Earnings Call Transcript - TPB Q3 2020

Louie Reformina, Chief Business Development Officer

Thank you, operator, and good morning, everyone. This is Louie Reformina, Chief Business Development Officer. Joining me are Turning Point Brands' President and CEO, Larry Wexler; Graham Purdy, Chief Operating Officer; and Bobby Lavan, Chief Financial Officer. This morning, we issued a news release covering our third quarter 2020 results. This release is located in the IR section of our website, www.turningpointbrands.com, where a replay of today's conference call will also be available. In this call, we will discuss our consolidated and segment operating results and provide a perspective on our progress against our strategic plan. As is customary, I direct your attention to the discussion of forward-looking and cautionary statements in today's press release and the risk factors in our filings with the Securities and Exchange Commission. Disclosure outlines various factors that could cause actual results to differ materially from projections or forward-looking statements that may be cited in today's discussion. These forward-looking statements and projections are not guarantees of future performance, and you should not place undue reliance upon them, except as provided by Federal Securities Laws, and we undertake no obligation to publicly update or revise any forward-looking statements. In the call today, we will reference certain non-GAAP financial measures. These measures and reconciliations to GAAP can be found in today's earnings release, along with reasons why management believes that they provide useful information. I will now turn the call over to Larry Wexler, our CEO.

Larry Wexler, CEO

Thank you, Louie, and good morning, everyone. Thank you for joining the call. Our third quarter once again exceeded our expectations, as we realized $104 million in revenue and $24 million of EBITDA. Our strategic growth initiatives are paying dividends, and we're responsible for most of the growth that we achieved during the quarter as we executed well in the favorable demand environment. Though we’ve provided a volatile selling environment for the company, we were able to navigate it successfully and accelerated a number of positive trends across all four of our focus product lines. Within Smokeless, MST same-store sales momentum continued, as we kept building our distribution footprint. Secular consumer trade-down trends remain in place, with our value proposition driving trial by new customers, many of whom we end up winning over. In addition, the pricing environment remains healthy as we took our second price increase on both cans and tubs last week, while still maintaining a significant price discount to our larger competitors. We also saw accelerated double-digit growth with our loose leaf chew business as a targeted sales force initiative, initiated in the first quarter, positioned us to achieve solid distribution and market share gains in the COVID-impacted environment. In Smoking, we saw our highest growth rate in recent history, driven by our product and channel growth initiatives behind our rolling papers and cigar wraps businesses. With the close of the Durfort transaction, we're also forming a closer and more direct relationship with our third-party MYO cigar web manufacturer in the Dominican Republic. This helped ramp production back up from the COVID-related disruptions experienced earlier in the year. Increased cannabis consumption is also benefiting us, and encouragingly, the majority of our growth during the quarter came from internal initiatives, through recently introduced products and the ramp-up of our e-commerce business. NewGen managed admirably through a significant disruption in the marketplace, caused by competitors liquidating inventory and exiting the market around the PMTA deadline. While negative in the short term, this process has the potential to be a tremendous long-term benefit for our business. Despite the competitive environment, had we not experienced last year's load in a tough time, the segment would have shown growth during the quarter. More importantly, we leveraged our regulatory and scientific expertise and infrastructure to file PMTA applications covering 250 products, one of the most extensive portfolios in the vape industry. While we still expect near-term disruption in the fourth quarter, the PMTA process provides us with significant potential upside as the market consolidates and we increase our mix with proprietary products. We're also very excited about our recently announced investments. Earlier this month, we announced an investment in WildHemp Hempettes, a leading brand in the hemp cigarette and smokable hemp market. With our exclusive distribution agreement on the product, Wild Hempettes adds to our growing portfolio of hemp and CBD products, allowing us to expand our retail footprint. We also project the smokable hemp market to grow from $70 million to $80 million in 2020 to a range of $300 million to $400 million by 2025. This product line will be an interesting alternative for convenience store retailers looking to fill in the whitespace left by flavored vape products which have exited the market. This morning, we also announced a strategic $15 million investment in dosist, one of the most recognized cannabis brands in the marketplace today. Dosist has built a well-recognized and trusted brand through a powerful marketing organization led by one of its founders, who is a top marketing agency and has serviced clients such as Coca-Cola, Disney, and Budweiser in large campaigns. Dosist built a sleek, disposable THC vape product that was well received in the marketplace. Building upon that success, dosist has reached a transformative point in its history with new product launches such as rechargeable pens, higher THC content products, and other form factors that take the brand into much larger addressable markets, thereby reshaping the company. The legal cannabis market is projected to grow from $16 billion today to $34 billion by 2025 according to BDSA. We think this market will find its way to our channels in the long run. We view dosist as the right partner to expand our exposure. We are also excited to work with dosist in co-developing a non-nicotine brand, and we believe we have significant potential within our core sales channel. In addition, the transaction comes with a viable option. We’ve invested another $15 million as pre-determined terms within the next 12 months. WildHemp and dosist transactions are representative of a strategic direction entering into large and growing addressable markets. You should expect us to make more investments in the future with our ample liquidity and free cash flow generation. We streamlined the business at the end of 2019 and laid out a number of initiatives to drive growth and improve our cost structure heading into this year. We are seeing our performance reflect the ongoing benefits from this reshaping of our business towards a more growth-oriented mindset. We've decided to play to our strengths: the two powerful brands, Stoker's and Zig-Zag, to ensure that we are putting in place the infrastructure for them to reach their potential and to prepare for the future with our Nu-X Ventures Group creating a robust pipeline of new products. Our focus on cost continues to drive operating leverage, so we can benefit from our market share gains. As a result, we are pleased to be able to raise our outlook once again for the remainder of the fiscal year, which Bobby will detail later on the call. We’ll add some additional color and perspective on our quarter and the path forward. Let me turn the call over to Graham Purdy, Chief Operating Officer.

