Good morning, ladies and gentlemen. Welcome to Village Farms International's Fourth Quarter and Year-end 2022 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the third quarter ended December 31, 2022.

That news release, along with the company's financial statements are available on the company's website at villagefarms.com under the Investors heading.

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

Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control.

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

A summary of these underlying assumptions, risks and uncertainties is contained in the company's various securities fillings with the SEC and Canadian Regulators, including its Form 10-K MD&A for the year ended December 31, 2022, which will be available 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 DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGigilio..

Thank you, Chris. Good morning. And thank you for joining us today. With me are Village Farms' Chief Financial Officer, Steve Ruffini; Village Farms Head of Canadian Cannabis, Mandesh Dosanjh; and Village Farms Executive Vice President of Corporate Affairs, Ann Gillin Lefever.

As for our usual, Steve and I will review the operating highlights and financial results for the quarter, and then we will be available for questions. Let me first begin with the key takeaways for our fourth quarter. First, our Canadian cannabis business now ranks number two nationally and market share after steady growth throughout the year.

In fact, our retail branded sales grew 25% year-over-year, while the market grew just over 13%. That's nearly twice of that market. We launched multiple brands, notably the original Fraser Valley weed company, Soar and Promenade and we generated 17 consecutive quarter of positive adjusted EBITDA.

Importantly, we grew while integrating Rose LifeSciences into our platform. Many times in the past we were asked about getting access to the Quebec market, we did. When we acquired Rose in very late 2021, it ranked 12th in terms of Quebec market share, it now ranks second. This is a great achievement in just one year.

And just after quarter and we further expanded our export markets with our first shipment to Israel, and expect additional shipments to other countries in short order. Second in the U.S. Cannabis business, Synergy+ is on track to be a $4 million a year brand in retail in less than one year since launch. Another outstanding achievement.

And once again in Q4 the team's performance has made balanced health. One of the very few positive EBITDA CBD companies that we know of. Third, Fresh Produce is turning around. 2022 was one of the most difficult years of my long career in the Produce business.

In fact, the Brown Rugose virus has cost us $13 million over ‘21 and ‘22 crop cycle in Texas alone. And that's only in production costs and yield. It does not include the impact on customer relationships, and it does not include the impact of the virus in calendar year 2022 in our Canadian facility, which we had not previously experienced.

A significant turnaround for Fresh Produce is on the horizon for 2023, which we will demonstrate in the first quarter of 2023, much as this being driven, encouraging success with the Brown Rugose protocols.

Q4 demonstrated the strength of our strategy, including surgical investments, operational improvements, including AI technology and innovations we made which resulted in the year ending on a much stronger footing than it started in Fresh.

With respect to Canadian cannabis, we have read all the same news articles and hear the same pundits that say Canadian cannabis is out of favor with investors. Actually, that all cannabis in North America is out of favor with investment -- investors.

Despite this, we are -- with all of our current challenges, we have worked hard demonstrated operational excellence and have proven our business and built an enviable position.

And what other consumer products industry does this kind of growth exist for an industry leader? I don't know of one, and who can claim our depth of experience to capture future growth in the industry. It will get better and when it does, we will have a clearer leadership position. Let me spend a few minutes clarifying our strategy.

When and since we expanded to cannabis we expected the sequence to be, one, launch in markets where our cultivation expertise would be the basis for a competitive and profitable business model. We chose Canada. Two, maintain optionality to enter the U.S. market, which as a number one single country market for cannabis is a huge opportunity.

We assigned a value to the very real optionality about Texas space assets as worth much more, assuming produce broke even. Than starting from scratch in the U.S. were legally permissible, as we have done in Canada. Which brings me to the last event in the sequence, number three, when the U.S.

market legally permits us in our case to enter it, which is permissible by NASDAQ and with a strong preference to convert some of our Texas space assets as we have done and proven in Canada.

So how is this working out? On number one as you can see, our results in 2022 despite very difficult market and regulatory conditions in Canada, which have happened all player’s profitability, we have built a very competitive and profitable business model.

I give us a solid A grade for our efforts, especially when the vast majority of what we have built we have built organically, not through M&A. Number two, has proven more difficult in 2022. In simple terms, the options to enter the U.S. market ended up costing more than expected due to factors I have discussed for the last three quarters.

2022 hurt the option value. So I'd give us a D for this part of the strategy last year. A number three, our original expectations were that restrictions would be addressed by Washington and the legislative actions in 2022, at least after the midterms at the latest, which we extended later on to the lame duck session ending in January of this year.

You probably guessed that I would assign an F to the efforts in Washington. But I'd also give us a C as it's our job to manage in a regulated market as well, we would never run a business the way Washington was itself. We recognize it to improve our average. To do so we are attacking all assumptions about entering the U.S. market.

Starting with the need to improve and de risk of Fresh business results. We have undertaken the following, we will be reducing the footprint of our Texas assets to improve profitability and focus on cultivation assets. And team in one region in Texas to better service our profitable customers.

We have identified and started implementing multiple operational improvements, which will enhance yields and lower costs. And we're reviewing every relationship focused on those accounts which are most profitable for us, so that we can over deliver to key customers.

Regarding factors out of our control climate virus inflation, I'm sure you can appreciate that operators only discuss these when things -- when they are putting pressure on the business model, but they are very real across all agricultural businesses.

Over our 30-year history and experience dealing with these factors is one reason we have built the top cannabis cultivation operation in the world. As of the first few months of 2023, inflation and the Brown Rugose virus, which puts tremendous pressure in our profitability in 2022 are abating.

I'm not ready to call victory yet but I will call on those in our Fresh business who have been attacked the virus input costs and pricing opportunities. They have made me cautiously optimistic. So to summarize, we have launched a plan to de risk of Fresh operations by attacking the asset base costs and consumer -- customer profitability.

