Village Farms International, Inc. (VFF) Q4 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to Village Farms International’s Fourth Quarter 2020 Financial Results Conference Call. This morning, Village Farms issued a news release reporting its financial results for the fourth quarter and full-year ended December 31, 2020. 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 the completion of the call. Details of how to access the replays are available in yesterday’s news release.

Thank you, Sharon. Hey, good morning, everyone. With me on today’s call is Village Farms’ Chief Financial Officer, Steve Ruffini. This morning, I’m going to spend a few minutes highlighting the key takeaways for the quarter. Steve will then review financial results, and I’ll return with some concluding thoughts, before we open up the call to your questions. So before I begin, I want to note on the onset that Q4 was somewhat of a noisy quarter that, to a degree, masked the underlying strong performance of the Pure Sunfarms business. Under GAAP accounting, upon the acquisition of the balance of Pure Sunfarms, we were required to revalue Pure Sunfarms inventory to its net realizable value. That meant writing up the portion of Pure Sunfarms inventory, we acquired from its exceptionally low cost of production to what we expected to sell it for. The end result was that from an accounting perspective, the inventory was sold through with a cost of goods sold equal to the selling price, or for zero margin. This resulted in a $3.3 million non-cash impact on Pure Sunfarms’ reported gross margin and net income for the fourth quarter. So this is one of those accounting requirements that causes many of us non-accountants, like myself, and I think even a lot of actual accountants to scratch our heads, as the accounting rules clearly don’t reflect the true underlying nature of actual transactions. There you go. So for me, it actually underscores the significant value Pure Sunfarms is adding with its cultivation expertise, but I did want to call that out since it’s unusual.

Thanks Mike. In the interests of time, I’m going to restrict my comments primarily to the fourth quarter results. Our full year financial results are available in our news release and our regulatory filings, which will be available on EDGAR and SEDAR, etc., as well as on our website later today. As a reminder, our reported results from the fourth quarter reflect the consolidation of Pure Sunfarms following our acquisition of the remaining interest on November 2. Beginning in Q1 2021 quarter, which we report on or before May 10 as we are now an accelerated filer, Pure Sunfarms will be fully consolidated for the entire quarter, so we will not have the noise of one month of a JV and two months of consolidation. But to assist the reader in this quarter, we have shown the Pure Sunfarms results in both Canadian dollars and U.S. dollars as if it were a standalone company in our press release. For comparative purposes, I will speak to the produce results and Pure Sunfarms cannabis results independently and then summarize some comments on the consolidated company. Starting with produce, sales for Q4 increased $1.5 million or about 5% to $34.6 million from $33.1 million in Q4 2019, driven mainly by an 8% year-over-year increase in our average net selling price in the fourth quarter with a slight year-on-year decrease in pounds sold. As Mike mentioned, we saw market pricing of tomatoes, which has been elevated for much of the year right into the first part of Q4 as a result of pandemic-related lockdowns. Recently the price has retreated back to more normalized levels in Q1, partially driven by some recent weakness on a year-on-year basis in retailer demand, we presume as people in the U.S., at least, are starting to return to a more normal life from lockdown. The higher year-on-year selling price was offset by the acceleration of produce costs in Q4 caused by the impact of the brown rugose virus that is impacting the global tomato industry at one of our Texas greenhouses to the tune of roughly $2 million in the quarter. We increased our cost per pound of production in the quarter above our historical cost per pound at this facility, which resulted in the acceleration of production costs in the quarter. While the virus was not as detrimental to our 2020 results as the virus was to our 2019 results, it did cause a negative produce gross margin for the quarter. Gross margin for the year was $8.8 million, a significant improvement, as Mike mentioned, to the negative gross margin of $7.3 million in 2019.

Thank you Steve. I actually thought begin catapulted off an aircraft carrier was exciting, but I never understood purchase accounting under GAAP was right up there - that’s awesome.

Thank you.

