Q3 2020 Turning Point Brands Inc Earnings Call
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Good morning, and welcome to the <unk> point, Brent So watch for Tony Tony Earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to new <unk>.
<unk> business Development Officer. Please go ahead Sir.
Thank you operator, and good morning, everyone. This is Louie Revpor Mena Chief business Development Officer, joining me attorney quite brands, but they didn't feel Directionally repartee, Chief operating officer, and Bobby Lattmann 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 Dot turning point brains Dot 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 her perspective on our progress against each plant.
Just got some really 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 allies based factors that could cause actual results to differ materially from projections or forward looking statements that may be sited in todays discussion.
These forward looking statements and projections are not guarantees of future performance 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.
On the call today, we will reference certain non-GAAP financial measures. These measures and reconciliations to GAAP can be found in todays earnings release, along with reasons why management believes that they provide useful information.
I will now turn the call over to Les Wexler our CEO.
Thank you Louis 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 eat.
Our strategic growth initiatives are paying dividends.
And were responsible for most of the growth that we achieved during the quarter as we executed well he favorable demand environment.
Oh, good provided a volatile said, it's showing in borrowing for the company, we're able to navigate successfully accelerated a number of positive trends across all four of our focus product lines.
Within smokers I missed your same store sales momentum continued as we kept building our distribution footprint.
Secular consumer trade down trends remain in place where their 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 or loosely true business as a targeted salesforce initiatives initiated in the first quarter positioned us to achieve solid distribution and market share gains in the cobot impacting barb.
Smoking, we saw the highest growth rate in recent history, driven by our product and channel growth initiatives, you hang a rolling papers and cigar wraps businesses.
With the close of the journey for transaction, we're also forming a closer and more direct relationship. There are third party Mario cigar rep manufacturer in Dominican Republic.
This help ramp production back up from the Kogan related disruptions experienced earlier in the year.
Increased Canada's consumption is also benefiting us, but more encouragingly majority.
A majority of our growth during the quarter came from internal initiatives through recently introduced products and the ramp up of our E Commerce business.
New Gen manage admirably through a significant disruption in the marketplace caused by competitors liquidating inventory exiting the market around the PMTA deadline.
Well negative in the short term this process has the potential to be a tremendous long term benefit for our business.
Despite the competitive environment not.
After lapped last year's loading the riptide segment would have showed growth during the quarter.
More importantly, we leveraged our regulatory and scientific expertise and infrastructure the file PMT applications covering 250 products.
One of the most extensive portfolios in the paper industry.
Well, we still expect near term disruption in the fourth quarter. The PMTA process provides us with significant potential upside as the market consolidates, we increased our mix of proprietary products.
We're also very excited about our recently announced investments earlier. This month, we announced an investment while temp have pets, the leading brand the NACF Ham cigarette and Smokeable have market.
With our exclusive distribution agreement on the product routing and pets adds to our growing portfolio of Hampton CBD products, we plan on expanding into our retail foot footprint.
He also rejects the Smokeable HAMP market to grow from 70 to 80 million in 2022, arranger 300 to 400 million by 2025.
This product line will be in an interesting alternative for C store retailers looking to fill in the white space left like flavored they'd products, which have exited the market.
This morning, we also announced a strategic $50 million investment in doses.
One of the most recognized campus brands in the marketplace today.
It was just as built a well recognized and trusted brand to a powerful marketing organization.
By one of its founders who they taught marketing agency and as soon as clients such as Coca Cola Disney and Budweiser in large campaigns those.
It was just built a sleek disposable THC big problem. It was well received in the marketplace.
Building upon that success Josias his alley transform transforming pointed in its 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 bgs in it.
We think this market will find its way into our channels in the long run and we view doses as the right partner to build their exposure.
We're also excited to work with doses on co developing a non GHG brand and we believe has significant potential within our core convenient storage sales channel.
In addition, the transaction comes with a very valuable option.
We invested another $50 million at Predetermine terms within next 12 months.
Well HAMP and doses 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 to drive growth and improve our cost structure heading into this year.
