Turning Point Brands, Inc. (TPB) Earnings Call Transcript & Summary

I'm Pam Kaufman, Morgan Stanley's U.S. tobacco and food analyst. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. For the next session, I'd like to introduce Turning Point Brands. As background, Turning Point operates in 3 main segments: smokeless products through the Stoker's brand; smoking products such as Zig-Zag rolling papers and wraps; and third, its NewGen segment, which manufactures nicotine liquids for open-tank vaping systems and also distributes third-party liquids and devices. Here today to walk us through the company's strategy and vision is Turning Point's Chief Executive Officer, Larry Wexler. I'll pass the call on to Larry for a brief overview of the business, and then we can jump into Q&A.

Thank you, Pamela, and thank you for the opportunity to speak to your audience. Okay. So the Turning Point Brands is a company in evolution. We started as a tobacco company, and we're moving more into overall actives. As an example, over half our operating income comes from Zig-Zag, which is highly associated with cannabis, and so we're moving away from our tobacco roots into more of an actives company. And I'll talk about that more as we get into NewGen. So just as a kind of brief overview of the company, the company has a very strong core business. It produces a lot of cash flow. It's recession-resistant. And it's got 2 leading brands that have over 50% gross margins and a 30% to 40% operating margins and generate over $50 million of cash flow over a year. So the -- we break down into 3 different segments, as Pam -- as you said. Our Smokeless segment has been doing very well this year. It's up 16% year-to-date. And it breaks down into 2 different product groups. The first is chewing tobacco, which is sort of the legacy for the company. That's where we started. That's a category that's marked by declining tonnage. It's been in a long-term decline since 1977, but it offsets that decline with pricing. So in essence, the category itself is basically revenue flat. We've done a little better than that because we've been able to take advantage of the pricing. It's a very regular pricing in the category and also growing market share. And we are organized there behind Stoker's. And -- but the real news in the Smokeless category is MST. It's been on fire. And there's no pun, obviously, because it's an oral product. But we -- it's grown about 25% year-over-year this year. And it's a great category. It's very -- it's a large category. It's one of the largest categories in the other tobacco products segment. It has $3 billion to $4 billion of manufacturer sales. And our Stoker's brand has about 5% of the tonnage in there. Our share -- I guess we're value-priced. We do a little bit less in terms of percent of revenue. And what's interesting about the category, it has a very unique positioning. We introduced the product in the tub as opposed to the 1.2-ounce can. And it actually looks a bit like -- and I have a little demonstration here. Actually, it looks a bit like a Baskin-Robbins ice cream container. And this product had been growing pretty rapidly. And with COVID, it really took off. It was a perfect positioning for the -- with the times. We had 20-some-odd million people who were laid off. We had lockdowns where people couldn't get to the store. We have a product that had value, convenience. And most importantly, when we test the product against some of the leading brands in the category, it tests very well. It tests at least equivalent or somewhat better. So it has about 5 share of the tonnage, and it grew about 1 share point in the past year, and most of that growth came from same-store growth. So we're very happy where we are. With only 60% of the coverage of the volume in the category, we think we've got a long runway for growth. Our Smoking segment is organized around Zig-Zag. It also has done very well this year. It's up 14% year-to-date, in fact, 19% in the third quarter. And Zig-Zag also breaks down into 2 different product groups. We've got papers, rolling papers, where it's legacy. That's a product we licensed in North America. So we have license for U.S. and Canada. We actually own the trademark for the other segment, which is Make Your Own Cigar wraps. Now Zig-Zag has about 30 share. It's a leading premium rolling paper in the country. It has about 30 share. We have about 70 share of the wraps market. Now this is a category that's actually in transition with -- as the market started opening up for cannabis, we have poured a lot of resources into reenergizing Zig-Zag. We've introduced a number of new products. Most importantly, paper cones. Think of them as a preformed paper, rolling paper. And as I'd like to say, never underestimate the laziness of Americans. They don't necessarily want to roll their own. They can just put their cannabis in the cone, light it up and go without much effort. That's a tremendous opportunity. We think the paper -- the cone market in the United States is roughly the same size as the vape market. And we're underrepresented because most of those sales are in channels that we don't operate in -- that we have not traditionally operated in. That's the second part of our strategy, is that we've really opened up Zig-Zag into new channels. So we've taken it into headshops and dispensaries as well as online. And all these -- we just started those initiatives mid last year. And you can really see the growth starting to pick up once we started getting into these alternative channels culminating in the third quarter where it grew about 19%. The other thing that's going on in this category that its margins are growing. Its margins were traditionally about 50% but now in the high 50s, and that's because of our acquisition of Durfort, which was our partner in the development of the wraps business. And we essentially captured the royalties that we were paying for them. So this is another segment that we were seeing some growth. Now NewGen, it's a little bit different. We built NewGen by buying a couple of third-party distribution businesses, both B2B and B2C. And that's a basis for it. So it's a bit lower margins as margins run about 30%. But to help supplement that, our long-term strategy there is to increase the proportion of proprietary brands going through that distribution platform. Think of the distribution platform as like having sales force that pays for itself by some third-party products. But by taking proprietary products through that platform, we think we can take the margins there from 30% to 50%. And with over $100 million in sales, that could have a substantial impact on the market. And some of the things we probably should talk about later, which is the PMTA, gives us a great growth option. That's a high-level view. And now let's dive in where you like to go, Pam.

