Business Overview and History
Village Farms International, Inc. (VFF) is a leading vertically integrated agricultural company that has carved out a formidable presence across multiple sectors, from fresh produce to the burgeoning cannabis industry. With over three decades of expertise in controlled environment agriculture (CEA), the company has leveraged its innovative and sustainable farming practices to drive growth and profitability across its diversified business divisions.
Village Farms was founded in 1987 in British Columbia, Canada, initially focusing on producing premium-quality greenhouse-grown tomatoes, bell peppers, and cucumbers for the North American market. The company's expertise in CEA, which involves the use of advanced technologies to optimize growing conditions, allowed it to establish a reputation for consistently high-quality produce. Over the years, Village Farms has expanded its footprint, becoming a leading provider of premium-quality produce in North America.
In 2017, Village Farms made a strategic pivot by entering the cannabis industry, converting two of its existing produce facilities to grow cannabis for the Canadian legal adult-use recreational market. This marked a significant milestone for the company as it diversified its business to capitalize on the emerging cannabis opportunity. Through its subsidiary, Pure Sunfarms, Village Farms quickly became one of the largest and lowest-cost greenhouse cannabis producers in Canada.
The company faced various challenges as it integrated its cannabis operations and navigated the highly regulated Canadian cannabis market. These challenges included managing the burdensome excise tax imposed on branded cannabis sales, addressing supply chain and inventory issues, and dealing with industry overcapacity and pricing pressures. Despite these obstacles, Village Farms maintained profitability in its Canadian cannabis business through disciplined execution and a focus on operational efficiency.
In 2021, Village Farms further expanded its reach by acquiring Balanced Health Botanicals, a leading manufacturer and distributor of high-quality CBD products in the United States. This acquisition allowed the company to enter the emerging U.S. cannabinoid market. Additionally, Village Farms made progress in its international expansion efforts, securing EU-GMP certification for its Canadian cannabis operations and beginning exports to medical cannabis markets in Australia, Germany, and the United Kingdom.
Financial Performance and Ratios
Village Farms has demonstrated a solid financial performance in recent years, with the company reporting total revenue of $285.60 million in the fiscal year ended December 31, 2023, down from $293.57 million in the prior year. Net income has been volatile, with the company reporting a net loss of $31.80 million in 2023 compared to a net loss of $101.15 million in 2022.
For the most recent quarter (Q3 2024), Village Farms reported revenue of $83.37 million, representing a year-over-year growth of 20%. However, the company reported a net loss of $820,000 for the quarter, primarily due to higher selling, general and administrative expenses, as well as an impairment charge of $11.94 million related to the company's U.S. cannabis business.
The company's balance sheet remains relatively strong, with a current ratio of 2.04 as of December 31, 2023, indicating a healthy ability to meet short-term obligations. Village Farms' debt-to-equity ratio stood at 0.18 as of the same date, suggesting a moderate level of leverage. The company's quick ratio was 1.09, further demonstrating its liquidity position.
As of the most recent reporting period, Village Farms had $28.70 million in cash. The company also has access to additional liquidity through its credit facilities, including an operating loan with $4.56 million available out of an $8.56 million total facility, and a Pure Sunfarms Revolving Line of Credit with a $15.00 million total facility, which was currently undrawn.
In terms of profitability, the company's gross profit margin was 17.3% in 2023, up from 9.4% in the previous year. The company's adjusted EBITDA (a non-GAAP metric) was positive $6.49 million in 2023, a significant improvement from the negative $31.62 million reported in 2022.
Operating cash flow for the fiscal year 2023 was $5.32 million, while free cash flow was negative $1.20 million. The negative free cash flow was primarily due to capital expenditures related to the company's ongoing expansion and improvement initiatives.
Segmental Performance
Village Farms' business operations are divided into four main segments: Fresh Produce, Canadian Cannabis, U.S. Cannabis, and Energy.
Fresh Produce: The Fresh Produce segment, which operates under the Village Farms Fresh (VF Fresh) brand, generated revenue of $125.88 million in the first nine months of 2024, up 10% from $114.12 million in the prior year period. Gross profit for this segment increased to $2.63 million, compared to a gross loss of $654,000 in the previous year, reflecting improved operational efficiency and better pricing. In Q3 2024, Fresh Produce sales increased 20% to nearly $43 million, with a gross margin of 8%, up 400 basis points year-over-year.
