Q2 2024 Village Farms International Inc Earnings Call

Unknown Executive: Thank you. Good morning, ladies and gentlemen. Welcome to the Village Farms International second quarter 2024 financial results conference call. This morning, Village Farms International issued a news release reporting its financial results for the second quarter ended June 30th, 2020. That news release, along with the company's financial statements, is 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 completion of the call. Details of how to access the replays are available in today's.

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Speaker Change: Good morning, ladies and gentlemen. Welcome to the Village Farms International's second quarter 2024 financial results conference call. This morning, Village Farms issued a news release

reporting its financial resorts for the second quarter ended June 30, 2024. That news release, along with the company's financial statements, are available on the company's website at VillageFarms.com under the Investors heading.

Operator: 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.

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.

Unknown Executive: Before we begin, let me remind you that forward-looking statements may be made today, during, or after the formal part of this conference. Certain material assumptions were applied in providing these statements, some 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 these forward-looking statements. A summary of those 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, M, D, and A for the year ended December 31, 2023, and 10-Q for the quarter ended June 30, 2023, which will be available on Edgar and Cedar Platte.

Speaker Change: 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, 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.

Speaker Change: a summary of those underlying assumptions risks and uncertainties is contained in the company's various securities filings with the sec and canadian regulators

Speaker Change: including its Form 10-K , MD&A for the year ended December 31, 2023 and 10-Q for the quarter ended June 30, 2024, which will be available on Edgar and Cedar Plus.

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

Speaker Change: those forward-looking statements are made of today's date and except as required by aapplicable securities law we undertake no obligation to publicly update or revise any such statements

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

Michael DeGiglio: Thank you, Tonya. Good morning, and thank you for joining us today. With me are Steve Ruffini, Chief Financial Officer, and Gillin Lefever, Chief Operating Officer, and Patty Smith, Corporate Controller. So Q2 is another strong quarter for Village Farms, with record consolidated sales driven by Canadian Cannabis, which reported a new quarterly sales record, and Fresh Produce, which tied its second-highest quarterly sales in the last five years. I'm very pleased with the continued growth in Canadian cannabis, which is broad-based across our brand's form factors in geography. Total net sales grew 45% year-over-year, all organically, without acquisitions, to $56 million; branded retail sales grew 35%, and we were once again profitable with positive cash flow from operations of $7.2 million Canadian dollars.

Michael DeGiglio: Thank you, Tonya. Good morning and thank you for joining us today. With me are Steve Ruffini, Chief Financial Officer, and Gillian Lefevre, Chief Operating Officer, and Patty Smith, Corporate Controller.

Speaker Change: So Q2 is another strong quarter for Village Farms, with record consolidated sales driven by Canadian Cannabis, which reported a new quarterly sales record, and Fresh Produce, which tied its second-highest quarterly sales in the last five years.

Michael Regan: I'm very pleased with the continued growth in Canadian cannabis, which is broad-based across our brands, form factors, and geography. Total net sales grew 45% year-over-year, all organically, without acquisitions, to $56 million.

Speaker Change: i'm very pleased with the continued growth in canadian canadabis which is broad-based across our brands form factors and geographies

Speaker Change: total net sales group forty-five percent year-over-year all organically without acquisitions to fifty six million dollars

Speaker Change: Branded retail sales grew 35% and we were once again profitable with positive cash flow from operations of 7.2 million Canadian dollars.

Michael DeGiglio: In Q1, we noted that we had the fastest growing market share of the top five Canadian LPs. In Q2, we were the only top five producer to grow market share, the only one. We are now less than two percentage points from the number one market share ranking. Unfortunately, our market growth is diversified across leading brands, multiple cannabis form factors, consumer segments, and anti-aggressions. So let me give you a few examples which show the depth of this, with the fastest growing producer and pre-rolls year-to-date.

Speaker Change: In Q1, we noted that we had the fastest growing market share of the top five Canadian LPs. In Q2, we were the only top five producer to grow share, the only one.

Speaker Change: We are now less than two percentage points from the number one market share rank in Canada. Importantly, our market growth is diversified across leading brands, multiple cannabis form factors, consumer segments, and geographies. So let me give you a few examples which show the depth of our business model.

Michael DeGiglio: In just the last 12 months, with investment in innovation and a renewed focus on assortment and pricing, a brilliant team has expanded our share of the national pre-roll market by just under 3 percentage points to nearly 8% of the Mark. Our game-changing high-depth pre-rolls remain a true innovation in the category, and we are also gaining share through our focus on quality inputs across all of our pre-rolls.

Michael Regan: We are the fastest-growing producer in pre-rolls year-to-date. In just the last 12 months, with investment in innovation and a renewed focus on assortment and pricing, our brilliant team has expanded our share of the national pre-roll market by just under 3 percentage points to nearly 8%. Our game-changing high-def pre-rolls remain a true innovation in the category, and we are also gaining share through our focus on quality ingredients across all of our pre-rolls. Super Toast, a milled flour brand, continues its outstanding performance despite the mill category being very competitive with a well-entrenched leader.

Speaker Change: We are the fastest-growing producer in pre-rolls year to date. In just the last 12 months, with investment in innovation and a renewed focus on assortment and pricing, our brilliant team has expanded our share on the national pre-roll market by just under 3 percentage points to nearly 8%.

Speaker Change: of the market. Our game-changing high-depth pre-rolls remain a true innovation in the category and we are also gaining share through our focus on quality inputs across all of our pre-rolls.

Michael DeGiglio: Super Toast on Bill Flowerbrand continues its outstanding performance despite the Mill category being very competitive with a well-entrenched leader. It's the third fastest growing brand nationally despite selling in just four stores, and Growth is Accelerating. We have 20% share of the mill category nationally, 25% in Ontario, and that's despite launching just one year ago. We have a 94% repeat purchase rate among our consumers. In May, Supertoast, Sgt.

Speaker Change: supertow build flower brand continues its outstanding performance despite the milk category being very competitive with a well-in renched leader it's a third fastest growing brand nationally despite selling and just four provinces

Michael Regan: It's the third fastest growing brand nationally, despite selling in just four provinces. We are also building share across different consumer price points. Another important metric is the geographical ranking, which tells us our products are responding across Canada's many consumer preferences. We are strengthening our number one and two position in Ontario and Quebec. We are now tied for second in British Columbia, moving up two positions in the last year. And in Alberta, we improved our rank to fourth. That's up four positions from eight this time last year.

Speaker Change: And growth is accelerating. We have 20% share of the mill category nationally, 25% in Ontario, and that's despite launching just one year ago. We have a 94% repeat purchase rate among our consumers.

Michael DeGiglio: Pineapple took over as the top mill SKU in Ontario. This is a great example of extending our quality and into new categories that resonate with our consumers. We are also building share across different price points. In the premium segment, our store brand continues to excel. Strong performance in flowers is being complemented by innovation in the infused pre-roll category. Saurus Pineapple God is the fourth best-selling premium skew nationally.

Speaker Change: In May, Supertoast, Sgt. Pineapple took over as the top mill skew in Ontario. This is a great example of extending our quality and into new categories that resonate with our consumers.

Speaker Change: We are also building share across different consumer price points.

Speaker Change: In the premium segment, our SOAR brand continues to excel. Strong performance in flowers is being complemented by innovation in the infused pre-roll category. SOAR's Pineapple God is the fourth best-selling premium SKU nationally.

Michael DeGiglio: Finally, we continue to innovate in flower with new strains that delight our consumers. We had the number one flower product nationally in both Q1 and Q2 of this year. Our Fraser Valley's Donnyburg and Pure Lane Big Pleasures were in that category. We recently launched three new cultivars in British Columbia under our grower-led Trials by Pure Sun Farm Strategy with its unique limited release small batch offer. In addition, our new in-house-bred Pure Sun Farms Kush God Strain, derived from two of Village Farms' iconic parent strains, Pink Kush and Pineapple God, and our new Pure Sun Farms Gold Face Strain, have each added meaningfully to market share, with demand outstripping initial expectations.

Speaker Change: finally we continue to innovate in flowourer with new strains delight our consumers

Speaker Change: We had the number one flower products nationally in both Q1 and Q2 of this year.

Speaker Change: Our Fraser Valleys, Donnie Burke, and Pure Lane Big Pleasures were in that category.

Speaker Change: we recently marched three new cult of ours and british columbia under our grower lead trials by pure sunfar strategy with its unique limited release small batch offer

Speaker Change: In addition, our new in-house spread.

Speaker Change: pure sunfronance cushgod strain derived from two village farms iconic parent strains pay cushion pine up a god in our new cand farms gold-face strain have each added meaningful to market share with demand outstripping initialshow expectations

Michael DeGiglio: Another important metric is the geographical ranking, which tells us our products are responding across Canada's many consumer preferences. We are strengthening our number one and two positions in Ontario and Quebec. We are now tied for the number two rank in British Columbia, moving up two positions in the last year. And in Alberta, we improved our rank to fourth. That's up four positions from eight this time last year.

Speaker Change: Another important metric is the geographical ranking which tells us our products are resonating across Canada's many consumer preferences. We are strengthening our number one and two position in Ontario and Quebec.

