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

Welcome to Haypp Group Q3 Earnings Call for 2025. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Gavin O'Dowd; and CFO, Peter Deli. Please go ahead.

Good morning, everyone, and welcome to our Q3 2025 conference call. Our CFO, Peter Deli; and I, Gavin O'Dowd, will take you through our results. Starting at Slide 4. I would like to focus on 4 key aspects of our operational highlights. Beginning first, with our nicotine pouch Q3 volume year-on-year growth of 21% on a like-for-like basis. It should be noted that Q3 last year had an exceptionally high traffic base in the U.S., which I will provide more details on in the next slide. Secondly, like-for-like sales grew 15% for the period, impacted by accelerated decline in snus sales during the period. Third, gross margin continues to increase to a record high of 18.8%, reflecting the strength of our operating model. And lastly, we have continued to make strides forward in our infrastructure overhaul, having successfully migrated our largest site onto our new infrastructure. By year-end, we expect to have the 2 remaining smaller sites completed, bringing the overall project to an end. This new infrastructure is already enabling much more speed and agility, and creates an excellent foundation for future growth. Moving to the next slide, Slide 5, and focusing on the U.S. performance. Our like-for-like sales volume in the U.S. grew 40% year-on-year despite the high comparators from last year, which you can see here in the chart. In addition, we recognized the strong development in our new consumers in recent quarters, which is visible in the second chart. And lastly, in mid-September, we resumed sales of Zyn in the U.S. This comes on the back of a mutually beneficial agreement, where the brand will also avail of our Media & Insights services. We recognize that there are many Zyn loyal consumers who are forced to buy from other retailers over the past year, but we are now placing an emphasis on reactivating those consumers. Moving to Slide 6 and the U.S. outlook. The FDA are piloting a new approval process, which aims to process products from 4 of the leading manufacturers before the end of 2025. While this process doesn't guarantee that each product will be approved, it may signal an acceleration in the range of new products entering the U.S. market. On the back of the ever-improving landscape in the U.S., Haypp Group are preparing to accelerate new consumer inflow. Haypp Group initiated a deep market analysis during Q3 with a third-party specialist firm. The goal of the analysis is to identify the evolving needs of different off-line consumer segments and how to overcome impediments with them shopping online. This work is expected to be completed this year. In conjunction, Haypp Group has commissioned a marketing agency with specific expertise relating to our business, with the intent of engaging key consumer segments to accelerate our new consumer inflow. The learnings from our pilots this year, such as same-day delivery, out-of-store advertising, referral and loyalty programs, are feeding into this marketing plan, and we expect it to be operational early in 2026. Moving to Slide 7, our regulatory and legal update. And starting with the U.S. In addition to the point of the prior slide regarding the FDA's pilot program to process a range of SKUs before year-end, we expect the most notable changes to occur around state-level excise taxes on nicotine pouches during 2026. As more information becomes available, we will continue to update you. It should also be noted that there is a referendum underway in Denver, Colorado on tobacco product flavor ban. Nicotine pouches is included in that categorization. Regarding the EU. In addition to the TTE, which we spoke of last quarter, the EU Commission is preparing a submission for the FCTC. These discussions are likely to generate a variety of headlines that over time will likely moderate, and we remain optimistic about the regulatory outlook for Europe, where the most aggressive positions are opposed by member states led by Sweden. In the U.K., the Tobacco and Vape Bill is currently being discussed in the parliament. We hope the bill will implement nicotine pouch product standards, which are in line with Haypp Group's policies. Regarding litigation, Haypp's legal proceedings in Stockholm are expected to take between 3 to 9 months. And regarding San Francisco, a settlement was reached during October, removing U.S. litigation uncertainty. With that, I will now hand over to Peter for an update on our financial performance.