We are seeing outperformance the ongoing benefits from this reshaping of our business towards a more growth oriented mindset right.
Aside to play to our strength.
Two powerful brands Stockers and zigzag.
Ensure that we are putting in place the infrastructure for them to reach their potential and.
And to prepare for the future with their new X. ventures group, creating a robust pipeline of new products.
Percocet focused on cost continues to provide the operating leverage so we can benefit from our market share gains.
As a result, we were 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 had 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 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.
Jordy the growth was driven again.
By same store sales gains stockers moist snuff market share was up 60 basis points compared to a year ago to 5.1% According to M.S. side.
Our share in stores, receiving the product was up 8.6% up 40 basis points from the previous year and.
Soccer'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 time in 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.
Turning it back to sales saw double digit increases targeted sales initiatives put in place earlier in the year led to meaningful expansion stalkers chip.
Jokers, two 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 sorts ordering smokers to compared to the previous year.
This is quite an accomplishment by our sales force and 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 MIT cigar reps in the U.S. zigzag papers strengthened as the leading print leading premium brand increasing its share in the measured market by 4.2 percentage points year over year to 335.3%. According to.
I must say I.
This was this was the fifth consecutive quarter zigzag is realized year over year share growth.
[laughter] family of skews, such as paper cones Unbleached paper.
And papers and hemp wraps along with our ecommerce business accounted for a majority of the segment's growth.
The exact share of the paper cone category has climbed to 39.6% getting an impressive 14.9 share points from the prior year to position zigzags the number two cones grant.
The exact paper cones are now at approximately 47000 retail outlets after adding over 5000 stores during the quarter.
Our hemp, perhaps product, which was just launched earlier. This year has been welcomed was strong market reception and capture 22.6% of the category in the third quarter.
It is now at approximately 31000 retail outlets after adding 8000 outlets during the quarter.
Our M Y O cigar wraps business saw strong rebound with double digit growth during the quarter after experiencing kobin related manufacturing disruption earlier in the year.
As Larry mentioned.
We now have a more direct relationship with our manufacturer in the D.R., which is allowing us to better plan and align our production based on market demand.
In Canada.
Ownership with recreation marketing is continue to ramp Rick.
Recreation has already placed zigzag into over 400 of the 800, plus dispensers and Canada. After just a second quarter of marketing or product.
We expect to be in a vast majority of the dispenser is by the end of the year.
Our developing ecommerce business.
Which was non existent last year nearly doubled from the previous quarter accounted for approximately 5% of the segments revenue.
Before I move on I want to take a moment here to help frame the story of our smoking segment. This.
This is a business that for various reason 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 did dedicated significant time in internal resources towards them.
The good news is that with the strong recognition in the iconic nature of zigzag brand. We are seeing early success that are clear and tangible as evidenced by our results.
Even better news is were 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 legalisation 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 to new Gen, where we had a resilient quarter in a disruptive environment.
Our veight distribution recorded flat revenues, despite competitive pressure in the market around PMTA as competitors exiting the market liquidity to their inventory.
Our new X business continues to build momentum with strong double digit growth.
Wallace, New X. CBD in our new new X. nutraceutical caffeine be 12 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 nutrition is a continued push of our proprietary products, which stands at roughly 20% of this and that year to date.
Product submitted in the PMTA and expected industry consolidation, along with our new non nicotine product introductions will lay the groundwork to continue to increase this mix.
As a reminder, the.
The premarket tobacco applications or PMT age.
Aren't important regulatory step whereby ft ever use products on an individual basis to determine whether the product is appropriate for the protection of public health.
The stand the market everyday product had to submit on September nine and expensive and comprehensive application that demonstrate this.
They can do an account both individual and population level affects the product and that does not attract new <unk>, 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 forties and older in some cases.
Hopefully this will to consolidate the veight 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 take market.
These included formulations for our leading E liquid brands, including among others thought.
Wallace and vapor five in our sick like brand South Beach smoke.
In addition, we partnered with two of the largest opened tank in coil manufactures horizon Tech.