Speaker Change: We are now tied for the number two rank in British Columbia, moving up two positions in the last year. And in Alberta, we improved our rank to fourth. That's up four positions from eight this time last year.

Michael DeGiglio: And we are also growing our international export business. Q2 was another good quarter with solid contributions from Germany and the United Kingdom as these countries ramp up and become an increasingly bigger proportion of our export sales. Notably, in Germany, we have seen higher demand following the regulatory change there in April. Sales to Australia overall are growing, while those reported as international sales decreased from Q2 last year. Total Australian sales, including those that get reported as non-branded due to the nature of the customer, grew four-fold from Q2 last year.

Michael Regan: And we are also growing our international export business. Q2 was another good quarter with solid contributions from Germany and the United Kingdom as these countries ramp up and become increasingly. Sales to Australia overall are growing, while those reported as international sales decreased. Both are important to maintaining the value of a fresh business with our customers and consumers to be able to share assets with our cannabis strategy. In short, we are expanding our asset-like growth strategy in FRESH to supplement our cannabis plan. I'll turn the call over to Steve now to review the financials and then come back.

Speaker Change: And we are also growing our international export business. Q2 is another good quarter with solid contributions from Germany and the United Kingdom as these countries ramp up and become an increasingly

Speaker Change: bigger proportion of our export sales. Notably in Germany we have seen higher demand following the regulatory change there in April .

Speaker Change: sales to australia overall are growing while those reported as international sales decrease

Speaker Change: from Q2 last year. Total Australian sales including those that get reported as non-branded due to the nature of the customer grew fourfold from Q2 last year. Our flower strategy has proven successful in Canada and is now doing the same internationally.

Michael DeGiglio: Our flower strategy has proven successful in Canada and is now doing the same in Canada. In the Netherlands, we are just months away from the start of production for our Dutch consumers. The program recently completed its startup phase, expanding the number of municipalities in the Netherlands in which legal cannabis can be sold in coffee shops from two to ten. I just returned from there, and I am so impressed with the build out.

Speaker Change: In the Netherlands, we are just months away from the start of production for our Dutch consumers.

Speaker Change: The program recently completed its start-up phase, expanding the number of municipalities in the Netherlands in which legal cannabis can be sold in coffee shops from 2 to 10. I just returned from there and I am so impressed with the build-out. It's an incredible facility and I'm very excited about our future in the Netherlands.

Michael DeGiglio: It's an incredible facility, and I'm very excited about our future in the Netherlands. We look forward to our first sales in Q1 2024. Now I'll turn to Fresh Produce, which also delivered strong sales growth despite temporary pricing pressure on the back half of the quarter. Steve's going to provide more detail, but I would like to highlight a couple of trends that set this business up for an improved second half as pricing recovers.

Speaker Change: We look forward to our first sales in Q1 2025.

Speaker Change: now i turn to fresh produce which also delivered sostrong sales growth despite temporary pricing pressure on the back half of the quarter

Speaker Change: Steve's going to provide more detail, but I would like to highlight a couple of trends that set this business up for an improved second half as pricing recovers.

Michael DeGiglio: First, our gross margin for the first six months of the year has improved by over 150 basis points despite the pricing challenge. The underlying cost structure continues to improve, and second, volumes are stronger, which will drive improved results as pricing recovers. This quarter, we added more partner sales, and we had higher yields in our Texas operation. Both are important to maintaining the value of a fresh business without customers and consumers to be able to share assets without a cannabis strategy.

Steve Ruffini: First, our gross margin for the first six months of the year has improved by over 150 basis points despite the pricing challenge.

Steve Ruffini: The underlying cost structure continues to improve, and second, volumes are stronger, which will drive improved results as pricing recovers. This quarter, we added more partner sales than we had

Speaker Change: and we had higher yields in our texas operations

Speaker Change: both are important to maintaining the value of our fresh business our customers and consumers to be able to share assets without countof a strategy in short we are expanding our asset like growth strategy in fresh to supplement our canabis plans

Speaker Change: a question i get asked is why invest in fresh produce the answer simple the business has great value as a top five north american produce marketer

Speaker Change: and a rollout of prvisional countabus in the u us either asaq permitted or texas space is taking longer than we predicted in the last four years our excellence has operated stem from our deep cultivation expertise

Steve Ruffini: Thanks, Mike. Starting with their consolidated results, total sales grew 19% year-over-year to 92.1 million, strong top-line growth in both Canadian cannabis and fresh produce. The net loss was $23.5 million or $0.21 per share, paired with a net loss of $1.4 million last year. This quarter's net loss breakdown is as follows. Approximately half, or $12 million, was a non-cash impairment charge on our U.S. cannabis business. Roughly a third.

Speaker Change: i'll turn the call over tosteve now to review the financials and thencome back seap

Steve Ruffini: thanks mike starting with our consolid ab results total sales through nineteen percent year-over-year to ninety two point one million strong top line growth in both canadian canvas and fresh produce

Stephen Ruffini: The net loss was $23.5 million or $0.21 per share, compared with a net loss of $1.4 million last year. The net loss breakdown is as follows. Approximately half, and $2.1 million was due to incentive stock compensation issued in the quarter, excluding the $5.6 million settlement of an illegal matter that contributed to our prior period produce results. Q2 sales increased 7% year-over-year to $47 million, equaling our second-best quarter in the last five years due to higher volumes at our tech screen houses and the strategic addition of third-party volumes, which were partially offset by the crisis. For context, prices in May and June were 31% lower than the January to April period and 11% below our forecast.

Steve Ruffini: Net loss was $23.5 million or $0.21 per share, paired with a net loss of $1.4 million last year. This quarter's net loss breakdowns as follows. Approximately half...

Steve Ruffini: $12 million was a non-cash impairment charge on our U.S. cannabis business. Roughly a third, or $8.3 million, was driven by our produce business due to poor market pricing, which I will give more color on.

Steve Ruffini: Where $8.3 million was driven by our produce business due to poor market pricing, which I will give more color on, and $2.1 million was due to incentive stock compensation issued in the quarter. Consolidated Just Deep Dove was negative 3.6 million, compared with negative 1.1 million for Q2 last year, excluding the $5.6 million settlement of an illegal matter that contributed to our prior period production results. Let's look at the business segments, starting with Fred.

Speaker Change: and two point one mion was d to incentive stock compensation issued in the quarter consolidated just ebitda was negative three point six millions compared with negative one point one million for q two last year

Speaker Change: excluding the 5.6 million settlement of illegal matter that contributed to our prior period produce results.

Steve Ruffini: Q2 sales increased 7% year-over-year to $47 million, equaling our second-best quarter in the last five years due to higher volumes at our tech screen houses and the strategic addition of third-party volumes, which were partially offset by the crisis. Tomato Pricings won dramatically lower in the back half of the quarter, driving the larger than expected operating loss. Adjust the battalions with negative 6.4 million.

Speaker Change: Let's look at the business segments starting with fresh produce.

Speaker Change: q two sales increased seven percent year-over-year to forty-seven million equaling our second best quarter in the last five years due to higher volumes at our tetech screen hounes and the strategic addition of third-party volume

Speaker Change: which were partially offset by pricing.

Speaker Change: tomato pricing sswung dramatically lower in the back half of the quarter driving a larger-than-expected operating loss adjusted ebitda was negative six point four million

Steve Ruffini: For context, prices in May and June were 31% lower than the January to April period and 11% below our forecast. Historically, May-June pricing is around 20% lower than the first four months of the year due to the seasonality of industry supply. Our ongoing focus on cost efficiencies and yield expansion drove a meaningful improvement in our gross loss for the first half of the year. In fact, at our own produce facilities, without an incremental Q2 third-party supply loss, we would have been very close to breaking even gross margins for the first six months of the year.

Speaker Change: For context, prices in May and June were 31% lower than the January to April period, and 11% below our forecast. Historically, May-June pricing is around 20% lower than the first four months of the year due to the seasonality of industry supply.

Stephen Ruffini: Historically, May-June pricing is around 20% lower than the first four months of the year due to the seasonality of industry supply. However, our ongoing focus on cost efficiencies and yield expansion drove a meaningful improvement in our gross loss for the first half of the year. In fact, at our own produce facilities, without an incremental Q2 third-party supply loss, we would have been very close. Just a reminder that we strongly encourage analysts and investors to look at our produce business the way we do, on a full-year basis.

Speaker Change: our ongoing focus on cost efficiencies in yield expansion drove a meaningful improvement in our gross loss for the first half of the year in fact on our own pro facilities without an incremental q two third-party supply loss we would have been very close

Steve Ruffini: Just a reminder that we strongly encourage analysts and investors to look at our produce business on a full-year basis, as quarterly adjustments in cost of sales can distort any quarter due to the accounting for our annual crop cycle. With the current improved pricing environment, partially due to seasonality and partly due to supply issues within the industry, with further improvements in our cultivation technologies, including AI, we expect significantly improved performance for fresh produce for the balance of 2024.

Speaker Change: to break even gross margins for the first six months of the year. Just a reminder that we strongly encourage analysts and investors to look at our produce business the way we do on a full-year basis.

