Village Farms International Inc. Q1 2023 Earnings Call
Good morning, ladies and gentlemen, welcome to fill which forms International's first quarter 2023 U Penn National results Conference call.
This morning village farms issued a news release reporting its financial results for the first quarter ended March 31, 2023 that easily 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.
T Joseph 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 this 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 securities filings with the SEC and Canadian regulators, including its Form 10-K.
K N DNA for the year ended December 31, 2010 at U S 10 Dash Q for the quarter ended March 31, 2023, which will be available on that score.
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 to check that.
Julio Chief Executive Officer of village Watch International. Please go ahead Mr. Julio.
Thank you Bella good morning, everyone and thank you for joining us today's call.
With me are village Farms', Chief Financial Officer, Steve Ruffini village farms head of Canadian cannabis Mandy do science and village farms Executive Vice President of corporate Affairs, and given the fever, and Patti Smith, Vice President and corporate controller.
As per our usual format, Steve and I will review the operating highlights and financial results for the quarter and then open up the call for questions.
So lets begin the first quarter was a solid start to 2023 with three particularly noteworthy highlights first our fresh produce business is tracking towards I'll go achieving sustainable positive adjusted EBITDA for this year.
<unk> delivered its third consecutive quarter of significant sequential improvement approaching breakeven adjusted EBITDA with a Q1 EBITDA loss of just under 1 million, that's a $5 $2 million turnaround from Q1 last year and a $2 million improvement from Q4.
While theres still much work to be done I'm encouraged by the meaningful and steady progress over the past several quarters.
Despite what remains a very difficult environment in which to operate a Canadian cannabis business continues to be one of the best and most consistent performers in the country.
Retail branded sales once again significantly outpaced market growth.
And we expanded market share, while continuing to generate positive adjusted EBITDA, which we did again this quarter.
And third we have added market so our Canadian export channel, which is generating strong momentum in this part of our international cannabis strategy, where margins are much higher and taxation is rational.
Let me address each of these starting with Canadian cannabis first village farms Canadian cannabis business keeps putting a big points on the scoreboard, which in a normal operating environment would be recognized.
There are three key areas in which the team continues to deliver one our number one position in dry flower category nationally, which we upheld consistently for five quarters, now and which remains the largest product category and the basis for all product formats.
Our strategic acquisition of Roes life Science, which has been accretive to that growth in the important Quebec market and Thats a contributor to our overall growth.
And three our execution commercialization and investment in innovation, which propelled us into the number two market share position overall last year in which we maintain during Q1 of this year, notably we are one of just three of the top 10 producers that meaningful meaningfully grew market share over the past year.
And we outpaced the second biggest gainer by more than two to one.
Our low cost production capabilities and continued incremental gains in our efficiency enables us to generate year over year growth in adjusted EBITDA, our 18th consecutive quarter in positive territory.
The team is focused on execution against those variables in our control yet.
Yet despite the proven sustainable strategic advantage is built into our Canadian cannabis model. We are operating in a structure that keeps much beyond our control. It feels like we are playing the game with one hand, and both the tied behind our back.
The iconic federal legalization of cannabis in Canada is approaching a six year Mark It was a bold and courageous and progressive move designed to bring about the availability of a safe regulated product create a new healthy competitive industry and converted in a listed market into beneficial tax <unk>.
Revenue.
As we speak with many other governments exploring legalization, we are asked about the Canadian model there.
There are many positives the availability of safe safe regulated product innovation and emerging research should benefit the consumer and a partnership between operators and regulators, where the rules are largely transparent or at least a means to discuss.
Yeah, and as we and other Lps have noted respectfully in our conversations with the regulators the Canadian excise tax is strangling the economics of producers and as a result, not January generating a sustainable tax dollars the government expected.
To put this in context Q1 alone we incurred $18 6 million Canadian dollars in excise tax.
More than our entire payroll expense on branded sales of $47 million or 40% of our provincial sales in a quarter. This does not include payroll tax or property tax so a licensing tax or income tax if we.
We were an alcohol tobacco company.
That nearly $19 million in excise tax would be in a neighborhood of just under $5 million. Let me say that again, if we were an alcohol tobacco company, we'd have paid roughly $14 million less in tax this quarter alone it's ludicrous.
