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DATE

Monday, Aug. 10, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer - Michael DeGiglio
• Chief Financial Officer - Steve Ruffini
• Chief Operating Officer - Ann Gillin Lefever
• Senior Vice President, Corporate Affairs and Investor Relations - Sam Gibbons

TAKEAWAYS

• Consolidated Net Sales -- $64 million, representing 7% year-over-year growth driven primarily by international medical cannabis exports.
• Net Income -- $7.2 million, or $0.06 per share, marking the fifth consecutive quarter of positive earnings since the company privatized its produce business.
• Adjusted EBITDA -- $15.4 million, reflecting 24% of total sales compared to $17.1 million in the prior year period.
• International Export Sales -- $20.9 million, growing 74% year over year and 43% sequentially due to increased market share in Germany.
• Cannabis Segment Sales -- $53.5 million, an increase of 5% versus the second quarter of 2025.
• Cannabis Gross Margin -- 51%, expanding from 42% last year due to a favorable product mix and lower production costs at the Delta campus.
• Netherlands Net Sales -- $3.3 million, increasing 35% year over year as the company continues distribution in the coffee shop pilot program.
• Produce Net Sales -- $10.2 million, increasing from $8.6 million in the prior year period due to strong production and favorable pricing.
• Delta 2 Production -- 15 metric tons, representing the expected harvest from the greenhouse expansion in the second half of 2026.
• Total Capacity Target -- 160 metric tons, the projected annual production of dried flower from the Delta campus upon completion of expansion projects.
• Cash and Cash Equivalents -- $73 million, including proceeds from a $15 million equity placement with institutional investors.
• Total Debt -- $40 million, carrying a blended interest rate of 5.6% as of June 30, 2026.
• Canadian Excise Taxes -- $15 million, representing approximately 40% of gross retail branded sales in Canada.
• Capital Expenditures -- $15 million, spent during the first six months of 2026 on expansion projects and technology enhancements.
• Income Tax Payments -- $17 million, representing approximately 18 months of Canadian income taxes paid during the first half of the year.
• Share Buybacks -- $7 million, executed during the first half of 2026 as part of capital allocation strategies.
• Groningen Capacity -- 10 metric tons, the maximum annualized production capacity expected from the Phase II facility in the Netherlands.
• SG&A Expense -- $18.8 million, increasing from $15.4 million last year due to updated transfer pricing policies and higher commercial costs.
• Clean Energy Revenue -- $269,000, decreasing from $483,000 in the prior year period.
• Inventory -- $46.7 million, compared to $41.5 million at the end of fiscal 2025.
• Trade Receivables -- $32.4 million, increasing from $23.2 million at year end due to longer terms for international export sales.
• Pure Sunfarms Credit Facility Draw -- 8.3 million Canadian dollars, utilized to support facility upgrades and technology enhancements in the Delta greenhouse.

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RISKS

• Mike DeGiglio warned, "There has been a decline in the non-compliance, so to speak, products that are flowing into Germany from multiple parts of the world," which impacts market pricing for non-certified goods.
• Ann Gillin Lefever indicated that some domestic supply is returning to the Canadian market because of "international markets... testing requirements as well as some crackdown on greenwashing."

SUMMARY

Management reported that Village Farms International, Inc. (VFF +3.56%) achieved its fifth consecutive quarter of positive net income following the privatization of its produce operations. Growth was primarily driven by international medical cannabis exports, particularly within the German market where the company has expanded its distribution network. The company is currently executing capacity expansions in its Delta facilities in British Columbia and its Phase II cultivation site in the Netherlands. Management indicated that these initiatives are designed to leverage economies of scale and utilize existing EU GMP certified infrastructure to meet rising global demand for pharmaceutical-grade cannabis products.

• CEO DeGiglio stated, "The German market continues to grow, and so has our share of the total market thus far in 2026."
• Management reported holding four of the top 10 market share strains in Germany and stated that the company possesses the widest pharmacy distribution of any cultivator in that market.
• The company began cultivation at the Groningen facility in the Netherlands during the second quarter, with production expected to reach full capacity by the end of the first quarter of 2027.
• Management indicated that conversion of the second half of the Delta 2 greenhouse expansion is scheduled to commence on Sept. 1.
• CFO Ruffini noted that the company no longer maintains a restricted cash balance following the completion of the one-year escrow period related to the 2025 produce business transaction.
• CEO DeGiglio stated, "We've never engaged in the production of synthetic cannabinoids or related products," noting that the company's CBD facility operates to higher compliance standards.

