Green Thumb Industries Inc

CNSX:GTII

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, and welcome to Green Thumb's Second Quarter 2022 Earnings Conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the conclusion of formal remarks.

During the question-and-answer session, we would ask for limit for one question per person. As a reminder, a live audio webcast of the call is available on the Investor Relations section of Green Thumb's website and will be archived for replay. I'd like to remind everyone that, today's call is being recorded.

I will now turn the call over to Shannon Weaver, Director of Internal Communications. Please go ahead.

[Shannon Weaver, Director of Internal Communications]

Thanks, Betsy. Good morning and welcome to Green Thumb's second quarter 2022 earnings call. I'm here today with Founder and CEO, Ben Kovler, and Chief Financial Officer, Anthony Georgiadis. Today's discussion and responses to questions may include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.

These risks and uncertainties are detailed in the earnings press release issued today, along with our reports filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including the 2021 annual report filed on Form 10-K. This report along with today's earnings release, can be found under the Investors section of our website. Green Thumb assumes no obligations to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

Throughout the discussion, Green Thumb will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release and SEC and SEDAR filing. Please note all financial information is provided in US dollars unless otherwise indicated. Thanks, everyone. And now, here's Ben.

[Ben Kovler, Chief Executive Officer]

Thank Shannon. Good morning everyone, and thank you for joining our second quarter conference call today. We reported another quarter of solid results, which feels particularly good, given the current economic environment. Revenue increased 15% year-over-year and 5% quarter-over-quarter to $254 million. We had positive GAAP net income for the 8th consecutive quarter of $24 million or $0.10 per diluted share, that's $0.22 per share so far and 2022. We posted adjusted operating EBITDA of $79 million or 31% of revenue for the quarter and $146 million year-to-date. Finally, our cash flow from operations is positive $40 million year-to-date.

Before I get into more details about the quarter, it's important to acknowledge the challenging market conditions that are putting macro pressure on the economy and consumers. While the market will continue to fluctuate, based on various economic factors, it doesn't change the fact that cannabis is a growth industry with strong demand tailwinds. As we sit here today, the cannabis market is at a run rate north of $26 billion. In fact, last quarter was the largest quarter of revenue for legal cannabis in the U.S. at over $6.6 billion. Yet it is still illegal to purchase cannabis for adult use in more than half of the states in America. The transition to adult use in key markets presents massive growth potential. We have had the opportunity to watch that movie in real time this quarter in New Jersey, with Rhode Island and Connecticut coming later this year, two markets where Green Thumb is well-positioned to serve the pent-up demand.

In the second quarter, we had a greater than 300 basis point improvement in EBITDA margin versus last quarter, bringing us back above the 30% level. Gross margin was 49.5%, which represents an improvement over the first quarter when normalized for reallocation of certain expenses. Our cash flow from operations was negative for the first time in 10 quarters at minus 15.4 million. However, this was not a surprise for us and something we knew was coming. There were three key drivers, first, two large cash tax payments in the second quarter compared to zero in Q1. Second, inventory build primarily in Maryland and Ohio. And finally the timing of 2021 compensation bonuses for our team. I think it's helpful to reiterate the tax schedule for US Corporations. Tax estimates are due on the 15th of the month in April, June, September, and December. Therefore we have two payments this quarter which totaled 65 million. Section 288 of our tax code is our current reality, and we take the position of paying taxes in full and on time. We have trained ourselves to think of free cash flow in an after tax or no pathway.

Given the nature of the cannabis industry, the punitive tax code and the fickle capital markets we continue to be focused on cash at Green Thumb. We believe operating cash flow is the best measure of a company's financial and operational health and we are not alone. With the prospects of a bear market and recession we've noted Wall Street is paying close attention to the fundamental attributes of a business such as cash flow, balance sheet and earnings quality. All of which support a company's health and ability to weather, whatever comes its way. When you're out of cash you're out of options and optionality is very important to us, regardless of any volatile external environment over which we have little or no control. What we can control is our capital allocation decisions and our balance sheet both of which are strong, competitive advantages and why we constantly evaluate our business to ensure we are operating as efficiently as possible.