Not surprising that then as others have noted the majority of the Lps are not paying these taxes, we suspect the economics do not allow it it has been well documented by industry experts that the government is solely the most profitable entity and a Canadian cannabis supply chain and we believe the illicit trade is.
Likely the most profitable.
This is the illicit market ample room to underprice, the legal safe market a major reason why the illicit market remains strong and underground for any industry.
It is questionable.
Steel industry will be able to convert the remaining 40% or so of.
Of all Canadian cannabis sales that is still illicit product.
<unk> tax regime.
Clear and consistent with the industry is.
Desired contribution in that are challenged as local enforcement efforts.
<unk> profitability just look at the lack of the corporate income tax distributions, the thousands of sub losses and impacts on the ancillary businesses and local communities.
And its challenges future investment innovation cannot be funded out of continued capital injection.
So this is another area of the listed trade can surpass industry.
Moreover, tax structure flat per Gram tax takes the absurd to another level and the contents of the rapid expansion of the value segment of the market, including our own Fraser Valley with.
Okay.
All of this is one reason we are attracted to the opportunities in international markets. The second highlight for our Q1 leveraging our experience.
Our experience in Canada for international opportunities with their attractive profit profile as a core part about Canada strategy and we are seeing very good momentum.
Year over year export sales were up more than tenfold and now contribute nearly 7% through our Canadian cannabis segment sales.
Most of the export growth to date, including this quarter has come from our first export market Australia earlier. This year, we added a second export market with the launch of <unk> farms brands in Israel.
And last week, we announced that launch and the German medicinal market. After successfully completing all testing protocols are testament to our team and local partner <unk> therapeutics, while lead up to both market launches habits delays I'm pleased that we have received follow on orders for both countries and we are thrilled.
To build our business with local partners.
And then my third takeaway for Q1, a significant turnaround in our fresh produce business fresh is an important strategic business for village farms, we are committed to derisking it and returning it to profitability as part of our long term growth strategy.
Q1 was another very encouraging step in that direction the macro environment has improved.
Oversupply is getting under control and we have made adjustments for inflation. We continue to work on our improvements across all aspects of our operations from greenhouse the customers receiving docs, including best in class operating protocols to manage plant viruses as you know that's been difficult.
The last few years.
Our fresh results for the first quarter continue to support our confidence in sustainable improvement.
<unk> financial performance for our <unk> business this year and reinforce our belief in the value of this business fresh and cannabis are synergistic each benefits from the other's expertise.
Assets and deep rooted experience.
We have capitalized on these synergies in Canada and have long I'd, the United States as such we are formally applied for medicinal licensed in Texas with the league.
Use of medicinal cannabis may be greatly expanded to include chronic pain while.
While the number of potential licensees and timing of when the state will make a decision are unknown. We are encouraged by the potential to contribute our Canada expertise of decades of investment in the state of Texas and our deep agriculture.
To any future plans by Texas to award additional licenses should we receive a license we will work with the stock exchanges towards an acceptable ownership structure that would enable us to participate in the market.
Okay.
Gives me.
With respect to our current CBD business in the United States balance health Botanicals continue to hold its own in another very difficult market in which to operate we continue to benefit from the success of synergy plus and its line of products last year.
So far this year this business is operating more or less on plan.
And with the continued focus on cost supporting near breakeven adjusted EBITDA regulation of the CBD business would be a meaningful game changing for this business and we eagerly await the outcome of the farm Bill 2023.
This year the potential review of the category in the meantime, the team is operating under the highest production standards both from our current customers as well as the opportunity to expand when food drug mass retails are ready and open.
So with that I will turn the call over to Steve for a more detailed review of financials Steve.
Thanks, Mike.
Consolidated sales for all of those funds for the first quarter were $64 7 million a decrease of 8% from Q1 of last year with the decrease due to lower sales from fresh produce and use cannabis, which were partially offset by Canadian cannabis sales.
Constant currency basis sales declined 5% with the stronger year over year U S dollar, reducing our reported number by two 6%.
On a constant currency basis, our canvas business sales were 48% of our consolidated U S.