INDUSTRY GLOSSARY

• EU GMP: European Union Good Manufacturing Practice, a pharmaceutical-grade quality standard for cannabis products.
• GACP: Good Agricultural and Collection Practices, a set of standards for the cultivation and primary processing of medicinal plants.
• Delta 2: The name of the company's major greenhouse expansion project located in British Columbia.
• LP: Licensed Producer, a company authorized by Health Canada to produce and sell cannabis.
• Groningen facility: The company's Phase II cultivation site located in the Netherlands.
• BHB: Balanced Health Botanicals, the company's U.S.-based CBD platform.

Full Conference Call Transcript

Operator: Good morning, ladies and gentlemen. Welcome to Village Farms International's second quarter 2026 financial results conference call. This morning, Village Farms issued a news release reporting its financial results for the second quarter ended June 30, 2026. 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 by the Internet, beginning approximately 1 hour following completion of the call. Details of how to access the 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 filings with the SEC and Canadian regulators, including its Form 10-K MD&A for the year ended December 31, 2025, and 10-Q for the quarter ended June 30, 2026, which will be available on EDGAR and SEDAR+.

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 statements. I would now like to turn the call over to Michael DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGiglio.

Mike DeGiglio: Thank you, [ Liz ]. And good morning, everyone. And thank you for joining us for our second quarter results. With me today are Steve Ruffini, our Chief Financial Officer, and Ann Gillin Lefever, our Chief Operating Officer, and [ Sam Gibbons ], our Senior Vice President, Corporate Affairs and Investor Relations. I will begin with my customary review of our highlights from the quarter, then Steve will review the segments and financials in more detail before I make some last closing comments. Our second quarter results continue to demonstrate the strength of our expanding global cannabis platform, driven by record cannabis revenues as we continue growing in target markets and product categories in the countries we currently operate in.

We delivered our fifth consecutive quarter of positive net income and earnings per share since we privatized our legacy produce business last year. And as we noted in this morning's press release, we're having a record year of production in our Delta, British Columbia facilities, which has contributed to stronger margin performance. Consolidated net sales growth was strong, and we achieved record cannabis harvest yields from our Delta facilities through the first half of 2026, with that including the first harvest from our Delta 2 expansion.

Record yields combined with greater operating efficiencies have resulted in lower cost of production and favorable sales mix also helped drive nearly 10 percentage points of year-over-year gross margin expansion, which translated to strong operating leverage as adjusted EBITDA and net income meaningfully outpaced total sales growth. I will also note that when excluding a one-time $4.3 million vendor settlement, which was tied to our legacy produce business, our EBITDA received in the second quarter of last year as a comparison, consolidated adjusted EBITDA increased meaningfully year-over-year to $15.4 million with a record Q2 cannabis segment performance. Moving on, in Canada, we've gained traction on our efforts to grow market share in convenience product categories.

And for the first time, our brands have achieved top 10 market share in all major categories with continued growth in vapes and infused pre-rolls. We've discussed our focus on strengthening our position in convenience product categories for several quarters, and we're encouraged by this progress, which has been entirely organic and builds in-house capabilities, which we'll apply to non-Canadian markets as well in the future. It was also another record quarter of international export sales, which grew 74% year-over-year and 43% sequentially, as we continue to benefit from our competitive advantage with the world's largest EU GMP certified cannabis facility.

We discussed on last quarter's call that we believe EU GMP certified product is a competitive advantage which drives strong growth and profitability, and we're pleased to prove it with today's results. This is an underappreciated Village Farms strength, strategically built over the past 5 years into the supply chain for our international customers. Without giving complete details for competitive reasons, our own sales mix of GACP to EU GMP certified product has improved significantly since we completed the facility upgrades we discussed last quarter.

As we stated, these upgrades made our Delta campus the world's largest EU GMP certified facility by total compliant product volume, and our higher sales mix of EU GMP certified product improved our margins during the second quarter. Some of our peers have discussed these challenges on their earnings call publicly for the first time over the last couple weeks, and we've been saying demand for EU GMP compliant product is continuing to increase. Importantly, the German market continues to grow, and so has our share of the total market thus far in 2026.

