Village Farms International, Inc.

Good morning, ladies and gentlemen. Welcome to the Village Farms International second quarter 2025 financial results call. This morning, Village Farms issued a news release reporting its financial results for the second quarter ended June 30th, 2025. That news release along with the company's financial statements are available on the company's website at villagefarms.com under the investor setting. 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 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 are 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, 2024, and 10-Q for the quarter ended June 30, 2025, which will be available on EDGAR and CDAR+. 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 such statements. I would now like to turn the call over to Michael DiGilio, Chief Executive Officer of Village Farms International. Please go ahead.

Well, thank you, Tanya. And good morning and thank you for joining us today. With me are Steve Ruffini, our Chief Financial Officer, and Gillen Lefevre, our Chief Operating Officer, Patty Smith, our Corporate Controller, and Sam Gibbons, Senior Vice President of Corporate Affairs. I'll begin with a brief summary of recent events and our second quarter highlights, and then I'll hand the call over to Steve before some last closing comments. The second quarter was transformational. It was a transformational, quarter for Village Farms, just to be clear, operationally and financially, with record levels of profitability that demonstrate the improving earnings power of our business and continued success in scaling a profitable global cannabis enterprise. During the quarter, we announced and then quickly closed a transaction to privatize about one-third of our produce assets and operations through the formation of a new partnership with proven private investment partners. Most on this call are familiar with the details of the new Vanguard partnership, and they are available in our various communications and filings, so I won't repeat them here. But I do want to take the opportunity to reiterate what all this means for Village Farms, our future prospects, our partners and team members, and of course our shareholders. First, we believe we have dramatically improved the long-term upside potential of our 36-year legacy in the produce industry as a private company with access to significant financial resources that will add additional acquisitions in the future. Our commitment and experience partners have created significant value for their shareholders in the past, and we are positioned to participate in this renewed opportunity throughout near 38% equity ownership interest. Second, we believe Village Farms has transformed into one of the most attractive platforms for revenue growth and margin expansion across the global cannabis industry. With proven operational capabilities, we can now focus on our various cannabis opportunities around the world. Third, the transaction generated 40 million in cash proceeds further strengthening our balance sheet, which along with our improving cash flow generation profile, we will support additional growth investments across the platform. And finally, our shareholders and prospective investors can now see the improving earnings potential of our remaining global cannabis business, which significantly improved forward visibility into our financial performance that is evident in our second quarter results. Before I get into the second quarter highlights, I want to make clear that the strength of our Q2 performance is not simply a result of us privatizing our produce business. The closing of that transaction has happened to coincide with several other powerful catalysts, including our recent commencement of sales in Holland's adult use market, success of recent initiatives to align our product portfolio in Canada towards higher margin SKUs, And finally, a continuing wave of additional countries around the world following Canada's lead with pragmatic approaches to regulating cannabis. All of these events are coinciding with near impeccable timing, yet it is the competitive strengths we've established over 36 years in controlled environmental agriculture that we are leveraging to deliver as one of the world's largest and most trusted scaled cannabis operators. So now I'll shift to a review of our second quarter highlights, which I'll focus on our performance from continuing operations, excluding the impact of the gain of our sale of produce assets during the quarter. As we disclosed in this morning's press release, second quarter results reflected record levels of profitability for the company. And not just record since we expanded the cannabis in 2017, but record performance in our near 20 year history as a publicly traded company. While consolidated sales increased 12% year over year, consolidated net income from continuing operations improved to 9.9 million, or nine cents per share. Adjusted EBITDA from continuing operations was 17.1 million, or roughly 29% of sales, both of which reflect record performance and improved sustainability from Q2 of last year. And adjusted EBITDA margin was up over 2,300 basis points. In our flagship market in Canadian cannabis business, retail branded sales in Q2 were in line with our expectations given our planned reduction in several low margin domestic SKUs. We are not yet seeing the types of price increases that one might expect given the changing supply dynamic in the retail market, but we have been pleased to see stronger contribution margin from our retail branded sales in Q2, which demonstrates the success of our recent margin improvement initiatives. In our wholesale channel, we continue to be optimistic in the contents of our focus on profitable sales. Q2 wholesale sales were consistent with the levels of last year or so. However, gross margin on these sales were up significantly on a year-over-year basis, as we believe supply and demand dynamics are driving more favorable outcomes in the wholesale channel. These dynamics resulted in another quarter of improvement in overall Canadian cannabis gross margin, which was at the top of our target range at 39% and our best quarterly gross margin in three years. We now deliver two consecutive quarters of gross margin within the targeted 30 to 40% range, and we are optimistic about our ability to sustain gross margin at the upper end of this range for the foreseeable future. Continued