Village Farms International Q2 2026 Earnings Report

Village Farms International EPS Results

• Actual EPS: $0.06
• Consensus EPS: $0.02
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: N/A

Village Farms International Revenue Results

• Actual Revenue: $63.98 million
• Expected Revenue: $56.30 million
• Beat/Miss: Beat by +$7.67 million
• YoY Revenue Growth: N/A

Village Farms International Announcement Details

• Quarter: Q2 2026
• Date: 8/10/2026
• Time: Before Market Opens
• Conference Call Date: Monday, August 10, 2026
• Conference Call Time: 8:30AM ET

Village Farms International (NASDAQ:VFF) is a North American agricultural company specializing in greenhouse cultivation of fresh produce and cannabis. Through its wholly owned operations, the company grows a variety of high-quality vegetables, including tomatoes, cucumbers and sweet peppers, using controlled-environment agriculture techniques designed to maximize yield and sustainability. Village Farms leverages advanced climate and hydroponic systems to deliver consistent year-round supply to major grocery retailers across the United States and Canada.

In its produce segment, Village Farms operates large-scale greenhouse facilities in Texas and Canada. These facilities employ integrated pest management, energy-efficient technologies and rigorous food-safety protocols to meet the specifications of supermarket chains and foodservice distributors. By combining modern automation with traditional horticultural expertise, the company aims to reduce resource consumption while maintaining the flavor and nutritional value of its crops.

Complementing its fresh-produce business, Village Farms is a 50/50 partner in Pure Sunfarms, one of Canada’s leading licensed producers of recreational cannabis. Pure Sunfarms cultivates, processes and packages a range of dried flower, pre-rolls and cannabis oil products at its greenhouse campus in British Columbia, supplying federally regulated adult-use markets. This joint venture brings together Village Farms’ greenhouse know-how with Pure Sunfarms’ cannabis-specific licensing and distribution network.

Village Farms International Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Record cannabis performance drove consolidated sales of $64 million, while cannabis adjusted EBITDA rose 16% year over year to a record $15.3 million. Cannabis gross margin expanded to 51% from 42%, supported by higher yields, operating efficiencies and a favorable EU GMP product mix.
• Positive Sentiment: International medical exports increased 74% year over year and 43% sequentially, with Village Farms gaining share in Germany and holding four of the market’s top 10 strains. Management expects continued European growth and entry into additional jurisdictions in the second half of 2026.
• Positive Sentiment: The Delta 2 expansion remains on schedule, with 15 metric tons of incremental production expected in 2026, another 25 tons in 2027 and a full 40-metric-ton run rate beginning in the third quarter of 2027. Management said the added scale should further reduce production costs and improve supply flexibility.
• Positive Sentiment: The company ended the quarter with approximately $73 million in cash and said Canadian and Netherlands expansion spending is nearly complete, positioning it for stronger free cash flow and cash growth in the second half of 2026.
• Negative Sentiment: Canadian cannabis pricing is showing signs of pressure as more supply returns to the market, particularly in lower-value flower, while cash flow from cannabis operations fell to $8.9 million from $19.2 million a year earlier due partly to income-tax payments and working-capital needs.

Presentation

[Operator]

Good morning, ladies and gentlemen. Welcome to Village Farms International second quarter 2026 financial results conference call. This morning, Village Farms issued a news release reporting its financial results for the second quarter ended June 30th, 2026. That news release, along with the company's financial statements, are available on the company's website at villagefarms.com under the Investors heading. Please note that today's call is being broadcast live over the internet and will be archived for replay both by telephone and via the internet beginning approximately one hour following completion of the call. Details of how to access the replays are available in today's news release. Before we begin, let me remind you that forward-looking statements may be made today, during or after the formal part of this conference call. Certain material assumptions were applied in providing these statements, many of which are beyond our control.

[Operator]

These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks, and uncertainties is contained in the company's various securities filings with the SEC and Canadian regulators. Including its Form 10-K MD&A for the year ended December 31st, 2025, and 10-Q for the quarter ended June 30th, 2026. Which will be available on EDGAR and SEDAR+. These forward-looking statements are made as of today's date, except as required by applicable securities law, we undertake no obligation to publicly update or revise any statements. I would now like to turn the call over to Michael DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead, Mr. DeGiglio.