Stephen Ruffini: As quarterly adjustments in cost of sales can distort any quarter due to the accounting for our annual crop cycle, with the current improved pricing environment, partially due to seasonality and partly due to supply issues within the industry, with further improvements in our cultivation technologies, including AI, we expect significantly improved performance for fresh produce for the balance of 2024.

Speaker Change: As quarterly adjustments and cost of sales can distort any quarter due to the accounting for our annual crop cycle.

Speaker Change: With the current improved pricing environment, partially due to seasonality and partly due to supply issues within the industry, with further improvements in our cultivation technologies, including AI, we expect significantly improved performance for fresh produce for the balance of 2024.

Michael Regan: Canadian Cannabis delivered another quarter of record sales, record retail branded sales, and a strong quarter for non-branded sales. These drove another quarter of positive adjusted EBITDA, an operating cash flow of Canadian $7.2 million. Importantly, this cash flow is enabling us to self-fund our first Netherlands facility and fund the acquisition of the additional 10% ownership of Rose during the quarter.

Steve Ruffini: Canadian Cannabis delivered another quarter of record sales, record retail branded sales, and a strong quarter for non-branded sales. These drove another quarter of positive adjusted EBITDA, and an operating cash flow of Canadian $7.2 million. Importantly, this cash flow is enabling us to self-fund our first Netherlands facility and fund the acquisition of the additional 10% ownership of Rose during the quarter. Total net sales grew 45% year over year to Canadian $55.8 million. Retail branded sales grew 38% to Canadian $41.8 million.

Speaker Change: canadian cannabis delivered another quarter record sales

Speaker Change: record retail branded sales and a strong quarter for non-branded sales. These drove another quarter of positive adjusted EBITDA, an operating cash flow of Canadian $7.2 million.

Speaker Change: Importantly, this cash flow is enabling us to self-fund our first Netherlands facility and fund the acquisition of the additional 10% ownership of Rose during the quarter.

Michael Regan: Total net sales grew 45% year-over-year to Canadian $55.8 million, and retail branded sales grew 38% to Canadian $41.8 million. This has become an interesting opportunity as other operators continue to shutter production and move to asset-light models.

Speaker Change: total net sales group forty-five percent year-over-year adium fifty five point eight million retail branded sales through thirty-eight percent to canadian forty one point eight million

Steve Ruffini: Non-branded sales tripled to Canadian $11.3 million as we continue to be opportunistic in the improved B2B pricing environment to reduce non-branded spec biomass inventory and generate cash. This has become an interesting opportunity as other operators continue to shutter production and move to asset light models.

Speaker Change: Non-branded sales tripled to Canadian $11.3 million as we continue to be opportunistic in the improved B2B pricing environment to reduce non-branded spec biomass inventory and generate cash.

Speaker Change: This has become an interesting opportunity as other operators continue to shutter production and move to asset-light models. We will continue to take advantage as long as it makes sense for our branded and international sales channels, which will always come first.

Michael Regan: We will continue to take advantage of it as long as it makes sense for our branded and international sales channels, which will always come first. It was another good quarter for international export sales, which were 2.1 million, up 11% from Q2 last year. Canadian Cannabis Gross Margin improved, from Q1 to 26%, excluding low-margin, non-branded, by far our largest single expenditure for our cannabis business. Very few can build sustainable, profitable businesses in Canada with such a tax.

Steve Ruffini: We will continue to take advantage of it as long as it makes sense for our branded and international sales channels, which will always come first. It was another good quarter for international export sales, which were $2.1 million, up 11% from Q2 last year. The first half of this year has been our best period for ongoing international sales to date, excluding those periods with load-in to new countries. We remain on track to deliver solid year-over-year growth this year.

Speaker Change: it was another good quarter for international export sales

Speaker Change: which were 2.1 million, up 11% from Q2 last year.

Speaker Change: the first half of this year has been our best period for ongoing international sales to date excluding those periods with load into new countries we remain on track to deliver solid year-over-year growth this year

Steve Ruffini: Canadian Cannabis Gross Margin Improved, from Q1 to 26%, excluding low-margin, non-branded, expect B2B sales; gross margin for Q2 was 28%, reflecting a higher proportion of value brand sales, mostly Fraser Valley and Pure Lawn, as compared to prior years. SG&A expenses percentage of sales for Q2 improved to 22% or 28%, driven by higher sales.

Speaker Change: adian cannabis gross margin improved

Speaker Change: from Q1 to 26% excluding low-margin non-branded

Speaker Change: pect me to be sales gross marg if at q two was twenty eight percent reflecting a higher proportion of value brand sales mostly frraser valuum pon as compared to prior year

Speaker Change: SG&A expense as percentage of sales for Q2 improved to 22% or 28% driven by higher sales.

Steve Ruffini: Q2 Adjusted EBITDA for Canadian Cannabis was 6.6 million, which was in line with Q2 last year. Before moving on from Canadian Cannabis, I would be remiss if I didn't point out the significant excise taxes we are paying as we expand our branded business. Our excise tax for Q2 was Canadian $27 million, and for the six months was Canadian $54 million, by far our largest single expenditure for our cannabis business. Very few can build sustainable profitable businesses in Canada with such a tax.

Speaker Change: Q2 Adjust EBITDA for Canadian Cannabis

Speaker Change: was six point six million wasn in line with q two last year

Speaker Change: Before moving on from Canadian cannabis, I would be remiss if I didn't point out the significant excise taxes we are paying as we expand our branded business.

Speaker Change: Our excise tax for Q2 was Canadian $27 million and for the six months was Canadian $54 million. By far our largest single expenditure for our cannabis business.

Steve Ruffini: An excise tax of 30 to 40 percent is a burdensome tax in any industry, let alone a young and developing industry. Until there is change, we will continue to see CCAA activity occurring within the industry, and with thousands of jobs lost, there will continue to be creative ways for some to try to circumvent their unpaid excise taxes.

Michael Regan: An excise tax of 30 to 40% is a burdensome tax in any industry, let alone a young and developing industry. Until there is change, we will continue to see CCAA activity occurring within the industry, and with thousands of jobs lost, there will continue to be creative ways for some to try to circumvent their unpaid excise taxes.

Speaker Change: very few can build sustainable profitable business in canada with such a attxs and excise tax of thirty to forty percent is a burdensome tax in any industry led alone a young in developing industry

Speaker Change: Until there is change, we will continue to see CCAA activity occurring within the industry with thousands of jobs lost or continued creative ways for some to try to circumvent their unpaid excise taxes.

Steve Ruffini: Supply is not only drying up in Canada due to some moving to asset light models, but others are simply going dark due to the burdensome excise. Now, turning to our U.S. cannabis business. Q2 sales were $4.3 million with a gross margin of 71%. Our sales continue to be impacted by the proliferation of unregulated hemp-based products, most notably synthetic products, and in response, a growing number of states that are severely restricting intoxicating hemp-based products to essentially ban synthetic hemp products, which in turn has negatively impacted our responsible GMP-produced natural hemp products sold under our CB Distillery brand.

Speaker Change: Supply is not only drying up in Canada due to some moving to asset light models, but others are simply going dark due to the burdensome excise tax.

Michael Regan: Turning to our U.S. cannabis business, Q2 sales were $4.3 million, with a gross margin of 71%. During Q2, we completed the internalization of dummy production to support margin, quality, and future innovation for this consumer-preferred format. We recognize that the consumer needs clear messaging about the use of synthetic cannabis. Q2 adjusted EBITDA was negative $240,000, with a net loss excluding the $11.9 million intangible asset impairment of $303,000. Both were improvements over Q1.

Speaker Change: Turning to our U.S. cannabis business.

Speaker Change: Q2 sales were $4.3 million with a gross margin of 71%.

Speaker Change: Our sales continue to be impacted by the proliferation of unregulated hemp-based products.

Speaker Change: Most notably, synthetic products, and in response, a growing number of states that are severely restricting intoxicating hemp-based products to essentially ban synthetic hemp products.

Speaker Change: which in turn has negatively impacted our responsible GMP-produced natural hemp products sold under our CB Distillery brand.

Steve Ruffini: During Q2, we completed the internalization of dummy production to support margin, quality, and future innovation for this consumer-preferred format. We are progressing on multiple initiatives to reinvigorate our sales. Recognize that the consumer needs clear messaging about the use of synthetic cannabis. Q2 adjusted EBITDA was negative $240,000 with a net loss excluding the $11.9 million intangible asset impairment of $303,000. Both were improvements over Q1. Turning to consolidated cash flows in the balance sheet, we generated cash flow from operations of $5.7 million compared with the use of cash in operations of $5.2 million in Q2 last year. The primary driver of the improvement was the reduction in our cannabis inventory.

Speaker Change: during q two we completed the internalization of dummy production to support margin quality and future innovation for this consumer preferred format

Speaker Change: We are progressing on multiple initiatives to reinvigorate our sales, recognizing the consumer needs clear messaging about the use of synthetic cannabinoids.