growth in Q2 was driven mainly by the successful execution of our international growth strategy. International exports increased almost 700% year over year, and we're up over 120% sequentially from the first quarter. We have proven that our international model works, and we are now scaling it with purpose and precision. At just the halfway point of the year, we have achieved our full-year target of tripling out 2024 international export sales. And given continued strength in the third quarter, we expect similar levels of sales through the remainder of this year as compared to the first half. International prescribers and patients are constantly choosing our flour, and we are seeing a strong preference for many of the strains that have been our most successful in Canada. During Q2, we increased deliveries to existing customers and also onboarded several new partners. Most of this growth is being driven by continued strength of demand from Germany, along with further increases in the UK and steady performance across our other markets. Despite recent headlines about Germany's proposed telemedicine reforms potentially limiting growth, our sales in Germany are to partners operating within a traditional pharmacy network, and we do not currently work with any telemedicine platforms. We have not experienced any impact to existing patients or disruption with our pharmacy model customers and distributors. I would also note that recent measures in Portugal to implement more stringent standards are also not impacting our business. We have been pleased to see more effective enforcement to ensure product quality coming through this channel into Europe, which has contributed to our improving position as one of the world's premier providers of consistent and trusted sources of quality product. Operational integrity and adherence to import standards are core to our success internationally. And I'm pleased to also report that we passed our recertification inspection in July for GACP and certification inspection against revised Israeli medical cannabis good agricultural practice requirements. These are in addition to our EU GMP certification and will enable us to continue exporting bulk flour to Israel and continue to provide additional GACP flour and GMP finished product to international customers. We also benefit from our first quarter of recreational cannabis sales in the Netherlands, where we are seeing strong momentum as our phase one facility has begun to reach its full operational capacity. We now have product in 66 of the 80 participating coffee shops, reflecting a marked penetration of 82.5%. And we're consistently hearing that Outflow is earning preference with such consumers. The Holland market will be an incredibly exciting one for the company where new opportunities will emerge, the realms of product innovation and consumer experience in coffee shops. With a rich history of legacy in the cannabis industry, we are pleased to have the opportunity to participate in this dynamic market and look forward to launching additional products during the second half of the year, beginning with the launch of our hash offerings during the third quarter. We are also making steady progress on our stay in the yard phase two facility in the Netherlands, which we expect to be operational during the first quarter of next year and will quadruple our annual production capacity, helping drive continued profitability growth in 26 and beyond. We'd like to thank all of our global business partners for the continued trust and support of Village Farms. We are looking forward to continued success together in the years ahead. So given the improving performance of our business, increasing demand in Canada, and from international partners, our strong cash position, we announced last week that our board of directors has unanimously approved the conversion of the remaining 550,000 square feet of our Delta II greenhouse in British Columbia to cannabis cultivation. This equates to about 40 additional metric tons of annual production once fully ramped. And as we always have, we will continue to prudently monitor demand as we onboard new supply and carefully match our allocation of inventory with profitable sales. Physical conversion is expected to begin in November this year with the first planning of new grow rooms expected this coming spring. The additional capacity will come online in phases with a target for the full 550,000 square feet to be in full production by the first quarter of 2027. The total investment for this expansion project is expected to be approximately 10 million Canadian dollars and will be funded through cash on hand and ongoing operational cash flows and will be incurred mainly in 2026. Given the improvement profitability profile of our business and our visibility into continued strength of demand from our international partners, as well as improving supply and demand dynamics in Canada, We believe this expansion will provide a substantial return on our investment. In stark contrast to the majority of our peers, our team has a proven track record of consistently matching our supply with demand from both our Canadian and international customers. And given our prudent and disciplined approach to CapEx, there is no clearer indication of our confidence in the future of our cannabis business than our decision to make this investment. We have always taken a crawl, walk, run approach to scaling our business. Our facilities and grow rooms have been designed to vary production capacity relatively quickly. We have also always enjoyed the strategic advantage of already owning our advanced greenhouse assets in the United States and Canada through our legacy in the produce business. This has helped us be more efficient with our capital than many operators who build their facilities from scratch. And we've also benefited from having an existing labor force in our greenhouses, which has been another important strategic advantage that limits execution risk when we convert additional growing space to cannabis. So in summary, we are growing organically, profitably, and generating positive free cash flow. And the strength of our balance sheet and asset portfolio is enabling us to make additional growth investments that we believe will drive strong returns for shareholders. So this concludes my initial prepared remarks, and I'll turn the call over to Steve to review financials before I make some closing remarks. Steve?