Our goal is to keep attacking these fronts until we can safely deliver a positive EBITDA contribution, absent any major climate or economic event. We others to stay cozy, we understand that as a business Fresh must contribute to the growth of Village Farms. I will turn it over to Steve for more detailed review of the financials.

Steve?.

Thanks, Mike. Before I get into results, just a quick reminder on the impact of the acquisition of 70% of Rose LifeScience on November 15 2021. And therefore, the fourth quarter and annual 2021 results only reflect six weeks of contribution in last year's comparisons. Turning to the results.

Consolidated sales for all Village Farms for the fourth quarter were $69.5 million which was a decrease of 5% from Q4 last year, due primarily to a weaker Canadian dollar in 2022 versus 2021. On a constant currency basis, our year-on-year sales were close to flat, year-on-year down 1%.

Higher sales from the Canadian cannabis business were offset by lower sales from Fresh Produce. On a constant currency basis or cannabis sales were essentially 50% of our consolidated U.S. dollar results.

Consolidated net loss for the quarter was $49.3 million or $0.41 per share, compared with a net income of $2 million or $0.02 per share for the same period last year. Our Q4 2022 net loss included the following significant non-operational charges to income due to balance sheet adjustments, specifically an additional $13.5 million.

Impairment to goodwill in the quarter related to the value on our balance sheet of the acquisition prices balance health botanicals. This in addition to the June 30 2022 impairment charge of $29.8 million as a direct result of the significant decline in the valuations in other CBD focused appear publicly traded companies.

The total impairment of $43.3 million for the year is a significant driver of our reported statutory full year loss of $101.1 million. We also -- in the fourth quarter wrote down in the Canadian cannabis business took an $11 million U.S. or $15 million Canadian charge for aged lower potency flower inventory.

Additionally, we took a valuation allowance adjustment to our U.S. deferred tax asset creating significant change in our 2022 tax provision resulting in a $19.2 million charge to earnings in the quarter. These balance sheet adjustments totaled $43.7 million of our reported $49.3 million loss.

Consolidated adjusted EBITDA for Q4 2022 was near breakeven at negative $756,000. Compared to positive adjusted EBITDA of $5.1 million in Q4 of 2021. The EBITDA loss in Q4 was -- this year was driven by Fresh Produce. Although we saw a considerable improvement compared to Q3. Corporate costs are relatively flat year on year.

As I shift to Canadian cannabis results, I’ll refer the results in Canadian dollars to provide a more accurate gauge of our period-to-period performance amidst exchange rate fluctuations. Our Canadian cannabis operations delivered year on year growth in Q4 of 13% to CAD38.2 million.

Retail branded sales for Q4 continued a meaningfully outpaced the market growth at 25% year-over-year. Wholesale sales for Q4 however, we're down 35% year-over-year, due to continued significant price erosion in the market as distress producers liquidate inventories. This revenue channel can vary widely from quarter to quarter.

This was especially the case in Q4. The wholesale pricing environment contributed to our decision to write down CAD15 million of aged and lower potency flower inventory. As its expected realizable value was reassessed relative to current wholesale market pricing. As it is sold, it will pressure our gross margin target range of 30% to 40%.

Excluding this write down which is recorded in our cost of goods sold for Q4 for statutory purposes. Without this charge, our gross margin for the Canadian cannabis in Q4 was 40% at the top end of our stated target range of 30% to 40%. Top from both Q2 and Q3 as we continue to execute on providing high quality everyday priced products.

Selling general and administrative expenses for our Canadian cannabis operations for the fourth quarter were CAD9.8 million or 26% of net sales compared to CAD9.2 million or 27% of net sales in Q4 in 2021. And was the sequential improvement following our investments in the end of 2021 in the first half of 2022.

We remain on track to bring SG&A as proportion of sales back into the lower 20% range in 2023. Q4 2022 SG&A includes severance costs of our publicly announced headcount reduction in early Q4. Our Canadian cannabis operations to their 17th consecutive quarter of positive adjusted EBITDA at CAD6.3 million, up from CAD6.1 million in Q4 2021.

I will now move to our U.S. Cannabis operations and revert my review back to U.S. dollars. U.S. Cannabis sales for the fourth quarter, which continued to be generated entirely by balance health were $5.3 million, which generated a gross margin of 67%. That compares with sales of $7.5 million and a gross margin of 71% in Q4 last year.

With the sales decreased primarily driven by the industry wide challenges, although indications are that we are outperforming the majority of our peers. Our back half 2022 results were driven in part by the success of our synergy plus line of hemp derived THC products. Adjusted EBITDA for U.S.

cannabis was $300,000 compared with adjusted EBITDA of $1.7 million in Q4 of 2021.

Now turning to Fresh Produce, although our financial performance continued to be impacted by inflationary pressures, especially for freight and other production inputs, and the volume loss due to the Brown Rugose virus, we delivered a significantly improved quarter driven predominantly by improvements in our Texas operations, which are continuing into early Q1 2023 and are coupled with stronger year on year pricing.

Adjusted EBITDA was negative $3 million compared with a positive $700,000 in Q4 of 2021, and notably a considerable sequential improvement from the negative $4.9 million in Q3.

And as expected it really was a first half second half story with adjusted EBITDA for the back half of the year improving to a negative $7.9 million from a negative $16.5 million for the first six months of 2022.

Turning now to cash flows and the balance sheet at December 31, 2022, we had $16.7 million in cash and approximately $44.1 million in working capital. During the quarter we had a net cash outflow of $1.5 million net of all operational capital expenditures and financing in the quarter.

Subsequent to quarter end Village Farms Management, our Board and our advisors made what we believe to be a prudent decision to raise $25 million through a registered direct offering of just under 18.4 million common shares at U.S. price of $1.35.

