications of how those have been trending.

In late Q1 into Q2, it would be great. Thanks.

Sure Randy take that globally.

Yes.

Yes, you kind of Theres slightly starting Eric so you're asking about volume or a pricing sorry can you just repeat that.

Just overall looking just to get a bit more color on some of the dynamics in wholesale and from Prudential buyers. You guys mentioned, you know, obviously that sort of seasonally weak first part of Q1 and Thats rebounded nicely at the end of the quarter and just looking for some color on how that's continued into Q2, and if you're able to quantify a law that'd be great.

Yeah, So I'll take the.

Wholesale <unk> non branded side first and then I'll come back into the provincial side.

As Doug was actually mentioning in his question about industry sales I mean, they ebb and flow month over month as I think we're starting getting to this cyclical quarter over quarter pattern, you see obviously, leading into summer and coming out very strong with everybody being a bit more social and some of the colder months you can kind of see some sales come down and be soft.

We see that same flow on the non branded wholesale side sales are really ramping in end markets are opening up or provinces start to expand we get those calls off the hook.

In other months.

We have a consistent base of <unk>.

<unk> and producers that we supply extract grade inputs for their own for their own product. So so that that ebb and flows throughout the year.

And so we'll always be active wherever theres opportunities and again our.

Expansive cultivation capacity allows us to opportunistically look at those revenue channels or what those opportunities may be the move into with the <unk> team the move to our additional brands is all about looking at the best margin.

Opportunities for our biomass and we've patiently waited.

With one brand under Pearson farms as we developed an extensive amount of genetic sourced as well as proprietary genetics that we've developed completely ourselves and no. One else has and then taking that those genetics to launch into the market under purion firms in our two additional brands as well as additional pre roll capacity and other products that we're going.

To be bringing to the market. So I think youll start to see a lot more.

Of the business flow into the branded side. So just wanted to give you that color to show you. How we're thinking about wholesale always be active we'll look at opportunities, but the plan has always been to start shifting some of that biomass into higher margin opportunities in their own brands. So that's the branded side on the retail dynamics or the provincial buying provincial boards and their buying behaviors.

I alluded to it earlier, we're always going to see this ebb and flow every March a lot of the boards go through their inventories and they are trying to manage kind of what the accounting and how they manage their distribution centers.

The listing process has been very efficient and we feel really pleased on the ongoing products. We got listed across the country inside and outside of Quebec, Obviously, what the Roche team there.

And what we're getting from the potential buyers.

And they want efficiency, they want really good suppliers and licensed producers that deliver on their commitments that they can rely on and I think everybody is continually looking at there the sales what's the forecast with products to carry.

We're still in early innings, so I think having a really strong relationship with the board that we do is a very positive thing because they're still figuring out a lot of the dynamics on their side. So I think youre going to see this ebb and flow quarter to quarter, while it sell in sell through.

But we believe in the trajectory of our revenue and our market share gains.

And we believe on the path that we have set forth in Canadian cannabis for this year.

Alright very helpful. I appreciate that color.

Last one for me on the <unk>.

Produce side.

Just wondering if you guys could expand a bit more on your ability to conserve costs.

Maybe kind of split it out between variable and fixed.

I'm, assuming that sort of the ability to you know maybe mothball one of the <unk>.

<unk> you guys have in Texas, I'm, assuming something like that as you sort of out of the question just given the.

The labor, there and whatnot in the sort of cost.

Restarting or whatnot, but could you just perhaps give us a bit more of an understanding of sort of the levers that you guys have the poll.

To conserve costs, there and just overall, how we should kind of think about.

Those process essentially.

Sure I mean, the business is a fixed cost business, 90% of fixed costs, our inputs, we know what they are.

Ahead of time, all that cost goes in the only variable component is if you pick more as an example, we have more boxes more freight but that variable cost component is very small very small percentage. So when you're faced with these fixed costs.

You know you have one hand tied behind your back as far as cutting back we are on a on a table like we have.

Profitable varieties.

Profitable skus, so one of our varieties.

We are the exclusive north American nobody has that product it does very well and another one where semi exclusive with two others in North America does very well the issue, though is it becomes sort of a whack a mole because if you take the SKU. That's the most commoditized, which is the number one selling SKU by the retailers.

<unk>.

That's there.

Thats their go to product then you need load factor because you can't just shipped two or four pallets to a retailer across the country you need to fill the truck out. So now you have to look at how do I grow that additional commodity.

That is.