Thanks, Mike. With the produce privatization transaction closing on May 30th, some of our produce assets were privatized and are now classified as discontinued operations. The reported financial results for comparative prior periods have been adjusted accordingly. Our ongoing investment in the new produce partnership is recorded as an investment on our balance sheet, and the operational results of the produce partnership are not included in our financial results. We recorded a gain on the sale of these produce assets net effect of $19.1 million during the quarter. Results from continuing operations are composed of our cannabis and clean energy businesses, neither of which neither of which changed following the transaction, as well as the results of our Canadian produce operations that we retained. I'll start with a review of our consolidated results. Consolidated net sales increased 12% to $59.9 million, mainly due to growth in our Canadian cannabis segment and the first full quarter of sales from our recreational cannabis sales in the Netherlands. The increase in sales was matched by improved profitability across all segments. On the continuing operations basis, net income improved to $19.9 million or $0.09 per share compared to a net loss of $16.6 million or $0.15 per share in Q2 of last year. Consolidated adjusted EBITDA from continuing operations excluding our gain on sale was $17.1 million compared with $2.9 million in Q2 of last year, our adjusted EBITDA margin of 28.6% of sales compared to 5.4% of sales in Q2 of last year, which, as Mike mentioned, is a record performance for the company. Turning now to our cannabis businesses, I will start with our Canadian cannabis segment, which I will discuss in Canadian dollars comparative purposes. Total net sales were 61.4 million for a 10% increase versus Q2 last year, driven mainly by the very strong growth in international sales as we continue to take share in these growing markets with increased sales from existing customers as well as contributions from onboarding several new customers. Export sales to our five international medicinal markets increased 690% from Q2 last year to $16.6 million and are now roughly one half the size of our retail branded sales net of excise tax. As Mike stated, we have hit our full year target of tripling 2024 international export sales just halfway through the year. With our focus on profitable sales, our Canadian retail branded sales were 20% lower than Q2 last year $34.5 million, however, with an improved gross margin as we have realigned our SKU portfolio toward higher margin opportunities. Canadian cannabis gross margin was 39% up from 26% in Q2 last year and at the high end of our target range of 30 to 40%, which provides clear evidence of success in both growing higher margin international export sales and our focus on higher margin products in Canada. Our success in expanding gross margin combined with a small year-over-year decrease in SG&A expenses drove significant improvements in the profitability of our Canadian cannabis segment. SG&A expense as a percentage of sales was 19% compared to 22% last year, primarily due to continuing efficiencies throughout our Canadian cannabis operations. Q2 adjusted EBITDA for Canadian cannabis improved 150% year-over-year to our strongest performance in six years at $16.5 million, resulting in an adjusted EBITDA margin of 27%, which was more than double the 12% last year. Cash flow from operations decreased 233%, $18 million, our strongest quarter of operating cash flow we expanded into Canadian cannabis in 2017. Finally, as we do each quarter, I will highlight that in Q2, we paid Canadian excise taxes on retail branded sales of 20.5 million, nearly 40% of retail branded sales and almost double our