Together with warrants to purchase up to the same number of shares, which at their exercise price of $1.65 will generate $30 million in additional proceeds. We made the decision to raise capital last month based upon two factors. First, our best informed assessment of all the 2023 factors outside of our control.

The second a failed federal cannabis legislative agenda that might have delivered more efficient capital market fundraising. We felt we had the responsibility to our shareholders, indeed all stakeholders to door up our balance sheet so that we could focus without distraction on executing our operational plan. And now I'll turn it back to Mike..

Thanks, Steve. There are a couple of insights with respect to the 2023 start that I would like to close with. First, as you know, we were always evaluating competitive dynamics, innovation and consumer demand preferences.

In our current assessment, the Canadian cannabis team is comfortable implementing a price increase on select products which have been communicated in market. This is what a market leader should do. And I know the team will monitor the impact through this initiative.

If successful, our leadership in this regard could be a positive inflection point for the industry. Second, as an industry leader, we have an obligation to share our expertise and insights with all of our stakeholders. Recently senior Pure Sunfarms Management participated in a series of meetings with members of Canadian government.

Our message is shared by other LP operators excessive excise taxation is contrary to the government's own promise to Canadians to keep taxes on cannabis low to support the objectives of legalization, which are keeping cannabis out of the hands of youth and profits out of the hands of criminals, as a key legislative initiative was the availability of a safe regulated product.

Yet even with the legal market approaching 5 billion, the illicit market is still estimated to be 40% of consumption, due largely to the huge tax driven price differential. Mission critical investments in the industries businesses, employees, and our communities are very much at risk.

The appropriate model of taxation exists in other consumable products industry, we support all efforts to revise excise taxation levels immediately. And with that, operator, we'll open up to questions. Thank you..

[Operator Instructions] Our first question will come from Aaron Grey of Alliance Global Partners. Your line is open..

Hi, good morning. And thank you for the questions.

Hey, how's it going? So first question for me just want to get a little bit more color in terms of some of the price increases that you indicated on Select products, any more color that you could provide? And maybe on what products or brands? And then how much are you willing to potentially cede some share in order to improve the profits and then margin on that? And then what gave you the comfort to maybe implement from those price increases now just given the market still rather fragmented and still seeing a lot of pricing pressure? So maybe you guys aren't, you know, deleting brand, but maybe some others not following you do see some share? What kind of gave you the comfort to that now versus waiting for someone returning the market? Thank you..

Well, thanks, Aaron. Before I turn it over to Mandesh, that was one of the last time that's became your first question. So I just think, Mandesh, do you want to give some color on that. .

Yes, absolutely. Good question. I mean, we're not going to give a huge amount of detail because there's a lot we looked at from a competitive set, but I'll answer some of your bigger points is. And the first one was around share, we don't -- it's not about seeding share for the purposes of improving margin.

We have a pretty robust understanding of what's happening at the consumer level, what's driving demand, and just making sure we understand pricing analytics, and where there's opportunities. I mean, we're always evaluating. And I think, right now what we see is a key opportunity to improve margin without impacting share.

So, always trying to improve margin, maintain or growth share is kind of our strategy. It's all about profitable market share, and improving the dynamics there.

And we see the opportunity and implemented the opportunity across a couple of our key brands where just demand was outstripping some of the supply, and really just sharpening across pricing sets within assortment in various regions as kind of the market dynamics are unfolding.

And why did we feel comfortable? I think it's the -- I know, it's the strength of our brand, the quality of the consistency of our products, and just the ability to compete in market. And I think any strong CPG company with strong pricing analytics is always going to sharpen their pencil when they think the time is right.

And we think the time is right for us right now..

Okay, great. Thanks for that color. I really appreciate that. And then just kind of going on top of that, in terms of some of the distressed sale of biomass that you mentioned, just any color in terms of how you think that will kind of unravel in 2023.

So looks to be a lot of inventory out there? So how do you expect there to be a lingering impact? And are you comfortable with how you're leveraging Fraser Valley to compete in that value segment? Obviously, as you feel comfortable the pricing from the earlier contract we just talked about just wanted -- so just want to get some other color in terms of the broader market, and more distressed sales and the impact that might happen, guys? Thanks..

Mandesh?.

Yes, maybe I'll take it in a bit of a reverse order there, Aaron. So your second part was around Fraser Valley. We launched Fraser Valley last year to compete in the value space of flowers, an emerging space where as Pure Sunfarms, was carving out a really solid niche and continues to and everyday premium.

We felt like we were under index or not represented while in value and Fraser Valley did that. And it's taking a leading market share position one, two, three, in every market that it competes in, with a very, very limited assortment being led by Donnie Berger a strain that's wildly popular across the country.

So in that brand, we think there's still a lot of opportunity, we see that segment, growing as we thought it would, as inflationary pressures with consumers. And then tough economic times happen across the country. So we love Fraser Valley, it's doing extremely well. It's growing a significant amount of market share for us.

And we think the ability to continue to leverage and play in Fraser Valley and take more profitable market share is definitely part of our strategy this year, and with some more innovative, exciting things happening within Fraser Valley.

Dovetailing that into the first part of your question, which was, will it allow us to be a source for extra inventory or inventory where we might have gotten our supply chain and forecasting incorrect and be long on some inventory? Absolutely.

Fraser Valley, is meant to be a value based SKU, it gives us gives consumers great affordability and great offerings and will definitely leverage it. So it is an outlet for us on inventory that we're long on. And then yes, Aaron, I think you're absolutely right. I mean, people are selling and being desperate out there.