Graham Purdy, Chief Operating Officer

Thank you, Larry. Let me now give you a quick snapshot of the performance from a segment level. Our results were strong in the quarter driven by strong execution of our initiatives in a favorable demand market environment. Smokeless saw double-digit growth in the quarter, with the majority of the growth driven by same-store sales gains as Stoker’s Moist Snuff market share was up 60 basis points compared to a year ago to 5.1% according to MSAi. Our stores receiving the product were at 8.6%, up 40 basis points from the previous year. Stoker’s Moist Snuff is now in stores representing 59.4% of industry volumes, which still leaves a long runway for further gains. Our growth and share performance would have been even stronger had we done our promotions in line with our timing from the previous year, instead of doing them later into the fourth quarter this year, with about a million year-over-year getting pushed out to the fourth quarter. Chewing tobacco sales saw double-digit increases targeted at sales initiatives put in place earlier in the year, leading to meaningful expansion of Stoker’s chew. Stoker’s chew registered a 24.3% share in the quarter, which is up 2.9 share points from the previous year. Our sales initiative led to 14% more stores ordering Stoker's chew compared to the previous year. This is quite an accomplishment by our sales force in a very mature category. Smoking saw double-digit growth in the quarter, led by strong double-digit growth in both U.S. rolling papers and MYO cigar wraps. In the U.S., Zig-Zag papers strengthened its position as the leading premium brand, increasing its share in the measured market by 4.2 percentage points year-over-year to 35.3% according to MSAi. This was the fifth consecutive quarter Zig-Zag has realized year-over-year share growth. Product families such as paper cones, unbleached paper, and hemp wraps, along with our e-commerce business, accounted for a majority of the segment's growth. Zig-Zag's share of the paper cone category has climbed to 39.6%, gaining an impressive 14.9 share points from the prior year, positioning Zig-Zag as the number 2 cones brand. Zig-Zag paper cones are now in approximately 47,000 retail outlets after adding over 5,000 stores during the quarter. Our hemp wraps product, which was just launched earlier this year, has been well received in the market and captured 22.6% of the category in the third quarter. It is now at approximately 31,000 retail outlets after adding 8,000 outlets during the quarter. Our MYO cigar wraps business saw strong rebounds with double-digit growth during the quarter after experiencing COVID-related manufacturing disruption earlier in the year. As Larry mentioned, we now have a more direct relationship with our manufacturer in the DR which is allowing us to better plan and align our production based on market demand. In Canada, our partnership with ReCreation Marketing is continuing to ramp. ReCreation has already placed Zig-Zag into over 400 of the 800 plus dispensaries in Canada after just its second quarter of marketing our product. We expect to be in the vast majority of the dispensaries by the end of the year. Our developing e-commerce business, which was non-existent last year, nearly doubled from the previous quarter, accounting for approximately 5% of the segment's revenue. Before I move on, I want to take a moment here to help frame the story of our smoking segment. This is a business that, for various reasons, has seen stagnant growth since we went public. We made a strategic decision late last year to address this by formulating a plan that involved a series of initiatives addressing gaps that we had in the market. These plans are never easy to execute, but we dedicated significant time and internal resources towards them. The good news is that with the strong recognition of the iconic nature of the Zig-Zag brand, we're seeing early successes that are clear and tangible, as evidenced by our results. Even better news is we are just at the precipice of the benefits we expect to see. We believe we have fundamentally changed the structural growth profile of this business to be able to capitalize on the increase in cannabis consumption as legalization