Speaker Change: q two adjusted ebitda was negative two hundred forty thousand with a net loss excluding the eleven point nine million intangible asset impairment of three hundred six thousand both were improvements over q one

Speaker Change: Turning to consolidated cash flows in the balance sheet, we generated cash flow from operations of 5.7 million compared with the use of cash in operations of 5.2 million in Q2 last year.

Stephen Ruffini: The primary driver of the improvement was the reduction in our cannabis inventory. For those that read our financial statements, our finished goods cannabis inventory is down 30 percent since the end of last year. Total term debt at the end of Q2 was $44 million, split approximately equally between fresh produce debt due in May 2027 and cannabis debt with maturity starting in February 2026. During the quarter, we amended and extended the agreement for our $10 million revolving line for fresh produce, which has a current balance of $4 million with a May 2027 maturity. We remain comfortable with our net debt level at $18.7 million. And with that, I will now turn the call back to Mike. Hey, thanks.

Steve Ruffini: For those that read our financial statements, our finished goods cannabis inventory is down 30 percent since the end of last year. We ended Q2 with cash of $29.7 million and working capital of $6.1 million. Total term debt at the end of Q2 was $44 million, split approximately equally between fresh produce debt due in May 2027 and cannabis debt with maturity starting in February 2026. During the quarter, we amended and extended the agreement for our $10 million revolving line for fresh produce, which has a current balance of $4 million with a May 2027 maturity.

Speaker Change: that primary driver of the improvement was a reduction in our cannabis inventory for those that read our financial statements are finished goods canadabis inventory is down thirty percent since the end of less

Speaker Change: we ended q two with cash of twenty-nine point seven million and working capital se six point one million

Speaker Change: total term debt the end of q two was forty-four million split approximately equally between fresh produce debt due may two thousand and twenty seven and canvas det with maturity starting with february twothousand and twenty six

Speaker Change: During the quarter, we amended and extended the agreement for our $10 million revolving mine for fresh produce, which has a current balance of $4 million with a May 2027 maturity date.

Steve Ruffini: We also have in place a Canadian $15 million cannabis line of credit, which is currently not drawn up. We remain comfortable with our net debt level at $18.7 million. And with that, I will now turn the call back to Mike. Hey, thanks.

Speaker Change: We also have in place a Canadian $15 million cannabis line of credit, which is currently not drawn on.

Speaker Change: We remain comfortable with our net debt level at $18.7 million, and with that I will now turn the call back to Mike.

Michael DeGiglio: Hey, thanks. At the half-year mark, I'd like to close with a few thoughts before we take your questions. We are delivering on our cannabis strategy, specifically revenue growth, market share, profits, and cash flow in our Canadian operation. And we're in the early stages of replicating that strategy in emerging markets. Our flowers are increasingly sought out by international partners and consumers based on the reputation and success of our brands and cultivars in Canada. We are proud to participate in the Netherlands Limited Licensed Country Market, as well as Germany, the United Kingdom, Australia, and other markets as they open. So,

Mike: Thanks. At the half year mark, I'd like to close with a few thoughts before we take your questions.

Mike: we are delivering on our canopbal strateggy specificically revenue growth market share profits and cash flow in our canadian operations

Mike: we'are any early stages of replicating that strategy and emerging markets our flowers increasingly being sortought out by international partners and consumers based on the reputation and success of our brands and cultabs in canada

Michael Regan: We are proud to participate in the Netherlands Limited Licensed Country Market, as well as Germany, the United Kingdom, Australia, and other markets as they open.

Mike: We are proud to participate in the Netherlands Limited Licensed Country Market, as well as Germany, the United Kingdom, and Australia, and other markets as they open up.

Michael DeGiglio: We've been working hard over the last four years, and we're ready to replicate these successes in the United States, but I really feel much stronger about what I could say here, but I've been edited back to just saying I'm frustrated. And I'm frustrated by the lack of regulatory direction, further compounded by an environment of non-enforcement even where there are regulations. It has created a race to the bottom, and as a result, consumers, employees, and an entire industry are in limbo.

Michael Regan: We've been working hard over the last four years, and we're ready to replicate these successes in the United States, but remain quite frustrated, yet adjacent businesses are lobbying to ban all hemp. By the way, hemp is the deregulated model that I would conjecture we would all like marijuana to follow in the United States, so why are we lobbying against ourselves? We would welcome any other LPs or MSOs or beverage industry participants. If we don't unite our basic messaging, we can only hold ourselves responsible for the regulatory abyss that just ends up hurting all participants and consumers.

Mike: So,

Mike: We've been working hard over the last four years and we've been ready to replicate these successes in the United States but remain quite frustrated.

Speaker Change: I really feel much stronger about what I could say here, but I've been edited back to just saying I'm frustrated. And I'm frustrated by the lack of regulatory direction.

Speaker Change: further compounded by an environment of nonenforcement even where there are regulations it is created a rac at bottom and as a result consumers employees and an entire industry in limbo

Michael DeGiglio: Coerciously, it also is dividing the industry rather than uniting us. We see this currently within the hemp segment, where our subsidiary, CB Celery, has developed responsible hemp-based products. Yet adjacent businesses are lobbying to ban all hemp. By the way, hemp is the deregulated model that I would conjecture we would all like marijuana to follow in the United States, so why are we lobbying against ourselves? At Village Farms, we believe these industries can coexist and prosper together and that both forms of cannabis, hemp, and marijuana, have their roles to play in benefiting consumers.

Speaker Change: Conversely, it also is abiding the industry rather than uniting us. We see this currently within the hemp segment, where our subsidiary, Seedbeet & Sealy, has developed responsible hemp-based products.

Speaker Change: Yet adjacent businesses are lobbying to ban all hemp.

Speaker Change: By the way, hemp is the deregulated model that I would conjecture we would all like marijuana to follow in the United States, so why are we lobbying against ourselves?

Speaker Change: and village strong we believe these industries can coexists and prosper together and that both forms of cantabis half in marijuana have their roose to play and benefiting consumers

Michael DeGiglio: We would welcome any other LPs or MSOs or beverage industry participants to all work together with us to speak as one voice with federal agencies and legislatures and at the state level as well. I'm sure we have confused lawmakers with differences rather than uniting over commonalities like other industries. Our door is always open to discuss this. Within Village Farms, we have strong regulatory cannabis and hemp talc. If we don't unite our basic messaging, we can only hold ourselves responsible for the regulatory abyss that just ends up hurting all participants and consumers. Operator will take any calls at this point. Thank you.

Speaker Change: We would welcome any other LPs or MSOs or beverage industry participants.

Speaker Change: to all work together with us to speak as one voice with federal agencies and legislatures.

Speaker Change: and at the state level as well i'm sure we have confused lawmakers without differences rather than uniting overcommonalities like other industries

Speaker Change: Our door is always open to discuss this. Within Village Farms we have strong regulatory cannabis and hemp talent.

Speaker Change: if we don't unite our basic messaging we can only hold ourselves responsible for the regulatory abyss that just ends up earning all participants and consumers

Operator: Thank you. 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.

Operator: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question will be from Aaron Grey of Alliance Global Partners. Your line is open, Aaron.

Speaker Change: operator will take any costs at this point

Speaker Change: thank you at the reminder to ask a question please press star one one on your telephone and wait for your name to be announced to withdraw your question please pressstar one one again

Speaker Change: Our first question will be coming from Aaron Grey of Alliance Global Partners. Your line is open, Aaron.

Aaron Grey: Hi, good morning, and thank you for the questions. So, first question for me, I want to talk about retail branded sales. It's really nice to see that growth, both year over year and sequentially. So I wanted to say, could you give any color in terms of whether or not there was an impact in terms of the timing of provincial boards that might have pulled forward some revenue? Or do you feel this reflects normalized purchase habits?

Analyst: Hi, good morning, and thank you for the questions. So my first question for me is about retail branded sales. It's really nice to see that growth, both year over year and sequentially. So I wanted to say, could you give any color in terms of whether or not there was an impact in terms of the timing of provincial boards that might have pulled forward some revenue? Or do you feel this reflects normalized purchase habits?

Aaron Grey: Hi. Good morning, and thank you for the questions. So first question for me, I want to talk about retail branded sales. You know, really nice to see that growth, both year over year and sequentially. So.

Speaker Change: I wanted to say, could you give any color in terms of whether or not there was an impact in terms of the timing of provincial boards that might have pulled forward some revenue, or do you feel this reflects

Analyst: And then on that front, have you seen a change in the buying habits of the boards amid the garnishing of payments, or are some of the boards just looking for LPs that can really supply quality products on a normalized basis? Thank you.

Aaron Grey: And then on that front, you know, have you seen a change in the buying habits of the boards amid, you know, garnishing of payments, or some of the boards just looking for LPs that can really supply quality products on a normalized basis? Thank you.

Speaker Change: Normalized Purchase Habits, and then on that front, have you seen a change in the buying habits from the boards amid garnishing of payments or some of the boards just looking for LPs that can really supply quality products on a normalized basis? Thank you.

Michael DeGiglio: Yeah, no, I would say it's totally based on our performance, our quality, our innovation. Subs by www.zeoranger.co.uk. Our genetics are all combined is what's driving those numbers, which are pretty, pretty incredible. We feel really strong about it. It's not really tied to timing or board. Just as it's pure execution that the Canadian cannabis industry.