All right, so moving on. 2020 set a new baseline for Village Farms to build and grow from as we leverage out 30 years-plus experience in a vertically integrated, controlled environment agriculture business for cannabis opportunities internationally. Our strategy is formed on multiple opportunities for sustainable value creation over the near term, medium term and long term. In Canada, we have proven out the Pure Sunfarms model: excellence in cultivation, highly efficient, low cost operations, a proven product strategy based on high quality products that customers want at an attractive price, and the ability to deliver consistent profitability, all of which positions Pure Sunfarms for continued growth based on steady overall market growth. Canada is now at an annualized run rate of $3.6 billion - that’s more than double where it was at the end of ’19, so that’s very favorable. Increased access to our products through growth in a number of retail outlets, especially in Ontario, expansion and enhancement of product offerings, and continuous improvement is a fundamental tenet of our product strategy and our team is heads down, continuing to elevate quality and innovate with a particular focus on those attributes most valued by customers, and finally expansion of our market share to capture more of the industry’s profitability pool going forward through 2022 and 2023. With this very favorable outlook, as Steve noted, we plan to start growing in half of our second 1.1 million square foot greenhouse, Delta 2, in the back half of this year to meet our forecasted demand for our products. Our goal is to start up the balance of the second half of Delta 2 in early to mid-2022 such that by mid next year, we will have doubled our current production levels. Each successive quarter of achievement of profitability for our Canadian cannabis business gives us great confidence in our ability to capitalize on the U.S. cannabis opportunity. We are very encouraged by the evolution of the regulatory environment in the U.S. We have developed and are refining and adjusting in real time multiple strategies which anticipate legal participation for us in the high THC market and leverage our team’s experience there, our organizational strength and our large greenhouse existing footprint. As Steve discussed, we have significant strength in our balance sheet to execute. There is little doubt that in the coming years, we will see significant progressive change in the regulatory and the regulations of low and high THC for both medicinal and recreational use in various countries around the world. We continue to be very active in pursuing additional targeted large market opportunities, and I can say looking at the future Village Farms just personally, not just as the CEO but the company’s founder and still largest shareholder, our people, our capabilities, our opportunities continue to give me great confidence in the ability of our company to deliver growth and a return on invested capital that is second to none in our industry and that will drive sustainable value creation for our shareholders. Before I open the call to questions, I just want to highlight for those that may have missed our news release yesterday, or on Monday, that Village Farms will be added to the S&P TSX Composite index before the market opens on March 22. It’s a proud moment for us and, we believe, validation of not just how far the cannabis industry has come in a very short period of time, but especially the significant value we at Village Farms have been able to create for our shareholders. I want to take a moment to thank all members of Village Farms and Pure Sunfarms leadership and team, who have contributed to the many accomplishments and successes in 2020. In this unprecedented situation, you all rose to the challenge to ensure our two essential businesses during this pandemic were continuing to deliver to customers and consumers throughout the year, but also continue to move forward the strategies for each business to position them for future growth and success. You each deserve this recognition, and I thank you. With that, Sharon, we’ll open up to questions.

First question comes from Rahul Sarugaser with Raymond James.

Good morning, Mike and Steve. Thanks so much for taking my questions.

Good morning, Rahul.

Congratulations on a terrific year, really. So like you said, this quarter’s numbers were a little bit muddy, but of course that’s our job to try and sort that out. So I’d really like kind of like to look forward, given that there was a rapid growth in Pure Sunfarms market share through 2020. Now looking forward into 2021, we’ve seen that the first quarter more broadly has been somewhat weak in general, and we – and our channel checks show that Pure Sunfarms didn’t perform that well relative to its rapid acceleration we saw in 2020. So how should we be thinking about Pure Sunfarms market share growth in 2021, particularly given your goal of 20% market share over time?

Yes, good morning, Rahul. I think the 20% market share, we - that is our longer-term goal. And I think achieving that market share is just a combination of what we can execute with our products, but it’s also dependent upon what happens with the competitive landscape. And as I said, it seems like profitability is just not that important in a marketplace, especially when many other LPs and companies can continue to access capital regardless of their cost of production and so on. So I think you have to take that into account, when will the music start to slowdown. So there is a lot of competition out there, and I think that was also -- we saw that with the provincial governments trying to get SKU rationalization. Some of the provincial governments had 1,000 - up to 1,800 SKUs and 60 different LPs that they were buying from, and that’s something we don’t control. At the end of the day, there’s just a limited amount of customers. So there’s a lot of dynamics playing. And I think overall, we have achieved close to a 20% market share on flower for a given month in Ontario, and that validation, even though it was just one month in the past, says that we can get there. If today of all product categories in Canada, we’re in a 3% to 4% range. I think looking long-term, 20% is possible. And as I said earlier, we feel confident on that. As we ramp up Delta 2, I don’t know of many other LPs ramping up production, but we are, and it’s really not a question of wholesale sales. I mean, I’ve heard numbers where north of 1.2 billion grams are in inventory at other LPs. If that is low potency, that product is not going to be sold. And as we continue to deliver new SKUs with higher potency, I think that will drive greater market share. So – but overall, quarter-on-quarter, it’s hard to like achieve -- continuing to achieve high percentage of quarter - sequential quarterly growth. We just can’t be measured that way. And I think we’re excited about starting to look at our results measured by year-on-year, by quarter and by year as opposed to every single quarter where there could be a lot of lumpiness in the market and so on. So I hope that helps answer the question.