spreads. Our team has been reenergized by the results, and we are extremely excited about our prospects as our initiatives ramp further in the next year. Moving to NewGen, we had a resilient quarter in a disruptive environment. Our vape distribution recorded flat revenues despite competitive pressure in the market around PMTA as competitors exited the market, leading to inventory liquidations. Our Nu-X business continues to build momentum, with strong double-digit growth from Solace, Nu-X CBD, and our Nu-X nutraceutical Caffeine B12 inhalers contributing to the growth. We plan to continue this momentum, introducing a number of new products over the coming months. Our overall strategy for nutrition is a continued push of our proprietary products, which stand at roughly 20% of our sales year-to-date. The products submitted in the PMTA and the expected industry consolidation, along with our new non-nicotine e-product introductions, will lay the groundwork to continue to increase this mix. As a reminder, the pre-market tobacco applications or PMTAs are an important regulatory step whereby the FDA reviews products on an individual basis to determine whether the product is appropriate for the protection of public health. To stay in the market, every vape product had to submit by September 9, and the expensive and comprehensive applications demonstrate this. They can account for both individual and population-level effects of the product and must not attract new users, including youth into the category. We submitted applications that we believe demonstrate this and feel confident with our applications, as the average age of our product users skews to the late 40s and older in some cases. Ultimately, this will consolidate the vape market and create significant barriers to entry, with several of our competitors already exiting ahead of the deadline given the expense and work needed to go through this process. Our submissions covered a broad portfolio of 250 products, one of the most extensive in the open tank market. These included formulations for our leading e-liquid brands, including among others, Solace and VaporFi, and our cigarette brand, South Beach Smoke. In addition, we partnered with two of the largest open tank and coil manufacturers, HorizonTech and FreeMaX, with whom we are now transitioning to be their exclusive distributor in the United States. We are now preparing to engage with the FDA as it reviews our applications over the coming months. While we cannot provide further clarity on the timing of a marketing decision just yet, the FDA has indicated it is working diligently to issue marketing order decisions for those applications received by September 9, 2020, over the course of the next 12 months. Importantly, the FDA has indicated it will be issuing a list of those products that have been accepted for further review and may continue to be marketed while under review. While this may take several months, we expect this to lead to better enforcement and more clarity for the market as to which products are authorized for sale and which are not. Effectively, this should lead to more competitors exiting the market. Overall, we believe the regulatory process will right-size the market while leaving ample products available for our sales channels. We now feel much better about our long-term outlook post the deadline. For our vape distribution business, many of our third-party partners that manufacture battery mods and kits, tanks, coils, and other hardware needed for open tank systems submitted their applications. This will help ensure a wide selection of hardware systems to support the industry. In addition, our hardware partners are continuing to work on enhancements to current and future products to continue industry innovation. While many e-liquid manufacturers submitted applications and will continue selling products over the next year, we believe a large number of these submissions will not result in the marketing order. This will place us in a favorable position with our proprietary products to gain meaningful share of the e-liquid market once the FDA ramps up enforcement activity. And with that, I'll turn it to Bobby for a review of our third-quarter financial performance.