[Michael DeGiglio, President and CEO at Village Farms International]

Thank you, Liz, good morning, everyone. And thank you for joining us for our second quarter results. With me today are Stephen Ruffini, our Chief Financial Officer, and Ann Gillin Lefever, our Chief Operating Officer, and Sam Gibbons, our Senior Vice President, Corporate Affairs and Investor Relations. I will begin with my customary review of our highlights from the quarter. Stephen will review the segments and financials in more detail before I make some last closing comments. Our second quarter results continue to demonstrate the strength of our expanding global cannabis platform, driven by record cannabis revenues as we continue growing in target markets and product categories in the countries we currently operate in. We delivered our fifth consecutive quarter of positive net income and earnings per share since we privatized our legacy produce business last year.

[Michael DeGiglio, President and CEO at Village Farms International]

As we noted in this morning's press release, we're having a record year of production in our Delta, British Columbia facilities, which has contributed to stronger margin performance. Consolidating net sales growth was strong, and we achieved record cannabis harvest yields from our Delta facilities through the first half of 2026, with that including the first harvest from our Delta 2 expansion. Record yields, combined with greater operating efficiencies, have resulted in lower cost of production and favorable sales mix, also helped drive nearly 10% points of year-over-year gross margin expansion, which translated to strong operating leverage as adjusted EBITDA and net income, both meaningfully outpaced total sales growth. I will also note that when excluding a one-time $4.3 million vendor settlement, which was tied to our legacy produce business, our EBITDA, received in the second quarter of last year as a comparison.

[Michael DeGiglio, President and CEO at Village Farms International]

Consolidated adjusted EBITDA increased meaningfully year-over-year to $15.4 million with a record Q2 cannabis segment performance. Moving on. In Canada, we've gained traction on our efforts to grow market share in convenience product categories. For the first time, our brands have achieved top 10 market share in all major categories with continued growth in vapes and infused pre-rolls. We've discussed our focus on strengthening our position in convenience product categories for several quarters, and we're encouraged by this progress, which has been entirely organic and builds in-house capabilities, which we'll apply to non-Canadian markets as well in the future. It was also another record quarter of international export sales, which grew 74% year-over-year and 43% sequentially as we continue to benefit from our competitive advantage with the world's largest EU GMP certified cannabis facility.

[Michael DeGiglio, President and CEO at Village Farms International]

We discussed on last quarter's call that we believe EU GMP certified product is a competitive advantage which drives strong growth and profitability, and we're pleased to prove it with today's results. This is an underappreciated Village Farms strength, strategically built over the past five years into the supply chain for our international customers. Without giving complete details for competitive reasons, our own sales mix of GACP to EU GMP certified product has improved significantly since we completed the facility upgrades we discussed last quarter. As we stated, these upgrades made our Delta campus the world's largest EU GMP certified facility by total compliant product volume, and our higher sales mix of EU GMP certified product improved our margins during the second quarter.

[Michael DeGiglio, President and CEO at Village Farms International]

Some of our peers have discussed these challenges on their earnings call publicly for the first time over the last couple weeks, and we've been saying demand for EU GMP compliant product is continuing to increase. Importantly, the German market continues to grow. So has our share of the total market thus far in 2026. We most recently held four of the top 10 market share strains, and based on our own internal research, we believe we have the widest pharmacy distribution of any cultivator with product in Germany today. We have a strong growing share of Europe's total addressable cannabis market, and we remain very excited about the opportunities we see in the U.K. and Australia, and we continue to expect that we will enter new European jurisdictions in the second half of this year. For a quick reminder of our Delta 2 expansion project.

[Michael DeGiglio, President and CEO at Village Farms International]

The Delta 2 expansion is the conversion of the second half of the 1.1 million sq ft Delta 2 greenhouse. As previously stated, we are completing the conversion in phases, one half of the expansion at a time. The first half is completed and in production, and the second-half conversion will commence on September 1st. We continue to expect that we will harvest an incremental 15 metric tons of production from this D2 expansion this year, with an additional 25 tons harvested from the expansion in 2027. We will be on a full 40 metric ton run rate starting with the third quarter of 2027, and with the full 40 tons of incremental capacity available beginning fiscal 2028. Once completed, the D2 expansion will bring our total annualized production in Delta to approximately 160 metric tons of dried trim flower annually.