So just a reminder, if anyone from the audience who would like to ask a question, you can submit it through the online portal. So that was a very helpful overview of the business. Can you maybe walk through at a high level how you're thinking about your financial goals and strategic priorities for 2021 and how the current environment has positioned you heading into next year?

Okay. So 2020 was a very interesting year for the country and for our company. COVID presented a lot of challenges, as it did for all businesses, but we were very well positioned to take advantage of that. We had a number of initiatives that we had planned for 2020 before knowing about COVID that turned out to be very instrumental in really helping improve the company's position. So with Stoker's, as I mentioned, with the tub, it was perfectly positioned with value and convenience during the lockdown. And the growth that we saw coming into the year actually accelerated during the COVID period. With Zig-Zag, with the new initiatives that we put into distribution. And in both Stoker's and Zig-Zag, we also saw some increased consumption from consumers as they're staying home. They just have more consumption occasions. We had some benefits from competitors having some supply issues. We had one supply issue ourself with our Make Your Own cigar wraps. Our production facility in the DR went down for 3 weeks, and we've been racing to catch up on rebuilding those inventories. And we're actually seeing some benefits in the third and fourth quarter from the restocking. So all our products were growing and gaining share throughout the year. Now it's sort of interesting because underpinning that and underpinning the company is a very strong distribution system. We can reach consumers wherever they shop. We have -- we reached over 200,000 stores in North America with our sales force and our partners in Canada. We have a B2B and a B2C operation, and we're now getting into digital channels with Zig-Zag. So all that has positioned us very well. And we're very optimistic about 2021. So the way we are looking at our businesses, we're traditionally -- Smoking, as an example, over the last couple of years has grown in the low single digits because of some products we've been deemphasizing, so it masks the mid-single-digit growth of our core products. We see that accelerating into the high single digits, maybe even double digits over the next year with our product initiatives and our channel initiatives. With the Smokeless segment, we expect moist -- Stoker's Moist to continue to grow strong double digits. Our chewing business may go back closer to the mid low single digits as it starts lapping some very tough comps from some of the progress that we made this year. What's interesting and probably the biggest volatility that we're going to see is in NewGen. As you may know, the FDA has put a process in place called the PMTA, which means that all products before 2007 have to be applied for approval to stay in the market. And those applications were due September 9. And this is a process that is a multistage process that the FDA has, where the first step of the process is where they have to -- they review all the applications and then accept some subset of those applications that met the rules, filled out all the blanks, sort of a simpler process. That process is going to start weeding out a lot of competitors in the e-liquid market. Right now, there are hundreds of competitors there. Many of them don't have the resources, skills or the capabilities of meeting the FDA requirements. And we're going to start seeing them weed it out. The first step of the weed-out will be during the acceptance process. And then as you go through the approval processes, when you go into scientific review, there's a lot of one-on-one interchange with the FDA. And we'll start seeing competitors drop out. So the biggest swing factor in 2021 will be how fast is the enforcement with the FDA. If they're fast, then the NewGen sales should show that -- it should show up in our NewGen sales, and where they set the bar. They set the bar high, which means that it's very tough to get through, that people will be dropping out faster. So we think that our businesses are coming in with great momentum, and we're very excited about 2021.