And we see kinds of spot prices in the b2b market all over the board. And it's just not sustainable. We have a good bevy of customers that we deal with on the domestic b2b side. And it's actually it's allowed us to simplify, customers who want to buy consistent product that's available that's consistently grow with great quality.

I mean, they're coming to us. And that's what we like dealing with. So we do see a lot of kind of irregularity on the spot market. And its kind of feast or famine, we see a lot of inbound calls come as pricing or things dry out there. And I just don't think it's sustainable. And then people are going to be desperate.

I'm not sure, Mike, if you want to add any more color on the desperation of other producers or what's happening there..

Yes, well, I mean, we're really focused on the retail side and you can see it in the numbers 25% year-over-year, as we mentioned in the call. But yes, as Mandy said, we you know, it's not sustainable. It's just not durable long term.

We have a real solid handle on our costs and think we know pretty well what the cost of production is by many other LPs and the prices that are selling for, it's just not sustainable. Now, it may last all ‘23 may even go into ‘24. It's hard to really say. But it is a perishable product at some point, the value just diminishes, and we'll be patient.

So, that's the color on that. Thanks..

Great. Thanks for the color. I’ll get back in the queue..

Thank you. Our next question will come from Frederico Gomes of ATB Capital Markets, your line is open..

Good morning. Thanks for taking my questions. My first question is on the divestment of your facility in Texas. How long do you think that that sales process will take and how much do you expect to sell it for, any color on that front? Thank you..

Yes, we're not going to comment on what we expect today for that asset, we don't think it'll take too long, probably the process has started. So, probably four to six months is what I would guess. It's a great asset.

As I mentioned, on the call, where we are out, the majority of our Texas assets are in one location, which is just the most ideal location, we believe in the United States are one of the top three. And we have a large footprint there, it’s an expandable footprint. That's where most of our management team is.

The Permian Basin is sort of out there on its own. So we want to focus our whole team on that larger footprint.

But, I think for Texas, when you really look at the ability to have an asset in Texas, as big as Texas, it is an asset like this, it's very limited where those assets can be, so we think it's a very valuable asset, and that we're optimistic that the process will move fairly quickly, Frederico..

Okay, thanks for the color. And then my other question is on the Canadian cannabis side, most of your exposure right now obviously remains in flower.

But could you provide some more details on the initiatives that you have in place for other categories, I think especially pre rolls, do you expect any uptick in sales from that category, this year, any new products, investment and automation, et cetera? Can you talk about that?.

Well, I'll turn it over to Mandesh to add some color. But I will start by saying that we consider pre rolls really as part of raw flower as we classify internally, and it is a very -- it's a growing market for sure. And as we speak, we just made another huge investment, capital investment in pre rolls.

So, we're very focused on it, and we're focused to win in that market.

Mandy, some color on that?.

Yes, thanks for the question. And appreciate the starting point there, Mike. And just to Mike's point, yes, we did increase our capital expenditure to add additional pre roll capacity, and Frederico, I'll talk about the pre roll. And then the other kind of derivative based products after. Pre was a huge part of our strategy.

I mean, we see that conversion from the flower, whole flower, consumer wanting more convenience and pre rolls. And we’re absolutely continue looking at our assortment and launching new SKUs to match some of our new strain offerings that are in market and then expanding into new strains that aren't in pre roll.

So, big focus, not just in Pure Sunfarms, but also now with our Fraser Valley. And then eventually, sorry -- with our store cannabis premium line, and then coming down the road with our Fraser Valley. So, managing assortment in the pre-roll category, huge opportunity for us.

And I think you'll see more innovation there and we're continually getting more listings. And then in a similar story on vapes. So in the process of doing, an interesting vape refresh on our main line and looking to expand that portfolio with great offerings.

And then the infused pre-roll category, obviously, a category that's definitely top of mind right now with consumers growing share in each of the key markets. And for us, it's just about figuring out and doing a SKU the right way, the right profitable way where we can grow meaningful and sustainable market share.

And so we're not always going to be the first ones there. But we're going to do it the right way. So lots more to come. We're just not resting on our laurels. As you know the number one flower company in Canada, it's about looking at other opportunities, and it will be part of our 2023 beyond strategy..

Thanks for that. I’ll back in the queue. Thank you. .

Thanks, Frederico..

Our next question will come from Scott Fortune of ROTH MKM, your line is open..

Hey, good morning. This is Nick on for Scott. Good morning, guys. Wondering if you could just provide a little color on mix specifically within the flower category kind of between the premium mainstream and value segments. And just kind of how you expect that to evolve as some of these new product launches take hold? Thank you..

Mandesh?.

Sorry, I was just on mute there. Thank you. Last year, when we launched Fraser Valley, we were really talking to this group, the analysts group and kind of in market of that real clear separation in value, core and premium.

And we are starting to see a bit more of that shift into the value but the course still being there and premium being you know, 15% or so 20% of kind of the full flower offering. So, 15% to 20%, of any kind of category in premium, you see the bulk of those sales kind of 40% 50% in core, and then another 20% 30% in value.

And so kind of that's kind of how it shaking out in certain regions, whether it's Alberta, British Columbia, Ontario might be slightly over under index. And now we're squarely positioned with three great brands. And each of those segments, so value being Fraser Valley, weed company, Pure Sunfarms playing in core and our store cannabis in Premium.

And what we're seeing our expectation for the year is growth in all three. And we're not seeing cannibalization across that I think that's a key piece. So as we saw with the launch of Fraser Valley and so we're getting again, profitable, meaningful market share, without impacting our core Pure Sunfarms offering.

So I think that's the key for us as we took our time to launch these three brands, the two other brands that will exist alongside Pure Sunfarms. And we wanted to do in a meaningful way that had differentiation. And that grew market share. So we're seeing that and the plan this year is to grow.