SG&A. I will note, however, that the lower retail branded sales in Q2 as compared to last year resulted in lower excise taxes, which also contributes to our stronger profitability. Turning now to our recreational cannabis business in the Netherlands, Q2 saw our first full quarter of sales from our Lely Holland operations. Sales were $2.5 million and adjusted EBITDA was $1.2 million, which are firmly in line with our expectations. Our phase one facility has now reached its full operational capacity, so we expect revenue performance from the Netherlands to be similar in Q3 and Q4, with similar profitability until the end of Q4, when we do expect to increase operating expenses ahead of the commencement of operations in the phase two facility, which will be coming online during the first quarter. Our U.S. cannabis business, with Q2 sales of 3.8 million, continues to reflect the impact of various state actions trying to deal with the unregulated hemp products by restricting all intoxicating hemp-based products. We did, however, see gross margin improve year-over-year to 63%, which benefited from the internalization of our gummy production, resulting in a small positive adjusted EBITDA for the quarter. Having been successful in our efforts to stabilize this business within the regulatory headwinds, we are working on a number of initiatives to reinvigorate sales of our responsible GMP-produced natural hemp products. In our remaining produce segment, sales increased 2% to $8.6 million. Our produce operations to Q2 and through the remainder of this year reflect contributions from our Delta 1 greenhouse and half of our Delta 2 greenhouse. The greenhouse tomato crop will be pulled in November at the end of its life cycle to commence our conversion to cannabis production for the entire Delta II facility. Net income from continuing produce operations improved to $4.3 million from a loss of $1.3 million and adjusted EBITDA from continuing produce operations improved to $6.4 million. Both of those figures include a $4.3 million vendor settlement related to previous operating losses incurred by our continuing produce operations. Our Canadian produce business is seasonal. Historically, the Delta produce assets report their highest revenue in EBITDA in the third quarter of each calendar year. We will continue to maintain our Permian Basin Texas greenhouse, and while not operational at this time, it is reported as part of our continuing produce business segment. Turning to consolidated cash flows in the balance sheet, total cash flow from operations was $22.3 million in the first six months of the year. Our free cash flow during the first six months, including all our CapEx and debt service payments, was $12 million. With $40 million in proceeds from the privatization transaction, we ended QQ with cash of $65 million with a net cash position of $29 million. Our total debt at the end of Q2 was $39 million, but as noted in our 10Q this morning, we paid down $3 million U.S. of our term debt as part of our produce lender's approval terms for the profitization transaction in August. During the quarter, we refinanced our cannabis loan, consolidating the three previous loans into a single credit facility with two existing lenders. The new facility has a variable rate which is currently below 6% which reflects a 250 basis point improvement over the previous facilities with additional improved financial covenants and now matures in February 2028. In closing, our Q2 results demonstrate the improving earnings of our power of Village Farms and our enhanced balance sheet liquidity easily supports our growth investments beginning with our existing capacity expansion projects in both the Netherlands and Canada. I'll now turn the call back to Mike. Thanks, Steve.