Great. And maybe diving deeper into the Smokeless segment. What are some of the key dynamics that you believe are driving the smokeless category? The industry used to grow mid-single digits, but there's been a slowdown over the last several years. And it seems that this was partially driven by greater cost category movement as consumers moved into vapor. What do you see as the main driver of category growth? And have you seen any movement back into smokeless since vaping has slowed?

Well, I think there is a truism is that many nicotine consumers that cross category. We've done some studies that show that majority of what nicotine users do, consume across at least 2 categories. I think there is some interaction because of that cross-elasticity, if you will. I think there is some interaction with consumers. And we did see Smokeless growth slowing a little bit to where it was essentially flat in 2019. With the additional consumption from COVID lockdowns and perhaps people going back to sort of basic staple products, we did see moist, the category itself, pick up a little bit. Now from our standpoint, with 5% of the tonnage, we think there's 95% of the people we have yet to get. So we see a huge market for ourselves and a long runway for growth. As a -- I guess I'm a little bit competitive. I feel personally insulted when not everybody uses my product. So -- and we -- and we have a lot of momentum, and we still have about 40% of the distribution to cover, which will take us a couple of years because we're trying to talk about smaller stores. We think through distribution growth, and what we're most excited about is that the bulk of our growth, and we grew 1 share point, about 25% last year, most of our share growth has come from same-store sales. So we see a very long runway and -- despite what we think is going to be a fairly stable category.

Great. And so maybe can you discuss Stoker's brand positioning relative to the major tobacco company products like Copenhagen and Skoal? I know you've had some market share, but maybe if you could just give us an overview of how the market share has been performing.

Okay. So Stoker's is positioned very differently than Cope, Skoal, Grizzly, the leaders in the category. For one thing is we try to position it as a family traditional brand. We actually have the creator of the brand on the package, which is somewhat unique. Other people have animals, or Copenhagen just has the brand name. We also have -- it's an incredibly high-value, high-quality product. We have a unique production process to use 100% American leaf. And consumers have an affinity for it. The other thing is that it's cut longer, so it actually performs very differently. It lasts longer, the nicotine lasts -- releases longer, the flavor releases longer. And as I said -- as I mentioned earlier, in consumer testing, we do get slight preference against some of the leaders. Now as a consequence of that, the brand is basically growing share almost in every quarter since we introduced it. And in the past year, it has really accelerated with its value positioning to where it grew 1 share point. And we think we're very well positioned with the tub. We introduced the cans 4, 5 years ago. They're doing very well. They've led us to get into a lot of the major c-store chains in the past couple of years. We've broken a lot of the major c-store chains, which is one of the underpinnings of accelerating growth.

And just to follow up on that. So can you discuss your current distribution footprint and how you're approaching further distribution expansion?

Yes. Right now, we're in about 60% of the weighted average of the distribution of MST. We still have a couple of major chains that are out there that we have to knock down, but it is basically a store-by-store approach. And we think we can add 3, 4 or 5, maybe 5 distribution points next year as our sales force gets out there. What we're finding is that we're coming into some accounts now. They've heard of us and people are asking for it, and they're interested in seeing us. So when you get into these chains like Speedway and [ Shifts ] and QuikTrip, you tend to make a name for yourself with a lot of the leader accounts, and it's opening up a lot of doors. And we expect to see continued expansion. But our main focus is on same-store sales growth. At this point, if you have a large enough distribution base, that certainly is a growth driver for us.

And can you talk about pricing dynamics within the smokeless category? What has been your approach to pricing? And do you typically follow the major manufacturers' price increases? Is there opportunity to close the gap on pricing?

Yes. The MST market is a very well organized market. You have Altria and VAT having about 85 share between their large brands. And they take -- they're very disciplined about taking prices, taking it 2 to 3 times a year. Historically, they have been about 5% to 7%. We're pretty much followers in pricing. Now the way we price Stoker's is that the cans are priced about 40% below the mode of the market. So you're talking about Grizzly and all of Copenhagen's nonnatural prices -- flavors. We believe that over time Stoker's can close that gap. As I said, we test very well. We think we've got the quality. Once we start filling in more of that distribution gap, we see us starting to close that pricing gap with Copenhagen and Grizzly. And we think that's a great engine for future profit growth for the group.