Great, yes. And you are absolutely in position to acquire when you’re talking about appreciating to the bottom line EBITDA over revenue. That said, the market continues to really value companies in this space on an EV-to-revenue basis. And given that Pure Sunfarms, essentially those farms will be consolidating Pure Sunfarms revenue completely starting in Q1, how do you anticipate that playing out more broadly for the company given that you will have some fully consolidated revenues? And then I can cheaply add one additional question, which is now that you have 150 - a nice healthy cash balance sheet. What are your plans in terms of deploying that cash, given essentially your historical record in being really good, efficient allocators of capital?

Yes. Well, for the first question, I mean, we’re 100 - like Pure Sunfarms today, we are so pleased with the results of the company. I mean, to us, positive cash flow and profitability, that’s what it’s all about. I mean, I just don’t understand a company that can operate year-on-year, for years going through billions of dollars of shareholder wealth and never get to a point of profitability, or not even see a path to profitability. Let’s just say in the Canadian market based on the fact that the real driver is taking market share from the illicit trade to the legal trade being competitive in that pricing. So we--Pure Sunfarms, man, they are uncuffed, unleashed, and they are going at it themselves. They have a fantastic management team, great organization. We have enough assets on the one footprint, if we converted the final greenhouse to do north of 35% of the entire Canadian requirement from a capacity perspective, and they’re going to just keep building that market share. Also, they now are going through GMP certification, that was a big cost for us in our fourth quarter SG&A, north of $0.5 million. And they’re gearing up for export of products coming out of Canada. So from our perspective, they’re ready to go, they’re fully solo and unleashed, and let them do their thing. So for us here, everything we do is a process. It’s systematic, get them positive, help them where we can, let them free, and they are, and now we’ve come back to corporate and we’re focused on not just our entry point to the U.S., which is priority, is one of our top priorities. But as we’re watching everything unfold and it changes week-to-week and month-to-month, and we look at Texas, the way we view Texas, by the way, talking about the balance sheet we have, how we deploy that, we are ready to go in Texas. We have our plan to duplicate exactly and leverage up what we did in Canada, by converting the first or second of massive greenhouses in Texas. We view Texas as a country. We don’t consider it part of 49 other states because it is the Republic of Texas, population equal to Canada, second largest populated state. No one has an advantage in Texas today. So when the race starts, we plan to be very aggressive within that marketplace, but that doesn’t mean that’s the only way we’re going to enter the U.S. market. We have other plans. And then equally, we’re very focused on the EU. We’ve been working there for a year-and-a-half, but everything we do has to come with very deep research, a process, understanding how we get a return on capital, understanding how we invest our dollars in companies or acquire them will get us cash flow positive. So it may not seem like we’re moving as aggressively as others. But I can assure you once we get into it and that’s right on the horizon, that we’ll do well.

The next question comes from Doug Cooper with Beacon Securities.

Good morning, guys. A couple of things, Steve, just a couple of nuts and bolts things I just wanted to confirm. So G&A was 5.9 -- I’m just talking G&A for Pure Sunfarms, $5.9 million in the quarter, and you said bad debt was 30% of that, so $1.7 million, is that right?

A little bit less than that.

Call it a million and a half, kind of thing?

Yes.

Okay, and Mike, I think you just said GMP certification cost you half a million bucks in the quarter. I guess I’m just trying to get at what is the baseline G&A going forward in the quarter, based on the current headcount?