Bobby Lavan, Chief Financial Officer

Thank you, Graham. Company results in the third quarter were ahead of plan once again. Turning to the segment reviews. Smokeless net sales increased 13.7% to $29.8 million in the quarter. Net sales for the MST portfolio grew 16.3% and represented 59% of Smokeless revenues in the quarter, up from 58% a year earlier. Total Smokeless volume increased 10.3%, with price mix advancing 3.4%. Note that our price mix thus far this year is still being weighed down by copying again in under accrual of allowances related to faster than expected ramp-up over chain wins in the previous period, and we should have a catch-up here in the fourth quarter. We've also recently implemented another price increase in MST, along with the industry effective last week. Of note, this is the second consecutive year the industry has taken three price increases. Year-over-year, industry volumes for MST grew by approximately 2%, with chewing tobacco growing by approximately 1% in the quarter. Stoker shipments to retail continued to outpace the Smokeless industry in the quarter, growing its MSAi share in both chewing tobacco and MST. I also wanted to take a minute to address COVID consumption in our quarterly segment results. While it's difficult to analyze precisely, we believe COVID consumption patterns positively impacted Smokeless sales by about $600,000 in the quarter, with a similar amount in the second quarter. Turning to Smoking products, segment net sales in the quarter increased 19% to $36 million, with strong double-digit growth in U.S. rolling papers and MYO cigar wraps. This more than offset a $2 million decline in our Canadian papers business, which prepared against an inventory loading during last year's third quarter. Non-focus cigars and MYO pipes declined by $300,000. Total Smoking segment volume increased 18%, while price mix increased 1%. We recently agreed on a 16% price increase to our distributor in Canada without affecting retail pricing, effective on October 1, to give us a more representative share of the margin pool as the product owner. According to MSAi, third-quarter industry volumes for U.S. cigarette papers increased strong double-digits, with our volumes growing 1.8 times the rate of the market and accounting for half the growth in their measured channel. This excludes the incremental volume we are seeing from the alternative e-commerce channels. MYO cigar wrap industry volumes were down mid-single-digits. During the quarter, we saw the segment’s gross margin expand significantly by 410 basis points to 59.1%. This was a result of increased sales of high-margin U.S. rolling papers and the financial benefits of eliminating royalty payments to Durfort, resulting in a higher margin for MYO and the cigar wrap product. Returning to our favorite topic, COVID, we estimate higher consumption rates in the Smoking segment increased sales by approximately $3 million to $5 million in the quarter. This is offset by a $2 million drag in the second quarter due to production issues. Moving to our NewGen segment, net sales decreased 4.8% to $38.4 million, flat performance in our vape distribution business, and double-digit growth from Solace and other Nu-X products was offset by a decline in Riptide, which compared against the trade loading during the launch in the prior year period. As mentioned, we continue to expect near-term volatility due to the PMTA process in the fourth quarter as competitors continue to liquidate inventory. For the quarter, NewGen gross profit decreased 12.8% to $11 million. Segment gross margin decreased 260 basis points to 28.6%, primarily due to temporary pricing pressure as competitors liquidated inventories and inventory reserves. In the quarter, we wrote off approximately $2.7 million of inventory, which mostly related to continued PMTA volatility. This $2.7 million is different from our cash PMTA expenses related to our adjusted EBITDA. Excluding these write-offs, gross margin would have been closer to 75%. I'm moving to the consolidated business. Adjusted EBITDA for the quarter was $23.9 million as compared to $18.8 million in the prior year. We achieved 70% incremental margins during the quarter, by far our best as a public company, reflecting the strong performance across our core segments and the benefits from the SG&A cost reductions made going into the year. Leveraging our fixed cost structure has been a priority for our management team, and we will continue to focus on generating strong incrementals in the future by managing our SG&A. In this morning's release, we once again increased our 2020 guidance. Taking into account the strengths we have thus far seen and expected near-term volatility with our NewGen segment, we revise our guidance as follows: Projected 2020 total net sales of $395 million to $401 million, up from our previous guidance of $370 million to $382 million. Adjusted EBITDA is now projected to be $87 million to $90 million, up from the previous guidance of $78 million to $83 million. In the year, the company spent a total of $16.6 million on the PMTA process. We do not expect any more significant PMTA related expenses unless we decide to bring new products to market. Moving to our balance sheet, we ended the quarter with $67 million of cash on the balance sheet and $114 million of available liquidity. Even after our recently announced investments, we still hold ample dry powder and are actively evaluating opportunities to deploy capital and transactions that will add long-term value to the company. With that, I'll turn the call back to Larry for closing comments.