Free Max 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 timing of a marketing decision just yet.
The FDA has indicated is working diligently to issue marketing order decisions for those applications received by September nine 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.
It 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 in 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 a big distribution business many of our third party partners that manufacture battery mods and kits tanks coils and other hardware needed for open tank system 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 manufacture 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 F.D.A. ramps enforcement activity.
And with that I will turn it to Bobby for a review of our third quarter financial performance Bobby.
Thank you Graham Compass.
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 NSP 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% as price mix advancing 3.4%.
Note that our price mix. Thus far this year is still being weighed down by comping against an under accrual of allowances related to faster than expected ramp up of our chain wins in the previous period, we should have the catch up here in fourth quarter.
We have also recently implemented another price increase an amnesty along with the industry effective last week of note. This is the second consecutive year at the industry has taken three price increases.
Year over year industry volumes for MSP grew by approximately 2% with chewing tobacco growing by approximately 1% in the quarter.
So Chris shipments to retail continue to outpace the smokeless industry in the quarter growing at Emmis AI share in both chewing tobacco an amnesty.
I also wanted to take a minute to address kobin consumption in our quarterly segment results.
While it's difficult to annualize precisely we believe coal consumption patterns positively impacted smokeless sales by about 600000 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 why no cigar wraps its more than offset a 2 million decline in our Canadian papers business, which compared against inventory loading during last years third quarter.
Non smoking cigars and M Y O pipe declined 300000.
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 onest, They give us a more representative share of the margin pool and the product the owner.
According to M. Sai third quarter industry volumes for U.S. cigarettes 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 and Y O cigar wrap industry volumes were down mid single digits.
During the quarter, we saw the segment's gross margin expanded 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 benefit of eliminating royalty payments to Darfur, resulting in higher margin or am I on the cigar wrap product.
Returning to our favorite topic Kobin.
We estimate higher consumption rates in a smoking segment increased sales by approximately $3.5 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.
Net sales decreased 4.8% to 38.4 million.
Flat performance in our base distribution business in double digit growth from solace in other new X products was offset by a decline in riptide, which compared against the train loading during its launch in the prior year period.
As mentioned, we continue to expect near term volatility due to the PMTA profit 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 PMTA volatility is 2.7 million is different than our cash PMT expenses related to our adjusted EBITDA.
Excluding these write offs gross margin would have been closer to 35%.
Moving to the consolidated business and.
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 I far best as a public company, reflecting the strong performance our core segments and the benefits from the S. Yoo <unk> cost reductions made going into the year.
Leveraging our fixed cost structure has been up for prior priority for our management team and we will continue to focus on generating strong incrementals in the future by managing our S. You name it.
In this morning's release, we once again increased our 2020 gotten taking.
Taking into account the strength, we have thus far seen an expected near term volatility with our new Gen segment revise our guidance as follows.
Rejecting 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.
I 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 a $114 million of available liquidity.
Even asked 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 direction as demonstrated by our results. Thus far this year really.
We are reorienting, our team towards faster growth or initiatives are building momentum were realizing operating leverage to help our bottom line.
Considering 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 prepare for the future.
I want to thank all of our employees are executing in these difficult times you 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. After.
Ask a question you May press Star, then why not telephone keypad.
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We can all your question. Please press Star then two okay.
Time away plus momentarily to assemble our roster.
So first question is from Vienna, either with Cowen. Please go ahead.
Hi, good morning.
Good morning.
No I will start with that and smoking segment on the strong double digit growth is certainly encouraging to see you there.
You know I think rightly point out that you do have a tremendous trademark on in that segment I am curious, though given the distribution gains on that you cited pretty big bag in the quarter, how much of a benefit with that in terms of volume fell.
Yeah, I mean so.
The volume is 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.
No that was offsetting the fact that there is a trade took down inventory unwraps all the way down in the second quarter.
On on the paper side, there wasn't a volume so there's just there was higher consumption.
Got it okay. That's helpful. Thank you for that.
Nothing segment.
Just call out I think on.
Lose sleep, which now I kind of like a <unk>.
Let me.