We most recently held 4 of the top 10 market share strains, and based on our own internal research, we believe we have the widest pharmacy distribution of any cultivator with product in Germany today. We have a strong growing share of Europe's total addressable cannabis market, and we remain very excited about the opportunities we see in the U.K. and Australia. And we continue to expect that we will enter new European jurisdictions in the second half of this year. For a quick reminder of our Delta 2 expansion project, the Delta 2 expansion is the conversion of the second half of the 1.1 million square foot Delta 2 greenhouse.

As previously stated, we are completing the conversion in phases, one half of the expansion at a time. The first is completed and in production and the second half conversion will commence on September 1st. We continue to expect that we will harvest an incremental 15 metric tons of production from this D2 expansion this year, with an additional 25 tons harvested from the expansion in 2027. We will be on a full 40 metric ton run rate starting with the third quarter of '27 and with the full 40 tons of incremental capacity available beginning fiscal 2028.

Once completed, the D2 expansion will bring our total annualized production in Delta to approximately 160 metric tons of dried, trimmed flower annually. All of this will drive further economies of scale, cost efficiencies, and improve flexibility to meet demand from our customers, consumers, and patients in Canada and around the world where we operate. As a reminder, any future conversion of our [ Delta 1 ] greenhouse would more than double our annualized production capacity. Turning now to our recreational cannabis business in the Netherlands.

We are continuing to maintain strong distribution with participating coffee shops and have been focused on expanding our product assortment to create more value for coffee shop owners who are looking to differentiate their menus. We remain incredibly excited about the Netherlands market and feedback from participating municipalities and coffee shop owners about the pilot program has been overwhelmingly positive thus far. The government is expected to issue a report with an internal review of the program later this summer, and we're quite optimistic that this will also reflect positively on the program. As we discussed on last quarter's call, we experienced a slight delay with final approvals of our Phase 2 facility.

But we did begin cultivating in the Groningen facility in Q2. Groningen is expected to ramp up to its full production capacity over the course of the next few quarters, positioning us for another step function of growth next year. We're committed to being a strong community partner and employer and believe there is tremendous long-term upside potential for Village Farms in the program if it is ultimately expanded, which could increase the total addressable market in the Netherlands for our products by nearly tenfold compared to where we are today. In summary, we are pleased with our second quarter results, which continue to reflect our disciplined execution.

We closed the second quarter in a strong position with $73 million in cash after completing the previously disclosed equity placement with U.S. institutional investors. We believe increasing institutional ownership alongside the support of retail shareholders will be critical for the global cannabis industry to succeed. And we believe both will benefit long-term from their investment in Village Farms. With capital expenditures from our Canadian and Netherlands expansions nearly complete, we are in an excellent position to deliver stronger free cash flow and continuing growing of our cash balance during the second half of this year. This concludes my introductory remarks, and now I'll turn the call over to Steve. Steve?

Steve Ruffini: Thanks, Mike. I'll start with a review of our consolidated Q2 results. All figures referenced reflect U.S. dollars unless otherwise noted. Consolidated net sales increased 27% sequentially and 7% year-over-year to $64 million, driven by continued international growth. Consolidated net income from continuing operations was $7.2 million, or $0.06 per share. The unfavorable variance compared to last year was the result of a one-time vendor settlement of $4.3 million received in the second quarter of last year. Excluding this impact, net income from continuing operations would have increased significantly as a result of our record Q2 performance.

Consolidated adjusted EBITDA from continuing operations was $15.4 million, or 24% of sales, compared to $17.1 million, or 28.5% of sales in Q2 of last year, with the unfavorable variance similarly driven by last year's vendor settlement. Excluding this impact, consolidated adjusted EBITDA would have increased approximately 20%. Turning now to our cannabis segment. Total net sales was $53.5 million for a 5% increase versus Q2 of last year. The year-on-year improvement was driven by the strong performance in our international medical exports, which increased 74% over Q2 of last year and 43% sequentially, predominantly from Village Farms taking a larger share of the German market.

As we discussed last quarter, we experienced a slight delay in the commencement of operations at our Phase II facility in the Netherlands. But Q2 sales increased 35% year-over-year to $3.3 million. Groningen is now operational and will begin contributing to stronger growth. As Mike mentioned, we expect Groningen to ramp to full production capacity by the end of Q1, positioning for continued growth through 2027. Cannabis gross margin was 51%, up 900 basis points from 42% in Q2 of last year, reflecting a favorable product mix, increased operating efficiencies, and a lower cost of production at our Delta production campus.

