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Turning Point Brands, Inc. (NYSE:TPB)
Q3 2020 Earnings Call
Oct 27, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Turning Point Brands Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Louie Reformina, Chief Business Development Officer. Please go ahead, sir.

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 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 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.

Lawrence S. Wexler -- President & Chief Executive Officer

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 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 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 sales force 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 Durfort transaction, we're also forming a closer and more direct relationship with our third-party MYO cigar web manufacturer in 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, 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, the last year's load in a grip tight, 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 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 Niacin hemp cigarette in smokable hemp market. With our exclusive distribution agreement on their product, Wild Hempettes adds to our growing portfolio of hemp and CBD products, and we plan on expanding into our retail footprint.

Nielsen projects 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 in 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 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 service 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 had a transforming 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 dosist as the right partner to build our exposure. We're also excited to work with dosist 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 pre-determined terms within the next 12 months. WildHemp and dosist 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 in our performance the ongoing benefits from this reshaping of our business toward a more growth-oriented mindset. We decided to play to our strength with 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 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.

Graham A. 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 as Stoker's Moist Snuff 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 in 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 of this year with about $1 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 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 a 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 paper 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 Zig-Zag 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 the 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 to position Zig-Zag as the number two 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 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 Zig-Zag into over 400 of the 800 plus dispensaries in Canada after adjusted 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 holds that we had in the market. These plans are never easy to execute, but we dedicated significant time and internal resources toward them.

The good news is that with the strong recognition and the iconic nature of the Zig-Zag 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 reenergized by the results and we are extremely excited about our prospects as our initiatives ramp further next year.

Moving to NewGen 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 NewGen is the continued push of our proprietary products, which stands at roughly 20% of this 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 9 an expensive and comprehensive application to demonstrate this, taking 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 take market. These included formulations for our leading e-liquid brands, including among others, Solace and VaporFi and our cig-like 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 FDA as it reviews our applications over the coming months. While we cannot provide further clarity on timing of the marketing decision just yet, FDA has indicated its working diligently to issue marketing order decisions for those applications received by September 9, 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 market it 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 rightsize 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 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 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 FDA ramps enforcement activity.

And with that, I'll turn it to Bobby for a review of our third quarter financial performance. Bobby?

Robert 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% 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 allowances related to faster than expected ramp up of our chain wins in the previous period. 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 a 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 in 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 compared against an inventory load-in during last year's third quarter. Non-focus cigars and MYO pipe declined 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 our 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 Durfort, resulting in a higher margin for MYO 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 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 continued 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 as mostly related to continued PMTA volatility. This $2.7 million is different than our cash PMTA expenses related to our adjusted EBITDA. Excluding these write-offs, gross margin would have been closer to 35%.

Now 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 a strong performance in 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 NewGen segment, we revised 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 previous guidance of $78 million to $83 million. 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.

Lawrence S. Wexler -- President & Chief Executive Officer

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 toward 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 that 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. And with that, I'd like to open up the call to questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Vivien Azer with Cowen. Please go ahead.

Vivien Azer -- Cowen and Company -- Analyst

Hi. Good morning.

Lawrence S. Wexler -- President & Chief Executive Officer

Good morning.

Robert Lavan -- Chief Financial Officer

Good morning.

Vivien Azer -- Cowen and Company -- Analyst

So I wanted to start with the Smoking segment. The strong double-digit growth is certainly encouraging to see. I think you guys, I think 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?

Robert Lavan -- Chief Financial Officer

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 $3 million to $5 million from wraps. That was offsetting the fact that there is a -- the trade took down inventory on wraps all the way down in the second quarter. On the paper side, there wasn't a volume sale, there's just -- there was higher consumption.

Vivien Azer -- Cowen and Company -- Analyst

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 like a 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?

Lawrence S. Wexler -- President & Chief Executive Officer

Down-trading at Smokeless is a longer term trend. I think it was exacerbated 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 it.

Vivien Azer -- Cowen and Company -- Analyst

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 intra-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 intra-quarter around that?