And again, in the Premium market for Soar cannabis, I mean, it's a much smaller market, the bulk of our growth rule will really come at Pure Sunfarms being the biggest brand. And then Fraser Valley being the second biggest. So those will be the two main drivers on growth.

But we're excited what Soar has done and already been able to take kind of a 1% to 2% share of flower in the markets that it's operating..

Got it. I appreciate that color. And then just a second for me on the international side. You mentioned solid growth in Australia, commencement of sales in Israel. Just wondering if you had any commentary on the newer markets. I know you're one of the few in the Dutch market, and it looks like Spain looking to ramp capacity.

Just any opportunities out there internationally that you're kind of looking at or evaluating, just some color, that would be helpful? Thank you..

Yes, Australia has really ramped up considerably. We're very pleased with the results in Australia and looking at New Zealand as well. On the European side, it's just been a long process to really get into Germany, we're ready to go, we finally got our permits, actually last week, and it's really to hold up more on the Canadian side.

Sometimes it can take 30 to 60 days, and I want to elaborate much on it. But it's crazy, but that should be forthcoming. Israel has gone very well for its shipment. We're actually in pharmacies right now. We've seen pictures of consumers that are happy. So we're excited to see where that can ramp up.

And then the UK and be -- we're going to ramp up in the UK very quickly. That's all that work has been done there. So we hope to announce something there in the coming months.

And then yes, there's an array of companies in the EU, we kind of not looking at the EU as a whole but surgically looking at different countries because they're all somewhat different. And our plan is to be in all those companies -- countries as well, looking forward in ‘23 ’24.

As far as the Netherlands? We're still focused on the Netherlands as you know all the export out of Canada's for medicinal purposes. You cannot export a rec, even though a lot of the strains are the same with the Netherlands being the first rec market, the true first large rec market cultivation will be in country there.

And as you know, we're one of the 10 license holders. So we hope to start ramping up that facility this year and looking at generating revenues in ’24..

Got it. That's it for me. I appreciate the color..

Thank you. Please. Our next question will come from Eric Des Lauriers of Craig-Hallum Capital Group, your line is open..

Good morning. Thank you for taking my questions.

I was hoping to just get a bit more information on the divestiture of the Texas asset, because you just help us understand maybe the financial impact that you're expecting to have on your overall costs in the Produce business? Or if you don't want to give that sort of detailed information, maybe just remind us what percentage of that Texas footprint this facility was.

And just maybe your overall thoughts kind of going forward with respect to this divestiture? Thanks..

Eric, this is Steve. So, that facility is 30 acres, we're currently growing on 10 acres based on our current consumer demands, our retailer demand. So based on that footprint growing in the third of the greenhouse, it's not let's say it's not our most efficient Texas operation currently.

And one of the reasons that we've made the decision -- we've made. Yes, one of our we have -- we are one of three growers who grow a specific crop in North America, that's licensed, I won't mention what it is that, it’s been predominantly the crop grown there.

That seed company has decided and not probably going to be looking at developing resistance in that. And so we're not sure we're going to actually be in that crop going forward. And that was predominantly what was grown there.

But we do have the capacity, as I said, in our other locations where we have over 100 acres, and that's expandable, so probably not going to elaborate more today on that..

Okay.

Could you perhaps help us understand, which will have a greater cost impact on the Produce business, this divestiture or some of those technology and innovations that you guys are implementing?.

Yes, we learnmore AI in our growing system, it's pretty proved that really well, we spent about a year on one of our facilities, and now we're bringing it to all the facilities in Texas and probably looking at Canada. One of the things we bet on, if you look at the -- when I -- my comments were really tied to how do we look at the U.S.

market? When you look at the success in the Canadian market, taking existing assets that were used for produce and converting them to cannabis, we were able to do that, I think better than anyone else, because building a new facility from the ground up, besides a huge capital cost today, can take three to five years to ramp up.

And I think if you look at the Canadian landscape, today, going back over five years, you'll see that there's been a tremendous difficulty in many companies who are new to -- not just new to the agricultural industry, but have brand new assets, it takes a tremendous amount of effort to get to a point of operational excellence, where you're generating profitable outcomes in training your people and ramping them up the attrition rate, understanding the tool, understanding the climate.

When you have an existing facility with tremendous climatological data that you can rely on a very experienced team, not just at the grower level, but all the way through the organization, that ramp up is compressed. And that resulted in us being able to grow organically.

So, when we look at these assets in Texas, and again, we believe that they eventually will be interstate commerce. And that the model in the United States today to a great degree is an experimental model that will change upon comprehensive legalization that we would be in a very strong position to win large scale, low cost high quality.

So, that's why again, we've kept our optionality not just for Texas, but for the U.S. market. So this asset for cannabis would probably be the last one we would ever convert because it's outside of the main hub of our assets. And that's one of the reasons we've decided to reduce this asset.

So, cost savings going forward, one of the biggest instances I mentioned was the control of the virus resistance is being built in. There is somewhat -- some level of resistance today in the varieties. And I think there'll be constant comprehensive resistance in all the tomato varieties.

And you know, this virus has affected tomato growers all throughout the world by 2025. So it is being solved, I mean, the virus will be no more eventually. But in the meantime, we have these protocols. And the point I wanted to mention is when we thought we had optionality on some specific assets in Texas that we would convert.

We then spend a lot of our normal capital in those assets, because we would just it would just be sunk costs on a conversion to another crop, in this case, cannabis. So we've made those corrections now, since we don't know what the future holds for federal legalization in Texas.

So we're back to focusing on our yields, operational excellence that we've had customer assessment, and we think a combination of those attributes will start to drive positive results on Fresh. Not to mention, always looking at alternatives of what we can grow the mean, we are a controlled environmental agricultural company.