Sales consolidated net loss for the quarter was $6 6 million or <unk> <unk> per share compared to a net loss of $6 5 million or <unk> <unk> per share for the same period last year.
Might incur.
Increase in net loss was mainly due to our improved operating loss of improvement of $2 two.
$2 2 million being offset by a higher year on year and our income tax expense of $2 3 million as we are booking evaluation allowance for our U S tax losses, which we started in Q4 of 2022.
Operating loss before tax for Q1 improved 27% from Q1 last year.
Improvement was mainly the result of the improved operating performance for VF fresh.
Consolidated adjusted EBITDA for Q1 was 519000 this is a significant year over year improvement from.
Negative $6 1 million for Q1 last year.
As a result of a $5 2 million fresh produce EBITDA turnaround Mike discussed earlier.
As well as higher EBITDA from our Canadian businesses.
And a 13% year over year decrease in corporate costs to $2 2 million excluding stock compensation.
Turning to our Canadian cannabis results, which I will discuss in Canadian dollars to provide a more accurate gauge of period to period performance without exchange fluctuations net sales for Q1 grew 23% year over year to $34 million with retail branded sales growing 40% once again.
Outpacing overall Canadian market growth by a wide margin.
Beginning this quarter, we are breaking out our international export sales.
In our Canadian cannabis business as they are becoming a larger part of our sales mix as Mike discussed with more favorable margins.
The increase is an increased focus for us international sales were $1 7 million, which was 750% increase over Q1 of last year.
Non branded our wholesale sales for Q1 were $2 3 million compared with $4 9 million in Q1 last year.
As already low spot prices in an oversupplied market, where further eroded by large inventory liquidations.
As we have discussed many times the wholesale market is opportunistic for us and we have been selective around our participation in the current market environment with the expectation of improved pricing when supply more aligned with them.
Gross margin for Canadian canvas in Q1 was 33% essentially in line with our 34% and adjusted gross margin. We reported in Q1 of 2022, which excluded the purchase price inventory adjustment in that period. The slight decrease in margin was primarily related to our sales mix.
With a higher portion of lower margin Fraser Valley sales at that brand continues to have success in the value segment of the market.
And it was not launched until the back half of 2022.
Being for the most part offset by the higher margins on our higher international sales.
Selling general and administrative expenses for Canadian cannabis for Q1 were $9 3 million or 27% of net sales unchanged from $9 3 million in Q1 last year, but down as a percentage of sales from 34% in Q1 2022 on a sequential basis SG&A.
<unk> costs were down on a dollar in dollar basis from $9 $8 million in Q4 and unchanged as a percent of sales.
I will note that Q1 is typically elevated on the percentage of sales basis due to seasonally lower sales SG&A cost efficiency remains an organizational wide focus.
Our Canadian cannabis operations delivered the 18th consecutive quarter of positive adjusted EBITDA of $5 3 million, which was up 95% from two 7 million for Q1 of last year, we continue to generate solid positive EBITDA in that cost and Uber competitive pricing market move.
Moving now to our U S cannabis operations for which I'll revert back to U S dollars U S. Canada sales for Q1 2023 generated entirely by our CBD business bounced health were $5 million generating a gross margin of 65%.
This compares with sales of $7 million and a gross margin of 67% for Q1 last year. The sales decrease is primarily due to the industry wide challenges.
Which we had mitigated with new product introductions, including our synergy plus line of hemp derived THC products.
Adjusted EBITDA for U S. Canada was just under breakeven at negative 151000 compared to a positive 580000 and adjusted EBITDA in Q1 of last year based on the information. We have we continue to believe that we are outperforming the majority of CBD focused peers.
Turning now to fresh produce although our financial performance continues to be impacted by inflationary pressures, we achieved our third consecutive quarter of sequential improvement in this business, which resulted in a considerable year over year improvement.
<unk> sales were down 16% year over year with an increase in sales from our own facilities being offset by lower project sales from our other suppliers due to lower year on year volumes as we transitioned our partner growers during 2023.
The lower year on year volumes were offset by a 27% increase in price due to both generally higher market pricing in early 2023 versus early 2022 as well as our success in having a higher percentage of VF fresh sales going direct to retail accounts, who generally pay a higher price than our wholesale accounts, which is one of the.