Lawrence S. Wexler -- President & Chief Executive Officer

No, it's interesting. I've been following some of the reports from NACS. And it seems as though, leaf -- since 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.

Vivien Azer -- Cowen and Company -- 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 like incremental strategic initiatives that you can pursue to really being into that? Thanks.

Lawrence S. Wexler -- President & Chief Executive Officer

Yeah. We think about -- we're sort of Texas hedged. We get down-trading if the consumer gets their bell time. So that has been very helpful for us. But that's been a trend we've seen for years, and COVID really accelerated it. 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 Zig-Zag or Stoker's. So we are preparing for that. We have this product, new product pipeline, including on sort of the value segment in Smoking that we're really excited about that will sort of offset, more than offset that next year.

Vivien Azer -- Cowen and Company -- 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 were you exploring other verticals? Thanks.

Lawrence S. Wexler -- President & Chief Executive Officer

No. Look, 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, people at the dosist seemed to understand marketing, there's some real pros there. And we think that they have -- they built a very good brand, obviously, Vape Gate last year sort of stunted their growth a little bit, but they responded and the slate of new products that they're just entering the markets, we saw there is a lot of great opportunity. We think they're going to be a terrific partner. And we're especially excited about the co-developing this CBD brand for our main channels.

We think that the CBD market is one that is under branded, there is 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 selling 1,000 milligrams of this, 300 milligrams of that. They're really focused on the consumer and the desired end state. And those are the type of people we're looking for. We think those are the type of people that will win in the long run.

Vivien Azer -- Cowen and Company -- Analyst

Got it. Thanks so much.

Operator

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

Susan Anderson -- B. Riley FBR -- Analyst

Hi. Good morning. Nice job on the quarter.

Lawrence S. Wexler -- President & Chief Executive Officer

Good morning, Susan.

Robert Lavan -- Chief Financial Officer

Good morning.

Susan Anderson -- B. Riley FBR -- Analyst

Good morning. 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 out longer term?

Lawrence S. Wexler -- President & Chief Executive Officer

So let me be little clear on the investment. We actually invested in dosist's, thc-free for their business in their Canadian operation. As part of that investment, should cannabis become legal -- legalize, 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 -- B. Riley FBR -- Analyst

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

Graham A. Purdy -- Chief Operating Officer

Yeah. 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 sort of catalyst is, the FDA is going to start enforcing and 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 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.

Susan Anderson -- B. Riley FBR -- Analyst

Got it. Okay. That's helpful. And then lastly, just on the margin difference between vape and Solace and Nu-X in the NewGen 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?

Graham A. Purdy -- Chief Operating Officer

Yeah. So vape, which is -- there's two parts of vape. 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, and let's say for round numbers, 30. Nu-X and Solace come in significantly higher than that. And such in the quarter, we wrote-off $2.7 million of inventory, and that flows straight to the bottom line. So 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 sort of vaping from a third-party perspective to just stay flat.

Susan Anderson -- B. Riley FBR -- Analyst

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

Lawrence S. Wexler -- President & Chief Executive Officer

Thank you.

Operator

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

Gaurav Jain -- Barclays -- Analyst

Hi. Good morning, everyone.

Lawrence S. Wexler -- President & Chief Executive Officer

Good morning.

Gaurav Jain -- Barclays -- Analyst

I have a few questions. So one is from these investments you have done in dosist and Wild Hempettes, what would be -- how should we model the equity income line going forward? Like would there be losses that would be getting booked there?

Lawrence S. Wexler -- President & Chief Executive Officer

Yeah. So dosist, you should keep flat. 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 WildHemp 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 those WildHemp bring to our business from a revenue and gross profit perspective.

Gaurav Jain -- Barclays -- Analyst

Sure. And is there anyway to dimensionalize how much that benefit might be in the next 12 months?

Graham A. Purdy -- Chief Operating Officer

Yeah. 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. 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 -- Barclays -- Analyst

Okay. And you've also mentioned that you're looking at further investments like these investments you have done, 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?

