Haypp Group AB (publ) (HAYPP) Earnings Call Transcript & Summary

Welcome to Haypp Group Q2 2025. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Gavin O'Dowd; and CFO, Peter Deli. Please go ahead.

Thank you very much. Good morning, everybody, and welcome to our afternoon version of the Q2 2025 conference call. Today, as opposed to this morning's version, we're going to go for a slightly abbreviated version, we will just focus on some key slides. And the rest of the material is available within the deck and is available on recording on our platform as well. So going forward from here, I'd like to start with Slide #4. And I'd like to focus on three key aspects of our operational highlights. Beginning first with our nicotine pouch Q2 volume, which had year-on-year growth of 23% on a like-for-like basis. And I would like to highlight that this doesn't reflect two key impacts on comparability, which reduced the reported growth numbers. The first effect is the Easter effect, and this particularly impacts our core markets. Easter in 2024 was in Q1, and it was in Q2 in 2025, which we highlighted in our Q1 presentation, and this impacted growth by circa 3 percentage points. The second point I'd like to highlight is that in Q2 2024, it was an exceptional quarter driven by the initial Zyn shortages in the U.S. And much of the incremental traffic we received resulted in sales of non-Zyn brands, which grew over 50% quarter-on-quarter in Q2 '24 versus Q1 '24. And for more detail on that, please refer to our Q2 '24 presentation. So adjusting for these factors, our nicotine pouch growth rates are relatively similar in Q2 '25 to Q1 '25. The second point I'd like to touch on here is our revenue. So revenue grew at roughly 20%, so comparable to our Q1 and our last 12 months when we adjust for the Easter effect. And lastly, I'd like to draw your attention to the material increase in our gross margin. Our business philosophy is built around sharing our economies of scale with our consumers in the form of superior convenience and the best value. And despite aggressively moving forward on both of these areas, Haypp has still been able to increase its gross margin by nearly 5 percentage points from 14% in Q2 '24 to 19% in Q2 '25. We believe this reflects the power of our operating model. Moving forward to the next slide and focusing specifically on the U.S. I'd like to touch on how the market is changing and how we are investing. And if I start, first of all, on the left-hand side of the market. The overall market conditions continues to show robust growth, driven both by consumers moving to the category and increasing consumption rates for those already in the category for a number of years. The U.S. nicotine pouch category is now larger than the U.S. legal vape category. In parallel, fragmentation within the category continues to accelerate with further introductions of FDA allowed products. As an anecdote, we launched more new nicotine pouch SKUs in the U.S. in Q2 2025 than in all of 2024. Regulation remains stable with early signs of increasing emphasis on ensuring existing rules are complied with rather than introducing new legislation. And while this is more evident in the vape category, it bodes well for nicotine pouches also. In conclusion, we believe the overall conditions for a compliant online retailer look extremely bright, and we will continue to allocate resources accordingly. Moving to the right-hand side of the slide, which focuses more on U.S. investment priorities, which we touched upon in the CMD. Since then, we have reinforced our team capabilities with our Chief Commercial Officer recently relocating to the U.S. office. In addition, we have recruited a Head of Consumer Acquisition. And in keeping with our commitment to compliance, we have onboarded both Heads of Legal and Regulatory Affairs. We consider these additions to our team to be an excellent bedrock to build a sustainable business from. We have focused much of our effort in recent months towards further improving our retention rates, which is key to minimizing the returns, we will achieve from new consumers in the future. Initiatives such as the same-day delivery in Houston, which has now been expanded to a broader area and the new loyalty program are key drivers in this improvement. And while we will continue to further sharpen our retention rates, we will also try a range of tools to accelerate our customer acquisition rates and access their success before allocating material resources. Finally, as we said in our Q1 release, we see Zyn supply and demand aligning, and we continue to expect the return to selling Zyn in the second half of '25. Moving to Slide 6, which covers legal and regulatory updates. We remain engaged in two cases. In Stockholm, the appeal process is ongoing in line with expectations, and we expect this will take between 1 to 6 months. As previously stated, we don't expect any material commercial impact from the outcome of this case. And on the second case in San Francisco, settlement discussions are ongoing. Further down regarding the EU, the EU released an initial draft of a tax proposal on nicotine products, including nicotine pouches. As with previous EU tobacco tax initiatives, we expect the final outcome to be radically different from this initial proposal, especially given the number of member states, which have openly opposed this draft. However, we do welcome that nicotine pouches are clearly recognized category in the draft, which is a strong step towards recognizing the category in other areas of regulation. And lastly, in the U.K., a nationwide ban on disposable nicotine vaping devices came into effect on the 1st of June 2025. Vape manufacturers changed to similarly branded rechargeable pod systems to limit consumer confusion. We believe the shift benefits online retailers over the long term and Haypp is in full compliance with the new regulation. However, the transition by offline retailers from disposables continues to create a temporary distortion in the market. With that, I will hand over to Peter for an update on our financial performance.