Total SG&A as a percentage of sales was 28% compared to 23% in Q2 of last year, reflecting an update to the company's transfer pricing policies as well as higher commercial and marketing expenses. The update to our transfer pricing policy is directly attributable to the sale of our produce business a year ago. So a higher percentage of our corporate expenses are now directly allocated to our cannabis business versus prior years. Q2 adjusted EBITDA from continuing operations for cannabis improved 16% to a record of $15.3 million, up from $13.1 million in Q2 of last year, resulting in an adjusted EBITDA margin of 29%.

Q2 cash flow from cannabis operations was a positive $8.9 million compared to a positive $19.2 million in Q2 of last year. The variance driven by Canadian income tax payments which did not occur during the prior year, as well as changes in non-cash working capital items as terms on export sales are generally longer than in the Canadian market and as we expand our production footprint in Delta 2. We believe we are the first and only major Canadian public cannabis LP in the position of paying corporate income taxes, which remains a testament to the strength of our operating capabilities and a sign of a sustainable, long-term, profitable platform.

As we do each quarter, I will point out that in Q2 we also paid Canadian excise taxes on our retail branded sales of $15 million, nearly 40% of gross retail branded sales. Turning to the balance sheet, where I'll note that we no longer carry a restricted cash balance after the completion of the 1-year escrow period as part of our produce transaction last May. We ended the first half of the year with cash of approximately $73 million. For the first 6 months we generated close to [ $21 million ] from continuing operations before working capital adjustments.

Working capital adjustments were significant in the first 6 months of this year, in particular due to the payment of essentially a full year and a half of Canadian income taxes, totaling $17 million, and that's in U.S. dollars. During the first 6 months, we also spent $15 million in CapEx, paid $51 million (sic) [ $31 million ] in excise taxes, as well as $7 million in share buybacks, and completed a $15 million equity placement with two key U.S. institutional investors. We remain very comfortable with our long-term debt level, which was approximately $40 million at a blended interest rate of 5.6% as of June 30, 2026.

During the quarter, we drew down an incremental CAD 8.3 million on our Pure Sunfarms credit facility to support our Delta facility upgrades and technology enhancements. We're in a net cash position of $33 million, and as Mike mentioned, we expect to grow our cash balance for the remainder of the year with stronger free cash flow during the second half. Our board and management will continue to evaluate capital allocation decisions on a quarterly basis, and we expect to maintain a balanced approach to capital allocation to drive returns to shareholders. I will now turn the call back to Mike for some closing comments.

Mike DeGiglio: Thanks, Steve. Before we open the call to questions, I'd like to recognize the continued execution of our team members around the world. Our team have undertaken significant development projects this year while continuing to deliver outstanding results. I personally thank all our folks who continue to lead us forward. In closing, we feel we've had an excellent first half of 2026, and we're proud to continue demonstrating the strength and durability of our global operating model. With industry-leading profitability and a global cannabis business that is approaching 50% of revenues from growing international markets, we're positioned for continued profitable growth regardless of our entry point or timing into the U.S. market.

We remain encouraged by what we see in the U.S. regulatory landscape, and we're pleased to see that the U.S. Congress provided an extension for full-spectrum CBD products into December, which will give them time to potentially find a workable permanent solution. As you know, we've never engaged in the production of synthetic cannabinoids or related products. Our BHB CBD facility has always operated to the higher standards. We're incredibly proud of that team and still see a lot of opportunity for BHB depending on how things settle out. But we're looking forward to the rules of engagement being finalized so we can start planning accordingly. I will reiterate something I mentioned last quarter.

We are pleased that we've become a partner of choice and are recognized as a strong leader in the global cannabis industry. But we will only pursue opportunities that are strategically compelling and supportive of long-term shareholder value creation. We have a considerable upside potential in our Netherlands business, Canadian and U.S. assets, and ownership interest in [ Vindextra ], and we believe Village Farms remains one of the most attractive cannabis growth platforms and investment opportunities in the world. We will now take time to answer some questions.

Operator: [Operator Instructions] Our first question comes from Aaron Grey with Alliance Global Partners.