Early wins and our operational plan.
The higher sales price is the primary driver of our improved EBITDA.
Adjusted EBITDA loss for fresh produce took another step closer to breakeven.
With a loss of <unk> <unk>.
995, which was a substantial improvement over the loss of $6 2 million in Q1 of last year as well as the.
Negative 3 million for Q4 of 2022.
A continued stabilization of the macro environment.
And our work on improving yields and customer profitability continues to support our confidence in substantially improved financial performance from this business in 2023.
Turning now to cash in the balance sheet at the end of Q1, we had cash of $34 9 million and $80 3 million of working capital, which are substantial increases from the $21 7 million and $68 million respectively. At the end of the fourth quarter of 2022.
Total debt and one was $52 million down slightly from $53 5 million at the end of the prior quarter as a recurring loan amortization is close to one 5 million per quarter.
I am also very pleased to report we extended the Pearson farms revolving non revolving credit facility.
Which now expires in February 2026 from February 2024, under the same terms conditions and covenants in the current environment of tighter credit higher interest rates lower risk tolerance financial challenges that many of our Canadian cannabis tiers as well as the regulatory focus on the health.
Of our financial institutions. The extension is a strong indicator by our lenders.
In our canvas business operations.
And now I'll turn the call back to Mike.
Thank you Steve.
So in closing I want to reiterate points. One we are pursuing return enhancing growth opportunities that lineup with our expertise and core capabilities.
This focus matters, we are still in the very early stages of cannabis markets in North America and around the world and there are many wrinkles in these markets still to be ironed out too we are holding ourselves accountable for what is in our control.
And finally I appreciate listening to our reflections on the challenges in the Canadian cannabis sector. I also appreciate the partnership of many in this industry governments are making bold decisions to revise decade long entrench segments about cannabis and we applaud their strategic rationale to provide us.
<unk> regulated product this is core to our DNA also.
<unk> will continue to work with all regulators to get the balance right to achieve these goals for the benefit of the industry.
For the benefit of consumers and for the benefit of village farms and all its stakeholders.
We will turn it over for calls at this point.
Operator, we're.
We're ready.
Thank you.
To ask a question. Please press star one on your telephone in with where need to be announced to withdraw. Your question. Please press star one again, please standby welcome Pat Danny roster.
And our first question comes from the line of Frederico Goldman with Keybanc capital markets. Your line is now open.
Hi, good morning.
For for taking my questions.
First question is on the produce side.
Can you maybe provide some more color on what exactly drove the margin improvement in produce how much.
Do you think is under your control to maybe continue driving those improvements over the remainder of the year and how do you see that segment performing.
For the next few quarters. Thank you.
Well I mean as I said.
We are very focused on what's in our control on margins. So that's going to be driven by obviously there has been price compression continues out there offset by innovation.
We see about 30% of it.
Each quarter, 30% of.
Our product being sold our new Skus that are entering the market.
Oh on produce I'm sorry.
So that so on produce one of the examples is we are investing heavily in artificial intelligence and autonomous growing systems.
As an example, we put one in a year and a half ago and we've had great results from it and now we're expanding that to all of our Texas facilities and our Canadian Protas facility starting in 2024.
Early results are.
Positive in helping to drive increased yield more efficiency lower cost.
We're investing heavily in automated equipment that will be operational in the fall with the new crops out of Texas.
Our significant capital expenditures, there close to $3 million that will drive greater efficiency in labor. So we're managing that at the facility level and as Steve has said we continue to manage.
And evaluate our retail customers.
Two.
So right size, our business for our most profitable customers.
So what that May do to revenue up and down which is going to drive for positive EBITDA and eventually positive cash flow. So I think contribution of all of those factors and more will continue to drive higher margins, but keep in mind.
It is a commoditized business and we are competing with Mexico and there is a limitation.
On driving higher gross margins, especially derived from price.
Okay.
Okay, Thanks, Mike for that color.
Just maybe moving on about.
Your application for a medical cannabis.
Licensing, Texas can you talk maybe a little bit more about the potential opportunity.