So my closing remarks, once again, our Q2 results reflect an exciting beginning for Village's next chapter, which is one we believe we can generate significant value for our shareholders. For anyone listening, today's call may be new to our story. I'd like you to know that I am firmly aligned with our shareholders as I remain Village Farm's founder and largest shareholder, and we are intensely focused on protecting and enhancing our shareholder interest. We have been hypersensitive to dilution, and we moved mountains recently to avoid a reverse stock split and retain our compliance with NASDAQ's listing requirements. And by the way, we've done this twice in the last two years without any share consolidation, and now our future has never looked brighter. I encourage anyone new to our story or our industry to take a look at our comparison of shares outstanding compared to our peers over the past several years. I think you'll find it pretty quickly that we take our fiduciary responsibility to our shareholders quite seriously. In closing, we have transformed our company into a powerful global cannabis platform with a proven team of cannabis leaders, an unmatched portfolio of assets, a track record of operational success, steadily expanding exposure to both international medical and recreational markets, and the tremendous upside potential from our ownership position and our private equity-backed produce partnership, an expansive US-based greenhouse assets and operations. While we are currently benefiting from multiple catalysts unlocking value for our stakeholders, but we also see significant potential for additional long-term value creation through these additional pathways to value creation, which provide investors with a unique upside potential in an investment opportunity. We have retained full control of Canadian greenhouse assets in Delta, British Columbia, as well as our Permian Basin facility, as well as optionality of one of our Marfa greenhouses should future cannabis market optionality in the U.S. or the state of Texas occur. We're excited about continued momentum in the U.S. cannabis policy and look forward to having a larger role in this market in the future and optimistic that our track record as one of the longest tenured operators in the Texas agricultural industry and the regulated cannabis industry that we are positioned well to replicate our success in Canada, in the US, in the future. Our retained greenhouse assets in the United States and Canada represent a combined incremental 4.2 million square feet of owned advanced greenhouse assets for future expansion potential in cannabis. These critical strategic assets provide a clear runway for us to continue replicating our proven success in operating at scale globally and considerable expansion capacity compared to our current 2.3 million square feet of operational capacity today. Also, not to mention the fact that we are operating and growing this business without violating any federal regulations in the United States. and are already a NASDAQ listed company that satisfies its tax obligations and generates positive free cash flow and net income. Finally, I would like to take a moment to thank and congratulate our fantastic team members on their recent achievements and the progress they've continued to make to enable our success. None of this is possible without their determination and focus. We've assembled a world-class team of experts in all areas of our business, and right now they are firing on all cylinders. We are a global multicultural organization with team members on the ground in the United States, Canada, and Europe, and servicing an increasingly complex global supply chain with a growing list of strong international partners. And we are all energized by the many upside opportunities that we see in front of us in virtually all aspects of our business. We are proud to be part of an emerging vibrant global cannabis ecosystem, proud to be leveraging our 36 years in highly intensive technology-driven agriculture to become a partner of choice in the cannabis community, and proud to be in a leadership position that is enabling us to self-fund our first and now second state-of-the-art cultivation facilities in the Netherlands, as well as the additional 40 metric tons of annual cultivation capacity to serve our Canadian international customers. Our improving fundamental financial performance from our existing operations, combined with the expansion of our cultivation capacity in Canada and the completion of our phase two facility in the Netherlands, positions Village with a clear pathway to continued revenue growth and margin expansion in the years ahead. That concludes our prepared remarks, and operator, we'll turn it over to you for any questions.

Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile our Q&A roster. Our first question will be coming from Aaron Gray of Alliance Global Partners. Your line is open, Aaron.

Hi, good morning. Thank you for the questions, and congrats on the strong quarter on all fronts. Alex Macmillan- um first question for me just want to speak to your decision to expand, you know delta to facility obviously speaks to your confidence in the market opportunities. Alex Macmillan- So you know, based on the quarter obviously it appears, a lot of this was driven by you know potential international market opportunities. Alex Macmillan- But if you could offer some more color in terms of you know what went into this is, I know something you've you know been you know thinking about for some time so. Is it more so a combination of what you're seeing on the international markets also wanting to maintain where you hold within the Canadian market today? Is it more your branded sales versus B2B opportunities? Then maybe more broadly in terms of pricing expectations that you're seeing going forward for the next two years, given it won't be coming online until 2027 for a full ramp. Thank you.

Thanks, Aaron. Look, for one, it's a very low dollar investment for us. So we're not building new assets. Our business is model was predicated on converting existing assets. So this is not like we're going out and building a new $100 million facility. This is a $7 million US investment. The asset is there, and we're just converting it to cannabis. So that risk and investment is fairly low for us. Secondly, the way we've designed our facilities, we have many, many separate grow rooms. So with that, we can alter the amount of capacity coming out. We can decrease grow rooms by three, four, five. We can increase it. And we've demonstrated that we've always been prudent with matching supply with demand, unlike many others. And you've seen that oversupply in Canada, which is really, you know, from the smoke and mirror days of Canada back in 2019 and 20. Uh, we were never really caught up in that. So we're not really worried about it. There's always ebb and flow to supply and demand and we can adjust accordingly. Uh, right now though, we're not fulfilling our commitments. We have, we're probably leaving, uh, around $50 million of revenue on the table right now. So we have to, you know, we have to manage our business and fulfill our customer needs. Um, and, uh, we're not concerned with the risk of being in an oversupply position.

That's really helpful color there. Thank you. And on that front, you know, I will switch to international, you know, for a bit really strong quarter there, you know, coming in above your expectation, your expectations already hitting the mark for tripling for the year on the first half. Um, so maybe just some more color in terms of, you know, some of the strong drivers, you know, in two Q for international, I think you mentioned Germany was a standout also, uh, within the UK. And then for the back half, I think you said 2H would roughly, you know, match 1H. So maybe speaking towards what you just alluded to in terms of having to allocate, you know, some products, is that just your need to maybe manage to why, you know, maybe it doesn't hold to the 2Q rate but, you know, holds to the 1H rate in 2H? So just any kind of comment on what drove 2Q and the expectations for 2H for international? Thanks.

Okay. I'm going to let Ann comment. Go ahead, Ann.

So I think we did – purposely say Germany and UK and onboarding new customers has been the driver where you know our growth aligns with where the growth of international markets is is hottest so we're there and the team has done a great job of working very closely with some trusted distributor partners that we've been working with for some time and You know, I think it's also important that, you know, Canada is really leading this initiative, Canadian LPs, and we're proud to be part of that group. Your second question with respect to outlook, you know, we're geared up for continued growth. You know, we're not going to guide as to what it's going to be. We were obviously off on our first half guidance. But the one thing I would just say is it's an area where a lot of folks are getting involved. And so we're going to continue to participate in the growth of the market. And there will be others that we know are adding capacity to be there with us. So that's important. And then concurrently, we'll continue to support our retail partners in Canada. That's a critical and very much an important channel for us as well. Okay.

Really appreciate the call there. I'll jump back into the queue. Congrats again on the quarter.

And our next question will be coming from Doug Cooper of Beacon Securities. Your line is open, Doug.

Hey, good morning, everybody, and terrific work on the quarter. Steve or Mike, I just want to confirm the numbers by segment, if I could. So Canadian cannabis, 11.9 million U.S. of EBITDA. Let's call U.S. cannabis small positive. The Netherlands... 1.2 million U.S. That gets me 13.1. You announced 17.1 of EBITDA. So I guess the question is, what was it? Vendor settlement, 4.3 million. Do I exclude that? I'm assuming I exclude that on an ongoing basis. So that would imply EBITDA from the produce sector in Canada was 2.1 million?

Well, the... The adjusted EBITDA from continuing operations for produce was 6.4, and it includes the 4.3, because the venture settlement was higher losses from those continuing assets. All of our greenhouses experienced the Brown-Ragos, and this settlement pertained to the assets that we retained.

But that's non-recurring, correct?

That's Non-recurring, but I also said that these assets that we've retained generally have their highest revenue and highest EBITDA in the third quarter.

Right. Okay. So, Justin, maybe you can just, in general then, if we're looking to model the company out, it just has, you know, going forward, it's just going to be D1, essentially, right? So, on an annual basis, you expect that to be...

In 2026, yes. For 2025, EQ is a positive EBITDA contributor to our business.

Yeah, I'm just thinking about 2026. So 2026 and beyond, this is a net income positive business on an annual basis, correct?

Yes.

Okay. Yes. Okay.

Every year, but it's a gross year. Okay.

Yeah. And... As well, the $9.9 million of profit, that's pre-tax, correct? Yes. Okay, and that also includes the settlement gain, correct? Yes. Okay. I just want to touch on maybe just what Aaron talked about. Just in the Canadian cannabis market, we've seen a number of your competitors continue to... report revenue down year-over-year in the Canadian cannabis rec market. Who's left? Maybe that speaks to, Mike, your positive supply-demand dynamics that you referred to.