We ended the second quarter with 312 million in current assets, including cash and cash equivalence of 145 million, which supports our ongoing financial and operational health. In June, we strengthened our balance sheet with the innovative industrial properties funding. And in July, we extended the maturity date of our debt until April 2025. These were easy decisions for the benefit of shareholders and again buys us optionality. From where I sit I'm bullish on the enormous market opportunity ahead and feel confident that we have the fire power, strong brands and team to ride the green wave as the industry doubles, triples and eventually reaches a hundred billion in the US. How we get there remains fluid as there are a number of factors that will impact timing. As I mentioned at the beginning, current market conditions and especially high inflation are putting pressure on consumers across all sectors.

On top of that pricing in cannabis products can vary tremendously across markets. At any time in ways that are difficult to predict pricing pressure may disrupt an individual market. That is why we have built a diversified portfolio of states with large vertical optionality which provides some insulation for near term volatility that we're seeing in certain markets. We know that the American consumer is demanding this product for wellbeing. We see it every day in our stores across the country. In addition, we have major tailwinds coming as new markets turn on adult use sales. We are putting capital into markets that will generate strong returns, but there may be unexpected challenges along the way. New York is a great example of a state that has created a lot of excitement up front, but has regulations that have created more questions than answers.

As such we've tempered our near term expectations for New York, but even so are well positioned in this market and will be patient. New Jersey on the other hand began adult sales on April 21st. And in the first 30 days, there were $24 million of cannabis sold across just 12 open retail stores in the state. Estimates indicate a $2 billion market in the next few years, which is 7X in current run rate.

Connecticut and Rhode Island should launch adult use sales later this year and Green Thumb is well-positioned in both. And in Illinois, our home state and largest market, we are seeing some positive action. After two and a half years of frustration, social equity licenses are now being awarded and we expect to see the beginning of new stores opening later this year. This should provide greater accessibility to wellbeing through cannabis, more diverse and equitable participation in the industry and an overall lift in the Illinois market.

We believe more than doubling of the store base will grow the overall market, even if there is pricing pressure. In our newer markets, we are seeing good momentum. In Minnesota, we opened our 6th retail store located in Mankato this past April and contributed our first day profits to Habitat, Minnesota whose mission is to bring people together to build homes, community and hope. With this new store, we have 77 retail locations across the nation.

On the product front, we're excited to offer edibles to Minnesota patients for the first time as of August 1st and we saw very strong demand, a good sign of things to come. In Virginia, patients are no longer required to have a medical cannabis card issued by the Virginia Board of Pharmacy as of July 1st. The lifting of this restriction is a big win for medical patients in the Commonwealth and we have seen demand tick up, and in 2024 adult used retail sales are expected to begin, which is another growth opportunity, given the state's population of almost 9 million people.

On the federal front, we are not holding our breath for cannabis legalization. Our extremely partisan Congress seems blind to the will of the people, which according to a 2021 Pew Research study found 91% of us adults are board with cannabis legalization in some fashion. Despite the noise we are doing what we do best, keeping our heads down on execution and our eyes on the prize. There are too many catalysts for growth to get distracted, and we are in a great position to benefit from some key tailwinds.

Before I turn the call over to Anthony, I want to touch on our consumer package use business. As you know, we are committed to growing indoor, high-quality flour under the rhythm brand. Paying attention to the plant is one of the most critical things that we do. It's not easy and never entirely predictable. The quality and efficacy of the plant is fundamental to a safe and satisfying user experience and that continues to be our focus. We are proud that rhythm continues to be a leading us brand according to BDSA data. We are excited to bring our authentic brands like Beboe, Rhythm, Dog Walkers and Incredibles to more Americans. We've also leaned into the expansion of one of our value brands called and shine which has seen tremendous growth, particularly in vape and flour. We remain laser-focused on serving consumer needs and at brand currency as a fundamental catalyst for growth.

Now I'll turn the call over to Anthony for his financial report, and I'll come back with a few closing remarks. Anthony?

[Anthony Georgiadis, Chief Financial Officer]

Thanks, Ben, and good afternoon, everyone. As you just heard the company has posted a respectful second quarter, generating $254 million in top-line net revenue in just under $79 million of adjusted operating EBITDA. Total net revenue increased $11.7 million over the previous quarter with gross CPG revenue remaining flat and gross retail revenue increasing approximately $20 million. As previously highlighted, the difference between gross and net is inter company revenue. And the company sold approximately $9 million more in product to itself in Q2 versus Q1.