Well, we’ve approved that they will ramp up their SG&A to get ahead of Delta 2, because remember Delta 2 is doubling our capacity and they’re going to be doing that through their positive cash flow, by the way. But it’s going to be like a reverse bell curve, that SG&A is going to ramp up for the next two to four quarters, or at least until we start generating revenue from that asset. We need to continue to build our team, our innovation, our products, and ramp the facility up. You know we’ve been ramping up greenhouses for north of three decades - it’s not an easy feat, and we want to get ahead of it, so once we start delivering revenue from Delta 2, I think you’ll see that the SG&A a percent of sales come back down to what we consider normal for us, which is still within the normal percentage of what a CPG company should be operating at. I think you should expect to see that higher over the next four quarters.

Okay. I’m just trying--out that $5.9 million, I’ll call it one-time, you’ve got bad debt of $1.5 million, EU GMP certification $0.5 million, and then the ERP was something in there too, right?

It’s 30% of the increase, so it’s 30% of $2.6 million was bad debt.

Thirty percent of 2.6? Okay.

Yes, and you talk about ERP and all - I mean, to a degree, we didn’t start out by putting a multi-million dollar ERP system. We waited until we can be profitable--

And they’ve been utilizing the Village Farms ERP system, which didn’t the handle the Health Canada requirements for batch controls, etc., so.

Right, so we’re really excited about it. Now it’s time when they can use their cash flow to start upgrading their systems for future growth, and I think that’s the way--you know, they’re doing it exactly the way we would do it.

Okay. Just getting back to Rahul’s question on market share, you target 20%. By my calculations, you were give or take--you obviously increased market share, I think the Canadian market grew 12% sequentially and you guys were up 29% sequentially on the retail sales, so obviously gained some share there in the large format, as you indicated. Can you give us a breakdown of your $15.5 million in sales, how much was Ontario, how much was B.C., and how much was Alberta?

We don’t have that data. I mean, Ontario--we would say Ontario is our biggest customer, B.C. and Alberta kind of go neck-in-neck in between, depending on months. As Mike said, it’s hard to measure this quarter on quarter. The ordering pattern for the provincial buyers is sporadic, so it’s not what I would call normal course buying like we see in the produce business on replenishment. In some instances, we’ve run out of SKUs that are big sellers in these provinces, which is frustrating. Obviously when we’re out of stock, that’s a lost sale; but as Mike said, we’re not in control of the buying patterns of the provincial governments. But Ontario is by far and away our biggest customer.

Okay. Is there an update on the entry into other provinces, in particular I’m thinking Quebec, the next biggest province? Between Ontario, Quebec, B.C. and Alberta, that’s pretty much the places you’d want to be. Is there an update on Quebec?

Honestly, Quebec remains a challenge for us. It’s a priority but it remains a challenge, that’s all I can say. At this point, we’re looking at many different--trying to understand it, and I won’t go any deeper than that. It’s a large market and we haven’t been able to penetrate that, but the good news is we’re looking at the Yukon as an expansion this year, so. No, but seriously. You know, B.C. is starting to roll out more stores, and God knows per capita, that’s the highest consumption, but the illicit trade is still pretty big on the west coast, and I think that’s a growth opportunity for us as well.

The next question comes from Aaron Grey with Alliance Global Partners.

Hey, good morning and thanks for the questions. Nice trends on the adult use side. A quick question from me is going to be on some of the habits that you’re seeing from the provincial buyers and how they’re looking to maintain their own inventory levels, what you’ve seen as they refine the inventory to keep on the shelf and their replenishment. Then secondly, given how you’re expecting to see more and more stores open up in Ontario, was curious as to how you look to align yourself with potentially the new retail stores and making sure you’re in the right place in terms of shelf space as these new stores are opening up, so that you can maintain if not gain your market share throughout the year. Thanks.

Well you know, first of all, let me just say that I have an incredible amount of respect for the provincial operations and the management teams there. This is a whole new, brand new industry, and you have to give them so much credit along with Health Canada to be able to gear up an industry in such a short amount of time with a product that is very personal in its usage as a CPG product. The fact that there is lumpiness and shortage of supply, no one should comment on what they’re doing and how they’re doing it. I think you have to give them the breadth and a year or two, three to get it going, because it’s a whole new industry. That said, that is the case and our team is working directly with the buyers there. In today’s world up in Canada, all of it is over the phone and Zoom, you don’t have that interaction, but I think it will come. One of the reasons, without getting too deep into it, we feel very confident ramping up, doubling our capacity with Delta 2, we wouldn’t be doing that if we didn’t feel that the input from the provincial governments wasn’t solid, giving us the confidence to go forward. That’s why we’re gearing up our production in anticipation, as I said on the phone, Ontario is going to triple the amount of stores virtually this year, so if you have a SKU that’s been going well, our pricing is tied to the illicit market, and we believe that’s a winning formula, and actually I think it’s proven out to be.