And one of the focus areas for investors is how the economic environment is impacting down-trading in tobacco. Are you seeing this dynamic within the Smokeless business? And what's your outlook for the value versus premium segments going forward?

I think it's sort of interesting. There has been a secular trend in MST towards value. It's not something that just started in the last 6 months. But like many trends in the marketplace like e-commerce and a dozen trends, COVID certainly accelerated all of the trends that were pre-existing in the marketplace. And we did see an acceleration of the shift towards value in the MST market. And we think that will continue. We think we're perfectly positioned with our tubs and with our can pricing. And we think we should be able to take advantage of that going forward.

And can you discuss your outlook for tobacco excise taxes following the election given current government budget shortfalls and the outcome of elections.

What did Reagan say? "If it moves, people want to tax it."? Yes, I think that we -- over time, we tend to get excise taxes. And generally, they come in the states, and they come sporadically across the states. You see a couple of states move each year. We would think that in 2021, we will see some of that because of the financial condition of the states. What's interesting in tobacco, and it's true -- it's definitely true in MST. Because at the end of the day, the manufacturers don't pay the tax. The price elasticities are very low in tobacco products in general and in MSTs specifically. And most of those taxes are passed through, and you see very modest impacts on overall demand. And if anything, as the prices go up, I think people will be looking for value alternatives. And once again, I think if that is the case, as that turns out, we'll be perfectly placed to pick up some of the downdraft from some of the higher-priced brands.

And would you say you wouldn't be surprised to see more taxes next year? Are you talking about at the state level specifically? Or would you also expect to see federal excise tax increase?

In our plans, we're not looking at a federal tax increase. I think the first week of January will be somewhat a dictator of what that environment would look like. But we -- the federal exercise tax only goes up sporadically. It's not something that they look at very often. And also, it's a very aggressive tax. Particularly MST consumers are on the lower end of the income spectrum. And so when they tax the consumer, because that's who pays the tax, it is a very aggressive tax. So hopefully, they'll look at that if they're looking at federal excise taxes. So in our plans, we're looking at state excise tax increases, but not -- that were not federal.

Right. And how are you thinking about the potential for strategic investments or M&A within Smokeless to drive growth?

Smokeless is one of the categories that were not overly focused on M&A. The opportunity is not as great as they were in Smoking and in NewGen. There are a couple of small companies that are out there, but it's a fairly concentrated market. And there are some new innovative companies we've been looking at. But at this point, we don't see a major M&A. If we do a deal in Smokeless, it will be a small deal, trying to acquire some technology and plug it into our distribution system, which is basically our overall strategy for M&A in any case with our strong distribution. We like to take products like -- that have a strong regional following and then putting them into national distribution. That's what you see us doing in Smokeless.

Great. So moving on to the Smoking segment. Late last year, you made changes to your strategy to stimulate growth in the segment. Can you talk about the initiatives that you've taken so far? And going forward, what do you see as the main growth drivers for the business and any potential headwinds?

Okay. So we basically took a set of strategies that were both product-based and channel-based. So in terms of products, we have -- we introduced cones, unbleached hemp papers. And in fact, when you look at the growth, the 19% growth we had in the third quarter, over half of it is from the new products that we introduced over the last 18 months. And so those new products have been very successful. They're already leaders in their categories, and we think they'll continue to grow and continue to expand. We also have another suite of new products that are in the pipeline that will be starting to hit the market that will further accelerate that growth. Now what's interesting is on the channel side. Traditionally, we focused on what we call a measured market, think of C-stores, gas stations, tobacco outlets. And in there, Zig-Zag is well over 30% share. Where it was underrepresented is in headshops and in dispensaries. So as you've seen cannabis legalization spread, you've seen some channel shifting by the consumers, where they're going into places like dispensaries and headshops to buy their papers. And we're moving where the consumers are moving. And so we've implemented a number of initiatives. So take headshops. We have some estimates. The measurements are not quite as refined as they are in what we call the measured market, but we're probably -- the exact share in headshops is maybe between 10% and 20%. We think that we can get that much closer to our measured market share of over 30%. We have special promotional packaging for the headshops that give greater visibility to Zig-Zag. We're starting to do a lot of online selling into the headshops. It's less expensive than sending our sales force in. And the online is actually another channel that is very interesting to us. We had no online. A very, very small online business for Zig-Zag. We ramped that up. It doubled in the first quarter, doubled in the second quarter and doubled in the third quarter. So it's growing very rapidly. I think it's probably helped a bit by the lockdowns. But we see online as another great opportunity for Zig-Zag.