During the quarter, the company generated gross margins of 49.5%, 120 basis point decline over Q1. This decline was primarily driven by the company's decision to allocate a portion of its SG&A expenses into its cost of goods resulting in a closer alignment of management's view of the business with its GAAP reporting. The allocation negatively impacted Q2 gross margins by approximately 150 basis points, but had no impact on adjusted operating EBITDA margins. Generally speaking, pricing headwinds in Maryland, Nevada, Massachusetts, and Pennsylvania, along with inflationary cost pressures were neutralized by strong performance in New Jersey and elsewhere.

On the SG&A side excluding depreciation, amortization, one time transaction costs and stock based comp our normalized SG&A for Q2 was $57 million, an approximate $1 million increase over Q1 or 2.5%. Please note that the company has taken steps to limit it’s SG&A spend through the rest of the year. Net of these expenses along with its 800K and other income, the company generated approximately$ 24 million in net income or $0.10 a share, our eight consecutive quarter positive earnings per share for the business.

Moving to our balance sheet the company ended the quarter with $145 million of cash. In late June we drew down an additional 55 million of funds via our Danville sale leaseback with IIP. As previously disclosed the terms and costs of this capital was negotiated late last year, which allowed the company to avoid the increase in capital costs our industry and the broader US environment has experienced since then. During Q2 we invested approximately $69 million in gross CapEx when including the spend associated with our sale leasebacks as the company continued to make investments into its infrastructure in New Jersey, Virginia, New York and Florida. We anticipate these investments to drive substantial returns for shareholders in the coming years. In addition, the company paid $65 million in cash taxes, which brought our year to date cash flow from operations down to $40 million. As Ben mentioned, the company is current on its tax bill.

Subsequent to quarter end at zero cost the company exercised its right to extend the maturity of the senior credit facility for one year until April 2025. Another positive move for shareholders. Net-net, our conservative balance sheet combined with our strong operating performance should help all our shareholders sleep well during these uncertain times. We remain incredibly bullish about the long term macroeconomic impact cannabis will have on this country, as well as the brands, strategic platform and distribution capabilities we've built over the last eight years.

Last quarter, I left you all with a few simple comments. As a reminder they were the following. One, tune out the noise. Two, be the consumer. Three, watch our cash and four, be ready to be opportunistic when others are fearful. While these still hold true today, the consumer remains our North Star as our ultimate success will be determined by how well we address the consumer via differentiated and unique products. The fun part is our team of approximately 4,000 strong, eats our own cooking and knows we all play a pivotal role in helping Green Thumb achieve this goal.

In closing as the end of summer approaches, we can't help, but think about what's brewing in the Northeast. Connecticut, Rhode Island and New York it's your time to make history and we'll be right there with you. Back to you, Ben.

[Ben Kovler, Chief Executive Officer]

Thank you, Anthony. One of the most important aspects of our culture is giving back to our communities. There's so much work needed to help repair the damage caused by the war on drugs and this is a passion point amongst our team. We continue to invest in this space through our Good Green program, which supports non-profits working in black and brown communities impacted by the war on drugs. In June, we opened our third round of Good Green Grant applications and on-track to donate more than $1 million by the end of this year. I'm proud of what this industry has achieved thus far. We are making positive contributions in so many ways.

According to leaf Leafly's job report, 428,000 full-time equivalent jobs are supported by legal cannabis as of January, 2022. The industry created an average of 280 new jobs per day last year. In 2021 [Technical difficulty] over $3.7 billion in tax revenue from recreational cannabis, that's economic value creation in action. We believe the Great American growth story is alive and well. Americans are continuing to choose cannabis for wellbeing and given the potential of the cannabis industry, I know it's frustrating when the market sentiment turns negative.

But as I've said before, we are playing a long game, one that requires patience and discipline to reap big rewards, and at Green Thumb we are confident in our strategy, we believe in our brand and we are committed to promoting wellbeing through the power of cannabis for the American people.

Now we'll open the call to questions. Operator?

[Operator]

[Operator Instructions] The first question today comes from Vivian Azer with Cowen. Please go ahead.