Michael Regan: Our genetics all combined is what's driving those numbers, which are pretty, pretty incredible. We feel really strong about it.

Speaker Change: Our genetics all combined is what's driving those numbers, which are pretty pretty incredible. We feel really strong about it. It's not really tied to timing or boards, just it's pure execution at the Canadian cannabis level.

Michael Regan: It's not really tied to timing or board, just as it's pure execution that of Canadian cannabis. In fact,

Michael DeGiglio: In fact, Aaron, if anything, we hit some out-of-stocks this quarter because we outsold our initial expectations on some of our better selling strains in particular. So, it really is just straight sales for the quarter.

Michael Regan: So, because we outsold our initial expectations on some of our better selling strains in particular, so it really is just straight sales for the quarter.

Speaker Change: In fact, Aaron, if anything, we hit some out-of-stocks this quarter because we outsold our initial expectations on some of our better-selling strains in particular. So it really is just straight sales for the quarter.

Aaron Grey: Okay, great. Thanks, Chris.

Analyst: Okay, great. Thanks for that.

Steve Ruffini: You're on the implied velocity there. The second question for me, then, in terms of gross margins, Steve, I believe you said 28% X the spec impact. So just as we look going forward, you know, how do we think about gross margin evolution? Historically, we've been saying, you know, 30 to 40% in that range. It sounds like, you know, some of the value products like Frederick Valley weighed a little bit more on margins in the quarter.

Analyst: It's great to hear about the implied velocity there. The second question for me, then, in terms of gross margins, Steve, I believe you said 28% x the spec impact. So just as we look going forward, you know, how do we think about gross margin evolution? Historically, we've been saying, you know, 30 to 40% in that range. It sounds like, you know, some of the value products, like Frederick Valley, weighed a little bit more on margins in the quarter.

Aaron Grey: great things script you on the implies velocity there

Speaker Change: The second question for me, then, in terms of gross margins, Steve, I believe you said 28% X the spec impact. So just...

Speaker Change: As we look going forward, you know, how do we think about gross margin evolution historically? We've been saying, you know, 30 to 40 percent in that range. It sounds like, you know, some of the value products, like Fragile Valley, you know, weighed a little bit more on margins, you know, in the quarter. So.

Steve Ruffini: So part of that might have been higher cultivation costs; I believe you have seen that in this season as well. So just want to get some color in terms of gross margin expectations going forward as we think about format mix, both in terms of Canadian adult use as well as international and B2B business. Thank you.

Analyst: So part of that might have been higher cultivation costs, and I believe you have had that in this season as well. So just want to get some color in terms of gross margin expectations going forward as we think about format mix, both in terms of Canadian adult use as well as international and B2B business. Thank you.

Speaker Change: Part of that might have been higher cultivation costs, and I believe you have in this season as well. So just want to get some color in terms of gross margin expectations going forward as we think about format mix, both in terms of Canadian adult use as well as international and the B2B business. Thank you.

Steve Ruffini: Yeah, the branded gross margin, 28%, was lower due to the higher, as I said, the higher percentage of value brands. We still support the range and guidance of 30 to 40%, and we are actively analyzing our current SKU in the market.

Stephen Ruffini: Yeah, the branded gross margin, 28%, was lower due to the higher, as I said, the higher percentage of value brands. We still support the range of guidance of 30 to 40%, and we are actively analyzing our current SKU in the market.

Speaker Change: Yeah, the branded gross margin, 28%, was lower due to the higher, as I said, the higher percentage of a value brand. We still support the range and guidance of 30 to 40%.

Speaker Change: and we are, you know, actively analyzing, you know, our current SKU in market.

Michael DeGiglio: Yeah, so I'll add here, too, that we have some very strong positions in that segment right now, and that is due to the hard work by all of our teams. That is where the consumer has moved to. I think the number right now is about 34% by volume of consumers are in that price segment. And so, as now, you know, a clear leader across the board, it's our job to work very carefully on profitability in that segment with our partners at the provincial boards and our retail customers.

Stephen Ruffini: Yeah, so I...

Speaker Change: Yeah, so Aaron, I'll add here, too, that we have some very strong positions in that segment right now, and that is due to the hard work by all of our teams.

Speaker Change: That is where the consumer has moved to, I think the number right now is about 34% by volume of consumers are in that price segment.

Stephen Ruffini: And so, as now, you know, a clear leader across the board, it's our job to work very carefully on profitability in that segment with our partners at the provincial boards and our retail customers.

Speaker Change: and so as now you a clear leader across the board it's our job to work very carefully on profitability at that segment with our partners at the inal horres and our retail customers

Aaron Grey: Okay, great. Thank you very much for the call today. I'll jump back into the queue. Thank you. Next question.

Operator: Thank you. Our next question will come from Eric DeLaurier of Craig Halen Capital Group. Your line is open, Eric. Again, Eric, your line is open.

Operator: Thank you. Now, our next question...

Operator: Thank you. Our next question will come from Eric DeLaurier of Craig Halen Capital Group. Your line is open, Eric. Again, Eric, your line is open.

Speaker Change: take great thank we much recover the object

Speaker Change: Thank you. Our next question will coming from Eric DeLaurier of Craig Halen Capital Group. Your line is open, Eric.

Eric DeLaurier: Sorry about that; I was on mute; thank you. Thanks for taking my question and congrats on the strong performance up in Canada. My first question here is kind of a bit of a follow-on from Aaron's question. Just with the increased mix of value products, I'm just wondering what ability you have to sort of manage margins and costs there, as you were kind of touching on there at the end.

Speaker Change: Again, Eric, your line is open.

Eric DeLaurier: Oh, sorry about that. I was on mute. Thank you. Thanks for taking my question. And congrats on the strong performance up in Canada. My first question here is kind of a bit of a follow on from Aaron's question. Just with the increased mix of value products, I'm just wondering what ability you have to sort of manage margins and costs there as you were kind of touching on there at the end.

Michael DeGiglio: Good morning, Eric, and no problem being muted. I'm sure it's a busy morning for you.

Speaker Change: Good morning, Eric, and no problem being muted. I'm sure it's a busy morning for you. The reality is that we'll be continuing to work on this, you know, with all of our customers.

Michael DeGiglio: The reality is that we'll be continuing to work on this, you know, with all of our customers. We have a pretty strong discipline around return on any of our expenditures across the company, and that includes our marketing spend. So when we go into any discussions, we have an expectation of what that looks like, and we monitor against that very, very closely.

Speaker Change: We have a pretty strong discipline around return on any of our expenditures across the company, and that includes our marketing spend. So, when we go into any discussions, we have an expectation of what that will...

Eric DeLaurier: All right, great. And then my next question is just about produce supply dynamics. So, Steve, you mentioned excluding some supply losses, gross margins would have been roughly break-even for the first half. Can you expand on that and then expand on the, I think you mentioned some industry-wide supply issues that point to some improved profitability in the second half. If you could just expand on both of those, that'd be great. Thank you. Yeah,

Analyst: All right, great. And then my next question is just on produce supply dynamics. So Steve, you mentioned excluding some supply losses, gross margins would have been roughly break-even for the first half. Can you expand on that and then expand on the, I think you mentioned some industry-wide supply issues that point to some improved profitability in the second half. If you could just expand on both of those, that'd be great. Thank you.

Eric DeLaurier: And we monitored against that very, very closely.

Eric DeLaurier: All right, great.

Speaker Change: And then my next question is just on produce supply dynamic.

Speaker Change: Steve, you mentioned excluding some supply loss. Gross margins would have been roughly break-even for the first half. Can you expand on that and then expand on the, I think you mentioned some industry-wide supply issues that point to some improved profitability in the second half. If you could just expand on both of those, that'd be great. Thank you.

Stephen Ruffini: Yeah, what I meant by close to break-even was on our own greenhouses for the full six months. We have improved significantly on our volumes and labor efficiencies at our Texas operations.

Steve Ruffini: Yeah, what I meant by close to breakeven was on our own greenhouses for the full six months. We have improved significantly on our volumes and labor efficiencies at our Texas operations.

Speaker Change: Yeah, what I meant by close to break-even would be on our own greenhouses for the full six months. We have improved significantly on our volumes and labor efficiencies at our Texas operations.

Steve Ruffini: My comment about when you look at, you know, quarter to quarter can be a bit misleading, simply the way we account for our cost of production. So now, the Texas crops are over for those that follow Village Farms. The Texas crop essentially starts in September and ends in June. You know, some of the second quarter cost, now that the Texas crop is over, hindsight being 2020 should have been charged in the first quarter, but for the full six months, the gross margin would have been close to break-even.

Speaker Change: My comment about when you look at quarter to quarter can be a bit misleading simply the way we account for our cost of production. So now that Texas crops are over, for those that follow Village Farms, the Texas crop essentially starts in July .