Thank you, Gavin. Good morning, everyone. Overall, we feel that we concluded a successful quarter. Our underlying sales development remained robust and our gross margin increased further. This allowed us to initiate the necessary investment primarily towards the U.S. market to lay the foundation for the next growth chapter. Despite the increased level of investment, our adjusted EBIT grew by 50 basis points to 4.2%. Moving to Slide 7 and looking at the sales performance. To properly understand the underlying performance similar to Q1, we must consider not only the impact of the discontinuation of Zyn and tobacco products in the U.S. and the closure of some states, but also the Easter impact. Q1 reported growth was higher, while Q2 is lower than the reality due to the Easter timing. To mitigate this distortion, we should look at extended periods from January to April and March to June. When you look at the left side of the graph, you can see that the growth rates for these extended periods are very similar, around 20%. There is no change in the product composition of the growth drivers. The reported 17% growth is mainly driven by NPs with Zyn's decline mainly in Sweden impacting our performance negatively by 3%. But this was fully offset by the emerging segment contribution of 3% to the overall growth. On Slide 8, I'm going into more details of the like-for-like sales development. And here, you can find the key building blocks of it. On a like-for-like basis, the growth is mainly driven by U.S. However, core and emerging markets contributed as well. Foreign exchange movements, particularly the depreciation of the Norwegian krone and the U.S. dollar against the Swedish krone had negatively impacted reported sales. As discussed earlier, Easter impacted both business units relative to the growth rates, it has a bigger impact on the core markets. Excluding the impact of Easter, the core markets grew by 9%, while the growth segments were up by 51%. We don't have it here. And as Gavin mentioned, this will be an abbreviated version of the morning, I would like to highlight here that the revenue for the Emerging segment is almost tripled versus the same quarter last year. Moving to Slide 9 and to the gross margin performance. Here you can see the long-term development of it both in absolute terms and as a percentage of net sales. Compared to last year, the key drivers of the increase are the same as they were in Q1. Year-after-year, we managed to increase our gross margin driven by consistent volume and top line growth and by increasing contribution of our Media & Insights business. When looking at the increase versus Q2 2024, it's important to highlight that the discontinued part of our U.S. business was not a major contributor to our gross margin pool. So the reduction in sales without significant negative gross margin explains around 2 percentage points of the increase versus last year. In Q1, we achieved a major step-up in our gross margin rates. In Q2, we managed to further improve it. Thanks to the increased contribution of the media business. I would like to reaffirm the foundational principles of our business model. We allocate the value created by our company across our consumers, business partners and shareholders. Our ongoing priority is to enhance the value we provide to consumers, which in turn requires us to strengthen the value we generate for our business partners. By continuously improving our Media & Insights offering, we are able to deliver greater value and convenience to our consumers while also driving healthier profit margins. On Slide 10, you can see how the overhead base evolved over the last 2 years. There is an increase in this quarter, and it's mainly driven by the U.S. and other growth markets where we enhanced local team capabilities and also rolled out category awareness and PR efforts. On Slide 11, you can see the key figures around our profitability. On this slide, we highlight key metrics and trends. Adjusted EBIT for the second quarter grew by 11%, reaching SEK 38.3 million. The adjusted EBIT margin increased to 4.2%, up by 50 basis points versus last year. The increase is driven by a better gross margin, partly offset by increased investments. While Q2 margin level is a step back versus the record high Q1, it is still 50 basis points better than Q2 2024. We maintained our investment into the Emerging segment. This quarter, the investment amounted to SEK 11.4 million and reduced the overall adjusted EBIT of the group by 1.2 percentage points. Adjusted EBIT for the Core and Growth segments was 5.4%, 0.9% better than the same period in last year. Here on this call, I'm not planning to go into the details of the Core, Growth and Emerging segments. However, during the Q&A session, we are more than happy to answer any particular questions around those. Also, you can find in the appendix the detailed list of KPIs, which we get used to publish. In terms of the balance sheet, you will see that there is no major shift versus Q1. We maintained a healthy balance sheet with 0.4% leverage net debt versus last 12 months adjusted EBITDA. And I think with that, I pass it back to Gavin.

Thank you, Peter. Moving to Slide 17. I will just touch briefly on the outlook here, and then we will open up for Q&A. In our view, the long-term future for risk-reduced nicotine products, the online channel and Haypp Group with its many strengths remains very encouraging. Haypp Group's operating model continues to generate increasing value for consumers and suppliers, while also providing margin expansion for Haypp. The expected increase in regulatory requirements are beginning to manifest, which further differentiates us given our sustained focus and investment on long-term compliance. As highlighted in our CMD in April, the conditions in the U.S. market provide a significant opportunity for long-term value creation. As such, we expect to invest heavily over the medium term, which is expected to impact our short- to medium-term earnings. With that, the following slide contains the outlook on what our targets are for 2028, which we feel very comfortable with at this point in time. With that, I will pass over to the operator for any questions.

[Operator Instructions] The next question comes from Roderick van Zuylen from Night Watch Investment Management.

Thanks so much for organizing this, this second call and allowing your U.S.-based investors to ask questions. I have a question on your Emerging Markets or Emerging Products segment. And I'm wondering now that it's getting to be a more substantial part of your overall business, whether you have any updated views on the market potential here at which point you should get closer to a breakeven point and maybe whether there are any ways to accelerate the growth in this business?

Rod, thank you very much for the question. We're very happy with the growth performance that we're experiencing within this category at this point in time. However, we recognize that it's still a relatively small share of the category that we have across the three markets that we're operating within. While we continue to see the robust a quarter-on-quarter growth within it, we will continue to invest. And I think it will get to a stage whereby, as long as we can see that growth, we will continue to prioritize that, and we envisage that, that will be the case at least for the next 12 months. At which point in time, subject to the opportunity that we see ahead of us, we may choose to lift the nose of the plane and move it more towards profitability at that stage. But I think we're still very much in the wait and see as the opportunity continues to open up ahead of us here.