[Vivian Azer, Cowen]

Hi. Good evening. So top-line better than we expected, I think broadly better than everyone expected. I'm just curious how it came in relative to your internal expectations, Ben and Anthony. And just on an underlying basis, any key call out, I know the states are idiosyncratic, but for core markets, any key states that were better or worse than you'd expected? Thank you.

[Ben Kovler, Chief Executive Officer]

Thanks for the question, Vivian. Good one. I think, on the margin as expected, maybe better, a little better than where we were two weeks, four weeks into the quarter, what we would've predicted. And in terms of a state-by-state breakdown, I mean, the hero of the portfolio is New Jersey with the turn on. So, material step up and we continue to like where that market's going. It continues to grow and it needs more stores and going to be continued growth. We've seen that movie before. So that would be the call out on the upside.

[Operator]

Thank you. The next question comes from Matt McGinley with Needham. Please go ahead.

[Matt McGinley, Needham]

Thank you. Your retail business did great this quarter, but the CPG sales to external customers dropped around 12% quarter-over-quarter. And before that your CPG business really hadn't grown at all in over a year. So is that drop in revenue more reflective of price compression or are you losing shelf space in retail? And if, I guess bigger picture is that, CPG segment is smaller or just less profitable than you had may have envisioned in the past because it still makes sense to deploy so much capital into cultivation and production.

[Anthony Georgiadis, Chief Financial Officer]

Hey, Matt. Anthony here. I'll take that. Look, it's a great question. Look, I think if you zoom out, you know, what's happening in a number of these markets is that as they become more competitive the verticality is increasing. And so, what I would tell you is that we've made a conscious decision to push more of our wholesale goods through our own retail kind of channels. And that's by choice and by design. And that's one of the ways that we've kind of combated some of the pricing compression that we've seen in some of these markets. In terms of losing shelf space, I think it's a little premature to say that because I think that, you know, we're not alone in what we're doing, which is pretty widespread throughout the industry at this point.

[Operator]

The next question comes from Andrew Partheniou with Stifel. Please go ahead.

[Andrew Partheniou, Stifel]

Good evening. Thanks for taking my questions and congrats on the quarter. Talking about capital allocation, your balance sheet is among the least levered it in the industry, you know, are you thinking about the opportunity to potentially raise more debt capital and accelerate organic CapEx investments given your -- a lot of catalyst rec conversions and Minnesota as well ahead, or are you thinking about potentially more M&A given where the market is headed? Just thinking about, you know, how do you prioritize your capital allocation? And if you could give any detail on states as well could be useful. Thanks.

[Ben Kovler, Chief Executive Officer]

That's great. Thanks, Andrew. I'll take that, it's Ben. In terms of the second part, first in terms of M&A it's really the same script here. Everything's really on the table. But we're very measured, pretty disciplined in the current investment in the business, especially with equity prices make the bar on M&A so much higher. So we're highly biased to invest in the business. We like the CapEx plan that we have. We continue to examine it constantly. We're confident with where the money is going, you know, where it's been and where it's going, places like New York, Virginia, Florida, Minnesota, and that's in the plan. Don't feel like getting more levered. Don't really use our peer set as a measure for where we gain comfort. We really look at our own cash and want to sleep well on what we have going here.

We like where our debt and our balance sheet is.

But we're very excited about the growth coming from those places where we're putting capital in the future and are really measuring ourselves on the return on that invested capital and what that will produce for shareholders. And as we look out to those states, those are big population states with major catalysts for growth that are like highly immature, underdeveloped, early part of the growth curve. So that's the best place we can put shareholder dollars to build that capacity.

And for the last question, it doesn't mean we're making less stuff. It's just where we're selling it, how it shows up on the income statement and at what margin. So we like the CapEx plan and don't particularly have appetite to accelerate it. We want to get it right.

[Operator]

The next question comes from Spencer Hanus with Wolfe Research. Please go ahead.

[Spencer Hanus, Wolfe Research]

Great. Thanks for the question. Just wanted to zoom in on New Jersey for a minute. Could you about the cadence of sales in New Jersey during the quarter? And as we look to second half are you confident that you're going to be able to get the product you need for your New Jersey stores?

