Haypp Group AB (publ)

STO:HAYPP

Earnings Call Transcript

[Gavin O'Dowd, executive]

Thank you. Good morning, everybody, and welcome to our Q3 2024 interim results. Our CFO, Peter Deli; and I, Gavin O'Dowd, will walk you through our results.

I would like to start by reiterating our higher purpose of inspiring healthier enjoyment for millions.

Moving along to the operational highlights. I would like to begin with our NP Q3 volumes, where there was year-on-year growth of 42% and 93% across the 2-year period.

Nicotine pouches accounted for 63% of our total volumes for the quarter, up 10 percentage points versus Q3 2023 as the robust trend continues. We're particularly happy with the continued strong NP volume performance in our Growth division which grew 58%. In addition, nicotine pouches continue to show strong performance in the Core Markets, growing 32%.

With that, I will hand over to Peter for more depth on our commercial performance, after which we can walk through other aspects of the business.

[Peter Deli, executive]

Thank you, Gavin. Good morning, everyone. Let me start our financial overview with our sales development. In Q3 2024, we grew sales by 25%, excluding the FX headwind. This means a further acceleration from our Q2 growth and brings the year-to-date average about 20% from a slow start of the year.

When we are looking at the contribution of the business units, we are very happy to see that both Growth and Core Markets are significantly contributing to the group growth and also that the improvement in the Emerging segment sales makes it a real contributor to our year-over-year sales performance.

In both segments, nicotine pouches were the key driver for the growth. Out of the 25% growth, excluding FX, it accounted for 23%. The actions we put in place in order to manage the smooth decline largely resulted and -- this category largely remained flat versus last year.

Moving to Slide 7, and our profitability. Profitability also remained robust. This is consistent with the previous quarters of 2024. Our adjusted EBIT grew by 81% to SEK 33.1 million, which means a 3.5% adjusted EBIT margin, an improvement from 2.4% last year. The result was supported by the sustained margin expansion, which we partly reinvested into the team mainly to support our Emerging segment.

Core and Growth markets' profitability before investments into the Emerging segment reached 4.3% on an adjusted EBIT level.

Important to highlight that in the quarter, we created a reserve for the San Francisco complaint based on the available fact supported by external legal advice.

Moving to the next slide to our Core Markets. Here, in Core Markets, we achieved a 16% growth, excluding the FX headwind of 3% in Norway, driven by the nicotine pouch category, which performed well in both markets.

The nicotine pouch volume grew 32% and consistent performance both in Sweden and Norway. Profitability-wise, our adjusted EBITDA is up by 0.7 percentage points versus same period last year, driven by the improved media and insights revenues, which demonstrate the robustness of our business model.

Moving to Slide 9, and our Growth Markets. In our Growth Markets, our sales grew by 44%, excluding the 4% currency headwind. We are happy with the nicotine pouch development across the board in both markets. Adjusted EBITDA was SEK 2.5 million, 0.9% of our sales, in line with previous quarters.

Active customer growth was exceptional. The increased search volume demonstrates the opportunity we see for the further these online channel penetration growth across the markets.

Slide 10, and our Emerging Markets. In the big scheme of things, these markets are still small. However, the sequential quarter-over-quarter growth remained robust versus Q2 2024, our sales is up by 64%. Active customers now reached 20,000 within the quarter. The investment for this business segment remained consistent and EBITDA for this business unit was minus SEK 7.8 million in Q3. This represents 0.8% reinvestment on a total level.

Moving to Slide 11, and our Selected KPIs. Here, I would like to highlight 2 numbers. Firstly, the investment level because year-to-date Q3, we invested SEK 69 million, which is 2.5%, slightly above the historical averages. But as we highlighted it several times earlier, this is not a flat line. Right now, we are working hard in the overhaul of our back-end and front-end infrastructure, which is now visible in these numbers. However, as soon as these projects are completed in the coming quarters, this number will go down to the previously -- previous levels.

Our net debt to adjusted EBITDA ratio is 0.8, looking at the last 12 months, which shows and represents a very robust and healthy balance sheet, what we maintain for the group.

With this, I hand the word back to Gavin to guide us through the legal and regulatory developments.