[Michael DeGiglio, President and CEO at Village Farms International]

All of this will drive further economies of scale, cost efficiencies, and improve flexibility to meet demand from our customers, consumers and patients in Canada and around the world where we operate. As a reminder, any future conversion of our Delta 1 greenhouse would more than double our annualized production capacity. Turning now to our recreational cannabis business in the Netherlands. We are continuing to maintain strong distribution with participating coffee shops and have been focused on expanding our product assortment to create more value for coffee shop owners who are looking to differentiate their menus. We remain incredibly excited about the Netherlands market, and feedback from participating municipalities and coffee shop owners about the pilot program has been overwhelmingly positive thus far.

[Michael DeGiglio, President and CEO at Village Farms International]

The government is expected to issue a report with an internal review of the program later this summer. We're quite optimistic that this will also reflect positively on the program. As we discussed on last quarter's call, we experienced a slight delay with final approvals of our phase two facility, but we did begin cultivating in the Groningen facility in Q2. Groningen is expected to ramp up to its full production capacity over the course of the next few quarters, positioning us for another step function of growth next year. We're committed to being a strong community partner and employer and believe there is tremendous long-term upside potential for Village Farms in the program if it is ultimately expanded, which could increase the total addressable market in the Netherlands for our products by nearly tenfold compared to where we are today.

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Stephen Ruffini, CFO at Village Farms International]

Thanks, Michael. I'll start with a review of our consolidated Q2 results. All figures referenced reflect U.S. dollars unless otherwise noted. Consolidated net sales increased 27% sequentially and 7% year-over-year to $64 million, driven by continued international growth. Consolidated net income from continuing operations was $7.2 million, or $0.06 per share. The unfavorable variance compared to last year was the result of a one-time vendor settlement of $4.3 million received in the second quarter of last year. Excluding this impact, net income from continuing operations would have increased significantly as a result of our record Q2 performance. Consolidated adjusted EBITDA from continuing operations was $15.4 million, or 24% of sales, compared to $17.1 million, or 28.5% of sales in Q2 of last year, with the unfavorable variance similarly driven by last year's vendor settlement. Excluding this impact, consolidated adjusted EBITDA would have increased approximately 20%.

[Stephen Ruffini, CFO at Village Farms International]

Turning now to our cannabis segment. Total net sales was $53.5 million, or a 5% increase versus Q2 of last year. The year-on-year improvement was driven by the strong performance in our international medical exports, which increased 74% over Q2 of last year and 43% sequentially, predominantly from Village Farms taking a larger share of the German market. As we discussed last quarter, we experienced a slight delay in the commencement of operations at our Phase II facility in the Netherlands, but Q2 sales increased 35% year-over-year to $3.3 million. Roteghem is now operational and will begin contributing to stronger growth. As Michael mentioned, we expect Roteghem to ramp to full production capacity by the end of Q1, positioning for continued growth through 2027.

[Stephen Ruffini, CFO at Village Farms International]

Cannabis gross margin was 51%, up 900 basis points from 42% in Q2 of last year, reflecting a favorable product mix, increased operating efficiencies, and a lower cost of production at our Delta production campus. Total SG&A as a percentage of sales was 28% compared to 23% in Q2 of last year, reflecting an update to the company's transfer pricing policies, as well as higher commercial and marketing expenses. The update to our transfer pricing policy is directly attributable to the sale of our produce business a year ago. A higher percentage of our corporate expenses are now directly allocated to our cannabis business versus prior years. Q2 adjusted EBITDA from continuing operations for cannabis improved 16% to a record of $15.3 million, up from $13.1 million in Q2 of last year, resulting in adjusted EBITDA margin of 29%.

[Stephen Ruffini, CFO at Village Farms International]

Q2 cash flow from cannabis operations was positive $8.9 million, compared to a positive $19.2 million in Q2 of last year, with variance driven by Canadian income tax payments, which did not occur during the prior year, as well as changes in non-cash working capital items as terms on export sales are generally longer than in the Canadian market and as we expand our production footprint in Delta 2. We believe we are the first and only major Canadian public cannabis LP in the position of paying corporate income taxes, which remains a testament to the strength of our operating capabilities and a sign of a sustainable long-term profitable platform. As we do each quarter, I will point out that in Q2, we also paid Canadian excise taxes on our retail branded sales of $15 million, nearly 40% of gross retail branded sales.