Well, Doug, my mom always said if you can't say anything good, don't say anything at all, so I'd rather not talk about our competitors.

Okay. Maybe just a comment about the dynamics, how the Canadian rec market dynamics look right now. Like,

The $40 million of excess. I'll let Anne talk.

I'll help you out here, Doug. So funny enough, even though we've seen pricing strengthen in the wholesale markets for well over a year now, we're only seeing it stabilize, which is good news in the Canadian retail environment. But we're not yet seeing pricing at the retail market level, which tells us there's still plenty of supply or suppliers to the market who are probably trying to, you know, take cash proceeds out or take market share. I think it is fair though, that, you know, among those that are reporting, you are seeing improving profitability. You're seeing folks focus on the, the portfolio and where they're making profits versus not. And I think that's, you know, to use a, An adage, you're starting to see the cream rise to the top within the Canadian producers. So, you know, I think there's a lot of good players that we respect. We love, you know, having that group with us in the market. And, you know, I think if we can just start to see some normal market dynamics, supply, demand, you know, and price respond, I think that'll be a positive thing. And I think that's important as Canada continues to lead the global market.

Okay. Just as we look forward into 2026 or 2027, international sales is a percentage of total Canadian cannabis revenue. Would you think it looks somewhat similar to what you just reported in Q2? Or what do you think this Q is not included in the Netherlands business?

I would say easiest bet is to say it could be where it is. You know, the challenge is that the growth is still a little bit hotter overseas than in Canada. So keeping pace with market growth or exceeding it would mean you'd kind of have a similar mix in 2027.

If I could add some color, I mean, you know, you have to at some point, Canadian LPs have to be profitable. I mean, the day is going to come when you're measuring fundamentals And you just can't keep raising capital and continuing to fund operations. Like any other normal business, you have to be profitable at some point. So the question is how long can they go continuing with ATMs and so on to continue to flourish or continue to exist, I should say. So who knows what the next couple of years, the dynamics will be in Canada. We'll have to wait and see.

Okay. Just on the balance sheet, obviously a tremendous improvement there. Are you seeing any M&A opportunities, whether it be in the Netherlands or Canada?

Well, first of all, we are so proud that we are predominantly growing organically. We always have everything we're doing on the international markets we've done organically. We haven't purchased any companies to get where we are in international today, because I think it's easy for companies to purchase a company and then, you know, spend a huge amount on M&A and then be able to say, well, you know, I'm number one market share. I have these revenues. We don't do that, but that's not to say that M&A isn't on our list. It would have to be very accretive or very strategic. And so far we continue to, uh, not see that happening i think you know we're the partner of choice for a lot of the european companies we're working with uh so m a is not off the table uh certainly in the netherlands uh if we look at the us i think m a will play a role in the us when and if we can enter that market uh but right now in canada unless there's a very strategic reason tied to maybe technology or something else. I just don't see us looking at that in the near term.

Okay. Final one from me just on, you know, market looks to be up significantly this morning based on some reporting that de-scheduling is sort of returning to favor in the U.S. administration. Um, thoughts on that and thoughts on what the implication is for your Texas greenhouse that didn't, that remains in the portfolio.