[Anthony Georgiadis, Chief Financial Officer]

Hey, Spencer, Anthony here. Look it's a great question. The market just turned on, right? So we're, you know, call it getting close to four months into this, I guess three and a half, or I guess a little over four at this point, it's still very early. I'll tell you that. We have the not seen any major supply issues up to this point. We are selling a lot of our own product, that's one of the reasons, why you saw kind of the CPG revenue do what it did. And I think the operators from what we can tell have got decent trade going and feel pretty good about where things stand from an inventory perspective. So, it's hard to say where it goes from here, but I'll tell you at this point we feel pretty good. Obviously additional capacity is being built out. There will be more stores that open. A number of us are building out additional capacity to kind of support that, and right now we're just taking it one day at a time, but I'd say so far so good.

[Operator]

The next question comes from Eric Des Lauriers with Craig-Hallum. Please go ahead.

[Eric Des Lauriers, Craig-Hallum]

Great. Thank you for taking my questions. A bit of a follow up to Matt's question here on the wholesale market here. I was just wondering if you could talk a bit more about the volume dynamics within the wholesale market. Others are certainly increasing vertical sales as well in response to pricing. Just wondering, if you're seeing any real volume changes in that wholesale market, or if it's really kind of just a price dynamic here? And then sort of within volumes in general, are you noticing any difference between premium and value products, as other companies are also sort of increasing their mix of vertical products. Just sort of wondering how the dynamics are changing for that remaining third party branded shelf space. Thank you.

[Ben Kovler, Chief Executive Officer]

Sure. This is Ben. I can take a crack at it. It's a good question. I think you have seen the business, right. We're not seeing a material down ticking units or anything like that. As Anthony mentioned, we are seeing other -- it depends -- on it's a very first state situation. So in a place like Massachusetts, where you have seen over, whatever four years it's been, since it's been going and there was a backup at the CCC and then all of a sudden all the applications came in a year goes by and a lot of the independent operators can go vertical based on the regulatory environment there. So, I think it's really a per state play on those units, but we're not worried about the unit count.

In terms of the trade down, we're seeing strength in the value segment where consumers are pressured at home or in the power bill or the capability or whatever the case may be. There is not a net decrease in the demand for cannabis. We see trade down into value orientation, larger serving size, larger units in order to get more product at a cheaper per unit price. And that's reflected in the data BDS and other things sort of across the market.

[Operator]

The next question comes from [Ty Colin] with Eight Capital. Please go ahead.

[Unidentified Analyst]

Thanks for taking my question. Maybe just a follow up to the last question there. Obviously, we are in a challenging economic environment, consumers starting to tighten their belt. So, how would you kind of characterize the risk of consumers actually returning to the illicit market to seek out lower prices? I'm thinking particularly markets like Illinois and New Jersey, where prices and taxes remain relatively high. Are you seeing any of that go on today?

[Ben Kovler, Chief Executive Officer]

It it's a good question. It's something we talk about a lot. At the end of the day, we don't feel like the legal market product price is that much of a premium. You are paying for branded product, you've got test results, you know the ingredients, you have the safety and yet there is product at all kinds of different price points in different illegal markets and different places.

So in general, sometimes thinking, Hey, the illegal market is much cheaper than the legal market, isn't totally accurate. It's not the case in places like New York or other places. It kind of depends where you are accessing it, where that product is coming from California, Colorado, Oklahoma being often the top three states. But we don't see the trade down from legal to illegal as a major factor here. You take a place like Illinois, just real time data, we saw 136 million in sales in July, second best month ever, growth over June. So we don't see consumers shying away from this product.

[Operator]

The next question comes from Camilo Lyon with BTIG, please go ahead.

[Camilo Lyon, BTIG]

Thanks. Good afternoon, everyone and nice results here in a tough environment. Can you help us think about the margin differential if there is one, when thinking about the value brand and the value end of the portfolio that's seemingly gaining more traction in the environment that we're in and it may be any offset that you have or -- thinking about from the production side, as it relates to maybe automation or greater efficiencies that you can drive to maintain the overall margin structure of the business.