[Stephen Ruffini, CFO at Village Farms International]

Turning to the balance sheet, where I'll note that we no longer carry a restricted cash balance after the completion of the one-year escrow period as part of our produce transaction last May. We ended the first half of the year with cash of approximately $73 million. For the first six months, we generated close to $21 million from continuing operations before working capital adjustments. Working capital adjustments were significant in the first six months of this year, in particular, due to the payment of essentially a full year and a half of Canadian income taxes, totaling $17 million, and that's in U.S. dollars. During the first six months, we also spent $15 million in CapEx, paid $31 million in excise taxes, as well as $7 million in share buybacks, and completed a $15 million equity placement with two key U.S. institutional investors.

[Stephen Ruffini, CFO at Village Farms International]

We remain very comfortable with our long-term debt level, which was approximately CAD 40 million at a blended interest rate of 5.6% as of June 30th, 2026. During the quarter, we drew down an incremental in Canadian dollars, CAD 8.3 million on our Pure Sunfarms credit facility to support our Delta facility upgrades and technology enhancements. We are in a net cash position of CAD 33 million, and as Michael mentioned, we expect to grow our cash balance for the remainder of the year with stronger free cash flow during the second half. Our board and management will continue to evaluate capital allocation decisions on a quarterly basis, and we expect to maintain a balanced approach to capital allocation to drive returns to shareholders. I will now turn the call back to Michael for some closing comments.

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Michael DeGiglio, President and CEO at Village Farms International]

We will only pursue opportunities that are strategically compelling and supportive of long-term shareholder value creation. We have a considerable upside potential in our Netherlands business, Canadian and U.S. assets, and ownership interest in Vendextra, we believe Village Farms remains one of the most attractive cannabis growth platforms and investment opportunities in the world. Liz will now take time to answer some questions.

[Operator]

As a reminder, if you'd like to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from Aaron Grey with Alliance Global Partners.

[Aaron Grey, Analyst at Alliance Global Partners]

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

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Michael DeGiglio, President and CEO at Village Farms International]

There has been a decline in the non-compliant, so to speak, products that are flowing into Germany from multiple parts of the world. You really need to be an EU GMP-compliant partner. I could say this, as far as your question for the U.S., I'm not saying U.S. single state, multi-state operators won't be there. I can tell you from our experience in the last six years, it is not easy. It's just not a matter of getting a DEA export license. Not just qualifying for EU GMP, but not just getting there on your initial certification, but maintaining it is even more difficult. I wish everybody luck, and as far as I'm concerned, we may be a U.S. exporter of EU GMP in the future as well. I think we have a great position right now that we can continue to build on.

[Michael DeGiglio, President and CEO at Village Farms International]

I think we're in a strong position going forward over really anybody who wants to focus on EU GMP for the European market.

[Aaron Grey, Analyst at Alliance Global Partners]

Okay, great. Thanks very much for that detail. A second question from me. Just talking about the EBITDA margin profile. We've seen some nice expansion in the past two quarters. How best to think about the long-term EBITDA margin aspirations as we think about all the puts and takes of your sales growth opportunities and potential broader sales pressure within cannabis? Thank you. Or pricing pressure within cannabis. Thank you.

[Stephen Ruffini, CFO at Village Farms International]

Aaron, Stephen. Our continued long-term focus is the 30%-40% for our gross margin, our EBITDA margin, certainly in the mid-20s is possible. We continue to be very focused on managing our costs. Obviously, the EBITDA margin and gross margin are also somewhat dependent on demand and supply. As more people enter the market, there could be some pricing pressure. Now, as Michael mentioned, we're continuing to see very strong pricing for our EU GMP, and we'll continue to get some economies of scale as we expand our Delta facility platforms over the ensuing years.

[Michael DeGiglio, President and CEO at Village Farms International]

If I could add to that, just with the increase in our gross margin, it really doesn't clearly show the efficiency of our operation because complying with EU GMP significantly increases your cost of production. When you're looking at others who may start to index on EU GMP out of the U.S., they should plan for much greater costs of production and overall costs to get there. That's not really identifying in our numbers. It just shows the power of large-scale, efficient operations, and the bigger we get, the lower we believe our costs will be going forward. We see that as a great advantage. You really need a large scale footprint to index. Thanks, Aaron.