Larry Wexler, CEO

Thank you, Bobby. Our company continues to progress in the right direction, as demonstrated by our results thus far this year. We are reorienting our team towards faster growth. Our initiatives are building momentum, and we're realizing operating leverage to help our bottom line. You can see it in our results across all our product lines, and the feeling inside the company is palpable. We have executed a number of strategic acquisitions, are executing on our PMTA strategy, and developing a robust pipeline of new products to prepare for the future. I want to thank all of our employees who are executing in these difficult times. They have demonstrated their commitment to our success. Thank you for participating in the call today. With that, I'd like to open up the call to questions.

Operator, Operator

At this time, we'll pause momentarily to assemble our roster. The first question is from Vivien Azer with Cowen. Please go ahead.

Vivien Azer, Analyst

Hi, good morning.

Larry Wexler, CEO

Good morning.

Bobby Lavan, CFO

Good morning.

Vivien Azer, Analyst

So I wanted to start with the Smoking segment. The strong double-digit growth is certainly encouraging to see. I think you guys rightly point out that you do have a tremendous trademark in that segment. I am curious though, given the distribution gains that you cited for Zig-Zag in the quarter, how much of a benefit was that in terms of volume sale?

Larry Wexler, CEO

Yes, the volumes in our business have remained fairly stable, around three months. As we mentioned, there was approximately $3 million to $5 million from wraps, which helped offset the inventory reduction in wraps during the second quarter. On the paper side, there wasn't an increase in volume sales; instead, we saw higher consumption.

Vivien Azer, Analyst

Got it. Okay, that's helpful. Thank you for that. On the Smoking segment, interesting call out, I think on loose leaf, which I kind of had like written-off as a segment but could be candid. I'm just wondering is the growth that you're seeing in that segment, do you think that's a function of downgrading in the overall oral nicotine category?

Larry Wexler, CEO

Down trading at Smokeless is a longer-term trend. I think it was accelerated a bit by COVID. But I think the important thing about the loose leaf is that we recognized that nobody was paying attention to it, and we put in place a series of initiatives. Stoker's has been growing in that segment, sharing that segment on a very consistent basis for a long period of time. And we saw an opportunity when un-grafted, and then COVID came along and just accelerated.

Vivien Azer, Analyst

That's helpful Larry. And yes, absolutely, you're right to point out that the down trading has been a long-term phenomenon. I'm wondering into the quarter, as kind of the Phase 3 stimulus checks kind of ran out. And there's not been a Phase 4, have you noticed an evolution in consumer behavior into quarter around that?

Larry Wexler, CEO

No, it's interesting. I've been following some of the reports from NACS. And it seems as though, these lessons last year that I saw, which went into early September, that the consumers have stayed pretty solid. In our business, we have seen continued strength, so we haven't seen any effects of that yet. I think that, I guess the extra $300 that was sent out for a period of time helped on that front.

Vivien Azer, Analyst

Right. And as we think about 2021, and I know it's premature to kind of think about guidance, but to the extent the consumer is under more pressure given unemployment rates and delays and incremental stimulus from the government. How are you guys thinking about positioning your business? From where I sit, I feel like you guys are well positioned to pick up share in down trading, but are there incremental strategic initiatives that you can pursue to really tap into that?

Robert Lavan, CFO

Yes, we feel we are somewhat protected against market fluctuations. If consumers change their spending habits, that has proven beneficial for us. This trend has been consistent for years, with COVID speeding it up. We are anticipating that discretionary income will remain stable, but we expect consumers to spend their money on dining out and entertainment instead of at-home options like Zig-Zag or Stoker's. To address this, we are preparing with a new product pipeline, particularly focusing on the value segment in Smoking, which we are very excited about and expect will help balance out next year's expectations.

Vivien Azer, Analyst

Okay, that's helpful. That seems reasonable enough. Last question, I'd be remiss if I didn't ask about cannabis. So any background on how the relationship with dosist evolved? And in examining the cannabis opportunities that were you guys singularly focused on vape or re-exploring other verticals?