Speaker Change: september and ends in june you know some of the second quarter costs now the text cross order you highsside being twothousand and twenty should have been charg first quarter but for the pull six months the gross margin would have been close to breke we did take on some incremental

Steve Ruffini: We did take on some incremental specialty tomatoes to fulfill winter contracts this coming winter, and market pricing was, as I said, it's always lower in May-June because of industry supply. The U.S. growers and most of the Mexican growers are not in the market in the later summer months, which again provides much significantly improved pricing in the July-August period. Very confident that we'll have a much improved second half of the year versus, certainly, the second quarter.

Speaker Change: especially Tomatoes, to fulfill winter contracts this coming winter and market pricing was...

Speaker Change: It's, as I said, it's always lower in May, June because of industry supply.

Speaker Change: The U.S. growers and most of the Mexican growers are not in market in the later summer months, which again provides much significantly improved pricing in the July-August period.

Speaker Change: So...

Speaker Change: Very confident that we'll have a, you know, much improved second half of the year versus the, certainly the second quarter.

Eric DeLaurier: All right, great. I appreciate your comments, thank you.

Analyst: All right, great. I appreciate your comments, thank you.

Operator: And our next question will come from Mike Regan of Excelsior Equities. Your line is open, Mike.

Speaker Change: All right, great. Appreciate your comments. Thank you.

mike riagan: and our next question we'll come from mike riagan of exl ier equities your line is open mike

Mike Regan: Everyone, thanks for the question. So I guess, back on the sort of the pricing dynamics in Canada for cannabis, sounds like a lot of the price pressure and margin pressure was some mixed shifts. Can you help us sort of understand how the pricing is moving on a like for like basis within categories in Canadian cannabis?

mike riagan: and well thanks for the question so just inthe

Analyst: Price pressure and margin pressure led to some mixed shifts. Can you help us sort of understand how the pricing is moving on a like for like basis within categories in Canadian cannabis?

Speaker Change: through the pricing dynamics in Canada on cannabis. It sounds like a lot of the price pressure and margin pressure was some mixed shifts. Can you help us sort of understand how the pricing is moving on a like-for-like basis within categories in Canadian cannabis?

Michael DeGiglio: I can grab that one. Good question, and you're correct. I would categorize it as more of a mix-up at this point.

Michael Regan: I can grab that one. Good question, and you're correct. I would categorize it as more of a mix-up at this point. At retail... So that's the good news. We think that the B2B business, which Steve mentioned we're participating in, is one of those leading indicators because pricing in the B2B segment has been increasing, and we think that that's gotta

Speaker Change: I can grab that one. Good question, and you're correct. I would categorize it as more of a mix-up at this point. At retail,

Michael DeGiglio: At retail... The price per gram declines are starting to very much stabilize, slow down, or flatten, depending on the segment. So that's the good news. We think that the B2B business, which Steve mentioned we're participating in, is one of those leading indicators because pricing in the B2B segment has been increasing, and we think that that's gotta play through to retail as well.

Speaker Change: we price program declines are starting to very much stabilize slowdown flatl pending on the segment

Speaker Change: So that's the good news. We think that the B2B business, which Steve mentioned we're participating in, is one of those leading indicators because pricing at the B2B segments has been increasing. And we think that that's got to...

Mike Regan: Okay, yeah, that would also make sense and let you know that you're seeing actual declines in supply in Canada as the taxes sort of push people out of business, or they just can't make any money at this point. Is that also starting to support prices? I think that

Speaker Change: play through to the retail as well.

Speaker Change: Okay, yeah that would also make sense and I think make you know that you're seeing actual declines in supply in Canada as the taxes sort of push people out of business or they just can't make any money at this point. Is that also starting to support pricing?

Michael DeGiglio: I think that's one of the factors for sure. I think the other factor is the move to asset-light strategies by some players, and that's certainly helping to take out some of the biomass that might have gotten dumped into the market. And the third factor, you know, certainly is for those that can export; that's another market drawing down on Canadian supply.

Michael Regan: I think that

Speaker Change: I think that's one of the factors for sure. I think the other factor is the move to asset-light strategies by some players and you know that's that's certainly

Speaker Change: helping to take out some of the biomass that might have gotten dumped into the market. And then the third factor, you know, certainly is for those that can export, that's another market drawing down on Canadian supply.

Mike Regan: Okay, great. Thanks a lot.

Operator: Our next question will be coming from Doug Cooper of Beacon Securities. Your line is open, Doug.

Operator: Our next question will be coming from Doug Cooper of Beacon Securities. Your line is open, Doug.

Speaker Change: Okay, great. Thanks a lot.

Speaker Change: have

Doug Cooper: Very good morning, guys. Just a quick one on the produce side, Steve. Improved pricing or a better environment in the second half, do you think it's enough to get you to break even EBITDA for the year on produce?

Doug Cooper: Very good morning, guys. Just a quick one on the produce side, Steve. The improved pricing or improved better environment in the second half, do you think it's enough to get you to break even EBITDA for the year on produce?

Speaker Change: Now our next question will be coming from Doug Cooper of Beacon Securities. Your line is open, Doug.

Doug Cooper: Very good morning, guys. Just a quick one on the produce side, Steve. Improved pricing or improved better environment in the second half. Do you think it's enough to get you to break even EBITDA for the year for the produce segment?

Steve Ruffini: Not for the full year. We are expecting good EBITDA in the second half, but not enough to get us back to break-even for the full year.

Speaker Change: Not for the full year. We are expecting good EBITDA in the second half but not enough to get us back to break-even for the full year.

Doug Cooper: Okay, Mike, switching to the Netherlands, you said you're just there. Can you give us some more color about, you know, how big you think the market is now that they moved from two to 10 municipalities; how many people would be captured in those 10 municipalities? And, you know, how we walk through the sort of ramp and revenue stack, there's no excise taxes there, I'm guessing you don't have to sell through winter boards and maybe just discuss what do you think the profitability will be like from that facility?

Speaker Change: Thank you.

Speaker Change: Mike, switching to the Netherlands, you said you were just there, can you give us some more colour about how big you think the market is now that they've moved from...

Mike: two to ten municipalities, how many people would be captured in those ten municipalities and, you know, how many...

Speaker Change: We'll walk through the sort of ramp and revenue stack. And I'm assuming there's no excise taxes there. I'm guessing you don't have to sell through the winter boards and maybe just discuss what do you think the profitability would be like from that facility?

Michael DeGiglio: Well, I think the profitability is going to be solid. In fact, I think we can really produce some outstanding quality that is not currently available.

Stephen Ruffini: Well, I think the profit is going to be solid. In fact, I think we can really produce some outstanding quality that is not, and the cultivation facility we have in our know-how. We're expecting some really great things.

Speaker Change: Well, I think the profitability is going to be solid, in fact, I think we can really produce some outstanding quality that is not...

Michael DeGiglio: Typically found in the Netherlands market, maybe with the exception of illicit trade coming in from the United States or Canada, from what I've seen, but what's produced in the Netherlands and what comes in from other adjacent countries, that quality has never been great. So with the cultivars we're going forward with from Canada and the Cultivation Facility we have in our know-how, we're expecting some really great things.

Speaker Change: typically found in the Netherlands market, maybe with the exception of illicit trade coming in from the United States or Canada.

Speaker Change: from what I've seen. But what's produced in the Netherlands and what comes in from other adjacent countries, that quality has never been great. So with the cultivars we're going forward with from Canada and the

Michael DeGiglio: Now, as far as the way the Netherlands has done it, you know, there's not a lot of data because it's been an illicit market for 50 years, both at the cultivation level and even at the coffee shop level. So there's not a lot of data. There are numbers that talk about the market in the Netherlands. It's about a billion dollar market, but it's not substantiated. However, that's really not important for us.

Michael Regan: Now, as far as the way the Netherlands has done it, you know, there's not a lot of data because it's been an illicit market for 50 years, both at the cultivation level and even at the coffee shop level. So, there's not a lot of data. There are numbers that talk about the market in the Netherlands. It's about a billion-dollar market, but it's not substantiated. However, that's really not important for us. What's important for us is that there are 10 municipalities and about 85 coffee shops that are now participating in the legal side, and that's going to be supplied by just 10 license holders.

Speaker Change: Cultivation facility we have and our know-how, we're expecting some really great things. Now as far as the way the Netherlands has done it, you know, it's not a lot of data because it's been an illicit market for 50 years, both at the cultivation and even at the coffee shop level.

Speaker Change: So there's not a lot of data.

Speaker Change: There are numbers that talks about the market in the Netherlands, it's about a billion dollar market, but it's not substantiated. However, that's really not important for us. What's important for us is that there are 10 municipalities and about 85 coffee shops that are participating now in the legal side. And that's going to be...

Michael DeGiglio: What's important for us is that there are 10 municipalities and about 85 coffee shops that are now participating in the legal side. And that's gonna be supplied by just 10 license holders. So we see ourselves as being immediately sold out because the capacity of the 10 license holders is just not quite enough to fulfill those 85 coffee shops to start. Secondly, as you mentioned, there is no tax. The prices in the Netherlands are far superior to anything we've seen in Canada or even the U.S., and the government wants to keep them that way.