[Aaron Grey, Analyst at Alliance Global Partners]

Great color. Appreciate that. I'll jump back in the queue.

[Operator]

Our next question comes from Doug Cooper with Beacon Securities.

[Doug Cooper, Analyst at Beacon Securities]

Hey, good morning guys. Terrific work in the quarter. Couple things. First of all, in Germany, you're up 70-odd% year-over-year, up 43% sequentially. What did the market grow and therefore, what kind of market share did you gain, you think?

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Ann Gillin Lefever, COO at Village Farms International]

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

[Doug Cooper, Analyst at Beacon Securities]

Okay. That's good color. I guess as visibility, how do investors view the visibility of growth in Germany? Obviously, it's a big part of your growth and margin expansion story. Looking out into 2027 and beyond, how do we get comfort that they're going to continue to grow as much as they have been?

[Michael DeGiglio, President and CEO at Village Farms International]

I think projections are pretty astronomical over the next five to six years towards 8,000 tons. Even if it was half of that, it would be a huge upside. Patient enrollments overall are still very low. It's probably in the single digits.

[Ann Gillin Lefever, COO at Village Farms International]

Low single digits. Very low single digits.

[Michael DeGiglio, President and CEO at Village Farms International]

Yeah, low single digits. I think we're very confident that the growth will continue, at least for the foreseeable future, at least five years, maybe more.

[Doug Cooper, Analyst at Beacon Securities]

Do you foresee ultimately getting a footprint in Europe to feed that demand?

[Michael DeGiglio, President and CEO at Village Farms International]

Probably talk to you offline on that one. Thank you.

[Doug Cooper, Analyst at Beacon Securities]

Okay. A couple of quick ones. CapEx remaining for second half of 2026 and 2027?

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Doug Cooper, Analyst at Beacon Securities]

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

[Stephen Ruffini, CFO at Village Farms International]

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

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Doug Cooper, Analyst at Beacon Securities]

Great. Excellent. Thanks, gentlemen and ladies.

[Ann Gillin Lefever, COO at Village Farms International]

Thanks, Doug.

[Operator]

Our next question comes from Frederico Gomes with ATB Cormark.

[Frederico Gomes, Analyst at ATB Cormark Capital Markets]

Thanks. Morning. Thanks for taking my questions. Congrats on the great quarter here. I want to ask, I'm going to go back to margins. Pretty impressive this quarter. You referenced, I guess, your long-term target of 30%-40% again. How sustainable do you think those high 40s margins are short term, especially as you increase the sales mix towards international, maybe reaching that 50% that you mentioned? That's number one. Secondly, obviously, I guess a portion that's not only sales mix but cost of production, and you mentioned continued improvements there. Can you maybe just elaborate on that? What's driving that continued improvement, and how can you be more efficient as you scale? Thank you.

[Michael DeGiglio, President and CEO at Village Farms International]

Well, there's a number of drivers, not just on pricing, which we see for the foreseeable future, we see maintaining our margins in Germany. We feel very confident about that. We've always mentioned for many years about continuous improvement and continuing to drive our costs down. That's number 1 and most prudent. You have to drive your costs down, and the first half of this year demonstrated that we are able to continue to drive our cost of production down. That's a factor of yield increases, more efficiency in how we operate. That showed strongly this first half of the year. In our long history of growing multiple crops, there's no end to increasing efficiency. You have to take that into account. If you look at Canada, I think Canada's become somewhat of a mature market now, 10 years later.

[Michael DeGiglio, President and CEO at Village Farms International]

It's got single-digit growth, and at some point, the pricing more or less is plateauing depending on convenience brands, pure flower, but it's not going to have great changes, I think, over the long term. Yeah, we feel pretty comfortable. Stephen said we've always said our target margin is 30%-40%, but that doesn't mean that we're not going to try to do better as we demonstrated this quarter. Scale matters. You can't get around it. It's ultimately a fixed cost business. The variable component is very small, at least on the cultivation side. The larger you can get, you can really hammer down your cost of production.