Larry Wexler, CEO

So we've talked to a lot of different people in the cannabis sector, and it's been something that's been of interest to us for a long time. We went through this process of looking at the various investment opportunities. And we started focusing on brands; we believe that we are good stewards of brands, and we are a consumer-brand company. As we looked around, we found that of all the people that we've met in cannabis, the people at dosist seemed to understand marketing—there are some real pros there. We think they have built a very good brand. Obviously, last year sort of stunted their growth a little bit, but they responded, and the slate of new products they just introduced to the market indicate a lot of great opportunities. We think they're going to be a terrific partner. We're especially excited about co-developing this CBD brand for our main channels. We think that the CBD market is one that is under-branded, as very few brands have emerged. We like their approach in both cannabis and CBD. They don't focus just on the molecule, selling 100,000 milligrams of this, 200 milligrams of that; they're really focused on the consumer and the desired end state. And those are the types of people we're looking for. We think those are the types of people that will win in the long run.

Vivien Azer, Analyst

Got it. Thanks so much.

Operator, Operator

The next question is from Susan Anderson with B. Riley. Please go ahead.

Susan Anderson, Analyst

Hi, good morning, nice job in the quarter.

Larry Wexler, CEO

Good morning.

Bobby Lavan, CFO

Good morning, Susan.

Susan Anderson, Analyst

I guess just a follow up on the cannabis side of things and the partnership with dosist. What's the plan for distribution of the product, meaning your website, stores, etc. and then, I don't know if you talked about this historically, but how big do you think this category could be for you looking at longer term?

Larry Wexler, CEO

So let me be a little clear on the investment. We actually invested in dosist’s THC-free business and their Canadian operation. As part of that investment, should cannabis become legalized, then we would receive warrants in the total company. So in the short run, our attention is going to be focused on the THC-free part of their business, and we won't be carrying any of the cannabis products with our sales force.

Susan Anderson, Analyst

Got it. That's helpful. And then just looking at the big category, so the competitor is liquidating right now, when do you guys think that will be complete? So you guys could get back to kind of like more normalized sales and margins there?

Graham Purdy, Chief Operating Officer

Yes, as we've sort of been projecting all year, we would see two quarters of significant volatility. That volatility really started at the end of August when a very large distributor liquidated. We're still seeing that inventory in the system. We expect to see that inventory in the system through sort of the end of the year and maybe a little bit into the first quarter of next year. But the real next catalyst is the FDA is going to start enforcing, and they're going to put out a list of products that are allowed to be on the market. When that happens, we'll see the market clean up very quickly. But we originally thought that that would come out in October, then we kind of pushed out our extraction in December, and now it feels like it's a first quarter 2021 dynamic.

Susan Anderson, Analyst

Got it. Okay, that's helpful. And then lastly, just on the margin difference between the products in the market category. I don’t know if you could talk about just kind of the differences in margin there and then also the mix of sales. Looking out longer term, how do you guys envision that mix changing?

Graham Purdy, Chief Operating Officer

Yes, vape, which is, there's two parts: there's third-party distribution of vape, and then there's proprietary distribution of vape. Third-party distribution of vape comes in at between 20 and 40. Let's say for round numbers, it's 30. Nu-X and Solace come in significantly higher than that. In such in the quarter, we wrote off $2.7 million of inventory, and that flows straight to the bottom line. We do expect things like Solace and Nu-X to continue to take the day in the segment and grow, while we expect the rest of vaping from a third-party perspective to just stay flat.

Susan Anderson, Analyst

Great. That's helpful. Thanks so much. Good luck next quarter.

Larry Wexler, CEO

Thank you.

Operator, Operator

The next question is from Gaurav Jain with Barclays. Please go ahead.

Gaurav Jain, Analyst

Hi, good morning, everyone.

Larry Wexler, CEO

Good morning.

Gaurav Jain, Analyst

I have a few questions regarding the investments you've made in dosist and Wild Hempettes. How should we project the equity income line moving forward? Will there be potential losses that could be reflected there?

Larry Wexler, CEO

Yes, so dosist’s, you should keep flat. We have a non-controlling warrant that exercises on legalization. So we'll just have it as a cost method, at least in the near term. From a WildHemp perspective, from an equity perspective, nothing will change there until we potentially bring it more in-house. But there are significant contributions to our sales and gross margin perspective. So I would be less focused on the equity method modeling, and I would be more focused on what those WildHemp bring to our business from revenue and gross profit perspective.

Gaurav Jain, Analyst

Is there any way to quantify how much that benefit might be in the next period?