Michael Regan: So we see ourselves as being immediately sold out because the capacity of the 10 license holders is just not quite enough to fulfill those 85 coffee shops to start. Secondly, as you mentioned, there is no tax. The prices in the Netherlands are far superior to anything we've seen in Canada or even the U.S.

Speaker Change: supplied by just 10 license holders.

Speaker Change: So, we see ourselves as being immediately sold out because the capacity of the ten license holders...

Speaker Change: is just not quite enough to fulfill

Speaker Change: those eighty five coffee shops to start secondly as you mentioned there is no tax the prices in the netherlands are far superior to anything we've seen in cattallor even the u s and the government wants to keep it that way

Michael DeGiglio: So if you really look at, you know, we take our hat off to how the Netherlands looks around and what would make the industry strong and sustainable. So I think we'll do well there. And, you know, we're prepared to talk more about it in the first quarter of 25. We will start planting out in October. So we're only about eight weeks away, so we're on track for that. And we should definitely be generating revenues in the first quarter.

Speaker Change: So...

Speaker Change: If you really look at, you know, we take our hat off to how the Netherlands looked around what would make the industry strong and sustainable. So I think we'll do well there and, you know, we're prepared to talk more about it in the first quarter of 2025. We will start planting out in October, so we're only about eight weeks away.

Speaker Change: So, we're on track for that, and we should be generating, for sure, revenues in the first quarter.

Analyst: I guess my last one, Steve. You mentioned the drop in inventories. What do you think this means, the read-through?

Doug Cooper: I guess my last one, Steve, you mentioned the drop in inventories. What do you think this means, the read through? Do you guys have to do some expansion of your Canadian facilities to keep up with demand? You know, you guys just talked about being sold out. So maybe just talk a little bit about that. Yeah, we are very actively looking at expanding our cultivation cannabis capacity.

Analyst: Do you guys have to do some expansion of your Canadian facilities to keep up with demand? You know, you guys just talked about being sold out, so maybe just talk a little bit about that.

Speaker Change: Okay, I guess my last one, Steve, you mentioned the drop in inventories. What do you think this means, the read-through? Do you guys have to do some expansion of your Canadian facilities to keep up with demand? You know, you guys just talked about being sold out, so maybe just talk a little bit about that.

Steve Ruffini: Yeah, we are very actively looking at expanding our cultivation cannabis capacity. As you know, we've only converted half of Delta II, and we are very actively looking at converting the other half. So I'll leave you with that at this stage. Okay, thanks, gentlemen.

Speaker Change: Yeah, we are very actively looking at expanding our cultivation cannabis capacity. As you know, we've only converted half of Delta II and we are very actively looking at converting the other half.

Analyst: Okay. Thanks, gentlemen.

Analyst: Okay, thanks, gentlemen.

Speaker Change: So I'll leave you with that at this stage.

Speaker Change: Okay, thanks, gentlemen.

Speaker Change: thank you forder i don't think

Operator: Operator, any questions? Tonya, we're ready for the next question.

Speaker Change: Operator, any questions?

Operator: I'm sorry, again. Our next question comes from Frederico Gomes of ATB Capital Markets. Your line is open.

Operator: I'm sorry, again. Our next question comes from Frederico Gomes of ATB Capital Markets. Your line is open.

Speaker Change: Tonya, we're ready for the next question.

Speaker Change: I'm sorry, again, our next question comes from Frederico Gomes of ATB Capital Markets. Your line is open.

Frederico Gomes: Good morning. Thanks for taking my questions. Mike, just to clarify on the Netherlands, just wondering if the other operators have already started sales in the Netherlands? And if so, in that pilot program, how does that evolve?

Frederico Gomes: Good morning, thanks for taking my questions. Mike, just to clarify on the Netherlands, just wondering if other operators have already started sales in the Netherlands?

Frederico Gomes: Good morning. Thanks for taking my questions. Mike, just to clarify on the Netherlands, just wondering if other operators, have they already started sales in the Netherlands? And if so, in that pilot program, how is that evolving?

Michael DeGiglio: Yeah, I think up to 10. We have already started generating revenue in the last couple quarters, probably six more by, five to six more by year-end. So I think by year-end, there will be eight of us at least generating revenue.

Speaker Change: Yeah, I think of the chance we have already started generating revenue the last couple quarters.

Michael Regan: Probably six more by, five to six more by year-end. So I think by year-end, there'd be eight of us at least generating revenue.

Speaker Change: probably five to six more by year-end. So I think by year-end it'd be eight of us at least generating revenue.

Frederico Gomes: Okay, perfect. Thanks for that.

Analyst: Okay, perfect. Thanks for that.

Speaker Change: Okay, perfect. Thanks for that. And then, in Canada, how sustainable you think, you know, those market share gains that we're seeing from you guys is, you know, I think that we've seen in the past, you know, LPs gaining share and then losing, you know, do you think that trend can continue just given the current underlying economics here with the sector, you know, trending towards double digit share and being sustainable with that?

Michael DeGiglio: And then in Canada, how sustainable do you think those market share gains that we're seeing from you guys are, you know, I think that we've seen in the past, LPs gaining share and then losing it. Do you think that trend can continue, just given the current underlying economics here with the sector, trending towards double digit share and being sustainable with that?

Analyst: And then, in Canada, how sustainable do you think those market share gains that we're seeing from you guys are? You know, I think that we've seen in the past, LPEs gaining share and then losing it. Do you think that trend can continue just given the current underlying economics here with the sector training towards double-digit share and being sustainable with that?

Michael DeGiglio: I think what drives it what we've found, you know, based on our consumer insights is innovation, quality, newness, and price. And you have to drive that constantly.

Speaker Change: yeah

Speaker Change: joe

Joe: I think what drives it, what we've found, you know, based on our consumer insights, is innovation, quality, newness, and price. And you have to drive

Michael DeGiglio: And as long as you're innovating and providing new strains, new products, new innovation, and you're priced right, then I think you can continue to drive, uh... at least sustain the market share. We feel very positive we can sustain the market share, but our goal is to drive it. We want to drive to number one and continue to do so. So I think, you know, we should just look at the numbers over the last five months. It wasn't just sustaining it; it was actually increasing it.

Speaker Change: drive that constantly and as long as you're innovating and providing new strange new products new innovation and you priced rate and i think you can continue to drive

Michael Regan: Uh... at least. We should just look at the numbers over the last five months. It wasn't just sustaining it. It was actually increasing it.

Speaker Change: at least

Speaker Change: sustain the market share. We feel very positive we can sustain the market share but our goal is driving. We want to drive to number one and continue to do so. So I think

Speaker Change: You know, we just look at the numbers over the last five months, it wasn't just sustaining it, it was actually increasing it. As I said in my opening remarks, we're one of the only top five that have done so.

Michael DeGiglio: As I said in my opening remarks, we are one of the only top five that have done so. And I think that's what's driving it at the end of the day, really, you have to have products that resonate with the consumer. It's got to be of great quality every single day, and you have to innovate and provide newness, and that'll drive increased sales. So, you know, if the market continues to grow single digits over the next three to five years, mid to high single digits, then I think we could see Canada driving to six, seven billion dollars at the retail level in the next three, three to four years. And we plan to take that share with us as we go.

Michael Regan: As I said in my opening remarks, we're one of the only top five that have done so. And I think that's what's driving it at the end of the day, really, you have to have products that resonate with the consumer. It's got to be of great quality every single day, and you have to innovate and provide newness, and that'll drive increased sales. So, you know, if the market continues to grow single digits over the next three to five years, mid to high single digits, then I think we could see Canada driving to six, seven billion dollars at the retail level in the next three, three to four years. And we plan to take that share.

Speaker Change: And I think that's what's driving it at the end of the day, is really, you have to have products that resonate with the consumer. It's got to be a great quality every single day, and you have to innovate and provide newness, and that'll drive increased sales.

Speaker Change: If the market continues to grow single digits over the next three to five years, mid to high single digits, then I think we could see Canada driving to $6, $7 billion at the retail level in the next three to four years, and we plan to take that share.

Michael DeGiglio: And Fred, the only other thing I would add is, you know, we still have white space that we're not playing in as you look at the universe or where the consumer is. And so we pay attention to that very closely as well as we develop our plans and our products. Yeah, I agree with that. And we have some exciting products.

Speaker Change: with us as we go.

Speaker Change: And Fred, the only other thing I would add is, you know, we still have white space that we're not playing in as you look at the universe, or the

Fred: where the consumer is, and so we pay attention to that very closely as well as we develop our plans and our products.

Michael DeGiglio: Yeah, I agree with that, and we have some exciting things happening that I'll probably talk about on the next call.

Michael Regan: Yeah, I agree with that. And we have some exciting

Fred: Yeah, I agree with that and we have some exciting things happening that I'll probably talk about on the next call.

Operator: Our next question will come from Scott Fortune of Roth Capital Partners. Your line is open.

Operator: Our next question will come from Scott Fortune of Roth Capital Partners. Your line is open.

Speaker Change: Thank you.

Speaker Change: Our next question will come from Scott Fortune of Roth Capital Partners. Your line is open.