And then what sort of <unk>.
Timeline can expect there in terms of not only a decision on the license, but also actually potential startup sales. Thank you.
So as you know we've reported that even though were expanding internationally and both on exports and looking at operating in other countries.
For us getting into the U S market was always a priority.
And we've undertaken that we will enter the U S market, one way or another.
We have a new.
Number of different entry points that we're working on and Texas is one now as you know four years ago.
Eight of taxes issue three license.
Okay switch.
Dave the only script the Doctor can write was for one form.
At least 13 different forms of epilepsy, So really had no traction there and that's why two of the three license all of those currently have really done nothing.
Two years ago in the last legislative session. They meet every two years in Texas nothing was done in terms of additional licenses nor any improvement to occur.
Alright.
<unk>. However, this session.
What's happened now is both.
Simultaneously.
Department of public safety for taxes has agreed to issue additional licenses how many we don't know, but we do know they were about 200000 applicants. The cutoff date of 200 200, I'm sorry, 200 applicants. The cutoff date was the end of April So that's a cutoff date, how many will be.
Approved is uncertain and there's a second round of the ones that are approved by.
Texas.
That will be up to the governor Abbott to decide how many key issues. So that's one thing second thing Thats happening simultaneously, which is incredibly positive is a bill that has already passed the house.
And as legislation session comes to a conclusion at the end of May So there's about 15 actual working days left.
And should the Senate.
Pass this revised bill.
Big takeaways that includes chronic pain.
And when you have chronic pain, which will include mental health issues.
PTSD as already and so it really drives taxes to be sort of a mainstream medicinal state and that chronic pain will give doctors a great opportunity to write scripts for a number of different therapies and issues. So we're very excited if that passes so that's why.
We've talked a lot about Texas and the Texas Optionality. This is a great <unk>.
Step in Texas.
As far as timing goes we expect well we'll know what the bill does very soon by the end of this month.
As far as the legislative.
Session ending in passing say an advancement.
As far as the.
The licenses that will be issued and if we will get one we should know that sometime but I would imagine by early fall early to mid fall. So we're standing by for that.
Yes.
Okay. Thanks for that maybe just a last question for me.
Just looking maybe more big picture on your Canadian cannabis business.
What we're seeing so far is as you mentioned in a market that's very competitive very fragmented.
Suffering from from pricing pressures in most of the value.
Going to the government in pharma taxes, so what sort of catalyst or event.
Should investors be waiting for each year rigor.
Regarding village or the overall industry that could change.
Some of that some of that some of those conditions. Thank you well I mean, the power of cannabis as a product is unbelievable. There was the New York Times article over the weekend that talked about.
Canada and what was <unk>.
<unk> statement in that article was can you imagine of cannabis was invented for the first time in this current day and age it would be like the miracle plant of all time, but unfortunately, we're fighting these long segments across the world.
And that's part of the issue I always look at it. This way you know we always talk that accounted this investor should be a long term investor and I think if.
This is the type of investment where.
It's going to be an incredibly large global industry at some point for investors what I would do is take.
Take our ports present in my portfolio and embedded long term because it will pay off and it may be for you.
But that's okay, it's coming so for us so as we reported we are hunkering down we are watching all our costs. We are trying to increase our market share innovation.
And be in a position that when there are these changes that will come that we want to be number one in the markets we enter.
And.
I think everything we do and we've proven.
If we get some relief on regulations and it's not just taxes, it's other things as well.
And we have to be patient, but it will come in I think.
I don't know what other consumer product currently has the potential of cannabis over the next five years. So that's how I see it.
Okay.
Next question.
Operator.
Just a reminder for everyone. Please make sure to limit your questions to one question and one follow up only.
One moment for your next question.
And your next question comes from the line of Kirin Great lines.
Please proceed with your question.
Hi, Hi, good.
Morning, and thank you for the questions.
So first one from me just in terms of pricing in the Canadian marketplace seems there might be some early signs of stability from some of the third party data, particularly in the flower category. So I appreciate any color you might be able to provide in terms of what youre seeing in the marketplace unmatched stability, particularly given I know you took some price increases on certain.