Graham Purdy, Chief Operating Officer

Yes, Gaurav, this is Graham. So if you're looking out into ‘21, the product currently sits in about 7,000 stores and they're selling about a carton, a store a month. The product sells for right around $40, and it carries traditional tobacco margins. Our goal in ‘21 is to push that product in upwards of 20,000 stores throughout the course of the year. So I think that gives you a pretty good perspective on sort of how we think about it.

Gaurav Jain, Analyst

Okay, you've also mentioned that you're looking at further investments like these investments, dosist and Wild Hempettes? So do you think, if you do like five, seven of these investments, then the narrative actually gets very confusing for investors? Because there is—unless you provide a lot of information about these investments, otherwise, how will investors analyze these investments?

Larry Wexler, CEO

Yes, I think that dosist is sort of a good example of what we're looking into, where we make a financial investment and we get a strategic business back. So with dosist, we have this financial exposure to this business that we're very excited about. At the same time, we're partnering with them on a national CBD brand, where right now, all of our core customers are looking to us to say, 'I want to sell CBD, but how are you going to generate pull?' And you're going to generate pull with great marketing organizations. And so that's sort of the partnership there. With WildHemp, we made a strategic investment in the business that allowed the owners to take some capital off the table of a business that they built. At the end of the day, we just gave you the financials that were close to them. So, I don't think our investors should be overly focused on us trying to make massive multiples on our money, and we do focus on that—what is the strategic benefit to the business and how does that flow through the income statement ultimately.

Gaurav Jain, Analyst

Sure. One last question just on the big outperformance that you have had this year, I mean, clearly, it's linked to some of the costs that haven't occurred like travel expenses and maybe lower promotion and marketing throughout the industry. So is it possible to dimensionalize that as to just understand what the headwind might be in FY ‘21 or FY ‘22 whenever things normalize?

Larry Wexler, CEO

Yes, we're still going through budgets, but I would say travel is off by about $1.5 million. I don't think all that's coming back. So I would model some of that coming back, but I wouldn't say that all is coming back. Our marketing budgets are off by a few million at this point, and a lot of our marketing is done at the store level. So it's not really down as much. I would expect that to come back. We do actually, though, still have some cost cuts that we expect into next year. So there's going to be some creep, but it's not going to be as significant as you're not going to wake up and see double-digits in SG&A or anything like that.

Gaurav Jain, Analyst

Sure. And these costs—per quarter costs, are you talking of annual costs?

Larry Wexler, CEO

That’s full, that’s annualized.

Gaurav Jain, Analyst

Okay, thank you.

Operator, Operator

The next question is from Eric Lauriers with Craig-Hallum Group. Please go ahead.

Eric Lauriers, Analyst

Hi, great. Thanks for taking my questions. Congrats on a very strong quarter and a really exciting investment here in dosist. If I could just start there on dosist, you guys called out scalability and their marketing pros as the two reasons why you decided to go with those guys. Can you give us any examples of what you are seeing in the business that gives you confidence that it is scalable? And in cannabis, you're dealing with some fragmented state markets? So maybe just kind of talk a little bit about what you're seeing in terms of scalability and then with their marketing that seems to be a big push for this co-created CBD brand. So maybe you just provide us with some examples of their marketing or sort of what we can expect on that front?

Larry Wexler, CEO

Yes, one of the things that interest us about dosist is the way they approach the market. When they came to market with their disposable, they actually had a dose control, which I guess as the name implies, but a dose controlled device so that the consumer could actually control their experiences. And on top of that—that's a series of products that are geared towards that individual and state. For instance, in their calm product, they'll have a different combination of terpenes and strains and other biomass along with the THC, in order to enhance that particular experience. From my standpoint, it's somewhat unique in the marketplace, because they're really focused on segmenting the market and delivering to the consumers exactly what they expect. And so it's that type of thinking; it’s that type of marketing ability, I think will help them succeed in the long run. Now as far as scalability and going across state lines—obviously, when you look at the MSOs, it's a lot more difficult as they have a lot of capital in those stores. They have product lines that are portable, and they partner with different companies, different suppliers in each state that make the product to their specs and to their formulas, and they're able to cross state lines.

Eric Lauriers, Analyst

Okay, great, that's helpful. And then in terms of the CBD brand that you guys are looking to co-create with them, any color you can provide on product format or whether it's a sort of a family of product types here, just any kind of color on what we can expect at this point?