Scott Fortune: Yeah, good morning. Just to expand on that kind of white space, you continue to build brands in the different segments of the market, you know, with Pure Sun, Fraser Valley, and Super Toast. Is there an area that you continue to lean in now, going forward, and just updating, you said you might update it in the future, but updating, kind of addressing these different categories, kind of timing on that strategy as you look at for, you know, continuing to gain market share overall in Canada from that standpoint?

Michael DeGiglio: Well, I think what we've sort of proven is the way we've operated is, let's be one, let's try to be number one or number two in each market before we go on to something new. And I think we've proven that in flour, by being number one in flour for the last two years. Then, as we approached pre-rolls, let's drive that to a number one or number two position. And we've done that. In fact, we really didn't want to expand internationally until we felt that we could be a top-tier player in Canada on a long-term sustainable basis.

Scott Fortune: Well, I think what we've got.

Speaker Change: The way we've operated is let's be one let's try to be number one number two in each market before we go onto something new and I think we've proven that in flower.

Speaker Change: Number one in flour for the last two years that as we approached pre rolls, let's drive that to a number one number two position.

Speaker Change: We've done that.

Speaker Change: We really didn't want to expand internationally. So we felt that we can be a top tier player in Canada on those long term sustainable basis, and I think that's true today.

Michael DeGiglio: And I think that's true today. And now, we look at what other segments are we not indexing in? And let's just take vapes for an example. That's an area that we want to focus on and continue. So I think you'll see that strategy going forward. We don't want to be all things unless we can be in a number one or number two position.

Speaker Change: And then now we look at what other segments are we not indexing and let's just take <unk> for an example, that's an area that we want to focus on and continue so I think youll see that strategy going forward.

Speaker Change: We don't want to be all things unless we can be in a number one number two position.

Scott Fortune: That makes sense. The strategy's worked out. And just a follow-up on the international side, what you're seeing from Germany, the kind of opportunity, and what you need to build out to continue to drive and grow that opportunity outside of the Netherlands on the international side going forward here.

Speaker Change: That makes sense strategies worked out and just a follow up on the international side.

Speaker Change: What you're seeing from Germany.

Speaker Change: Can the opportunity what you need to build out that continues.

Speaker Change: Five and grow that opportunity outside of the Netherlands on the international side going forward here.

Michael DeGiglio: Well, you know, our strategy has always been, you know, crawl, walk, run, be the turtle and end the race, not be the hare. And I think we've proven that in Canada, and we're going to do the same there. But a lot of people talk a great game in the EU; it'll get there. I mean, it's a huge market. But it's, you have to, it's a hard business to be successful in.

Speaker Change: Well you know our strategy has always been a crawl walk run being the turtle.

Speaker Change: And the race.

Kevin: Lastly, the hair and I think we've proven that Kevin and then we're going to do the same there, but a lot of people.

Speaker Change: People talk a great game in the EU It will get there I mean, it's a huge market.

Speaker Change: But it's yes, it's a hard business to be successful.

Speaker Change: I think thats been proven on both sides of the border here in North America. So.

Michael DeGiglio: And I think that's been proven on both sides of the border here in North America. So we're confident that we'll continue to achieve end rates going forward. We like our medicinal program.

Speaker Change: We are confident that we will continue to make and where its going forward. We like them additional program. I mean, we are low cost producer in Canada.

Michael DeGiglio: I mean, we're a low-cost producer in Canada; we would expect price compression in the EU markets over time, that's just natural. And I think the same thing we've leveraged up on in one in Canada, we could do the same in Europe. And of course, being in the Netherlands for REC, being that first REC market, if that expands, I think we can springboard out of the Netherlands to other markets as it opens up. So we really like what the horizon looks like for us in the EU.

Speaker Change: We would expect price compression in the EU markets over time, that's just natural.

Speaker Change: I think the same thing we've leveraged up and one in Canada, we could we could do the same in Europe and of course being on the Netherlands side on rack being that first rec market. If that experience I think we can springboard added lateral links to other markets.

Speaker Change: So we really like what the horizon looks like for us.

Michael DeGiglio: Just specifically on Germany, we are, like others have stated in their calls, seeing increased inquiries and revenues as that market opens, so confirming the same trend. And on the good news front, we went through a recertification of our EU GMT and of our Canadian greenhouse, and we've passed that, so we're in our second term with the German municipality that sponsored us.

Speaker Change: In the EU.

Speaker Change: Just specifically on Germany, we are like others have stated in their calls we are seeing increased inquiries and revenues as that market open.

Speaker Change: Confirming the same trend and on the good news front, we went through a recertification of our EU GMP and our Canadian.

Speaker Change: And we are past that so we're in our second term with art with the German municipality that's sponsored.

Scott Fortune: I appreciate the color, thanks.

Speaker Change: Okay.

Speaker Change: I appreciate the color. Thanks.

Operator: Our next question comes from Pablo Zuanic of Zuanic and Associates. Your line is open, Pablo.

Speaker Change: And our next question comes from Pablo Swanwick, <unk> and Associates. Your line is open Pablo.

Pablo Zuanic: Good morning, this is actually Mohamad Hussein. I'm on for Pablo, and we have two questions. What about your Texas produce greenhouses? Can you remind us of their scale and whether all are being utilized, or some are idle? And also, please remind us what benchmarks you are using to determine the value of the Texas greenhouse.

Speaker Change: Good morning, this is actually Muhammad, saying I'm on for Pablo two questions.

Muhammad: One about your Texas produce greenhouses can you remind us of the scale and what they all are being utilized or some of our Idaho and also please remind us what benchmarks you are using to determine the value of the Texas greenhouses.

Steve Ruffini: We're not going to comment on the value since nobody really values our produce business anyway, but we're not going to comment on the values of our Texas greenhouse at this point. But all our facilities are in production with the exception of the Permian Basin, which we had reported as an asset for sale, but all the others are in full production. Which means we have three in full production, and they're really very well detailed in our 10K in terms of square footage and the like. I can tell you that the replacement value of those assets is probably... Oh, we're sorry.

Speaker Change: We're not going to comment on the value since nobody really values, our produce business anyway, but we're not going to comment on the values about Texas greenhouse at this point, but all our facilities are in production with the exception of the Permian Basin, which we had reported as an asset for sale, but all the others are in full production, which means.

Speaker Change: We have three in full production and they are really very well detailed in our 10-K in terms of square footage.

Speaker Change: The Lake.

Speaker Change: Thank you.

Speaker Change: We paid the replacement value of those assets are properly.

Operator: We're sorry; go ahead.

Operator: Oh, we're sorry. Go ahead.

Speaker Change: Okay.

Speaker Change: Sorry go ahead.

Pablo Zuanic: And for the second question regarding Holland, we understand some licenses have already started to supply the coffee shops. Do you have a sense of how the market is performing so far and what do you expect to start supplying the market there?

Analyst: And for the second question regarding Holland, we understand some licenses have already started to supply the coffee shops. Do you have a sense of how the market is performing so far? And what do you expect to start supplying the market there?

Speaker Change: And for the second question regarding hall, and we understand some licenses already start to supply the coffee shops do you have a sense of how the market performed so far and when do you expect the supply in the market there.

Michael DeGiglio: Yeah, I mean, I got to meet with a number of coffee shop owners, both in the legal ones and the current non-legal ones. The comment I received is that the quality, for the most part, is the best they've seen in Holland.

Speaker Change: Yeah, I mean, I got to meet with a number of coffee shop owners both in the.

Speaker Change: The legal ones than the current non legal once and.

Speaker Change: The car.

Speaker Change: Comment I received is the quality for the most part is the best they've seen.

Michael DeGiglio: So I think it's very positive. It's early stages, and I probably don't want to add more color to it, but I think at this point, I would say it's a positive start.

Speaker Change: Owen.

Muhammad: So I think.

Speaker Change: I think it's very positive it's early stages, probably don't want to add more color to it but I think at this point I would say, it's a positive start.

Pablo Zuanic: Alright, thank you for the information. You can call me back on cue.

Speaker Change: Okay.

Speaker Change: Alright, Thank you for the information coming back on queue.

Speaker Change: Thank you.

Operator: I would now like to hand the call back to management for closing remarks.

Speaker Change: I would now like to hand, the call back to management for closing remarks.

Michael Regan: Thanks, everyone. I appreciate being on the call today, and we look forward to reporting back in November.

Michael DeGiglio: Thanks everyone, I appreciate being on the call today, and we look forward to reporting back in November.

Speaker Change: Thanks, everyone I appreciate you being on our call today, and we look forward to reporting in November.

Operator: And this concludes today's conference. Thank you for your participation. You may now disconnect.

Speaker Change: And this concludes today's conference. Thank you for your participation you may now disconnect.

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Michael DeGiglio: In short, we are expanding our asset-like road strategy in fresh produce to supplement our cannabis business. (Inaudible) A question I get asked is, why invest in fresh produce? The answer is simple. The business has great value as a top five North American produce marketer and a rollout of provisional cannabis in the U.S., even as that permitted or Texas base is taking longer than we predicted in the last four years. Our excellence has operated stemmed from deep cultivation expertise. I'll turn the call over to Steve now to review the financials and then come back, Steve.