Thank you, Gavin. Good morning, everyone. Before going into the details, I just would like to quickly summarize what you're going to see. In our view, we concluded a solid quarter. As Gavin already elaborated on, we successfully relaunched Zyn, the market-leading brand on our U.S. storefronts, and we maintained our strong gross margin, allowing 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 investments, our adjusted EBIT remained flat versus the same period last year at 3.5%. On Slide 8, let me begin with our sales development like-for-like comparison. Like-for-like comparison became even more complex because we have to adjust our 2025 Q3 reported numbers as well to make the numbers comparable. In 2024 Q3, we had Zyn in the U.S. for the full quarter, while in 2025 Q3, we sold this brand only for 19 days. Our reported sales grew by 1%. Excluding FX, the increase was 3%. Like-for-like sales growth was 15%. There is no change in the product composition of growth drivers. The 15% like-for-like growth is mainly driven by nicotine pouches, with snus decline mainly in Sweden impacting our performance negatively by 5%. This is partly offset by the Emerging segment contribution to the growth of 2%. The snus decline accelerated during the quarter. However, on a going-forward basis, we expect it to moderate. On Slide 9, going into more details about our like-for-like sales development, you can find the key drivers. The net impact included in the reported sales driven by U.S. Zyn tobacco discontinuation and closing states was SEK 92 million. As said before, currency created a headwind for us. The impact of the foreign exchange movement remained in line with the first half of the year, the depreciation of the Norwegian krone and the U.S. dollar against the Swedish krone have negatively affected reported sales. Zooming into the operational performance. All reporting segments contributed to the growth on a like-for-like basis. The growth segment, U.S. particularly, remained the biggest driver, accounting for 54% of the operational growth. Core segment represented 29%, while the Emerging segment accounted for 17%. Moving to Slide 10 and progressing a few lines down in the P&L, you can find the long-term quarterly development of Haypp Group's gross margin, both in absolute terms and as a percentage of net sales. Q3's margin level remained in line with the first half of 2025. Compared to last year, not only in terms of the margin rate, but also the key drivers of increase are the same. Year after year, we managed to increase our gross margin driven by consistent volume and top line growth and by the increasing contribution of our Media & Insights business. The sustained robust margin performance is the foundation for the execution of our growth strategy in the U.S. This allows us to make the investments required to set the foundations of the next growth chapter. Important to note that going forward, the return of Zyn is not expected to negatively impact our margin levels. Sustaining a strong Media & Insights business will remain important, and the continued development of those products are pivotal for us. 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 offerings, we are able to deliver greater value and convenience to our consumers, while also driving healthier profit margins over the medium term. On Slide 11, you can see an overview of our overhead base, which increased to SEK 126 million for the third quarter. This increase is mainly driven by the U.S. local team capabilities build. We also strengthened our Media & Insights teams and invested into activities to increase online channel and Haypp Group brand awareness. On Slide 12, you can see key figures around our profitability. Adjusted EBIT for the third quarter grew by 0.9%, reaching SEK 33.4 million. The adjusted EBIT margin remained flat at 3.5%. We got a benefit from the increased gross margin. However, this was offset by the increased investments into overheads, and marginally, into paid marketing. The increase in depreciation similar to previous quarters this year is partly driven by the U.S. automatization, which we installed mid-December last year. We maintained our investment into the Emerging segment. This quarter, the investment amounted to SEK 13.1 million and reduced the overall adjusted EBIT of the group by 1.6 percentage points. Adjusted EBIT for the core and growth business was 5.1%, growing 0.7 percentage points versus last year. Moving to Slide 13 and zooming in, in our core markets. This segment delivered an overall 5% constant currency net sales growth. The quarter started slow, with some acceleration during the second half of the quarter. Behind the sales growth, 2 completely different dynamics remained. The nicotine pouch segment, which accounted for 57% of the volume of our core markets, maintained its growth and consistently gaining share within our volume. The snus segment's volume remained in decline, and this decline was accelerated in Q3 versus the first half of the year. The decline was driven by the reduction of the underlying consumer demand. But also important to note that Q3 is the last quarter where the tax reduction-driven price decrease on the 1st of October 2024 drove a negative price mix for the Swedish market in the snus segment. These 2 opposite dynamics mean that the share increase of the fast-growing nicotine pouch segment will improve the overall growth rates of the core markets. The changes in the purchasing customer numbers are also showing the different dynamics. While we are continuously building on nicotine pouch consumer base, the decline in Swedish snus consumer offset this. Adjusted EBITDA remained strong for this segment at 10% in Q3. This result is 1.3 percentage points above the same period last year. The driver behind the increase is the Media & Insights revenue growth. On Slide 14, you can find our gross market performance. Net sales, excluding currency impact on a like-for-like basis, is up by 39%. While all markets increased their sales, we are very pleased with the high double-digit growth rates of the U.S. and the nicotine pouch volume development in the U.K. Adjusted EBITDA moved into the negative territory, driven by increased investment levels mainly to the U.S. In absolute terms, it amounted to minus SEK 1.4 million, and the adjusted EBITDA rate was minus 0.6%. While the profitability is down versus the same period last year, important to note that gross margin remained stable for the segment. However, the overhead increase, mainly driven by the U.S. negatively impacted the business unit. On Slide 15, our Emerging segment. The sequential sales growth continued, and we are particularly pleased with the Swedish and German market performance. Unfortunately, operating in the U.K. vape market remained challenging due to the absence of regulatory enforcement across the entire spectrum of market participants. Haypp Group was and always will be committed to comply with regulation. However, this can create a significant competitive disadvantage in case other retailers are not doing so. On markets and segments, where we are market leaders, we can compensate with our [ weight ], but in the U.K. vape market as a challenger, the unlevel playing field prohibits us from achieving our ambitions. As you can see on the bottom chart, while Sweden and Germany net sales maintained its growing trend, this was not the case in U.K., despite the heavy investments we made both into our consumer offer and also into our internal capabilities. These factors led us to decide to discontinue our [ vape ] and heat-not-burn sales in the U.K. during Q4. On Page 16, I would like to highlight 3 or 4 selected KPIs. The full list of KPIs are available in the appendix of this presentation. Starting with the inventory, it increased versus Q2, driven by the Zyn inventory build in the U.S., with slight reduction in other inventories in other locations. The inventory increase didn't translate it fully into the increase in our working capital, driven by improvements in other components. Net debt to adjusted EBITDA ratio remained at 0.4x. With this, I would like to hand back to Gavin.