And we have the ability to excel in many different crops as well..

That's helpful. Appreciate that color. Last one for me here. Just wondering if you can talk about the impact that implementing dry hanging has had on your overall various different brands? And then I guess, specifically on cost as well. I mean, I was surprised to see Canadian cannabis, normalized gross margins, expand to 40% in the quarter.

I would have thought that dry hang would have perhaps had a negative impact on cost there.

But, could you just kind of talk a bit more about the overall implementation of the dry hang now? Or we could perhaps going to see more of that inventory in ’23 and we'll see that drag there, or are you just seeing strong sell through with that, sort of differentiated product here? Thanks..

Yes, Mandesh, do you want to answer that?.

Yes. So yes, the hang dried process, we rolled out in totality across the entire operation, spring, summer, last year. So at this point, I mean, all of our inventory that's been hitting the market over the last least quarter or two has been hang dried.

And we have seen, obviously significant consumer feedback, we've kind of did it in a very humble, low approach way, and not really kind of publicizing it until it's fully there.

And then really let the consumers in behind the scenes, through our digital channels, social media, kind of just letting people get sneak peeks and consumers and bud tenders and store owners across the country have been Wow, and seeing that across our entire portfolio from Fraser Valley, Weed Co., and Pure Sunfarms as well as Soar.

It's been remarkable, especially as we put in different strain offerings, and just really improve that overall bag appeal. And we're definitely seeing that market. And we're grateful for that. On the cost side. Yes, I mean, I think that was one of the reasons why we did this initiative, and it took us a little bit to figure it out.

But we kind of, at some level where cost neutral. It was really about total cost of ownership. When you're running a facility like we are, there's a lot of different pieces prior to hang drying, which we were doing on shag drying, where we’re drying on trays. So a lot of cleaning, there's a lot of kind of moving parts that you have to maintain.

So when you go to hang dry, yes, you're spending more labor and time to get the plant kind of set up that way. But we really implemented a process carefully, where we actually were neutral and even in some areas improved our labor efficiencies.

And that's the other part of our natures, we're always going to be looking at ways to improve our cost structure and margin profile. So I think you're seeing a bit of both you're seeing kind of the move to hang dry, not causing us to increase costs.

And then our continuing ongoing commitment and experiencing control environmental agriculture and operations, just driving further efficiency in the operations to make sure our margins continue to be strong and one of the best if not the best in the industry..

That's great to hear. Great execution. And thanks again for taking my questions. .

Our next question will come from Pablo Zuanic of Cantor Fitzgerald. Your line is open..

Look, the first question regarding the announcement by the OCS about adjusting their margin structure.

Are you seeing any impact in the market? Is that leading to better margins for you, lower prices to the consumer, better margins for the retailer? Any comment you can share there? And then the second question, can you remind us in terms of your plans in British Columbia to convert more of your automated greenhouses to cannabis? I mean I hear more companies going asset light.

You have more demand on the wholesale side and then you continue to gain share on the branded retail side. So just an update on that, please. Thanks..

Okay. I'll answer the second one, Pablo, and then hand it over to Mandesh for the first one. So I mean, we're not going to -- we have the -- our third greenhouse, which is directly adjacent to our other two that are in cannabis', that footprint is bigger than our two cannabis greenhouses combined.

So we're all about retail, building our brands in retail and export. So we wouldn't make a capital investment to convert that greenhouse for B2B. It's just not where we want to be long term. It would have to be where we felt we were going to gain market share.

We reported -- if we converted that greenhouse, we would have enough capacity for 35% of the domestic market in Canada. And with imports ramping up, it is something we can do.

And by the way, in that facility, which is broken down into two parts, we can actually do one which we couldn't do years ago based on the legislation for Canada early on where you have to be a single crop. So that's where that change would happen if it did.

Mandesh?.

Yes. Thanks, Mike. So Pablo, on your question about the OCS announcement, so the OCS announced kind of two main things. They said they're going to be going to a fixed markup and they're reducing some of their margins or making that consistent.

And the announcement they made was that it was going to have about a $60 million impact to the dollars at OCS, and that was kind of their view. It hasn't -- so some of the details are still forthcoming. There's a webinar that's going to be occurring where more details are going to be shared.

My understanding is those changes are going to be rolled out later this year. And again, understanding is it's going to be up to the retail -- up to the producer to decide how that give back from the OCS impacts MSRP. And I think that it's going to have a meaningful impact on an annualized basis to any producer who has meaningful share.

So, if it's a $60 million impact to the OCS they're going to be giving back in margin. And let's just say you have a 10% share. I mean that $6 million is going to be coming back to your margin profile or thereabouts kind of on an annualized basis. So I think we're excited about it.

I think it shows a leadership position in OCS to look at where the market is and understanding that their margin and markup profile was on the higher end of the boards, and they know everything that's been happening in the market with excise tax and the over taxation. So I plotted yes for the move. I think it was great that they're looking at that.

And it's going to be up to the producer now are they going to invest in price or keep the margin. So that's kind of where it stands, and we're excited about it.

We think the ability to kind of do both, invest in where we need to or take sharpen our pen on pricing, but we believe it's going to be a margin pickup for ourselves and others in the industry..

That's good. That's very helpful. And then just a follow-up, Mike. Any lessons from the CBD deal, right? I understand the market has worked out for many people that made investments there. So you're not alone.

But were you able to leverage your distribution capabilities on the produce side to improve CBD sales? Just lessons, I guess, I don't want to call it a postmortem, but in terms of where are we there and what's the outlook. And then a very short question regarding the Texas optionality.

I get the idea, it's always been about in the future, interstate commerce. But short answer, the fact that you have those greenhouses there doesn't necessarily give you an edge if Texas was going to implement a medical program, for example, right? If you can comment on that? Thanks..