At the lowest costs are losing money to get the freight efficiencies I E plus the fact that your retailer won't buy the other profitable products. If it doesn't have the commodities that he moves in our case, if you looked at T O V.

Which is tomato undefined beefsteak those of the old school legacy commodity type of products, but they are the highest volume ones.

So as far as shutdowns, we are looking at that but not a separate facility half of one facility and maintain.

<unk> key management team and base.

And we can do that we did shut one down last year in Permian Basin, we put it back in production they have to Covid and we may do that again and we're also looking at.

We're having a lot of conversations with certain competitors on working together on the marketing to reduce costs and get some scale.

The fulfillment side. So yes, we are doing it and looking at that.

As well.

That's very helpful. Thank you Mike thank.

Thank you. Your next question comes from Scott Fortune Roth Capital Partners. Scott. Please go ahead.

Hey, good morning, Nick on for Scott Here, just a first question around the derivatives side. It looks like the derivative segment in Canada was up sequentially as a percent of sales could.

Could you just provide a little color around your growth strategy within that category and what you've seen in terms of pricing and end market demand within that segment. Thank you.

What was the product we were talking about Scott because you have a lot of background noise.

Sorry to point out the derivative segment within Canada. It was up sequentially as a percent of sugarcane mandates why don't you take that call and as you pointed out.

Absolutely good question, so derivatives, meaning.

<unk> Edibles NDA goes extracted products.

So I think when you look at that space.

For sure <unk> number two three category in sales in almost every jurisdiction, it's a very important part.

The sales trajectory and we're going to continue to innovate we're going to continue to put out new products, we launched a new <unk> CBD vape pen we have some other high THC vapes coming onto the market.

And it's an important part that we're going to continue to innovate being where the consumer wants us to be at the price point.

Staying with edibles, continuing to expand the portfolio and look at various formats and flavor profiles.

Take a step back of.

To point out and we talked about the word commoditization. It's one of the words that I think about the most when I think about the 2.0 space.

And Steve alluded earlier on our flower margins and how high and strongly our which is the largest part of the market. So derivatives and an important part of the market will continue to innovate and be there for the consumer and make sure we're offering the right assortment strategy.

For our Purion farms brand as well as our two new brands on THC that we're going to launch, but it's a highly commoditized space I mean, the main input distillate is a commodity and it's true sense and I think we're going to continue to see.

Massive price reduction.

Okay.

People, who are going on.

Okay.

Lower grade.

You would have expected.

And when I look at some of our competition in the money, they're losing its clear that that's the bet they've made on the 2.0 space. So I think that that's okay.

We look at aerospace and important part to be in.

We're definitely going to be flower first, but we're not going to lose focus on how we innovate and understand what the key trends are and where our product assortment needs to be in that space.

Got it I appreciate that color and then a follow up for me on the U S. CBD side. It looks like balance health was slightly off quarter over quarter in terms of revenue, but still profitable.

You just provide an update on your growth strategy there within U S CBD and how youre looking at potential M&A versus new SKU introductions retail expansion et cetera to drive that growth. Thank you.

Well, we're pleased with their performance.

It is.

We have a multi pronged.

Strategy for high THC in the U S and balance health as the center piece for that.

As an incredible team.

And.

We're going to utilize that organization to go much further in high THC when we can.

Thats aligned on a parallel track without plans in Texas as a cultivator as well another maybe M&A opportunities at that point, but for looking at the CBD pure play CBD in the U S for.

M&A.

I'd tell you that we all look at that at an ongoing basis and there's nothing resonating.

No one is making profit accept so we can tell publicly traded b HB kudos to that team for constantly doing that their margins are exceptional which means if we see erosion in the quarter on revenue.

In light of the current economic times.

CBD can.

Cannabinoid products are important, but theyre not eggs and milk.

That may happen over the course of this inflationary period.

That said, we're pretty pleased but yes, we would look at opportunities to expand that it's just that we love accretive deals.

And we don't like to take on other People's mask, just to shut them down which seems to be a big player in the M&A space. So we're going to be patient there.

Right now.

Cash is king and that when we utilize our capital we want to be very prudent and very sure we're going to win here and it's going to be accretive and.

And we have to compare those current opportunities in our current U S market to the international opportunities as well.

Got it I appreciate the color.

Alright, well, thank you operator, and thanks for everybody hanging in this long we appreciate everyone hanging on the phone.

And.

We look forward to reporting on.

On our next quarter.

Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.