And we've seen a number of states legalizing marijuana in the last few weeks. How are you thinking about the pace of legalization? And what is your outlook for the cannabis industry at the state and federal level?

Yes. I think it was actually a clean sweep in the elections. I think all the states that have referendums passed them. And if you look at the public polling, I think the public has basically accepted marijuana as a product that they like to have in their portfolio of consumption. So we see a trend towards legalization. We think, ultimately, it will be nationally legal. Obviously, as a public company, with all the restrictions that are currently in place and actually touching the product, we've been focusing our efforts where Zig-Zag lives, which is in the accessory markets. Everybody is sort of chasing the gold. We're selling the picks and shovels, and we're doing quite well at it. And so we see the marijuana and the cannabis business continuing to grow. There's been some projections that it could go to $30 billion, $40 billion over the next 4 or 5 years. We expect to participate in that through Zig-Zag and also through our acquisition of dosist. A couple of months ago, we put our commitment into a company called dosist, which has a brand that is positioned in cannabis around health and wellness. It actually gives a measured dose, and it has end products engineered for specific benefits. And so what we see in the category -- so over time, as legalization takes place, we see the distribution points expanding. We think that the governments will increase the licenses. And so we think that the play in cannabis, like it is in most other consumer product companies, is with brands. And we think the dosist brand is a terrific brand. When we look at brands, we look at brands that have a point of difference and deliver that point of difference in an emotional way. I'd like to say let someone else on the product specifics. I want to own the emotion because that's what ties people to a brand. And with dosist, they have a unique technology that delivers a very specific dose, if you will, of THC with each puff of inhalers or tablets. And they design the terpenes and all the other bio-matter that goes into the product to support a specific health benefit that you get. So if it's relaxation, or it's enjoyment, or it's sleep, whatever that health benefit is. And we think that's the way that brands will develop in the marijuana market, in the cannabis market. And we think dosist is very well positioned to do it. And as part of that investment, we're actually putting together a CBD product, or a THC-free product as they like to call it, with dosist and take it into distribution. We think that the hemp market, the hemp CBD market, is another market that everybody has been selling the molecule, including us, quite frankly. But we would like to switch to selling the end benefit to the consumer and selling the emotion to the consumer. And we think that dosist, which has a terrific management with very deep marketing experience, can help us develop that brand and sort of change the CBD market a little bit and switch people away from buying 1,000 milligrams of CBD to buying a product that helps them sleep or relieves or helps them get rid of aches and pains, or helps them relax, but a product that's designed around many different cannabinoids, not just CBDs, and terpenes and other bio-matter. So we're pretty excited about that investment.

Can you give us some more detail about the products that dosist is going to sell? And is there -- are you working on any scientific research or support behind the claim that the products will have?

Okay. So the -- so right now, dosist sells an inhaler. And they're coming out with another suite of inhalers as well as tablets and edibles, all designed around a specific dose of THC and a package of terpenes and other cannabinoids that will deliver against these particular products. I think that there's a lot of research that needs to be done. I will tell you that I am a consumer of the CBD products and that I find that they do work. I think that each individual -- I think each individual body reacts very differently with these products. But I think it is a big market. I think it's a tremendous opportunity. I think that it will be very helpful, particularly on the CBD side, once the FDA engages and sets down some ground rules in terms of what the maximum doses should be. There's a lot of confusion. And particularly, there's a lot of confusion around -- particularly around edibles in the CBD market. And I think that the FDA should take it on their mantle to sort of clean that up. I know there's a lot of trade confusion about it because each state, there's 50 different regimes for consuming CBD. And it's very confusing for the trade. It's very confusing for the manufacturers. So it would be very helpful for the FDA to step in. This is one case where regulation might help give some clarity to the consumers as well as clarity to the trade and manufacturers so that we can best serve the consumers in the most productive manner.