Q, so what youre seeing in terms of flower pricing and how the price increases on the skus have been.
<unk> in terms of the marketplace. Thanks.
Sure mandate why don't you take that question.
Thanks, Mike.
Thanks for the question there so on pricing in the market your data at Intel.
Pretty accurate, we're starting to see that flattening out and that stabilization specifically around flower.
And it kind of leveling out and not seeing a lot of major price activity. So you're spot on there and we're seeing the same thing.
Second point on our general price increase that we started to take across the country.
Started in late Q1 as I mentioned in the last earnings call in March and so very positive reception and what I mean by that is that.
Retailers understood. It the boards were very supportive of it and I think we started even get some really good commentary from our competitive LP set that we're doing that and I think it shows something needed and warranty the industry and we're seeing good momentum behind it and we're not seeing any backlash from any of our customers. So all in all.
All right move positive for us positive for the industry and it's being viewed as such.
Okay. Okay. That's great to hear the second question for me you talked about artificial intelligence and how that can help the produce business sure. So anything you can leverage some of that potentially for for cannabis as well talked about.
Driving the increase yields higher efficiency lower cost all things that are helping produce I would also imagine would help candidate as well so anything that you might be able to leverage in terms of the artificial intelligence on produce and bring into the canvas side. Thanks.
Yeah, absolutely. So we wanted to start with produce.
And then started in Texas and now as I said our Delta.
Delta one facility, which is one of the largest footprints in produce in the country will move forward their incident.
Year.
But after that we want a learning as much as we can from it and then bring it into the cannabis side. So these are autonomous.
China Mist growing system that is sort of having a co pilot, which is 24 hours a day, so there'll be a tremendous amount of synergies I think in our cannabis business, not just in Canada, or Quebec, or EBIT, especially in the U S going forward.
We've been looking at this technology for years and waiting for and are really excited where are sort of on the front burner of doing it.
And so I think it would be very synergistic there and remember as we've always said one of the key pillars of excellence that we have is on a cultivation site and besides building brands and being innovative and all the things you need to do to be a successful consumer products company, especially in the cannabis space.
We are still in agriculture in the most prudent thing as low cost production highest quality low cost. So this is part of our overall continuous proven process.
And we're excited to look at that as a next step.
Okay, great. Thank you very much for the color I'll jump back in the queue.
Okay.
Okay.
One moment for your next question.
Your next question comes from the line of Ali.
With Craig Hallum Capital Group.
Your line is now open.
Great. Thank you for taking my questions.
First one from me just wondering now that you're breaking out international menu reported financials. If you could just comment on the expected.
<unk>.
Sales or perhaps timing of sales that you are expecting.
This year for international Thanks.
Yes, I mean, where we think.
We feel very confident I mean first of all Australia has really done well for us very consistent.
It takes a long time to really get through the whole testing procedures and protocols, it's really unbelievable, both domestically and in Canada as well as the other countries. So that's number one.
But.
But the good news is like for Israel, where we shipped in January in Germany.
We've already received our secondary orders.
So we're excited about it but we want to be a little conservative going forward. We're looking for a 10% increase this year I think that can rise to five years.
10% this year.
And then increasing to 15% going forward.
We are working on other <unk>.
Countries, which are not going to put out now we never announce.
New country to we've actually made a sale and it's been accepted.
So.
I hope that answers your question.
No that's helpful. I appreciate that.
And our next question from me.
I apologize if you touched on this already.
But just looking for an update to the Texas greenhouse that.
You guys have what's the for sale list, if there's any progress to comment on that thanks.
Well it is officially for sale and Thats. All we know at this point, we have a long list of 260 <unk>.
Possible.
Folks are receiving the package on it and.
We want to move very quick.
As in production partly.
So it is a little bit of a cost drag on us because we're not in full production.
But hopefully by the time we report.
In August we will have some good news on it.
Okay.
Thank you.
You're welcome.
One moment for your next question.
Your next question comes from the line of Michael Freedman with Raymond James.
Proceed with your question.
Hey, good morning, Mike, Steve and good morning, and thank you.
Thanks, very much for taking our question.
And congratulations on a terrific turnaround in the BFS segment.
Yeah.
