Turning Point Brands, Inc.

Good morning and welcome to the Turning Point Brands' third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star, then one, on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Louie Reformina, Chief Business Development Officer. Please go ahead, sir.

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, Grant Purdy, Chief Operating Officer, and Bobby Lavin, 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 statement 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 security laws, and we undertake no obligations 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. 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 a favorable demand environment. COVID provided a volatile selling environment for the company, where we were able to navigate it successfully and accelerate a number of positive trends across all four of our focused product lines. Within Smokeless, MST's 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 which 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 of our loose-leaf chew business as a targeted Salesforce initiative initiated in the first quarter positioned us to achieve solid distribution and market share gains in a 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 Durford transaction, we're also forming a closer and more direct relationship with our third-party MYO cigar wrap 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. But more encouragingly, the majority of our growth during the quarter came from internal initiatives through recently introduced products and a ramp up of our e-commerce business. NUGEN 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, if not for last year's load-in at riptide, the segment would have showed 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 of proprietary products. We're also very excited about our recently announced investments. Earlier this month, we announced an investment in Wild Hemp Hempettes, a leading brand in the nascent 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, and we plan on expanding into our retail footprint. He also projects a smokable hemp market to grow from 70 to 80 million in 2020 to a range of 300 to 400 million by 2025. This product line will be an interesting alternative for C-store retailers looking to fill in the white space left by flavored vape products, which have exited the market. This morning, we also announced a strategic $15 million investment in Dosis, one of the most recognized cannabis brands in the marketplace today. DOSIS has built a well-recognized and trusted brand through a powerful marketing organization led by one of its founders, who leads a top marketing agency and has serviced clients such as Coca-Cola, Disney, and Budweiser in large campaigns. DOSIS built a sleek, disposable THC vape product that was well-received in the marketplace. Building upon that success, DOSIS has had a transforming platform 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 into our channels in the long run, and we view DOSIS as the right partner to build our exposure. We're also excited to work with DOSIS on co-developing a non-THC brand that we believe has significant potential within our core convenience storage sales channel. In addition, the transaction comes with a very valuable option to invest another $15 million at predetermined terms within the next 12 months. Wild hemp and dosage transactions are representative of a strategic direction to enter 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 that drive growth and improve our cost structure heading into this year. We are seeing in our performance the ongoing benefits from this reshaping of our business towards a more growth-oriented mindset. We decide to play to our strength with two powerful brands, Stokers and ZigZag, to ensure that we are putting in place the infrastructure for them to reach their potential and to prepare for the future with our new X-Ventures group creating a robust pipeline of new products. Our focus on cost continues to provide the 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. To 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.

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 environment. Smokeless saw double-digit growth in the quarter. The majority of the growth was driven, again, by same-store sales gains. Estoker's moist enough market share was up 60 basis points compared to a year ago to 5.1%, according to MSAI. Our share in stores receiving the product was at 8.6%, up 40 basis points from the previous year. And 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 the previous year, instead of doing it 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 sales initiatives put in place earlier in the year led to meaningful expansion of Stoker's Chew. Stoker's 2 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 2 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., ZigZag Papers strengthened as the leading premium brand, increasing its share in the measured market by 4.2 points year-over-year to 35.3%, according to MSAI. This was the fifth consecutive quarter ZigZag has realized year-over-year share growth. Our new family of SKUs, such as paper cones, unbleached paper, hemp papers, and hemp wraps, along with our e-commerce business, accounted for a majority of the segment's growth. Zigzag's share of the paper cone category has climbed to 39.6%, gaining an impressive 14.9 share points from the prior year to position Zigzag as the number two cones brand. Zigzag 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 welcomed with strong market reception and captured 22.6% of the category in the third quarter. It is now in approximately 31,000 retail outlets after adding 8,000 outlets during the quarter. Our MYO Cigar Wraps business saw a strong rebound 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 ZigZag into over 400 of the 800-plus dispensaries in Canada after just its second quarter of marketing our product. We expect to be in a 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, accounted 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 involves a series of initiatives addressing holes 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 and the iconic nature of the ZigZag brand, we are seeing early success 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 re-energized by the results and we are extremely excited about our prospects as our initiatives ramp further next year. moving the new gen where 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 exiting the market liquidated their inventory. Our Nu-X business continues to build momentum with strong double-digit growth. Solace, Nu-X CBD, and our new Nu-X Nutraceutical Caffeine B12 inhalers contributed to the growth. We plan to continue this momentum introducing a number of new products over the coming months. Our overall strategy of new gen is a continued push of our proprietary products, which stands at roughly 20% of the system at year-to-date. Products submitted in the PMTA and 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 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 on September 9th, and expensive and comprehensive applications demonstrate this. Take into account both individual and population level effects of the product, and that does 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 Vaporfy, and our Siglite brand, South Beach Smoke. In addition, we partnered with two of the largest open tank and coil manufacturers, Verizon Tech and Freemax, with whom we are now transitioning to be their exclusive distributor in the United States. We are now preparing to engage with FDA as it reviews our applications over the coming months. While we cannot provide further clarity on timing of a marketing decision just yet, FDA has indicated it's working diligently to issue marketing order decisions for those applications received by September 9th, 2020, over the course of the next 12 months. Importantly, 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 a marketing order. This will place us in a favorable position with our proprietary products to gain meaningful share of the e-liquid market once FDA ramps enforcement activity. And with that, I'll turn it to Bobby for a review of our third quarter financial performance. Bobby?