Okay, great. Thanks for that. Then just a quick second question from me, you guys now have a couple quarters with 2.0 sales, you guys are now selling gummies as well, flower still remains dominant for the market as well as you guys. what are your expectations in terms of product format mix over the next 12 to 18 months for the Canadian market and how you continue to position yourselves? Thanks.

Well you know, there’s a lot of competition in the 2.0 market. Like flower, we weren’t first in, and it’s just been really gearing up at the end of this year. I think the team has done a great job of rolling out a number of derivative products, including gummies. I think they are unmatchable, the product we have, but there is competition. Others have been there and it may not have the swiftness of our flower penetration, but we keep refining and honing. That is coming almost all in-house on being able to make those products all in-house, which will increase our margins going into mid 2021. I think we’re on track for--but I mean, to comment what percentage that would be, I think it’s too early on. I don’t have that data at this point.

The next question comes from Andrew Partheniou with Stifel GMP.

Hi, thanks for taking my questions, and congrats on the great success in your cannabis business. Maybe just tying back to continuation of questions on production and your Delta 2 expansion, could you give an indication of where you guys are at right now in terms of your production with Delta 3 and your sales? You guys mentioned that you are running out of some SKUs at certain points. Are you guys capacity constrained and this is one of the reasons why you guys are thinking about expanding or doubling your production with Delta 2, or is it really more driven by guidance from provincial governments and the expansion on stores that you touched on earlier? Just a little bit more color there would be helpful in light of the overproduction of the market.

It’s all of the above, Andrew, because we curtailed the--just going back to summer of 2020, we took a very conservative approach in 2020 and cut back on our production, and that’s the beauty of how we’ve designed our assets. We can go from 16 major grow rooms down to 8, down to 4, down to zero, and ramp it back up very quickly with doing 5.5 cycles per year. As you know, ramping up a facility, as I said on the call, is a huge undertaking, and I think it’s fair to say that many have come to realize just how hard that is, so you really have to get ahead of it. We have to project the capacity we’re going to need in 2022 and into 2023, and that is a combination of looking at the market dynamics, looking at historicals, our penetration rate, our market share, looking at the movement from the illicit trade, as I mentioned - $3.6 billion, that’s way up from the end of ’19, so we anticipate there will be more cannibalization of the illicit trade, the input from the provincial governments plus our innovation in SKUs we have coming on. We’re very focused on some incredible new SKUs coming up. Potency rules at the end of the day, and that’s what we’re shooting for. If we waited until--you know, we are just about at full--if you look at our inventories versus our competition, I would venture to say we’re at the very low end of inventory levels compared to everybody else, which means it’s working. Yes, so we believe coming into the second half of this year, we’re going to need more capacity, and even though we’ve allocated half the greenhouse now, half in 2022, we can move that forward a month, back a month once we get the cultivation license or the expanded cultivation license - that’s what we need, and then we have a lot of flexibility how we prepare. But at the end of the day, we do not want to--we do not want to not deliver to our customers when they want our products, so we have to be ready and taking that approach.

Thanks for that additional color. Just touching on your recent financings, could you give maybe an order of priority on what you’re looking at in order for use of proceeds? You mentioned the U.S. is a huge focus. Are you looking at the CBD or maybe the THC market? Any more color on international expansion or use of proceeds would be useful.

Yes, I’m not going to give too much color on the U.S. The regulatory climate changes daily, it’s very political - you know, stateside, federal side. Again, being on NASDAQ and TSX gives us the greatest restrictions of all. Steve has worked very closely with the exchanges to what they can--what they’re expecting tied to any federal legislation, be it a modification of the States Act, the MORE Act and whatnot. Obviously under the cannabis umbrella, there is CBD, there is normal THC as we say, and we just want to be very clear on the move we make, again outside of Texas. Texas goes, we go, so keeping that in mind, we’re looking at probably deploying some capital to international markets where we think we can leverage up all we’ve accomplished in Canada and our 30 years experience, and be ready for those markets to open up. I think more to come on that.