Okay, great fantastic.
I.
I wanted to talk about the a fresh and about.
Some market cost of sales reductions year over year.
You are seeing.
Significant reduction in greenhouse costs, which I think I understand but I wonder if you could touch on supply partner partner costs looks like they reduced $4 $8 million. This quarter I Wonder if you could share some color on that.
Okay.
Yes.
This is Steve.
The reduction in supply partner cost is directly related to the reduced volume.
No.
Less volume.
Obviously less payments so that third party. So we generally work.
We take possession of the produce they predict under our under our labels are various those funds labels and.
<unk> brands sell them to our retail accounts and essentially take eight percentage off the top of their remit the balance to be.
Our supply partner.
So less volume less less payments.
Got it okay that makes sense.
Now.
Next question.
Year over year for Pearson farms, Theres been a big EBITDA margin expansion.
I'm wondering if you could just describe the improvements that have been made or what factors have been driving this.
<unk> year on year expansion.
Okay.
Randy do you want to take that call.
Yes, I can turn it off.
And if there is anything Mike or Steve that you were.
Want to add.
Chime in.
Michael Thanks for calling that out and pointing it out.
Mike alluded to some things earlier about it's always about looking at your costs, making sure you can compete.
And set yourself up for long term success. So we're always going to be looking at things around our cost structure, how we improve yield.
Looking at our operating costs.
You've seen our SG&A fall as a percentage of sales we know that when we talked about it last year, it's going to continue to be a competitive environment.
So we're continually looking at where we can drive better margin on our Skus rationalizing our assortment.
Getting better performance out of our products and then looking across all of our costs yield efficiency line items.
To continue to maintain our ability to drive through ebay.
EBIT performance and overall margin performance.
The pricing component.
I touched on earlier didn't have a large impact in Q1, because it is at the tail end of that so it did just one on one call lineup. So again, it's looking at assortment is looking at costs understanding how we can continually.
Prove our overall operating structure and make sure we're setting ourselves up for that success, knowing that it's continued to be a tough time in 2023.
Sure is there anything else you want to add Mike Steve.
Yeah.
No I think that.
That's good.
Okay.
Alright, Thank you very much I'll jump back in queue.
Thank you.
One moment. Please our next question.
Okay.
And your next question comes from the line of client.
<unk> with Stifel GMP Your line is now.
Yes.
Hi, there good morning, Julien for Andrew.
Thanks for taking my question.
So your guide.
I'm flipping over a bit to operating cash flow.
<unk> had an operating cash burn of $3 $7 million this quarter wonder.
I'm wondering given that second quarter is seasonally a lower margin period wondering if you can provide.
Some color as to where you would expect.
Operating cash flow to be for the next few.
A few quarters.
For the full year.
This is Steve so.
Generally the first quarter is a.
Tougher cash flow quarter for us.
As Mike mentioned the Delta one facility in Canada is is whether the largest if not the largest.
Greenhouse in North America that generates zero cash for us in the first quarter.
And obviously, it's farming so it's a significant cash outflow for us that facility.
Knock on wood doesn't have round goes this year that facility will generate positive cash flow for the next three quarters.
And with respect to our cannabis business generally we see higher sales in.
Particularly with branded.
And we're expecting higher sales of international So I think our operating cash flow will improve.
As the quarters.
Progress this year, our operating cash flow.
Okay.
Okay.
Sounds great.
All my other questions were answered so that's all for me and I'll jump back in.
Alright, thank you.
Again to ask a question. Please press star one on your telephone Lake Feraheme to BMO.
Taiwan, one on your telephone.
Okay.
Sure.
Operator, we'll take one more question.
And we have a follow up question from.
Sam Kleinberg from Stifel.
Alex.
Yes.
That's one question.
Okay great.
Other questions and the queue I will now turn the call back over to Mr. Ed Tilly now.
Alright, Thank you Bella and thank you to everyone for joining us today, and we certainly look forward to speaking to you at the time of our Q2.
Announcement and conference call in August .
Great. Thank you thanks operator.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
[music].
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
[music].
Yes.
Yes.
Yes.
Okay.
Okay.
Yes.
Okay.
[music].
Okay.