[Gavin O'Dowd, executive]

Thank you, Peter. Moving to Slide 12, covering some legal and regulatory areas. We were encouraged by Sweden's recent policy improvement, which has moved from tobacco and nicotine consumption to the focus on tobacco and nicotine harm, reflecting the benefits of risk reduction.

In addition, the U.K. has recently reintroduced its tobacco and nicotine bill, reinforcing the importance of risk-reduced products.

Haypp had 2 regulatory-related challenges in the latter part of Q3. In Sweden, Stockholm Municipality made a decision to revoke [Technical Difficulty]. We firmly believe that the decision was unjust and we're appealing it through the court system. During the appeal process, we will continue to sell traditional snus as normal, and we believe that the process will take 1 to 2 years to conclude. In the meantime, we have implemented all of the recommendations from the municipality, and we expect a very limited impact on our sales.

Secondly, the city of San Francisco's Attorney has filed complaints against our U.S. subsidiary and their brand [Technical Difficulty] stores regarding the sale of flavored nicotine pouches into San Francisco. There are multiple locations in the U.S. where we restrict flavored products due to local legislation. However, we did not do so in San Francisco as we had received a clear legal opinion from a credible law firm supporting our sales to the city. This opinion was issued in [Technical Difficulty] earlier before. The case is ongoing as we speak.

In addition, California is introducing new legislation, which will remove the exemption for online retailers to sell flavored and nicotine -- sorry, to sell flavored nicotine and tobacco products into the state.

Moving to Slide 13. The upcoming legislation in California, which extends the restrictions on flavored products to include online, has meant that we have suspended sales, most of which was flavored products into the state until we have further clarification.

While California represented circa 10% of our nicotine pouch volume in Q3, the growth levels were substantially lower than the rest of the country. This new legislation impacts not only flavored nicotine pouches sold into the state, but also oral tobacco. Oral tobacco products such as MST and snus were already a rapidly declining share of our U.S. sales and circa half of them were being sold into California. As a result, the group has brought additional tobacco product [Technical Difficulty] to late 2024.

Moving to Slide 14. The U.S. continues to represent an ever-increasing share of group, 19% of the group volume during Q3. I would like to take this opportunity to provide more depth on the breakdown of our U.S. business and the drivers of growth. As stated in the prior period, while nation -- sorry, as stated in the prior slide, while nationwide tobacco products and California's nicotine pouches make up circa 3% of the group volume, they effectively have not been growing.

In addition, from the latter part of Q3, we have experienced a challenge in sourcing. If this continues throughout the quarter, our, Zyn sales in the U.S. [Technical Difficulty] offer quality products to our consumers, reaching to diversify individual brands.

As highlighted in our Q2 release, other brands, which have been on the market for some years, started to show a robust share growth from late 2023. This is driven by increasing consumer awareness and brand equity. These brands are effectively the drivers of all of our U.S. growth. In addition, new brands from large international manufacturers have and are expected to come to the market during 2024. These are further broadening the range of quality nicotine pouches for our customers.

Now to take a look at our long-term performance and our outlook on the next slide. We recognize that it's just over 3 years since we have listed on the stock market. I would like to take this opportunity to look back at our sustained business performance over that time. Starting with strategically important nicotine pouch volume, we have grown over 250% since early 2021, bringing it from 31% of our volume to 63% of our volume in Q3.

In addition, we have also entered the vaping category, which now accounts for just over 2% of our volumes. Also during this time, we have increased our EBIT margin.

The group intends to provide a set of longer-term targets to the investor community in the spring of 2025.

Moving to Slide 17. In addition to the strong set of results in Q3, we would like to reiterate the robust fundamentals for risk-reduced products. The suitability of online for the category for a variety of reasons, not least of which is the traceability and control and Haypp's strengthening position within the online channel. The rapid and sustained growth of nicotine pouches is expected to generate increased scrutiny and, in many cases, the scrutiny is warranted. We will continue to invest significantly into compliance, and we recognize that it is not only a source of sustained competitive advantage, but it is also the right thing to do.

Moving to our final slide. We would like to reflect on the dynamics underpinning our continued performance. Haypp has a substantial competitive advantages in its business model, which in turn are built on robust processes and systems. However, our overall processes is a result of an excellent team and culture that has fostered and their connections to our higher purpose of inspiring healthier enjoyment for millions. I would like to take this opportunity to thank the team for their commitment, dedication and overall performance.