The next question comes from Scott Fortune with Roth Capital Partners.

Good morning and thanks for the questions. Real quick, just kind of want to get a sense for the wholesale opportunity longer term as you look at it, and then was wholesale affected a little bit by the outdoor grows that came onboard in fourth quarter? Just kind of frame it as you look at the wholesale opportunity - are you in discussions with other LPs looking to offset some of their high cost production to you guys longer term? Just step us through. I know it’s going to be very variable from that standpoint, but .

Well, it’s hard to comment on that, Scott, so don’t really want to talk about that per se with respect to our customers. If we’re selling somebody under a non-branded or wholesale side, they’re a customer and we want to respect the fact that they are a customer, whether a competitor or not. Our decisions go deeper in how we do things. One example I can tell you is we’re focused on the operational side, and gearing up, I think it gets under-played in the industry as a vertically integrated company, the cultivation side gets sort of under-played of just how hard that is to ramp up. To the extent that we don’t want to be growing anything we can’t sell, that’s a mutual benefit for us. But you know, we don’t control the wholesale market per se. We have some companies that are doing very innovative things that we consider a part of our non-branded strategy, and we want to support those companies as a light asset model, and then you have other LPs. But if another LP wants to work with us, we’re not opposed to doing that.

Scott, it’s Steve. We’ve seen no competition from outdoor grow - zero. Haven’t had any issues.

Okay. Appreciate the color. Can you call out a little bit more on the provinces? Obviously Ontario has come onboard with more stores, you see B.C. a little bit as you look in 2021, the provinces that can come on and add to growth for you from that standpoint?

Not really. I think as soon as the lockdown--I think I’d probably want to reserve that for when things ease up as far as the pandemic lockdown. Ontario, I’ve been told, is probably going to have another tightening up, and although we said in our comments that we’re pretty happy with the flow in 2020, it has to be affecting people’s purchases in store and going out, so. We don’t control that, and of course if approaching the summer, if things open up across Canada, I think that’s only going to improve things. I think you’ll see some concern and lumpiness in the first and second quarter for companies in Canada, and that certainly attributes to it in our opinion.

The next question comes from Eric Des Lauriers with Craig Hallum Capital.

Great, thanks for taking my questions, and congrats on the strong year and strong quarter. At this point, I think your leadership in the Canadian market is undisputed, whether it’s costs, brand, market share, profitability. You guys have clear optionality in the U.S. with nearly 6 million square feet of greenhouses in Texas, yet as is probably obvious to everyone on this call, you somewhat inexplicably trade at a steep discount to peers. I’d imagine that at this point, any of your competitors would love to acquire or merge with you, but I also definitely respect that you guys don’t want or need to take on anyone else’s issues. Can you talk a little bit about the M&A environment in Canada and your appetite for M&A, whether as an acquirer or a target?

Well, I think it’s pretty clear, and thank you for the opening remarks, Eric, that’s certainly really appreciated, acknowledging that. Really, if it’s--you know in Canada and working with the leadership of Pure Sunfarms, our appetite would be tied to innovation, IP, things that can really resonate and enhance our brand and our company going forward. To the degree that--we get calls every day for production assets and we’re not interested. We have built many mega projects in 30 years and we’ve learned a lot from that, and we don’t really need to be in multiple provincial areas to produce large quantity, very--you know, in one footprint, we have a scale, as I mentioned, that could do north of 30% of the Canadian capacity, for the whole country, and managing one footprint of a high scale is where you want to be. In fact, probably we’ll see that model in other countries in the future, without going further. If some production asset comes in a different jurisdiction, different climate, different labor philosophies, proximity to the market, it doesn’t necessarily--it’s not something we want, so to look at any M&A activity on the production side, it’s not just resonating for us. As far as brand goes, one good question is there really a brand yet? I mean, we are branded guys, we believe in brand, but I think the Canadian market is really still about market share and cannibalization of the illicit trade, and brands will come. But I don’t see anyone out there leading that far in a brand that would be attractive to us, so I think we’ll let Pure Sunfarms loose, they are loose, keep going the way they’re going, and reserve our capital for M&A activities probably in other countries.