Aaron Grey: Congrats on the strong quarter. I want to talk a little bit more about international and the medium-term opportunity. Maybe give some color in terms of some of the demand supply bottlenecks you might have near-term and how those get alleviated as 1H and 2H expansion for Delta 2 are completed. And this maybe just talk about long-term, your confidence to remain with a competitive advantage, even with potential for U.S. exports.

Mike DeGiglio: Okay, good morning, Aaron. A few questions in there. Yes, we remain confident that we'll continue to expand. As I said in my call, we still have Delta 1 availability behind the expansion of Delta 2, and that's a 33% increase with expansion, bringing us to the 40 incremental metric tons going forward. So we don't talk much about Delta 1, but that is always a possibility for us, and it's even a possibility for export to the U.S. market, depending on how things shape out in the future. So we think we can continue to meet our EU GMP growth as well going forward, and we feel confident about Germany continuing to grow going forward.

As far as pricing, we haven't seen a decline in our pricing. There has been a decline in the non-compliance, so to speak, products that are flowing into Germany from multiple parts of the world, but you really need to be an EU GMP compliant partner. And I could say this, as far as your question for the U.S., I'm not saying U.S. single-state, multi-state operators won't be there. But I can tell you from our experience in the last 6 years, it is not easy. It's just not a matter of getting a DEA export license, not just qualifying for EU GMP, but not just getting there on your initial certification, but maintaining it is even more difficult.

So, you know, I wish everybody luck, and as far as I'm concerned, we may be a U.S. exporter of EU GMP in the future as well. So I think we have a great position right now that we can continue to build on. And I think we're in a strong position going forward over really anybody who wants to focus on EU GMP for the European market.

Aaron Grey: Second question for me, just talking about the EBITDA margin profile, I've seen some nice expansion in the past two quarters. How best to think about the long-term EBITDA margin aspirations as we think about all the puts and takes of your sales growth opportunities and potential broader sales pressure with the pricing pressure within cannabis.

Steve Ruffini: Our continued long-term focus is the 30% to 40% for our gross margin, our EBITDA margin. Certainly in the mid-20s, it's possible. You know, we continue to be very focused on managing our costs. Obviously, the EBITDA margin and gross margin are also somewhat dependent on demand and supply. And, you know, as more people enter the market, there could be some price pressure, but now we're, as Mike mentioned, we're continuing to see very strong pricing for EU GMP, and we'll continue to get some economies of scale as we expand our Delta facility platform over the ensuing years.

Mike DeGiglio: Yes, and if I could add to that just with the increase show the efficiency of our operation because complying with EU GMP significantly increases your cost of production. So when you're looking at others who may start to index on EU GMP out of the U.S., they should plan for much greater costs of production and overall costs to get there. So that's, well, you know, that's not really identified in our numbers. It just shows the power of large-scale, efficient operations. And the bigger we get, the lower we believe our costs will be going forward. So we see that as a great advantage. You really need a large-scale footprint to index.

Operator: Our next question comes from Doug Cooper with Beacon Securities.

Doug Cooper: Terrific work in the quarter. A couple of things. First of all, in Germany, you're up 70-odd percent year-over-year, up 43% sequentially. What did the market grow and therefore, what kind of market share did you gain, do you think?

Mike DeGiglio: Hi, Doug. Good morning. It's really hard to know. There was some indication of that being tracked in Germany, which is not really happening, so we have to really rely on internal numbers. And those numbers have been anywhere from sort of 8% to 15% internally, but I can't really verify it, so probably won't go there right now. But I can tell you that we have 4 of the 10 top strains and with the percentage of growth, I think that outweighs others as far as the growth potential. Ann, do you want to put some color on it?

Ann Gillin Lefever: Yes, I agree. It's hard to quantify. But there's also for us, we do monitor our distribution penetration and we have been growing in locations where we're distributing or where our cultivars are distributed.

Doug Cooper: Okay, that's good color. I guess there's visibility. How do investors view the visibility of growth in Germany? Like, obviously, it's a big part of your growth and margin expansion story. So, you know, looking out into 2027 and beyond, you know, how do we get comfort that they're going to continue to grow as much as they have been?

Mike DeGiglio: I think projections are pretty astronomical over the next 5 to 6 years towards 8,000 tons. So even if it was half of that, it would be a huge upside. And patient enrollments overall are still very low. It's probably in the single digits.