[Frederico Gomes, Analyst at ATB Cormark Capital Markets]

Thank you, Michael. Appreciate that. Secondly, you mentioned that pricing is maybe plateauing in Canada. Can you comment on how the domestic prices have evolved recently? I know that we talked about how international is maybe benefiting domestic prices, anything on the recent trend in terms of pricing domestically? Thank you.

[Michael DeGiglio, President and CEO at Village Farms International]

Ann?

[Ann Gillin Lefever, COO at Village Farms International]

Yeah. Good morning, Frederico. A couple of things. We are seeing some more supply come back into the Canadian market. We think it's tied to the testing requirements that the international markets have, as well as some crackdown on greenwashing. Within the flower category in particular and some of the close derivatives, we're seeing a little bit of a mix emerging towards the lowest value segment, which we think is again, folks using that outlet to raise cash on existing biomass. We're continuing to invest. As Michael highlighted in the remarks, we've spent a lot of time building into our convenience categories. We see those plus the dominant position we have as flower as a way for us to continue to drive the mix and price in the market.

[Frederico Gomes, Analyst at ATB Cormark Capital Markets]

Thank you. Appreciate that.

[Michael DeGiglio, President and CEO at Village Farms International]

Thanks, Frederico.

[Operator]

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

[Pablo Zuanic, Analyst at Zuanic & Associates]

Good morning, everyone, and congratulations on the very strong export numbers. The first question, Michael, and I think we've talked about this before. If you can give more color about your route to market in Europe, or is it pretty much an FOB model in which you sell to distributors and they take care of the distribution and selling to pharmacies? Color in terms of how your company's involved in that selling effort. That would help. By the same token, whether at some point you see opportunities to sell branded product there. Now, the second part to the question is as you expand your scale and your capacity, does that model hold, or do you need to invest in downstream assets to gain more control over your distribution in Europe? Thank you.

[Michael DeGiglio, President and CEO at Village Farms International]

On the branded question, I would say absolutely. As I said, we know our strains. We have four of the top 10. Our brands is in work. That is part of the future. Absolutely there. As far as downstream, yeah. We sat back and watched what others have done. If you really look at, say, Germany as an example, going back eight to 10 years, the evolution is pretty incredible from Malta to Portugal to others building small assets in Germany. We don't think they've ever made money. We've watched all this capital over many years being spent with really no return. Now, of course, the GACP magic wand approach is not really working.

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Ann Gillin Lefever, COO at Village Farms International]

I'll jump in.

[Pablo Zuanic, Analyst at Zuanic & Associates]

No, that's fine.

[Michael DeGiglio, President and CEO at Village Farms International]

Go ahead, Ann.

[Ann Gillin Lefever, COO at Village Farms International]

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

[Pablo Zuanic, Analyst at Zuanic & Associates]

Yeah. No, that's great, Ann Gillin. Thank you. I'm sure you heard in the Curaleaf conference call, they mentioned you as a key supplier of theirs. I don't know if that's already happening or it's in the future, but congrats for that. Look on the same topic. When I try to think of your CAD 21 million number for the quarter, in very simplistic terms, I would call that an FOB number, and what some of your peers, larger Canadian peers report, it's pretty much a landed almost to pharmacy number, right? The numbers are not comparable. I don't know if you have a way to calculate this, but are you really the largest Canadian exporter by volume, or am I exaggerating there?

[Ann Gillin Lefever, COO at Village Farms International]

We think we are the largest Canadian exporter by volume.

[Pablo Zuanic, Analyst at Zuanic & Associates]

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

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Pablo Zuanic, Analyst at Zuanic & Associates]

Okay. Thank you.

[Michael DeGiglio, President and CEO at Village Farms International]

Thank you.Pablo

[Operator]

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

[Michael DeGiglio, President and CEO at Village Farms International]

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

[Operator]

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

Participants

Executives

• Michael DeGiglio, President and CEO
• Stephen Ruffini, CFO
• Ann Gillin Lefever, COO

Analysts

• Aaron Grey, Analyst at Alliance Global Partners
• Doug Cooper, Analyst at Beacon Securities
• Frederico Gomes, Analyst at ATB Cormark Capital Markets
• Pablo Zuanic, Analyst at Zuanic & Associates