To be candid I'm just wondering.
I think you're seeing in that segment do you think that's a function of downtrading in the overall.
Right.
Downtrading Downtrading in smokeless system.
There's a longer term trend I think it was yes.
You answered it a bit but like cold, but I think the important thing about the loosely because we recognize that nobody was paying attention to it and we put in place a series of initiatives. Stoke is it's been growing segment share in that segment.
On a very consistent basis for a long period of time, we saw an opportunity went on graft in uncoated came along and just accelerate.
That's helpful. Larry <unk>, Yeah, absolutely you're right to point out that the downgrade happened.
And long term phenomenon I'm wondering into a corner as you kind of the Thieffry stimulus checks kind of ran out and there's not been a war had have you noticed an evolution in consumer behavior on inter quarter around that.
No. It's interesting I've been following some of the reports from an X. and it seems as though at least elections last report I saw which was <unk> went into early September that the consumers have stayed pretty solid in our business. We have seen continued strength. So we.
We haven't seen any of that so I think that the I guess the extra $300 that was sent down for a period of time helps on that.
Right and I would think about.
It's premature to kind of think about guidance, but you know to the extent on.
Yeah that the consumer is under more pressure given the unemployment rate and delays in incremental contracts from the government. How are you guys thinking about positioning your business you know from where I sit I feel like you guys are well positioned to pick up share in downtrading, but there are there like incrementals for key yet and you said that you can pursue.
It's really been into that.
Yes, we we think about.
HM.
We're we're sort of Texas hedged, we get Downtrading, if the consumer gets there by their belt thing so that has been.
Very helpful for us, but that's been a trend we've seen for years and covert 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 staying home and using zigzag are still occurs. So we are preparing for that but we have.
This product new product pipeline, including on the sort of the value segment and smoking that we're really excited about that will sort of offset more than offset next year.
Okay, that's helpful and I think a reasonable or not.
Question I'd be remiss, if I didnt ask about Canada.
Candidates on so.
On how the relationship with doses evolved and.
The M&A candidates opportunities that reside singularly focused on de Maria barring other verticals. Thanks.
Oh, we look we've talked to a lot of different people.
<unk> says section that category its 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. We started focusing on brands. We believe that we are a good stewards of brands and brand.
The brand company and as we looked around sound there are.
Of all the people that we've met in campus that people that doses seem to understand marketing, there's some real pros there and we.
We think that they have built a very good Brad obviously vacated last year sort of stunted their growth a little bit, but if they do they responded and the slate of new products that are just entering the markets weak market, we saw a lot.
Great opportunity, we think they're going to be a terrific partner and we're especially excited about the.
The co developing this CPG brand through our means our main channels.
We think that the CBD market is one that is under branded as very few brands that have emerged and we liked their approach those candidates and in CBD. They don't go to focus just on the molecule selling hunt.
100000 milligrams of this 300 milligrams that they're really focused on the consumer and the desired in state and those are the type of people who are looking for is we think those that type people that will go to win long run.
Got it thanks, so much.
The next question from Susan Anderson with B. Riley. Please go ahead.
Hi, good morning.
Got the murder and good morning My name.
I guess just to follow up on the cash side of things and the partnership because [laughter], what's the plan for distribution of the product, meaning your website and stores et cetera, and then [laughter] I don't know if you talk about this historically that how big do you think that category could be for you looking out longer term.
Okay. So let me be maybe a little clearer investment, we we actually invested in doses th C part of their business and their Canadian operation.
As part of that investment should Canada has become legal.
Legal lines, then we would receive warrants in the media.
Total company so in the short run our attentions didn't you focus on the T.H.C. three.
Three part of their business and we won't be carrying TV John.
In her with our systems.
Got it that's helpful.
And then just looking at the Big category. So [laughter] liquidating right now when do they think of that well be quickly.
So you guys can get back to kind of like what the more normal I tell him I can fare.
Yeah, Hi, it's you know as Weve 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 and we expect to see that inventory in the system through sort of the ended 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 F.D.A. is going to start and forcing and you know they're gonna put out a list of saying what part.