Lawrence S. Wexler -- President & Chief Executive Officer

Yeah. 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 poll, and you're going to generate poll with great marketing organizations. And so that's sort of the partnership there.

With WildHemp, 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 built. And at the end of 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, 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.

Gaurav Jain -- Barclays -- Analyst

Sure. One last question is 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 expense 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?

Lawrence S. Wexler -- President & Chief Executive Officer

Yeah. We're still going through budgets. I would say travel is off by about $1.5 million. I don't think all that's coming back. So that's -- 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, a lot of our marketing is done at the store level, so it's not really down as much. 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're not going to wake up and have double-digits in SG&A or anything like that.

Gaurav Jain -- Barclays -- Analyst

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

Lawrence S. Wexler -- President & Chief Executive Officer

That's annualized, yeah.

Gaurav Jain -- Barclays -- Analyst

Okay. Thank you.

Operator

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

Eric Des Lauriers -- Craig-Hallum -- Analyst

All right, great. Well, thank you 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. So you guys called out scalability and their marketing prowess as two of the reasons why you 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? 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, that seems to be a big push for this 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?

Lawrence S. Wexler -- President & Chief Executive Officer

Yeah. One of things that interest us on dosist is the way they approach the market. So when they came to market with their disposable, they actually had a dose control, which I guess as name implies, a dose controlled device so that the consumer could actually control what your experience is. And on top of that -- and series of products that are geared toward that individual end state.

So for instance, in their comp product, they'll have a different combination of terpenes and strains and other biomass in 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 in those 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.

Eric Des Lauriers -- Craig-Hallum -- 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?

Lawrence S. Wexler -- President & Chief Executive Officer

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 Des Lauriers -- Craig-Hallum -- Analyst

Okay, great. 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 sort of a 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've seen at this point?

Lawrence S. Wexler -- President & Chief Executive Officer

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 sort of consumer products that it just happened almost overnight. And so people are saying, 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 of the open systems industry. People are very excited that those guys are still around. But it's still early days. I mean, we're feeling good. We do need all of this legacy inventory to flush through the system before we can call it a win.

Eric Des Lauriers -- Craig-Hallum -- Analyst

Okay. That makes sense. And then last one for me. Can 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 dosist and WildHemp, there's 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, the nicotine vape side of the business, can you just kind of talk about the M&A environment post PMTA here?

Lawrence S. Wexler -- President & Chief Executive Officer

Yeah. So one thing that's really important about the PMTA is, 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 you'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&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 being having a gut check and saying, do I want to be here?

Eric Des Lauriers -- Craig-Hallum -- 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?

Lawrence S. Wexler -- President & Chief Executive Officer

Extremely active.

Eric Des Lauriers -- Craig-Hallum -- Analyst

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

Lawrence S. Wexler -- President & Chief Executive Officer

Thank you.

Operator

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

Gregory Pendy -- Sidoti & Company -- 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 -- can you just give us a little bit on where do you think manufacturing capacity is? And is there at any point a step up where you have to add toward manufacturing capacity? Thanks.

Graham A. Purdy -- Chief Operating Officer

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. We have room for a second line. And I would just tell you, right now we run four day a week. So we could add shifts. And so we feel like we have at least a few more years before we really start hitting bottlenecks or ceiling. 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.

Gregory Pendy -- Sidoti & Company -- Analyst

Perfect. That helps. Thanks.

Operator

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

Louie Reformina -- Chief Business Development Officer

Larry?

Lawrence S. Wexler -- President & Chief Executive Officer

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

Graham A. Purdy -- Chief Operating Officer

Thanks, guys.

Robert Lavan -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Louie Reformina -- Chief Business Development Officer

Lawrence S. Wexler -- President & Chief Executive Officer

Graham A. Purdy -- Chief Operating Officer

Robert Lavan -- Chief Financial Officer

Vivien Azer -- Cowen and Company -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

Gaurav Jain -- Barclays -- Analyst

Eric Des Lauriers -- Craig-Hallum -- Analyst

Gregory Pendy -- Sidoti & Company -- Analyst

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