[Anthony Georgiadis, Chief Financial Officer]

Hey, Camilo, Anthony here. Great question. I would say, you know, if you zoom out there really isn't a material difference in margin when you go from premium to kind of value. Now, obviously as, you know, as we saw some changes, we made some adjustments on the wholesale production side to kind of to really reflect the decrease in price. And that's why really on the value side, you see kind of larger format size or whatnot. But, you know, when we unpack the data, it's, you know, we have not seen a material difference between, products that sell at premium versus products that sell at value, at least at the current time.

Now, you know, that's not always consistent market to market. It can vary by market based off of supply and demand within that market. For us our focus is high indoor premium. I think if we were in the greenhouse game or something else, it's probably -- someone may give a different answer, but from our side, you know, our value is still as good if not better than someone else's kind of premium if they're growing under glass. So we just haven't seen an impact yet on the business.

[Camilo Lyon, BTIG]

That's really helpful. Thank you, Anthony. And if I could follow up with one more, you mentioned that there should be -- you're expecting to have more limited spending throughout the rest of the year. Can you help us quantify how that should look and maybe the areas that you plan on reducing that spend?

[Anthony Georgiadis, Chief Financial Officer]

Sure. Yeah. I mean, look that's really targeted towards, you know, SG&A and so we've take -- as I said, on my prepared remarks, we've taken steps to kind of curtail that growth. We do anticipate kind of minimal growth from here through the end of the year, but again, it's very focused on SG&A. And our real focus is just making sure that we don't see any negative inverse leverage on the SG&A line relative to revenue. We want to continue to be able to drive solid operating leverage. And so, you know, we continue to watch that line very, very closely.

[Operator]

[Operator Instructions] The next question comes from Aaron Grey with Alliance Global Partners. Please, go ahead.

[Aaron Grey, Alliance Global Partners]

Hi, good evening, and thank you for the question. So just looking at some factors like pricing pressure in some key markets, more difficult capital market environment, particularly for small operators and then operators selling more products in house to insulate for margin pressure, how do you think that might drive some potential force shakeout for some of those operators that might not be vertical in these markets and aren't able to access capital. So do you think that might impact the competitive environment as some of the larger, more vertical players, insulate themselves, and those without might find themselves harder times selling the product. Do you feel like that might impact the dependent environment for some more rationalization on the pricing or force some shakeout being accelerated, particularly if there might not be some change at the federal level in terms of the Safe Act or otherwise. We'd love get your comment on that. Thanks.

[Anthony Georgiadis, Chief Financial Officer]

Aaron, it's a great question. So we talk about a lot, because that's a great question, that's going to determine kind of where the returns on capital go. How long in a capital environment, especially with the stress in the overall market will capital go into something to lose money. It's unclear, but some of the working dynamics in the industry, particularly the tax structure, lack of verticality and access to expensive capital, make a startup business in cannabis much different than it was 5 years ago. And you need to look no place other than Massachusetts to see what's happening in some of the new grows and what that return on capital looks like, with the delay and the regulatory, we can explain that one out and we'll have to see what happens.

But we are here watching, we feel very good about our position. I'm not sure what will go on, but we like what we can do for shareholders. We like the optionality and we feel good about our balance sheet and our cash. We're certainly not wishing any you will on anybody, but as supply overgrows price comes down, margin pressure increases taxes, don't change, cash gets tight. We've seen the movie before and so we're watching carefully.

[Operator]

The next question comes from Scott Fortune with ROTH Capital. Please go ahead.

[Scott Fortune, ROTH Capital]

Good afternoon. Thanks for the questions. Real quick on the retail side, what metrics drove those recent traffic uptick or is there more normalized season you saw and how you kind of see seasonal -- going forward here? And are you viewing overall transactions coming from the new consumers, primarily from New Jersey or a little bit from the existing patient and consumer side of the things? And just kind of the follow-up on the pricing stabilization we starting to see the reset in some of these state markets on the pricing side, or still lots of pressure there?

[Anthony Georgiadis, Chief Financial Officer]

Hey, Scott. Anthony is here. Another great question. So, let's just zoom out. Realistically, what we saw throughout the quarter was more transactions and a slightly lower ticket, and that's across the aggregate portfolio. I think your comment about, where is the actual -- where is the growth kind of coming from? And look the reality is, we continue to see new people enter the space each and every day. It's something we are tracking closely. And there is very few markets where it many where we are not seeing that, when we analyze the data.