Well, look, you know, the largest market in the world is the U S and, uh, I think everyone is feeling the momentum today. It's not if it's just when, and, uh, we have worked very hard. the last couple years to continue to look at option A, B, and C for our entry point to the U.S. outside of what we're currently in, which is on the cannabinoid side because that is legal and accepted by the NASDAQ. You know, Schedule 3 comes, I think it's a stepping stone to safe banking. I still believe that a lot of the U.S. model is experimental. And what I mean by that is if it changes and at some point even interstate commerce occurs, I think at that time, large scale, low cost, just like the winning formula in Canada and other places has to prevail. So I think there'll be a change in the market. Again, with our Texas assets, you know, to go out and spend hundreds of millions of dollars to build the capacity we currently have the optionality on, We're ready to go there, whether that's a stepping point in Texas. And Texas alone could be a very huge market as our entry point. And as I said earlier, M&A's on the table for the U.S. market. But we, you know, the timing, like we were very frustrated with the last administration making campaign promises and doing nothing. But on the other hand, you know, the timing really worked out for us because it continued to strengthen our position in Canada as a top tier player. And more importantly, it allowed us in those last few years to have a footprint in the first adult use recreational market in Europe, which we could leverage up that into other countries in the future should they go REC. it allowed us to take a very commanding position in the international medicinal market without being diluted on our U.S. strategy. So that foundation is in place now. We just got to keep executing and building upon it. And the timing is actually better for us as the U.S. looks to open up. So we feel, from a timing perspective, we're in a very good place.

Thanks, Mike. And just to be clear, the U.S. federal rescheduling Does that have to follow suit in Texas, or can they somehow opt out of that?

Well, it's interesting. You know, Texas, as the Republic of Texas, they do have a mandate that they have to follow federal guidelines. So, you know, it's been kind of nebulous, for lack of a better term, in Texas these days. But they do have to follow those guidelines. And, you know, there's going to be a lot of – a lot of swinging going on till it stabilizes in the next couple of years. So Texas would have to follow that. And the other thing on de-scheduling to three as medical, it could open up the doors for us to export medical marijuana from Canada to the United States, which is a whole other conduit that no one else is really thinking about right now. So yeah, we think we're in a good way. So, but for Texas, we love Texas. We've been there, as I said in my remarks, 20 years. We'll see what happens with the teacup licensing here in the next month. So, and, you know, we've always been patient. And I think that's one of the virtues of villages. We're patient. We don't react to, we know what the game rules are, what the regulations are. We're not here to waste money and have sunk costs. So, yeah, I feel like we're in a good position, be it Texas or the U.S. as a whole. Great. Thanks very much, Mike. You're welcome, Doug.

As a reminder, to ask a question, please press star 11 on your phone and wait for your name to be announced. Our next question will be coming from Frederico Gomes of ATB Capital Markets. Your line is open.

morning thanks for taking my questions congrats on the great quarter here um first question on your um canadian cannabis growth margins uh very strong there i guess in the high end of your 30 to 40 range but uh do you think there is upside to those margins you know considering what you're seeing international uh you know could we be at a point here where we could see your target range moving above that 40 level thanks

With the few mix and the customer mix, it's possible. With respect to some markets, we believe could be more lucrative like the UK. Again, that's an emerging market and we'll see, but that certainly is possible. We could be reporting higher numbers.

I would also just say that as we add unit volume to our existing footprint, that improves our cost base. And so you're seeing some of that in the margins as well. And the team on the ground has worked very hard on continuous improvement as well. So those are also contributing. And just the last thing I would add is the price equation in some of our newer markets is still settling out and so I think we're being prudent by just keeping this price this gross margin range as we know the story of Canadian cannabis price compression and we're prepared for it thank you appreciate that and then just talking about growth I guess for the second half of this year I guess just

you know, thinking that you're seeing more demand than you can supply at this point, which I think is a good problem to have. But in terms of drivers for growth in the second half, how should we think about that? Thank you.

Well, I think the second half we feel, you know, we just don't want to get ahead of ourselves. That's the main thing. So we're basically saying that for the remainder of the year, we think we'll be tracking pretty similar and with maybe the exception of Lely, who's continuing to ramp up. As you know, we just got in production. We're approaching fully ramped up and diversifying the SKUs there. So we think we'll see continuous growth there, and coupled with quadrupling our capacity for next year, we see that as a strong ramp up internationally. But I think right now we're pretty... pretty constrained for anything more than we've seen in the first half.

Thank you very much. Thanks, Federico.

I would now like to turn the call back to Mike for closing remarks.

Well, thanks, everyone, for participating today. We really appreciate listening to our second quarter results. We are excited about the future and very much look forward to further communication and reporting out the third quarter here in November. Thank you, operator.

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