Great. So maybe moving on to the NewGen segment. Can you talk about your PMTA applications? What products did you apply for? And where are your applications currently in the process of being reviewed by the FDA?

Yes, sure. Okay. So we applied for 200 PMTAs and 250 SKUs. It's a very expensive process, as you might know. We spent around $16 million, $17 million putting that application in. Our applications are in. We have only received one acceptance so far. But these acceptances we're rolling out we don't think that the FDA -- the FDA got -- we're told millions of SKUs that were applied for. So we don't think that all the acceptance letters will go out until late January as they go through that pile. Now once they get through the acceptance level, then go into scientific review. And that's where it gets really interesting because that's where the FDA has scientists that look at both the applications, the physical science as well as the social science. So the physical science is, what does it do to the body? How is the nicotine getting there? Are there any harmful products in there? Is it fairly clean? We have a bunch of scientists. We believe that our products will fly that part with flying colors. On the social science side, the FDA is interested in, is this in the best interest of public health, which the way I interpret that and the way they seem to interpret it is, does it attract new consumers into nicotine, particularly youth? Now right now, our products and the products we apply for are geared towards the open-tank systems, which is where the consumer actually pours a liquid into a container, attaches it to a battery and then vapes, as opposed to a pod system where you slip a pod on to a battery. Pod systems are products like JUUL and [indiscernible] and they tend to have gotten a lot more of the notoriety in the vaping category. Our products -- our tank products are basically used by ex-smokers, almost 100% of them are used by ex-smokers. And they tend to be much older than pod consumers age -- average age may be somewhere in the high 20s, low 30s. Our average age is in the high 40s, low 50s. And so we think that the FDA, which has a policy, or it seems to have the intent of moving people off the cigarettes into what's perceived as less harmful products. Open-tank systems is one of the places where it is demonstrated that people will move from cigarettes, and they tend to be older smokers. People don't initiate with open-tank systems. And so we think, again, our PMTA applications are perfectly positioned to get through this highly rigorous process. And we'll see this roll out over the next 12 to 18 months as we engage with the FDA. We're still [indiscernible] science we put in, if they have any more needs and then eventually get our approvals and also see the entire market consolidate as these hundreds of people who may have put in applications that might be able to get through the acceptance process, a lot of them will not be able to get the approval process. And so you'll see hundreds of competitors go down to dozens, maybe even less than a dozen competitors, depending on where the FDA sets the bar.

And I guess, have you started to see any rationalization in the category since the PMTA applications came due? And what is your expectations for how the category will look following the PMTA review process in terms of the mix of open versus closed systems flavors and the number of players in the market?

Yes. So we have seen -- we've seen a lot of volatility in this category over the last couple of months. We expect that to continue through most of 2021. We saw some competitors drop out of the mark. One of the notable ones was VapeWild, which is a company that RJR had an investment in. They essentially just withdrew from the market. I assume RJR wants to focus on Vuse which is their pod system. We've seen a lot of companies that probably have -- do not have high expectations of getting to the approval stage of the FDA, dumping a lot of products, a lot of inventory on the market, which has caused a lot of volatility in the market, a little bit of margins coming in. And we expect that to continue as we go through this process. Now coming out of the process, as these people start coming out, you'll start seeing pricing firm up, start seeing the market start to consolidate. And we see -- the open-tank system has roughly about 1/3 of all the vapes sold. Pod systems are about 2/3, open-tank system is about 1/3. We expect to see that share fairly stable. It is one of the few places we can get flavors now because the FDA did eliminate flavors in pod systems. I think that's -- I think you can see that as a reflection of how the FDA looks at open tanks. They don't see flavors as a problem because they don't see open-tank systems selling them to the underaged population. So they allow the open-tank system to keep flavors. And we believe that this is something that will continue to track consumers over time. So we think that the market could be stable. Could it pick up some share? The real question, and any question on NewGen and the PMTA comes down to the FDA and where does the FDA set the bar for both pod systems and open-tank systems and how quickly do they enforce. And those things will drive the reshaping of the market. We think this is a once-in-a-generational opportunity. We think it's a great growth option. We think it will happen, but we don't know the rate at which it will happen, and that's sort of in the FDA's hands.

How should we think about the long-term margin profile within the NewGen segment?