Thats are allowed to be on the market and when that happens you will see the market clean up very quickly.
But we you know we.
I really thought that that would come out in October and we kind of push out our expectation in December and now it feels like it's a first quarter 2021 dynamic.
Got it okay.
And then lastly, just on the margin difference between the <unk> and so if he likes in the meeting category.
If you could talk about kind of the differences in margin. There and then also what makes a salad and I guess looking out longer term, how do you guys kind of envision that Nick changing.
Yeah. So so veight, which is there's there's two parts of it there's there's third party distribution vape and then as proprietary distribution of that third party distribution abate comes in at between 20, and 40 and much let's say for round numbers 30, you.
You actually saw its come in significantly higher and that.
And you know and such in the quarter, we wrote off 2.7 million of inventory and that that flows straight to the bottom line. So you know we do expect things like solved from New York to continue to take the day in that segment and grow while we expect the rest of the sort of vaping from a third party prospect.
Perspective to just stay flat.
Great. That's helpful. Thanks, So much good luck next quarter.
Thank you.
The next question is from got have a gain with Barclays. Please go ahead.
Hi, good morning, everyone.
Good morning.
A few questions. So one of these investments have done both invited him, but what could be possibly one of the equity income line going forward. They would then be losses, but they can move there.
So those assets you should you should keep flat.
You know, where we are we have a non controlling warrant that exercises on legalization. So we'll just have it has cost method at least in the near term.
From a wild perspective from an equity perspective, nothing will change their 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 those wild bring to our business from a revenue and gross profit perspective.
Sure. It is there any way to diamond chalets, how much that benefit might be in that mix yeah.
Yeah, Greg This is Graham so.
You're looking out to you know into 21.
The product currently sits at about 7000 stores and they're selling about a carton of store a month.
Product sells for right around $40 and it carries <unk> traditional tobacco margins.
Our goal and 21 is to push that product a in upwards of 20000 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 also mentioned that you were you looking at further investments like dog like these investments are members convert beds.
They do like five soon all the investments that then that'll do actually gets very confusing for investors because that.
That is a miss to provide a lot of information about these investments for the long haul them invest those analyze this investment.
Yeah, I think that dose. This is sort of a good example of what we're looking to do where it's we make a financial investment and we got a strategic business back so with doses. We have this financial exposure to the 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 cost to say, how do you know I want to sell CBD, but how are you going to generate pole and you're going to generate pull with great marketing organizations and so that's sort of the partnership there with wild Hanam, we we made a strategic.
Investment in the business allowed the owners to sort of take some capital off the table in a business that they built and at the end of day. We just gave you the financials that were 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.
My question is just on you know the big outperformance that you have had this year I think the lids led to some of the costs that haven't decided they travel expense.
And maybe lower promotion and marketing throughout the industry.
But somebody could dimensionalize that as to just understand what the headwind might be in there from my point of view on auto I couldn't get the weather patterns normalized.
Yeah, we're still going through budgets, but I would say travel is off by about a million and a half.
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 its coming back our marketing budgets are off by at this point a few million or a lot of our marketing is done at the store level. So it's not really.
<unk> down as much.
And so I would expect that to come back or we do actually that we still have some cost cuts that we expect into next year. So they'll be there's there's going to be some creep, but it's not going to be a significant is as you know you're not going to wake up and have done.
Double digits in action or anything like that.
Sure and this caused by board of course, or you're talking about I hope, that's but that's that's annualized.
Okay. Thank you.
The next question is from Eric There's only yeah, we have that Craig Hallum Group. Please go ahead.
All right great. Thanks for taking my questions Congrats on a very strong quarter and.
Exciting investment here in a in doses.
If I could just start there on doses. So you guys called out a scalability and there you know marketing prowess as as two of the reasons why you decided.
Decided to go with those guys.
Can you give us any examples of what are you seeing in the business that gives you confidence that it is scalable and candidates were dealing with some fragmented state markets. So maybe just kind of talk a a.
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 co created CBD brand. So maybe just provide us with some examples of their their marketing or sort of what we can expect on that front.