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 comping against and under accrual of allowances related to faster than expected ramp up of our chain wins in the previous period. We should have a catch up here in fourth quarter. We have 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's shipments to retail continue 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 and our quarterly segment results. While it's difficult to annualize 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 load-in during last year's third quarter. Non-focused cigars and MYO pipe declined $300,000. Total smoking segment volume increased 18%, while price mix increased 1%. We recently agreed on a 16 percent price increase to our distributor in Canada without affecting retail pricing effective on October 1st 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 in 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 the result of increased sales of high-margin U.S. rolling papers and the financial benefits of eliminating royalty payments to Derfert, resulting in a higher margin for our MYO cigar wrap product. Returning to our favorite topic, COVID. We estimate higher consumption rates in the smoking segment increase sales by approximately 3 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 new gen 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 NUX products was offset by a decline in Riptide, which compared against a trade load-in during its 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, new-gen 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 as mostly related to continued PMCA volatility. This $2.7 million is different than our cash PMCA expenses related to our adjusted EBITDA. Excluding these write-offs, gross margin would have been closer to 35%. 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 on 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 strength we have thus far seen and expected near-term volatility with our new-gen segment, we revised our guidance as follows. Projected 2020 total net sales of 395 to 401 million, up from our previous guidance of 370 to 382. Adjusted EBITDA is now projected to be 87 to 90 million, up from previous guidance of 78 to 83. In the year, the company spent a total of 16.6 million on 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. Thank you, Bobby.

Our company continues to progress in the right directions. as demonstrated by our results thus far this year. We are reorienting our team towards faster growth. Our initiatives are building momentum. 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.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. We draw your question, please press the star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Vivian Acer with Cowen. Please go ahead.

Hi, good morning.

Good morning. Good morning.

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

Yeah, I mean, so the volumes on... our business are actually held pretty tight. It's about three months. So there was, as we called out about three to 5 million from wraps bill, but that was offsetting the fact that there was a, you know, the trade took down inventory on wraps all the way down in the second quarter on, on the paper side, there wasn't a volume filled. There's just, there was higher consumption.

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

The downtrading in the smoker system is a long-term trend. I think it was exacerbated a bit by COVID. 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. Stokers 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 and went out and grabbed it. And then COVID came along and just accelerated it.

That's helpful, Larry. And, yeah, absolutely, you're right to point out that the down trading has been a long-term phenomenon. I'm wondering, inter-quarter, as, you know, kind of the phase three stimulus checks kind of ran out and there's not been a phase four, have you noticed an evolution in consumer behavior inter-quarter around that?

No, it's interesting. I've been following some of the reports from NACS. And it seems as though, at least since the last report 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.

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

Yeah. So we, we think about we're, we're sort of Texas hedged. We, we get down trading if the consumer gets their bite, their belt sign. So that has been, you know, very helpful for us, but that's been a trend we've seen for, for years and COVID really accelerated it. You know, We are preparing for... discretionary income to stay flat, but for consumers to be able to go spend money at restaurants and movie theaters versus spending it on, you know, staying home and using Zig Zag or Stokers. So we are preparing for that, but we have this product, new product pipeline, including on the sort of the value segment in smoking that we're really excited about that will sort of, you know, offset more than offset that next year.