Yes. Well, I guess I could self-incriminate myself saying we believe some of the Washington practitioners because when you look at CBD and you talk to the consumers of CBD in the United States, it's astounding how many people have made CBD products part of their life. And I'm not just saying that because we're in industry, it's clear.

And the problem is we couldn't leverage our great relationships on retail because the retailers are waiting for FDA clarity, FDA is in the pockets of pharma, in my opinion. And until as they've admitted until there's an act of Congress clarifying the consumption issue with CBD then the retailers are not going to take it on.

Now we do have some retailers that take it on that are bold enough put that realize that it is a very -- we have a human endocannabinoid system, which most people don't realize. So we don't have a broccoli system. We have an endocannabinoid system, and it works very well for many parts of our being, so to speak. So it will come.

And Washington is the problem. I alluded to that in my calls. It's not just a problem when it comes to the comprehensive legalization for recreational cannabis, but certainly for something on the health side. We consider our CBD health and wellness.

It's under the envelope or the umbrella of cannabis, but at the same time, it's really targeted at health and wellness, and it does wonder. So we really have to wait till our politicians get their act together. But I think we very much feel that CBD will be a huge consumer product once that FDA clarity comes. So that's where it is.

On the optionality for Texas, look, I think we've proven our business model, I believe that our business model has been proven out in Canada, and that's the same model for the U.S. If you look at Washington State, California, they're already trying to push interstate commerce. It's going to happen.

And I don't make the bold enough statement to say that if you're in a major indoor grower in the northern part of the U.S.A., the time will come when it's not a question of producing good quality, it's a question of producing good quality at the right price.

And you could see what a disaster it is currently with pricing compression and what's going on. So assuming that there will be clarity in the U.S., then it's going to go to large scale, low cost, and those existing assets.

Yes, we've taken a hit last year, but our intent is to be positive on our Fresh business and keep that optionality because to create that will cost hundreds of millions of dollars of capital and years to ramp it up, not to mention getting the talent that really makes Village Farms different than others.

So we're going to try to stick to the plan but not costing but not losing money. That's really where we're focused. Now that being said, we also have other entry points for the U.S. I'm not going to mention where, but we like a regional place. We don't want to be everything to everybody.

And we're constantly looking at an entry point for 2023 because we're kind of getting fatigued of having our hands tied behind our back by NASDAQ and the lack of Washington support..

Given that you brought it up, Mike, and I don't want to take up to long here on the call, but -- so are you saying that you would consider like kind of grow the listing from NASDAQ and just lifting the TSX to be able to enter the U.S..

Well, I will say this, that there was a quote by Hannibal hundreds, thousands of years ago that said we will either find a way or make a way. And I'll leave it at that..

Our next question will come from Michael Freeman of Raymond James. Your line is open..

Congratulations on making material steps to tighten up the Fresh Produce business. This is really encouraging. My first question is on international business. You started shipping into Israel during the first quarter.

I wonder if you could describe the -- give us a picture of volumes and how you expect cannabis segment revenue to be impacted by international sales during the first quarter and then looking to 2023 in general?.

Well, I think overall, we feel pretty good this year. We budgeted probably about sub 10% of our revenue going international for 2023. And specifically, Australia, Israel, Germany and England. So we think that's kind of where we're looking at. It could be more, but we want to be a little more conservative because again, it's a regulatory process.

Getting things done for this product as far as having each government working together import permits and so on is achieving its product takes a tremendous amount of effort. But that being said, the margins and the tax structures are excellent everywhere we're going.

So it actually -- it actually will return our highest margin over our domestic sales anywhere in Canada. So that's sort of our plan this year. And we have a team that we're building specifically to look at the entry points in a number of different countries over the next 2 years. That's again outside of our participation in the Netherlands.

I'm very bullish on the Netherlands. It's really our first footprint with physical production assets in the European theater.

And we -- our roots stem out of the Netherlands, greatest respect of the greatest producers of food in the world, best agricultural operators, and we think we'll have a great point to leverage up, a great opportunity to introduce brands even from Canada and look at brands in the Netherlands, understand consumer insights across Europe for really a lot of growth over the next decade..

Okay. Great. This is a nice new chapter. And then just quickly on the Canadian cannabis side. I wonder if you could comment on the inventory write-down and whether we should expect further write-downs heading into 2023. And then very quickly, when were the price increases implemented on certain products in Canada..

Okay. So Steve will answer the first point, Mandesh the second part..

Michael, it's Steve. With respect to the inventory write-down, we felt it was older inventory, aged inventory at year-end, roughly greater than 15 months old, lower potency and smaller buds. So we essentially wrote it down to what the current market pricing is because that's what we're trying to do. We have been selling that product.

It's not that it hasn't been selling. We just wrote it down to the market price, and some of that will go into -- like the smalls will go into pre-rolls. So it will be sold over the course of time, and it's more just driven by the current market pricing for our comparable biomass inventory in the Canadian marketplace today..

Yes. And I would also say that if you look historically in Canada, our write-downs on inventory have been, I think, very low compared to most of the other part -- the other part of the industry.

Mandesh?.

Yes. So Michael, your question was around the timing of the price changes. So we've started to roll those out now and depending on region that'll be executed over the next quarter or two..

Okay.

So to be clear, did you implement these at the start of March?.

They will start rolling out this month. That's correct. Sorry, you cut out for a second. So yes, they'll be starting to roll out this month and then ongoing depending on the region..

Our next question will come from Andrew Partheniou of Stifel GMP..

Maybe going back and diving a little bit deeper into something talked about previously, first on the Permian divestment and how that could impact your cross profile in Produce. You talked about its one-third of your footprint there, but you also have Delta one. On the other hand, understanding that Produce is a very heavy fixed cost business.