Yeah, one of the things that.
Interest us do this this 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 is it says name implies.
Jos controlled device, so that the consumer today actually comes to control, what's your experiences and on top of that the series of products.
Geared towards individual Interstate so for instance in.
In their comp they'll have a different accommodation or mature beans, and strains and other bio bio mass in along with the T.H.C. in order to enhance or that particular experience some.
From my standpoint, its somewhat unique in the in the marketplace because they are really focused on.
Segmenting, the market and delivering to their consumers exactly what to expect and so that's a that's it's that type of thinking that type of marketing ability I think will.
Help them succeed in the long run and as far as as far as scalability going across state lines. Obviously, you look at the Msos on some more difficult. So a lot of capital built stores. They have they have a product line that is portable they partner with different companies different suppliers in each.
Hey that make the products to their specs to their formula and they're able to cross state lines.
Huh.
Okay, Great. That's helpful. And then in terms of the the CBD brand that you guys are looking to co create with them any color you can provide on a on 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.
It'll be it'll be a family of products and again it'll be geared.
To the consumer benefit as opposed to just selling them onshore, which is which I think will be a differentiating factor in certain in this market.
Okay, great and.
And then switching gears to a new Gen and PMTA here. So you know we did see a number of competitor website, it's coming down I understand that there's this sort of avoid a with these with certain products that may exit the market that you know you guys will look to fill with your brands.
Increase your proprietary mix, but.
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 its visits to your your web sites all the competitor websites or just increased demand for for for your brands that you've seen at this point.
Yes, I would say you know feedback so far has been.
Good if not I actually saw study this morning, it was great.
But it's still early you know really you know we've we've seen one of the biggest changes in sort of consumer products. As 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 baby shop partners are very excited that we kept rising in free Max in the market and horizon free Max or.
Two of the top brand in sort of tanks and coils, which has been a razor blade on the open systems industry people are very excited that those guys are still around it's still early days I mean, we're feeling we're feeling good but 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.
Kind of just talk about some of the M&A opportunities that you're seeing in light of this PMTA disruption I mean, obviously with a with dose S and wild HAMP you know there's number of a very attractive M&A that you guys are have.
Have been executing on of course.
But you know when we look at the.
You know who tobacco products side, the nicotine based side of the business can you just kind of talk about the M&A environment post the PMTA here.
Yeah. So the one thing that's really important about the PMTA is the PMTA was not it's not a process specific to beeping, it's specific to tobacco products. So the entire industry, whether you're a vapor comp me or a cigar company is going through the same thing where we are trying to figure out why do I want to be involved in that.
And so we're seeing we're getting tons of incoming calls and so right now we're very focused on larger cash flowing M&A.
You know I think those system was a good investment for US we'll continue to look for investment 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 insane do I want to be here.
Okay, Great and so you guys are getting a similar increase calls and it sounds like the that M&A environment as a perhaps a bit more a bit more targets that are coming available post PMT I hear.
Extremely active.
All right great. It's great to hear well congrats again guys on a both a strong quarter and the strong investment here in a in doses for an exceptional brand. So congrats and are looking forward to the future here.
Thank you.
The next question is from Greg Pendy with Sidoti. Please go ahead.
Hi, guys I'm just wanted to clarify you said the 600000 coded impact on was that the entire smokeless <unk> category or just cans and tubs and then in addition, just given the volumes you are seeing in smokeless how much can you just give us a little bit on where you think manufacturing capacity is and is there at all.
Any point to step up where you have to add towards manufacturing capacity. Thanks.
Thanks.
So on your first question, the 600000 or for the total category in smokeless.
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.
We.
So we could add shifts.
And so we feel like we have at least a few more years before its you know we really start hitting.
I will next or ceiling. So we're feeling pretty good about that but it is it doesn't 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 the Star then one now.
All right any part of that question you May press star and two I'm on your telephone.
This concludes our <unk> session I would like to turn the conference back over to Mr. from Anna for any closing remarks.
Larry.
Thank you everybody and 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.
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