Okay, that's helpful, and that seems reasonable enough. Last question. I'd be remiss if I didn't ask about cannabis. So is there any background on how the relationship with dosis evolved and in examining the cannabis opportunity set? Were you guys singularly focused on vape, or were you exploring other verticals? Thanks.

No, we've talked to a lot of different people in the cannabis section category. It's been something that's been of interest to us for a long time. And 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. And as we looked around, we found that of all the people that we've met in cannabis, the people that the doses, uh, seem to understand marketing. There's some real pros there. And, um, we think that they have, uh, they've built a, uh, very good brand. Obviously, uh, vacate last year, uh, sort of stunted their growth a little bit, but they, they responded. And, uh, the, the slate of new products that they're just entering the market. We market, we thought a lot of great opportunity. We think they're going to be a terrific partner. And we're especially excited about the, uh, co-developing this CBD brand for our main channels. We think that the CBD market is one that is underbranded. There's very few brands that have emerged. And we like their approach in both cannabis and in CBD. They don't focus just on the molecule, you know, selling 1,000 milligrams of this, 300 milligrams of that. They really focus on the consumer and the desired end state. And those are the type of people we're looking for because we think those are the type of people that we're going to win in the long run.

Got it. Thanks so much.

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

Hi. Good morning. Nice job on the quarter. Good morning. Good morning. I guess just to follow up on the cannabis side of things and the partnership with Joseph, What's the plan for distribution of the product, meaning your website, stores, et cetera? 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 out longer term?

Okay, so let me be a little clearer on the investment. We actually invested in Dosis' THC-free part of their business and in their Canadian operations. as part of that investment, should cannabis become legal, 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.

Got it. That's helpful. And then just looking at the vape 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?

Yeah, as we've 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 the end of the year and maybe a little bit into the first quarter. of next year. But, you know, the real next sort of catalyst is the FDA is going to start enforcing and, you know, they're going to put out a list of saying what products are allowed to be on the market. And when that happens, we'll see the market clean up very quickly. But we, you know, we originally thought that that would come out in October. Then we kind of pushed out our expectation in December. And now it feels like it's a first quarter 2021 dynamic.

Got it. Okay, that's helpful. And then lastly, just on the margin difference between Vape and Solus and Nulex in the new gen 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. And I guess looking out longer term, how do you guys kind of envision that mix changing?

Yeah, so Vape, Um, which is, there's, there's two parts of it. There's, there's third-party distribution of vape and then there's proprietary distribution of it. Third-party distribution of vape comes in at between 20 and 40. And let's, let's say for round numbers, 30. Um, New X and Solace come in significantly higher than that. And, you know, and such in the quarter, you know, we wrote off 2.7 million of inventory and that, you know, that flows straight to the bottom line. So, you know, we do expect things like Solace and New X to continue to take the day in the segment and grow while we expect the rest of sort of vaping from a third party perspective to just stay flat.

Great, that's helpful. Thanks so much. Good luck next quarter. Thank you.

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

Hi, good morning, everyone. Good morning. I have a few questions. So one is on these investments you have done in Doyst and Weill-Hempeth, how should we model the equity income line going forward? Would there be losses that would be getting moved there?

Yeah, so doses you should keep flat. You know, we have a non-controlling warrant that exercises on legalization, so we'll just have it as cost method, at least in the near term. From a wild hemp perspective, from a 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. And so I would be less focused on the equity method modeling, and I would be more focused on what does wild hemp bring to our business from a revenue and gross profit perspective.

Sure, and is there any way to dimensionalize how much that benefit might be in the next 12 months?

Yeah, 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. 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.

Okay. And, you know, you also mentioned that you're looking at further investments like these investments you've done first and buy them best. So do you think if you do like five, seven of these investments, then The narrative actually gets very confusing for investors because unless you provide a lot of information about these investments, otherwise how will investors analyze these investments?

Yeah, I think that Dosis is sort of a good example of what we're looking to do where we make a financial investment and we get a strategic business back. So with Dosis, 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, you know, 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 Wild Hemp. we made a strategic investment in the business, allowed the owners to sort of take some capital off the table of a business that they had built. And at the end of the day, we've just gave you the financials that we're focused on. So, you know, I don't think our investors should be overly focused on us trying to make massive multiples on our money. I mean, we do focus on that, but what is the strategic benefit to the business and how does that flow through the income statement ultimately?