Now, where is pricing within each of these markets? Again, this comes back to a market. This is on a market to market basis. I will say that we have seen some stabilization in some places and in others, there is probably still some room to go. This quarter Maryland kind of popped on our radar as a new market, that's starting to experience some compression. We're watching that close.

On the flip side to that, you have to question how much lower pricing is going to go in perhaps a place like Nevada. But look, we're still in the early chapters of this book. It's hard to really kind of predict the future, and time will tell.

[Operator]

The next question comes from Howard Penny with Hedgeye. Please go ahead.

[Howard Penny, Hedgeye]

Thanks very much. Wondering if you might be able to expand on your comments in New York and what you are seeing and why you are holding out less hope. Thanks.

[Anthony Georgiadis, Chief Financial Officer]

Sure. Thanks, Howard. New York is a tricky one. It's a complex environment and has a regulator and the rules have taken shape. Originally, we thought timing for the regulated program and so the legacy ROs would be the beginning of 2023. You know, we think there's going to be a first start by the hemp community, the hemp operations. So the clarity on that remains a little bit tricky and the rules and the set of rules and everything is a little bit slow to come out. So where we thought it would be ready to start with the stores built, we haven't seen that go. We’ve seen the regulars take a pretty proactive approach and strong play with an active government that's building stores and setting up a different kind of program that we've seen anywhere else.

And lastly, in a different topic is a robust, unenforced, rampant illegal market that looks like California or really LA. It rhymes with LA. Not the same, but anybody who's walked in Manhattan, didn't know and what I’m being told, that cannabis is legal, you could buy it in stores, you could buy it from trucks, you could buy it from ice cream salesman and it's everywhere. So all those give us, you know, moment for pause. We are still active in Warwick. We continue with the project. We believe in the loop we have and the process we're going to build, but the vastness of our expectations is tempered in the near term.

[Operator]

The next question comes from Michael Lavery with Piper Sandler, please go ahead.

[Michael Lavery, Piper Sandler]

Just wanted to follow up on capacity. I know you usually don't get into too many specifics, but I think late -- around late in the second quarter, you had some additions coming. Can you just help us understand how to think about the second half and how much lift that might give and just some idea of -- maybe help us not get carried away with what to expect, but just some thoughts about what that could do to give a boost?

[Anthony Georgiadis, Chief Financial Officer]

Sure, Michael. Anthony here. So let's ride a little bit. So we've recently completed expansions in Pennsylvania, Ohio, New Jersey and a small one in Maryland, you know, in terms of the benefit that we're going to see from those assets, it really comes down to a state by state basis.

And PA, let's start there. You know, that's a situation where we're not anticipating really any growth in that business until we see edibles or adult use. Ohio, we've got the benefit of the incremental kind of stores that were just awarded. We think those are operational call it Q1, Q2 of next year. Between now and then, since we didn't have flower on the market, we'll see some small incremental growth, but we're, relate to the party there, so it's going to take some time to build out those sales channels.

New Jersey, you know, look, we start to see the benefit in Q2 and obviously, we're pushing a lot of that product through our retail stores. And in Maryland, it's a similar story to PA with regard to adult use. You've got a medical market that is a bit stagnant and the real -- near term catalyst is going to be adult use.

Where we see kind of near term growth really comes down to Rhode Island and Connecticut, when those turn on for adult use, we're nicely positioned in both. And that's really where, as we look ahead, we anticipate seeing some growth.

[Operator]

The next question comes from Matt Bottomley with Canaccord. Please go ahead.

[Matt Bottomley, Canaccord]

Yeah, good evening, all. Thanks for taking the questions. Just wanted to pivot back to New Jersey and just wondering if you can give any color, not really guidance related or anything like that, but just on the I guess the ability for growth just given, limited retail and what from what I understand, the wholesale channels are pretty competitive in that. Most people are putting as much as they can through their own stores. So is there any ability to increase overall contribution from that state going into Q3 here in wholesale channels? Or do you think it's more or less what your stores can pump out, given initial demand in that market?