Ann Gillin Lefever: Low single digits. Very low single [ digits ].

Mike DeGiglio: Yes, low single digits. So I think we're very confident that the growth will continue at least for the foreseeable future, at least 5 years maybe more.

Doug Cooper: And do you foresee ultimately getting a footprint in Europe to feed that demand?

Mike DeGiglio: Probably. Talk to you offline on that one.

Doug Cooper: A couple quick ones. CapEx remaining for the second half of '26 and '27?

Mike DeGiglio: We really don't have anything on the front burner right now for CapEx internally. We spent most of the CapEx now, even though we indicated that we're breaking ground on the second half of Delta 2 August 1st. I mean, we procured all the material we need. The Netherlands is fully built out, so there's really nothing right now that we're looking at.

Doug Cooper: Okay, and final one, if I could, just on the produce side, I see, or produce and other, I guess, I see that gross margin expanded to 26% from 11% last year. What do you attribute the profitability? I know it's not a huge part of your business anymore, but just what do you attribute that improvement in profitability to?

Steve Ruffini: Pricing was very strong in Q2, as well as we had strong production and we had strong pricing. So as we've said for years, Doug, it's a commodity-driven business. The demand was strong, in particular in April and May, and we had very good early production out of Delta 1, which I continue to believe is one of the most profitable, or if not the most profitable greenhouse in North America, but obviously everyone else is private. I can't prove that, but someday hopefully we can prove it with campus.

Mike DeGiglio: Yes, and one of the catalysts, real quick, was under the U.S. Trump administration. There's been this suspension agreement with Mexico for 22 years. And that suspension was stopped, which increased the 17% tariff on Mexican imports of tomatoes. So as Steve said, price demand that helped drive that balance better in favor of pricing in the U.S. So that occurred about a year ago and seeing less capacity coming out of Mexico.

Operator: Our next question comes from Frederico Gomes with ATB Cormark.

Frederico Yokota Gomes: I want to go back to margins. Pretty impressive this quarter. You referenced, I guess, your long-term target of 30% to 40% again, but how sustainable do you think those, you know, high 40s margins are short-term especially as you increase the sales mix towards international, maybe reaching that 50% that you mentioned. So, you know, that's number one. And then secondly, obviously, I guess a portion that's not only sales mix, but cost of production. And you mentioned improvements there, but can you maybe just elaborate on that? I mean, what's driving that continued improvement and how can you be, you know, more efficient as you scale?

Mike DeGiglio: Well, there's a number of drivers, but not just on pricing, which we see. For the foreseeable future, we see maintaining our margins in Germany. We feel very confident about that. But we've always mentioned for many years about continuous improvement and continuing to drive our costs down. I mean, that's number one and most prudent. You have to drive your costs down. And this was the first half of this year demonstrated that we are able to continue to drive our cost of production down. That's a factor of yield increases, more efficiency in how we operate. So that showed strongly this first half of the year.

And in our long history of growing multiple crops, there's no end to increasing efficiency. So you have to take that into account. If you look at Canada, I think Canada's become somewhat of a mature market now, 10 years later. It's got single-digit growth. And at some point, the pricing more or less is plateauing, depending on convenience brands, pure flower, but it's not going to have great changes, I think, over the long term. So yes, we feel pretty comfortable. I mean, Steve said, we've always said our target margin is 30% to 40%, but that doesn't mean that we're not going to try to do better as we've demonstrated this quarter. And scale matters.

It's just you can't get around it. The largest, you know, it's ultimately a fixed cost business. The variable component is very, very small, at least on the cultivation side. So the larger you can get, you can really hammer down your cost of production.

Frederico Yokota Gomes: Thank you, Mike. I appreciate that. And then secondly, you mentioned that pricing is maybe plateauing in Canada. Can you comment on how the domestic prices have evolved recently? I know that we talked about how international is maybe benefiting domestic prices, but anything on the recent trend in terms of pricing domestically?

Ann Gillin Lefever: Good morning, Frederico. A couple of things. We are seeing some more supply come back into the Canadian market. We think it's tied to the testing requirements that the international markets have, as well as some crackdown on greenwashing. And so within the flower category in particular and some of the close derivatives, we're seeing a little bit of a mix emerging towards the lowest value segment, which we think is, you know, again, folks using that outlet to raise cash on existing biomass. We're continuing to invest.