Yes. So part of this strategy of applying for 250 SKUs is to switch our product mix within the category. So if we could -- right now, we -- most of our business is selling third-party products. And what we would like to do is switch that to proprietary products. And we're doing that in 2 ways. One is through the PMTA process, which as these other liquid disappear, we can both change our mix of sales, which today is about 2/3 devices and 1/3 liquids. We think we can switch that. We can grow the liquids substantially. And when we grow the liquids, they will be proprietary products. Now a third-party liquid, you can get margins around 20%, 30%. With a proprietary product, it will be more like tobacco margins, which are 50-plus percent. So even if we did nothing but held our sales, let's say, let's call ourselves $130 million. And if you just held our sales at that level and started selling more proprietary products, you would move the gross margins from 30% to 50% to 50-plus percent over time, with basically very small increment in terms of selling expense. So that would be -- it's a great profit driver. The other aspect that will drive margins in NewGen is a group that we call Nu-X ventures. Think of it as a skunkworks that develop new products. They've come out with a stream of new products. In fact, we just launched a modern oral product called Free that came out of that group. It's a white pouch product. It is positioned at the higher end of the nicotine levels of the products. We've seen a trend in modern world where people come in at the 2 or 3 milligrams. They trade up to 6, and the highest one, other than us, in the marketplace is an 8. We came out with a 9- and 12-milligram product. And the testing that we've done, we've gotten a great feedback on it. We just introduced it about a week ago, so we really don't have a lot of in-market data, other than we were on one of the online platforms that sell the product. And they said that this was the best-selling introduction that they've ever had. We'll see if that's sustained. But this group is fairly creative. We have a gum-like product called Solace Chew, which basically allows the consumer to chew it when they want nicotine and then park it in their mouth when they don't want any nicotine. And as soon as they feel the need for more nicotine, they can sort of chew it again and it starts releasing. So it's a very creative group, and that's the other element that will drive both sales and margin over the next couple of years.

And maybe just touching on your outlook for M&A. You mentioned that Smokeless is not an area where there's a significant opportunity given how highly consolidated the market is. So we continue to expect to see NewGen M&A and within the Smoking segment. Where do you see the most significant opportunities for M&A?

Yes. We are actively looking at the market. We think it's a pretty rich market out there for potential acquisitions. We're in a great position to do so. We have about $100 million of liquidity. We have $50 million of cash on our balance sheet, and we have an undrawn line of credit of another $50 million. So we have the gunpowder to go out and then make the acquisitions. Where we're looking at is in a couple of different areas. One is in Smoking. There are a lot of regional cigar brands, smaller cigar brands that are pretty good brands, but they just don't have the distribution breadth that we can just fly to them. So we think of them as sort of a plug and play, where they're selling, they go to same customers, they go to the same stores. We can just put in our sales guys back and increase their sales. And that's the basic -- that's one of the basic theses of our M&A strategy, is the strength of our distribution gives us the leverage and gives us a lot of opportunity for synergies with these brands, whether it's in Smoking, whether it's in NewGen. And as a NewGen, we've done 2 acquisitions so far this year. The first is dosist, that I talked about. The second one is we bought a piece of wild hemp bets in return for getting an exclusive distribution in the U.S. This is a hemp smoking product. It looks a lot like a cigarette. It's sort of an interesting product. There's been some projections that the smoking hemp market will go to sort of around $50 million to $80 million now, will go to $300 million, $400 million, $500 million over the next couple of years. We think it's -- we think this is a very well positioned brand. It's very hard to process hemp and put it into a smoking device, and they mastered it. They have a high-quality product. And there's another product that we just introduced starting last week. And so we're starting with -- we'll get some results over the next couple of months. But those are the types of acquisitions that we're looking at, looking for new people who have some new technologies or people who have small retail brands that just need some love and attention from a strong distribution partner to take them out national. And as I said, we've got a lot of firepower ready to deploy to make those acquisitions.

Great. Thank you. Well, we're coming up on time. But Larry, I wanted to thank you for participating in the conference. It was great to hear that Turning Point Brands strategy and overview of the business. And I hope that everyone listening has a happy and healthy holiday season. And please feel free to follow up if you have any questions. Thank you.

Thank you, Pam. And I enjoyed it. Thank you very much.

Bye.