[Ben Kovler, Chief Executive Officer]

Sure. Thanks, Matt. It's Ben. Good question. I would say it's combo of both, but there is not a step function coming until new retail channels open. So we have seen major step-up with the end of April, May, June as we get our sea legs and now you are starting to see incremental off to the right, as the whole state, I don't think we get direct monthly numbers, but as the whole state starts to incrementally grow. So it'll be a balanced growth and I would say a store start to grow revenue that doesn't mean it's all just vertical and there is no opportunity for more wholesale sales.

As we look at our store, we think the same thing, growth comes that make up a number 10%. We are buying a lot from others as part of that 10% growth, and I think the same would be true of our customers on the B2B side. So we see the whole thing rising as this market grows, but the next step function is certainly more retail channels for the dense population that has an extreme amount of demand, 5x to 7x from where we currently are now.

[Operator]

The next question comes from Patrick [Mouro] with [indiscernible] Capital. Please go ahead.

[Unidentified Analyst]

All right. Thanks for taking my question. Just wanted to ask on what you are seeing in regards to brand development? And if we take Rhythm, for example, are you seeing the brand outperform relative to some of its competitors in the wholesale channel?

[Ben Kovler, Chief Executive Officer]

Sure. Thanks, Patrick. It's Ben. Short answer is, yes. We believe in the power of the brand. We see consumers relating to the brand, especially if some of these products differentiate from others on the shelf. There is not a massive national marketing campaign and awareness remains low. So the focus of a lot of it is brand awareness and building loyalty. And in flour with Rhythm, with where you're talking and the core product is flour, you build that loyalty overtime, every time you open the jar with high quality flour. So as both of us mentioned that focus on the indoor environment, on the genetics, on the techniques, on the cure, and the grow in the jar remain paramount for us to build that in Rhythm. We see it there, we see it in Beboe, and we are excited about the brands.

[Operator]

The next question comes from [Daniel Tojanski], who is a Private Investor. Please go ahead.

[Unidentified Analyst]

Hi. Thank you very much for taking my question, and congrats on the quarter. Very great. I have a quick question regarding your press release for May, 2021, where a Green Thumb and COOKIES partner together to open up a Cookies on the Strip retail location. We all know that the COOKIES brand has an enormous call it following, product quality’s top notch, and I can't take anything away from your own products, Dog Walkers and Rhythm, et cetera. But may I ask if you can provide some insight into your current relationship with COOKIES and if Green Thumb has any -- if you are looking to expand partnerships in Nevada or any other market going forward with the COOKIES brand? Thank you in advance.

[Unidentified Company Representative]

Sure. Thanks Daniel. Good question. Yes, we did open Cookies on the Strip. The relationship is strong, and good close relationship with Berner Parker and the whole team over there, as they built out their infrastructure really nationally and particularly internationally. The growth that we see with the COOKIES site has more to do with on-prem and that's Nevada growth. We have seen a lot of pressure in Nevada. We're not active in looking at new states on a licensing agreement with them. They have their growth potential. We are big fans, we're big fans of the product. But we like what we've done in Las Vegas, it remains a big tourist destination. We feel like we have upside opportunity as we expand that real estate as the program expands in Nevada.

[Operator]

The next question comes from [Valerie Quintana] with [indiscernible]. Please go ahead.

[Valerie Quintana]

Thank you. It's pretty timely. I was just going to ask if your plans include expanding to the Southwest states and it sounds like no.

[Anthony Georgiadis, Chief Financial Officer]

Southwest states, I think you said Southwest.

[Valerie Quintana]

Yes. In the Southwest, New Mexico, Arizona.

[Anthony Georgiadis, Chief Financial Officer]

I mean everything's on the table. We're looking at it, we obviously studied Arizona with the transition there, but we would prefer to be making bets in states that are early on in their curve that are immature in patient consumer penetration. And that market hasn't developed. We can get a much larger return on our capital going into a place like, you know, a new state like Virginia or Minnesota versus a state like Arizona. Even if on paper, Arizona's a $2 billion market and Minnesota's a $100 million market. We're more likely to bet on a Minnesota given those dynamics than in Arizona. Not because of Southwest-Southeast, just a return on capital potential based on the population.

[Operator]

This concludes our question and answer session. I would like to turn the conference back over to Ben Kovler for any closing remarks.

[Ben Kovler, Chief Executive Officer]

Thanks everybody for joining. Look forward to updating you again this fall. Enjoy the rest of your summer.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.