We've, as Mike highlighted in the remarks, we've spent a lot of time building into our convenience categories, and so, we see those plus the dominant position we have as flower as a way for us to continue to drive the mix and price in the market.

Operator: Our next question comes from Pablo Zuanic with Zuanic & Associates.

Pablo Zuanic: Congratulations on the very strong export numbers. The first question, Mike, and I think we've talked about this before. You know, if you can give more color about your route to market in Europe, or is it pretty much an FOB model in which you sell to distributors and they take care of the distribution and sell into pharmacies? Or color in terms of how your company is involved in that selling effort. That would help. And by the same token, you know, whether at some point you see opportunities to sell branded product there.

Now the second part of the question is, as you expand your scale and your capacity, does that model hold, or do you need to invest in downstream assets to gain more control over your distribution in Europe.

Mike DeGiglio: On that branded question, I would say absolutely. As I said, we know our strengths, we have 4 of the top 10. So our brand is in work, that is part of the future. So absolutely there. As far as downstream, yes. You know, we sat back and watched what others have done. If you really look at, say, Germany as an example, going back 8 to 10 years, the evolution is pretty incredible from Malta to Portugal to others building small assets in Germany. We don't think they've ever made money. So we've watched all this capital over many years being spent with really no return. And now, of course, the GACP magic wand approach is not really working.

As Ann mentioned, that's why we see more capacity in the Canadian market, because this is a pharmaceutical-grade cannabis product, and the regulators are coming down on those who can't meet that uniform criteria as EU GMP and that we've never strayed away from that. So, to answer your question, as we sat back and looked at the landscape, who's developing, we've looked at valuations, for example, in some cases. We puked when we saw some of these ridiculous valuations. We're taking our time, but I would say yes, we see ourselves being much more vertically integrated in the European theater going forward for sure. Yes, and as far as your first question, what was your first question? I'm sorry.

Ann Gillin Lefever: I'll jump in.

Mike DeGiglio: No, no, go ahead. Go ahead, Ann.

Ann Gillin Lefever: Pablo, you asked about our route to market specifics. And I just want to roll back a little bit and say right now the playbook in international is not unlike how we set up in Canada. We were initially very much B2B oriented. And then as we got the, essentially the cost of goods sold right, the COGS line, we started to invest in the SG&A. So I think you should expect us to do that. We have great distributor partners around the world, frankly. And we've stayed focused on getting the best quality product into the market as our first step.

Pablo Zuanic: Yes, no, no, that's great color. Thank you. And I'm sure you're hearing the Curaleaf conference call. They mentioned you're a key supplier of theirs. I don't think that's already happening or it's in the future, but congrats for that. Look, on the same topic, when I try to think of your $21 million number for the quarter. I mean, in very simplistic terms, I would call that an FOB number. And what some of your peers, larger Canadian peers report, it's pretty much landed almost to pharmacy number, right? So the numbers are not comparable. I mean, I don't know if we have a way to calculate this, but are you really the largest Canadian exporter by volume?

Or am I exaggerating there?

Ann Gillin Lefever: We think we are the largest Canadian exporter by volume.

Pablo Zuanic: Okay, thank you. Look, and the last question, moving on to Texas, with the 12 licenses already issued, provisional licenses, is that door pretty much shut? Is that window for Village Farms to win a license through the process, is that window shut? And the only option for you to enter Texas is by buying one of those drug licenses?

Mike DeGiglio: I would say no. I mean, first of all, as you pointed out, these are conditional licenses. They're not licenses yet. And there's a lot of noise out there of what people are doing. And we know Texas well, so one, to answer your question, I don't necessarily think that it's 100% sure we won't get a license. If you, we've spent a lot of time and done a lot of homework on who received them. And I think it's still yet to be determined what the final number of those licenses will be. But I can't say one way or another we plan to be in Texas and just kind of leave it at that at this point.

Pablo Zuanic: Thank you.

Mike DeGiglio: Thank you, Pablo.

Operator: That concludes today's question-and-answer session. I'd like to turn the call back to Mr. DeGiglio for closing remarks.

Mike DeGiglio: Thank you everyone for participating in today's second quarter call and we very much look forward to reporting come November for our third quarter. Have a great week. Bye.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.