Business Overview

Village Farms International, Inc. (NASDAQ:VFF) is a leading vertically integrated greenhouse grower, producer, and distributor of premium-quality cannabis and fresh produce. The company has leveraged its decades of experience in greenhouse cultivation to establish a strong presence in the Canadian cannabis market and is now positioning itself for global expansion.

Village Farms operates through four key segments: Canadian Cannabis, U.S. Cannabis, Produce, and Energy. The Canadian Cannabis segment, comprising Pure Sunfarms and Rose LifeScience, is the company's largest and most profitable business. Pure Sunfarms is one of the largest and lowest-cost cannabis producers in Canada, with a focus on high-quality, branded products. The U.S. Cannabis segment, led by Balanced Health Botanicals, is a leading cannabinoid brand and e-commerce platform in the United States. The Produce segment, known as VF Fresh, grows, markets, and distributes premium-quality greenhouse-grown produce, primarily tomatoes, peppers, and cucumbers, in North America. The Energy segment, VF Clean Energy, operates a renewable natural gas facility that converts landfill gas into high-demand renewable natural gas.

Financial Performance

In the fiscal year 2023, Village Farms reported annual revenue of $285,603,000 and a net loss of $31,798,000. The company's annual operating cash flow was $5,315,000, and its annual free cash flow was -$1,203,000.

For the first quarter of 2024, the company reported total sales of $78,077,000, a 21% increase from the same period in 2023. The Canadian Cannabis segment was the primary driver of this growth, with net sales increasing by 49% to $37,446,000. This was driven by a 28% increase in branded sales and a 181% increase in non-branded sales. The U.S. Cannabis segment reported sales of $4,537,000, a 9% decrease from the prior-year period, while the Produce segment saw a 4% increase in sales to $36,094,000.

Gross profit for the first quarter of 2024 was $15,513,000, up from $12,300,000 in the same period of 2023. The Canadian Cannabis segment reported a gross margin of 25%, while the U.S. Cannabis segment had a gross margin of 59%. The Produce segment's gross margin improved to 9% from 2% in the prior-year quarter.

Adjusted EBITDA for the first quarter of 2024 was $3,591,000, a significant improvement from $519,000 in the same period of 2023. This was driven by the strong performance of the Canadian Cannabis and Produce segments.

Liquidity

As of March 31, 2024, Village Farms had $31,685,000 in cash and cash equivalents, and $78,177,000 in working capital. The company's total debt stood at $46,083,000, with a weighted average interest rate of 9.1%. Village Farms believes its existing cash, cash generated from operations, and available credit facilities will provide sufficient liquidity to meet its working capital needs, debt repayments, and planned capital expenditures for the next 12 months.

Canadian Cannabis Segment

The Canadian Cannabis segment is the company's largest and most profitable business, accounting for 48% of total revenue in the first quarter of 2024. This segment is led by Pure Sunfarms, one of the largest and lowest-cost cannabis producers in Canada, and Rose LifeScience, a prominent cannabis products commercialization expert in the province of Quebec.

In the first quarter of 2024, the Canadian Cannabis segment reported record net sales of $37,446,000, a 49% increase from the same period in 2023. This was driven by a 28% increase in branded sales and a 181% increase in non-branded sales. The segment's gross margin was 25%, with the lower-margin non-branded sales impacting overall profitability. Excluding the non-branded sales, the segment's gross margin was 31%, at the low end of the company's annual target range of 30% to 40%.

The Canadian Cannabis segment continues to focus on innovation and brand development, with the launch of its high-potency "Hi-Def" pre-rolls and the continued growth of its SuperToast milled flower brand. These initiatives have helped the segment gain market share, with Pure Sunfarms becoming the second-best-selling licensed producer nationally and regaining the top market share position in Ontario, Canada's largest provincial market.

U.S. Cannabis Segment

The U.S. Cannabis segment, comprising Balanced Health Botanicals, is one of the leading cannabinoid brands and e-commerce platforms in the United States. In the first quarter of 2024, this segment reported sales of $4,537,000, a 9% decrease from the same period in 2023. The decline was primarily due to the proliferation of unregulated hemp-derived products in the market, which has impacted Balanced Health's direct-to-consumer sales.

Balanced Health's gross margin for the first quarter of 2024 was 59%, down from 65% in the same period of 2023, due to a shift in product mix towards lower-margin gummies. The segment reported an adjusted EBITDA loss of $615,000, compared to a loss of $151,000 in the prior-year quarter.

Produce Segment

The Produce segment, known as VF Fresh, grows, markets, and distributes premium-quality greenhouse-grown produce, primarily tomatoes, peppers, and cucumbers, in North America. In the first quarter of 2024, this segment reported sales of $36,094,000, a 4% increase from the same period in 2023. The improvement was primarily due to an increase in supply partner average selling prices, partially offset by a decrease in sales from the company's own greenhouses.

VF Fresh's gross margin for the first quarter of 2024 was 9%, up from 2% in the same period of 2023. This improvement was driven by a decrease in per-pound cost of sales at the company's own greenhouses, a decrease in freight costs, and an increase in supply partner sales. The segment reported adjusted EBITDA of $2,028,000, a significant improvement from a loss of $995,000 in the prior-year quarter.

Energy Segment

The Energy segment, VF Clean Energy, operates a renewable natural gas facility that converts landfill gas into high-demand renewable natural gas. This facility, which began operations in April 2024, is expected to contribute incremental profitability to the company starting in the second quarter of 2024.

Global Expansion

Village Farms is leveraging its expertise in cannabis cultivation and branding to expand its presence globally. In the Netherlands, the company is building its first indoor cannabis production facility, targeting the start of production in the fourth quarter of 2024. This facility will serve the country's Closed Supply Chain Experiment program, which allows for the legal cultivation and sale of cannabis.

Additionally, Village Farms has been exporting its best-selling Canadian cannabis strains to international medical markets, including Australia, Germany, the United Kingdom, and Israel. The company's European Union Good Manufacturing Practice (EU GMP) certification for its Delta 3 facility in British Columbia has enabled these exports and positions Village Farms to capitalize on the growing global medical cannabis market.

Risks and Challenges

Village Farms faces several risks and challenges, including the ongoing regulatory uncertainty surrounding cannabis in the United States, the potential for increased competition in the Canadian and global cannabis markets, and the cyclical nature of the produce industry. The company also faces risks related to its international expansion, such as navigating different regulatory environments and managing currency fluctuations.

Outlook

Village Farms is well-positioned to capitalize on the growing global cannabis market. The company's focus on innovation, brand development, and cost-efficient cultivation in its Canadian Cannabis segment has driven its market share gains and profitability. In the U.S., the company is closely monitoring the regulatory landscape and evaluating opportunities to participate in the market once federal legalization is achieved.

In the Produce segment, the company expects to continue benefiting from its investments in cultivation and automation, as well as the recovery of the tomato industry from the devastating virus that impacted the sector in recent years.

Overall, Village Farms' diversified business model, strong balance sheet, and proven track record in the cannabis and produce industries position the company for continued growth and success in the years ahead.