Canadian Cannabis: The Canadian Cannabis segment, represented by the company's Pure Sunfarms subsidiary and an 80% ownership in Rose LifeScience, reported revenue of $114.65 million in the first nine months of 2024, a significant increase of 40% from $81.99 million in the same period of 2023. Branded sales comprised 76% of the total cannabis sales. Adjusted EBITDA for this segment was $13.64 million in 2023, up from $13.27 million in the previous year, demonstrating the strong profitability of the company's cannabis operations in Canada. In Q3 2024, total net sales for the Canadian cannabis business grew 29% year-over-year, with branded resale sales growing 22%. The segment was profitable with positive adjusted EBITDA of CAD 6.5 million and cash flow from operations of CAD 6.1 million.
U.S. Cannabis: The U.S. Cannabis segment, which includes Balanced Health Botanicals, reported revenue of $12.78 million in the first nine months of 2024, down 16% from $15.27 million in the same period of 2023. The segment's performance was impacted by new restrictions on CBD sales in certain U.S. states and increased competition from unregulated hemp-derived products in the U.S. market. Gross profit for the U.S. Cannabis segment was $7.82 million, down 22% year-over-year.
Energy: The Energy segment, which includes the company's renewable natural gas (RNG) facility in Delta, British Columbia, began operations in April 2024. For the first nine months of 2024, the Energy segment generated $313,000 in revenue and contributed $338,000 in operating income, up from $128,000 in the prior year period.
Risks and Challenges
While Village Farms has demonstrated its ability to navigate the complexities of the agricultural and cannabis industries, the company faces several risks and challenges that investors should be aware of:
1. Regulatory Uncertainty: The cannabis industry, both in Canada and the United States, is subject to evolving regulatory frameworks, which can create uncertainty and impact the company's operations and profitability.
2. Competition: The fresh produce and cannabis markets are highly competitive, with the potential for new entrants and pricing pressures that could erode the company's market share and margins.
3. Supply Chain Disruptions: As a vertically integrated agricultural company, Village Farms is susceptible to supply chain disruptions, such as labor shortages, transportation issues, and raw material availability, which could affect its ability to meet customer demand.
4. Currency Fluctuations: As a company with operations in both Canada and the United States, Village Farms is exposed to currency exchange rate fluctuations, which can impact its financial results.
5. Reliance on Key Customers: A significant portion of the company's revenue is derived from a limited number of large customers, which can make it vulnerable to changes in their purchasing patterns or financial stability.
6. U.S. Cannabis Market Challenges: The company has faced headwinds in its U.S. cannabis segment due to new restrictions on CBD sales in certain states and increased competition from unregulated hemp-derived products.
Outlook and Future Prospects
Village Farms has demonstrated its ability to adapt and thrive in the ever-evolving agricultural and cannabis industries. The company's diversified business model, with a strong presence in fresh produce, Canadian cannabis, and U.S. cannabinoids, has positioned it well to capitalize on growth opportunities across multiple sectors.
In the Canadian cannabis market, Village Farms experienced some out-of-stock inventory in several of its most popular SKUs during Q3 2024, which they estimate resulted in lower sales of approximately $2.5 million. The company expects to return to normal in-stock levels across the board by early Q1 2025. Looking ahead, Village Farms anticipates that sales growth in the overall Canadian cannabis market will slow to mid-single digit levels next year, compared to recent historical growth rates.
The company is also making strides in its international expansion efforts. Village Farms has begun cultivation at its new indoor facility in the Netherlands in October 2024 and is on track to have its first sales during Q1 2025. The company anticipates pricing of approximately EUR 6 per gram, which would put them on track to generate revenues of approximately EUR 12 million on an annualized basis once the facility is fully ramped up to its capacity of around 2,000 kilos of dry flower.
The success of the company's Pure Sunfarms subsidiary in the Canadian cannabis market, coupled with the expansion of its international medical cannabis operations, highlights the company's ability to leverage its expertise and establish a leadership position in emerging markets. Additionally, the company's entry into the U.S. cannabinoid market through Balanced Health Botanicals provides exposure to a rapidly growing industry with significant long-term potential, despite recent challenges.
While the company faces various risks and challenges, Village Farms' proven track record of innovation, operational excellence, and strategic decision-making suggests that it is well-equipped to navigate the complex landscape and deliver value for its shareholders over the long term.
Overall, Village Farms International offers investors a unique opportunity to gain exposure to a diversified agricultural and cannabis conglomerate with a strong growth profile and a focus on sustainable, high-quality production practices. The company's ability to maintain profitability in its core segments while expanding into new markets positions it well for future growth and success in the dynamic agricultural and cannabis industries.