Okay, that makes sense. That’s great color, appreciate that. I’m going to try one more on the U.S. cannabis opportunity. I know that you guys don’t want to tip your hand here much, but as you look beyond Texas, what are your thoughts on M&A versus organic license applications within the U.S., and are you guys more focused on--like, as you look at markets beyond Texas, are you focused more on regulatory structure, i.e. limited license versus unlimited, or are you more focused on geographic locations, building out a regional footprint? Any additional color there would be helpful.

Well I can tell you this, that our U.S. philosophy is more where it’s going to be, where is the puck going to be, so to speak, the Bobby Orr philosophy of where is it going to be, and that’s where we want to be. We don’t necessarily believe that the current model of whether it’s limited license, single state, multistate, in the end we don’t believe that having 42 production facilities among 40 states is the way to do it. We believe that upon full federal legalization, that there will be interstate commerce and the model of large scale low cost will prevail. You can’t stop interstate commerce in the United States regardless of what some governors believe. Yes, it will take time, it will be a fight, there will always be pockets like there was for alcohol, but ultimately that’s the model. We have to be careful when we look at an entry point on the valuations of these companies, because a lot of their investment, we believe, will be sunk costs with no return. That’s what we’re evaluating, and the valuations are pretty sky high right now, not on CBD but on normal THC. How’s that for color?

The last question comes from Adam Buckham with Scotiabank.

Morning Mike and Steve. Thanks for taking my question. There have been some comments in the market about Mexico’s progression towards rec cannabis and how that might benefit VFF, given its network and partnerships in the country. Are you able to provide any color on that market along with the company’s interest in it?

Yes, Mexico was sort of on our front burner, went to our back burner, and is sort of back on the second burner. We have very solid contacts. We’ve been operating there almost 30 years, and in working with our contacts, we wanted to sit back and take a back seat. We’re never going to get emotionally caught up that we have to be first in, as opposed to having the right model. Mexico clearly needs--we need to see the separation of medicinal versus recreational. I’m not sure we want to be opening up a store in Acapulco, but the medicinal side is interesting. There are some companies that are interesting to us that may make their way in there, that can utilize support and help, so it’s sort of back on the secondary burner but we’re taking our time.

Okay, great. That’s good color. My second question is just more for modeling purposes. I just wanted to touch on the produce business. I think Steve alluded to a few issues that impacted margins in the quarter. We’re now almost at the end of Q1. Are there headwinds still there from a margin perspective, and then maybe at a high level, can you walk us through how some of your partner growers are providing a benefit to margins for the business?

Yes, in my tenure, which is pretty long, up until this brown rugose virus that has become a global pandemic and is so--well, it’s not funny but when we had the coronavirus, we shook our heads in here and said, every day we’re battling a tomato virus that really started out in Jordan and Israel some five years ago, and it’s all over the world today and everybody is suffering from it within the tomato industry. We’re battling that but there’s no cure for it, and the seed companies are working aggressively to build a resistance. They will get there, but in the meantime that’s been an impact and probably the greatest impact for us and the most uncontrollable, is dealing with that specific virus more so than the market conditions. Our pricing will get affected if one of our facilities is growing high value specialty products and they have a hit, and more of our commodity products are surviving, then it drags down our average pricing. It’s something we’re battling, and our partners in Mexico and Canada - God, the virus is everywhere. As well, we have issued with the border as far as importation, so there’s a lot going on, a lot of noise there, but it will work out. I’ve seen it before. But yes, our partners provide us with consistent margins because for the most part, the cost of production for our high value produce crops in Mexico and in Canada are lower than the United States, and the way things are going in the United States, it’s only going to get more costly and that is a concern. I think our model of shifting certain U.S. assets to cannabis in the future is a good opportunity for us, and we’re closer with our partners in those countries.

At this time, I will turn the call over to the presenters.

Well thank you again. It’s the end of a great year, 2020. We think it’s a great year. We’ve made a lot of progress. We’re excited that we’ve proven out our original model in Canada and hope to leverage that up in other places, and we certainly thank all of our shareholders. Our institutional shareholders are part of our village. Thank you all and look forward to reporting first quarter in May. Thank you.

This concludes today’s conference call. You may now disconnect.