Sure. And one last question is just on, you know, 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 expense and maybe lower promotion and marketing throughout the industry. Is it possible to dimensionalize that as to just understand what the headwind might be in FY21 or FY22 whenever things normalize?

Yeah, we're still going through budgets. but I would say travel is off by about a million and a half. Um, I don't think all that's coming back. So, so that's, you know, that's, I, I wouldn't model, I would model some of that coming back, but I wouldn't say that all of it's coming back. Our marketing budgets are off by at this point, a few million. Um, you know, a lot of our marketing is done at the store level, so it's not really down as much. Um, And so 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 know, you're not going to wake up and have, you know, double digits in SG&A or anything like that.

Sure. And these costs were per quarter costs, or you're talking of annual costs?

That's annualized, yeah.

Okay, brilliant. Thank you.

Our next question is from Eric DeLaurier with the Craig Hallam Group. Please go ahead.

All right, great. Well, thank you for taking my questions. Congrats on a very strong quarter and a really exciting investment here in DOSIS. If I could just start there on DOSIS. So you guys called out scalability and their – marketing prowess as two of the reasons why you decided to go with those guys. Could you give us any examples of, you know, what are you seeing in the business that gives you confidence that it is scalable? You know, in cannabis, we'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, you know, that seems to be a big push for this you know, co-created CBD brand. So maybe just provide us with some examples of their marketing or sort of what we can expect on that front.

You know, one of the things that interests us on dosis is the way they approach the market. So when they came to market with their disposable, they actually have a dose control, which I guess the name implies, a dose control device that so that the consumer could actually control what their experience is. And on top of that, they have a series of products that are geared towards an individual end state. So, 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 that 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. It's a lot of capital. You've got to build stores. They have a product line that is portable. They partner with different companies, different suppliers in each state that make the product to their specs, to their formula, and they're able to cross state lines that way.

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 sort of a family of product types here, just any kind of color on what we can expect at this point?

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.

Okay, great. And then switching gears to NUGEN and PMTA here, so You know, we did see a number of competitor websites coming down. I understand that, you know, there's sort of a void with these, you know, with certain products that may exit the market that, you know, 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, you know, whether it's visits to your websites or competitor websites or just increased demand for, you know, for your brands that you've seen at this point?

I would say, you know, feedback so far has been fantastic. good. If not, I actually saw a study this morning. That was great. But it's still early. You know, really, you know, we've seen one of the biggest changes in sort of consumer products that, you know, it just happened almost overnight. And so people are sitting there going, do I want to try this, you know, 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 the tanks and coils, which is the razor blade of the open systems industry. People are very excited that those guys are still around. It's still early days. I mean, we're feeling good. We do need all this legacy inventory to flush through the system before we can, you know, call it a win.

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

Yeah, so one thing that's really important about the PMTA is the PMTA is 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 seeing, we're getting tons of incoming calls. And so right now, we are very focused on larger cash-flowing M&As. You know, I think Dosis 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 being, you know, having a gut check and saying, do I want to be here?

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-PMCA here?

extremely active.

All right, great. It's great to hear. Well, congrats again, guys, on both the strong quarter and the strong investment here in Dose. It's really an exceptional brand. So congrats and looking forward to the future here. Thank you.

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

Hey, 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, can you just give us a little bit on where you think manufacturing capacity is, and is there at any point a step up where you have to add towards manufacturing capacity? Thanks.

So on your first question, $600,000 for the total category in smokeless. And it was about the same in the second quarter as well. From a capacity perspective, you know, 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. We have room for a second line. And I would just tell you, right now we run four-day capacity. So we could add shifts. And so we feel like we have at least a few more years before it's, you know, we really start hitting bottlenecks or ceiling. So we're feeling pretty good about that. But it is it does mean a little bit more capex and, you know, some more shifts to manage these step ups in volume. Perfect. That helps. Thanks.

Again, if you have a question, please press star, then 1. For any further questions, you may press star and 1 on your telephone. This concludes our Q&A session. I would like to turn the conference back over to Ms. Reformina for any closing remarks.

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

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