And with that, I will hand over to the operator for questions.

[Operator]

[Operator Instructions] The next question comes from Niklas Ekman from Carnegie.

[Niklas Ekman, analyst]

First question here on the withdrawn Swedish license. Do you have any further news here? Any dialogue with the authorities on this issue? And I guess as a first question, have you already submitted your appeal? And do you have any indication if the changes that you've already made, if those could be sufficient for this license to be given back? Or just any of your thoughts here on the process would be appreciated.

[Gavin O'Dowd, executive]

Niklas, yes, we have submitted our appeal and that moves the process into the legal system, so it's no longer to the same extent in dialogue with the municipality. It has now moved into the parallel infrastructure here of the legal system as it goes through.

As I've said, we have -- over the last 6 weeks, we have implemented all of the recommendations, which the municipality raised, some of which were only implemented as recently as last week. And so they're all now completed at this point in time. However, I don't expect that the position from the municipality is going to alter at this point in time. I think this process is going to be brought through the court system where we expect that we will get the right conclusion coming through there.

[Niklas Ekman, analyst]

Very clear. And just to clarify, you had SEK 11 million of one-off costs here. I didn't really understand, was that related to legal fees? Or is that a provision for the fines that you're expecting to receive in San Francisco?

[Peter Deli, executive]

Niklas, basically, that covers the expected settlement fee with the city and also the city's legal cost is included in this reserve. But this is based on the very initial estimations because we are still in the data gathering fact for the case.

[Niklas Ekman, analyst]

Okay. Do you see any risk that, that fee could be significantly higher, meaning like SEK 50 million to SEK 100 million? Or do you think SEK 11 million is -- is that the absolute best estimate?

[Gavin O'Dowd, executive]

I think it's probably fair to say, Niklas, that, that's our best estimate at this point in time.

[Niklas Ekman, analyst]

Fair enough. Any reflection on the change of administration in the U.S.? I think in the past, Republicans have generally been more relaxed on regulation. Do you think or do you have any indications about how the regulatory environment in the U.S. could change? And if that could be to your advantage?

[Gavin O'Dowd, executive]

I think it's still a little bit fresh at this point in time, not just because of a Republic administration within the White House, but also with the impact of having control on both Congress and the Senate. And your hypothesis is correct. Historically, the Republican administrations have been more supportive of an -- have been more supportive of our category in general, and there has been some statements coming from the White House regarding risk -- from the incoming administration regarding risk-reduced products in general.

However, I think it's a little premature to determine exactly what the specifics of that will be. So I think we would like to keep a closer eye on how this evolves and perhaps have a little bit more guidance once we get to the Q1 results, whereby the administration should have made [Technical Difficulty] our policies a bit clearer on many of these aspects.

[Niklas Ekman, analyst]

Absolutely fair point. Also just wondering about your margin development now. It's risen very consistently at around 110 basis points in the last 3 quarters, looking at the year-over-year effect. What do you think is the likelihood of another 110 basis points going into next year? And obviously, there's a lot of uncertainty here. But do you think that the scale benefits, the improved negotiations with suppliers, et cetera, do you think that, that could be sufficient for a similar margin progression going into '25?

[Gavin O'Dowd, executive]

Yes. So I think what we have seen in recent years has been a material uptick as we move from one calendar year into the following calendar year, where we see many of the benefits of scale coming through in steps rather than coming through gradually throughout the year. And I think you guys are probably reasonably familiar with this from prior years. There's no fundamental reason for that to stop on the basis that as the group continues to grow, those benefits of scale continue to manifest.

We won't give guidance at this stage as regards to what our margins will be for 2025. As you say, there is external moving factors. But in addition to that, there is also considerations as regards to how much do we reinvest in different spaces as the opportunity ahead of us seems even greater than perhaps we previously expected across many markets. So I think it's probably a little bit premature at this point in time, Niklas, to provide an awful lot of guidance for 2025. But I can confirm that what you're saying there as regards to the benefits of scale, which have been released in previous conversions from one calendar year into the next would be expected to occur for next year as well.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Gavin O'Dowd, executive]

Thank you all very much for your time. It's greatly appreciated. And I look forward to giving you another update in February.

[Peter Deli, executive]

Thank you, everyone.