Larry Wexler, CEO

It'll be a family of products. And again, it'll be geared to the consumer benefit as opposed to just selling the molecule, which I think will be a differentiating factor in this market.

Eric Lauriers, Analyst

Okay, great. That's helpful. And then switching gears to NewGen and PMTA here. So, we did see a number of competitor websites coming down. I understand that there's a sort of void with certain products that may exit the market that you guys will look to fill with your brands and increase your proprietary mix. But just kind of looking a bit more on the growth side of things, any early feedback you can provide in terms of whether it's visits to your websites or your competitor websites or just increased demand for your brands that you're seeing at this point?

Larry Wexler, CEO

I would say feedback so far has been good. If not, I actually saw a study this morning that was great. But it's still early. Really, we've seen one of the biggest changes in consumer products that just happened almost overnight. And so people who are seeing there, going, do I want to try this tobacco liquid versus this tobacco liquid. So we're still seeing—it's still early days. I would tell you that our vape shop partners are very excited that we kept Horizon and FreeMaX in the market. And Horizon and FreeMaX are two of the top brands in sort of tanks and coils, which is the razor blade on the open systems industry. People are very excited that those guys are still around. They are still early days. I mean, we're feeling good, but we do need all of this legacy inventory to flush through the system before we can call it a win.

Eric Lauriers, Analyst

Okay, that makes sense. And then last one for me, can you just kind of talk about some of the M&A opportunities that you're seeing in light of this PMTA disruption? I mean, obviously, with dosist and WildHemp, there are a number of very attractive M&A that you guys have been executing on, of course, but when we look at the new tobacco products side of the nicotine vape side of the business, can you just kind of talk about the M&A environment post PMTA here?

Larry Wexler, CEO

Yes, so one thing that's really important about the PMTA is that it's not a process specific to vaping; it's specific to tobacco products. So the entire industry, whether you're a vape company or a cigar company, is going through the same thing where we're trying to figure out, do I want to be involved in this space? And so we're getting tons of incoming calls, and right now we are very focused on larger cash flowing M&A. I think dosist was a good investment for us. We'll continue to look for investments like that. But right now, the focus is on cash flowing M&A that comes out of the entire tobacco industry sort of having a gut check and saying, do I want to be here?

Eric Lauriers, Analyst

Okay, great. And so you guys are getting some more increased calls, and it sounds like that M&A environment is perhaps a bit more targets that are coming available post PMTA here?

Larry Wexler, CEO

Extremely active.

Eric Lauriers, Analyst

All right, great. It's great to hear. Well, congrats, again, guys on both the strong quarter and the strong investment here and dosist. Really an exceptional brand. So congrats, and I look forward to the future here.

Larry Wexler, CEO

Thank you.

Operator, Operator

The next question is from Greg Pendy with Sidoti. Please go ahead.

Greg Pendy, Analyst

Hi, guys. Just wanted to clarify, you said the $600,000 COVID impact on—was that the entire Smokeless category or just cans and tubs? And then in addition, just given the volumes you're seeing in Smokeless? How much, or can you just give us a little bit on where do you think manufacturing capacity is? And is there any point of step up where you have to add towards manufacturing capacity? Thanks.

Larry Wexler, CEO

So, on your first question, $600,000 for the total category in Smokeless. It was about the same in the second quarter as well. From a capacity perspective, we've been chasing capacity for a few years now. So you do see that our CapEx is a little bit higher. We are putting in efficiencies, and we have room for a second line. I would just tell you, right now we run four days a week. So we could add shifts. We feel like we have at least a few more years before we start hitting bottlenecks or ceilings, so we're feeling pretty good about that. But it doesn't mean a little bit more CapEx and some more shifts to manage these step ups in volume.

Greg Pendy, Analyst

Perfect, that helps. Thanks.

Operator, Operator

This concludes our Q&A session. I would like to turn the conference back over to Mr. Louie Reformina for any closing remarks.

Louie Reformina, Chief Business Development Officer

Thank you, everybody. We look forward to speaking to you next quarter. Thank you for joining the call.

Larry Wexler, CEO

Thanks, guys.

Robert Lavan, CFO

Thank you.

Operator, Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.