Village Farms ($VFF) has been quietly building out sales and reputation in cannabis over the past year. Sales have been ramping, and they have a reputation inside industry of being good growers.
We’ve documented their trajectory within the Pure Sun Farm (PSF) joint venture with Emerald Health, and mused about the utility of their veggie business, which is a typical ‘big-ag’ consumer business. Because PSF is a private joint venture between two companies – reporting from it is usually at the high level, and not much granularity is presented in segmentation or costs.
Boosters of this outfit point to their throughput (they’re #1 in Ontario & BC) and strong inter-co sales. I like to point out the breaks in valuation between $EMH & $VFF, and note that of this little honey of PSF, $VFF only owns some ~=55% of it as of writing. That probably won’t last, as Emerald’s actions have been analogous to walking up to a poker table and playing Crazy 8’s. And to be sure, $VFF has the incentive to go all-in and take 100% of everything PSF is. I suspect Emerald’s lack of cash for investment (PSF’s Phase 2 expansion), and their corresponding inability to pay for off-take from PSF will help do just that. I still see breaks in asset valuation between the 2 equities and the underlying PSF JV, but I’ve not drilled into the master agreement to detail the landscape. Its’ mechanics and clauses are the roadmap to how $VFF can pry remaining ownership away from $EMH, with creditors and lawyers sure to be near at hand on every side.
Let’s see what’s been happening.
To the financials!
- Sales way up over system, from $32MM to $47MM in the quarter. Recall, they have produce operations on both sides of the border, with PSF being added in. Gross margin over all system sales is 7%.
- And…. another negative gross margin reported on US veggies, losing $5.4MM on $33.6MM of sales (eep). I’d say that’s a reflection of seasonality in produce markets, but I cant recall a season in which US veggies did make money.
- CDN produce sales up strong, from $2.6MM to $7.1MM (margins of minus 14% and positive 54% (!) respectively).
- PSF sold $9.4MM of weed this quarter, down from $13.1MM prior, a drop of some 38%.
- PSF entered into a forward product swap in a biomass for extract. Likely Valens, and perhaps under Emerald. They’re the only ones listed that have a deal with Valens and connected to PSF. If so, the partnership/JV between $VFF & $EMH is retaining some sort of operational integration. More below.
- 56% of total sales are to the provincial monopolies, 44% to ‘wholesale’. If that entire amount went to the extractor, then the swap was $4.1MM. More below.
- And, that’s about all one can say. This quarter sees average selling prices of flower and trim now un-reported, an emerging theme of several in the sector ($OGI & $WEED come to mind). They do mention a percentage change in prices in the discussion, but I’ll take a guess and expect that to be gone next quarter as well. More below.
- SG&A got a one time boost from government COVID relief. Looks like they got about $1MM. I’ll go out on a limb here and predict SG&A next quarter of $3.1MM
- Margin at PSF: 35%
- I do see a reference to escrowed shares – and it looks like $VFF will end up with 60% ownership the next time $EMH cocks up. Notice I didn’t say ‘if’.
- There’s another 2 private JV’s held by $VFF, both in hemp. I wrote about them last year – and while the one in Colorado looks like it got completely wiped out, the remaining one lost $2.5MM this quarter. $VFF had provided seed money ($10MM) as a note receivable. The JV’s losses have seen that note written down to zero. Looks like an errant folly at this point. I’m not going to be charitable, I’ve suffered through enough PR crap as it is, and $VFF hasn’t been shy about it at all.
Ok. That’s the big stuff. The financials are a little thin with respect to PSF, but there’s still a fair amount of data.
The price compression in the sector is becoming apparent, as we’ve seen in other LP’s. In the case of PSF, average sales prices are down 48% (!):
There’s a raft of drivers listed for this, but price adjustments and concessions are pretty much it. A 90% increase in volume in a segment that’s more than half of their business, came along with a 50% drop in selling price, and a corresponding 38% drop in total revenue. This is the story of these financials for both PSF, and the sector.
They see themselves as the ‘market leading’ in ‘value-priced SKUs’ – and they apparently intend to stay right in that very spot. $VFF appears to have had an issue with one particular state monopoly – it looks like they took a forced return of product. $VFF states they’re going to use it for 2.0 products. No mention of who the monopoly was.
COGS is flat QoQ at some $6.3MM. Given the hammering their sales took, it looks as if those price concessions stepped in hard as well. It reveals they’re willing to go where they see themselves – and if sector prices at retail get smoked – so be it.
Regarding that forward biomass swap, mention of it did indeed appear in their first quarter financials. Should anyone want to see a gold standard on how these deals can be disclosed, $VFF lays it out:
That also tells us that $2.1MM of their wholesale this quarter was swap, the rest likely B2B. Perhaps the sale/purchase mechanism went through $EMH, one can’t tell from this.
If there was much doubt about how well $EMH is doing (and not only regarding PSF), they only need to look at the ‘Other Income’ note attached to the 10Q, where their settlement with $VFF to get out of (thrown out of) the JV off-take agreement resulted in a $4MM gain and increase in PSF ownership by $VFF. $EMH only bought $660k of cannabis for the entire first quarter of this year:
This quarter’s negative margins in the US veggie business are less clear. Due to COVID, prices and volumes went up. A lot. The only clue I can spot is that they seemed to have some sort of disease rolling through their greenhouses in Texas. Sleeving product to satiate firm supply contracts are a quick way to drop margin, I can’t confirm if it continues into this quarter though.
From previous quarter about the Texas veggie business:
Regarding CDN produce, one notices the healthy margins compared to US operations. While things in Canada aren’t as competitive as in the US, it’s hard to accept that big of a spread in margins across close-country agriculture. Could well be. But. The potential for co-mingling of production costs between cannabis and veggies exists, and because of the private JV structure, we have little ability to view inter-segment allocations. The extent (if any) to which cannabis is subsidizing CDN veggies is near impossible to divine.
Their ‘Energy’ segment has become immaterial, declining linearly QoQ, now at some $118k in revenue
In general, disclosure is improving QoQ. Initially, it was horrible. But now, honestly, even in summary form, the disclosure is better than most LP’s.
So. A money losing veggie business in the US, an absolute rock-star of a tomato biz in Canada, and 53% ownership of a discount weed outfit – totalling some $45MM in annual sales – all adds up to be a break even business. As it largely has been for the past year.
I can’t (and believe me, I’ve tried) see the valuation that the market is putting on this thing. Perhaps the market is seeing both PSF phases up and in full flight, and 100% owned by $VFF. My earlier posits about the $EMH/$VFF/PSF menage-a-trois dynamic doesn’t hold anymore as negotiation (and a firm squeeze on $EMH’s
testicles shoulder by $VFF) altered many of the linkages.
$VFF’s got 56MM shares out there. Historically, the equity was around $1-$2 without PSF. At $VFF’s $7 share price, that means the market is valuing 53% of PSF at $270MM.
Due to required reconciliation of proportionate ownership to US GAAP, we can see $VFF’s share of PSF brought in $5.5MM, had $1MM in adjusted EBITDA, $460k in net income.
Those kind of results for $250MM? In all seriousness, I just can’t see it, let alone get past it.
Look next time to see continued pressure on selling price as additional value-brands entries come in, and if there’s going to be an effective ‘floor’ to where retailers (and producers) can go. These guys are definitely leading the way to finding it. Also look to some sort of change/enhancement regarding the US ops. Again, seasonality could play a big role….and I am admittedly not your best resource for commercial agriculture (outside of weed of course). But if US veggies begin to become seen as a permanent anchor on $VFF’s stock price, it wouldn’t be surprising.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $VFF