So putting it all together, could you give any kind of color on returning to positive gross margin in any quarters in 2023? I know Q4 is typically the highest margin quarter if you talk about a seasonal basis.

So without the Permian dragging on results given that you were almost achieving positive gross margin in this quarter, could we see positive gross margin at some point next year?.

Yes. Andrew, this is Steve. Yes, the fourth quarter's gross margin was primarily impacted by Delta 1 with the brown rugose. As you said, it's fixed cost business, and that crop is now over. So those crop costs flush through in Q4, which was the main driver. The Texas operations that were in production, Permian Basin was not in production in Q4.

It was due inspection in Q1, but the Texas operations did have positive gross margins in Q4. So the negative gross margin is 100% due to the brown rugose impact on the Delta 1 facility..

Sorry, I was on mute there. And then maybe going back to your production on the Canadian cannabis side and understanding that you guys pride yourselves on having amongst the lowest amount of write-downs in the industry here.

Could you talk a little bit about where your Canadian cannabis production is at right now? Remind us, are you producing at 100% capacity of the facilities that you've already converted and you're selling at all? Have you thought about adjusting your production either upwards or downwards? Because it seems like there's 2 different things happening, right? You've got a little bit of an inventory write-down here, but you also have the choice that you've taken to increase prices versus maybe balancing that out with increasing production.

So just trying to put it all together and get a big picture here..

Yes. So Andrew, the inventory write-down was not our inability capacity-wise to sell. It's the market has changed. Like if you look at THC levels that consumers want in the last 5 years, they've changed dramatically. So as consumers are changing their needs, we have to adapt to that. And it’s still agriculture.

So if you look at the perfect strain and the perfect THC level in the perfect shape and all those attributes just doesn't happen in growing a crop. So again, if that's not a product that we want to put our name behind retail and as Steve said, we can put that -- those products into other offerings, we'll do that.

So it was really writing down the price in that regard. As far as capacity, we started with Delta 3, 1.1 million square feet.

And then we started with our next greenhouse Delta 2, which is a mirror image of Delta 3, and we went to 50% capacity, never greater than that, and we still stand here today at full capacity on Delta 3, 50% on Delta 2, and we purposely did not increase that.

But we felt comfortable where we're at because of our international our goal to expand internationally.

And the reason we felt confident is because when we look at our ability to -- our production costs domestically in Canada, and our ability, as you know, when we launched retail a couple of years back, we launched a 31% under the next highest LP for the retail market and not to undercut them but to compete with the illicit trade, that was the price point.

And we think it's -- we think we have a huge advantage in our cost. So we're going to use that same philosophy internationally because again, as Mandesh alluded to, we're not always first to the market. We weren't first to the export market, but we want to ramp it up.

And we think that additional capacity happening in '23 and '24, we feel very confident where our current production levels are.

Mandy, do you want to give any color on that?.

Yes. Andrew, good question. So the -- every month we assess kind of 5, 6 months out because of the crop cycle, what we want to do on inventory plantings and how we run the facilities. And that's an ongoing conversation where we're trying to dial in the best we can.

It's not the way you can grow, it's about what you can sell and you want to align those 2 as best you can. And so right now, we are running, like Mike said, the facility in half. It's running at full operation, full tilt right now. We're heading into some of the best growing conditions all year.

Just kind of given the spring summer months, it's arguably some of the best conditions we get in terms of yield and results. So we're hitting that peak right now. And then we're constantly evaluating it. And we're looking at our outlets and what our sales and demand cycles are. So we feel confident in our approach and our ability to match the 2.

And we like where we sit now. And the pricing adjustments, yes, we're driven by how we're seeing demand go and we just believe there's an opportunity for us to improve our margin profile. But it's not really meant to kind of stunt any demand or sales growth.

We'll take advantage of our ability to operate and leverage our capacity to look at opportunities on the domestic side and then use extra production planning capabilities for international sales that are starting to ramp up..

Yes. And I would just one other thing. I mean we're -- as you know, we're in Quebec now when we made this decision for Delta 2, we took into account that we would be operating in Quebec. And as you know, we have a production facility there. But we want to make sure that we have insurance that we always have enough capacity to meet the demand, too..

If I can just ask one more follow-up on this question here.

Understanding that you still have the other half of Delta 2, what would you like to see before you decide to turn on the other half of Delta 2?.

Andrew, this is Steve. We would like to see a change in the excise tax regime. The -- we're paying the government, if you look at the difference between our gross and our net that's excise tax on our same results. We're paying them with more money than we're paying all our Pure Sunfarms employees, plus, plus, plus.

It's -- as others have written on social media and in the press, the excise tax regime as its current working is a moneymaker for the government, and it's very difficult on an ROI basis based on current interest rates.

If you look at our net cash return at the Canadian cannabis business, which you can do the math, and it just wouldn't pencil on the current excise tax we'd love to but not with the current excise tax regime in place..

Yes. And I would add that we -- most of the capital costs needed to put the second half of Delta 2, we've already spent that money. So it wouldn't be a huge burden for us to put that in production. So we're not really looking at a return on invested capital since we already have it. And it was worthwhile doing it all once.

You don't want to remobilize and it's cheaper to order all the equipment you need for the conversion. So we can do that. International ramping up could be if international triples, that could be a catalyst for us because as we've said, there's no excise tax and the margins are much higher. But for the situation in Canada, it's just hard to justify..

And this will end the Q&A session for the call. I would now like to turn the conference back to Michael DeGiglio for closing remarks..

I just want to thank everyone for your participation today, and we feel very confident for 2023 and the direction we're going. So thanks for participating today and look forward to chatting with everyone in May. Thank you, Chris..

Welcome. This will conclude today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day. Thank you..