Thank you very much, Peter. Moving on to our outlook slide, Slide 18. 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. Conditions within the U.S. continue to evolve in a positive direction for Haypp. And Haypp Group's operating model continues to generate increasing value for consumers and suppliers, while also providing margin expansion opportunities over the medium term. The expected increase in regulatory requirements are beginning to manifest, which further differentiates us given our sustained focus on investment in long-term compliance. And finally, on Slide 19, I would like to touch upon our medium-term guidance from the Capital Markets Day in April of this year, which runs out to 2028. We envision revenue growth rates of 18% to 25% CAGR over the period, with the U.S. market being a material contributor. This reflects the lower expected growth rates for 2025 due to the comparatively narrower consumer base in the U.S. We also guide towards 5.5% EBIT at the end of the period, plus or minus 150 basis points. While we have been materially increasing our EBIT over the past 2 years, we intend to reinvest into the U.S. to accelerate our market share growth over this period. I would kindly direct your attention to our CMD material, which is available on our group site, and this provides more detail behind these targets. Lastly, the company does not intend to issue a dividend over this period, instead reinvesting surplus cash flows into the company's future expansion. Before I open up for questions, I would like to take the opportunity to thank my colleagues for their dedication and hard work in delivering these strong results. With that, I will hand over to the operator for questions.

[Operator Instructions] The next question comes from Johan Fred from SEB.

A couple of ones from my side. First one on Zyn. Now that Zyn is back in the U.S. assortment, could you share any early indicators on reactivation of dormant U.S. customers? I saw that active customers declined by 25% year-on-year in Q3 in growth markets. But what did you observe from mid-September once Zyn returns in terms of traffic, conversion, et cetera?

Johan, yes, absolutely. And if I take this question, perhaps in chronological order. So if I take a look back, first of all, at 2024, there was an exceptional number of customers even relative to the volume because we were rationing the volume of products, and particularly of Zyn, that any consumer could buy over a 30-day period during Q2 and particularly Q3 of 2024. Then moving along to this year. So yes, we note that there was a substantial number of consumers, which came in particularly during 2024 that then, of course, disappeared in the latter part of the quarter when we no longer had the product. And I guess there are 2 dynamics to those. Some of those were ones who were forced to online because they couldn't get the product anywhere else. And some of those were ones who chose to come online and quite enjoy the experience. So there's quite a substantial number of consumers there along the way. We have been working on reaching out to those consumers via different channels over the window from the time Zyn came back, and we've been quite happy with the early successes we've made on that. However, we realize this is a substantial number of consumers, and we need to keep leaning into to that to capture as many of those and reactivate as many of those as possible over the remainder of Q4.

Cool. Got it. And maybe if I can just dig a bit deeper into that topic. And I wonder if you could walk us through your strategy here into rebuilding awareness in the U.S. Is this primarily a CRM driven? Or will we see a step-up in paid acquisitions? And if so, what channels are you leaning on? And any sort of early read from what you have from the end of September would be much appreciated.

Yes. So it starts off with the -- the lowest hanging fruit here is very much via CRM as regards to the ability to reach out to them initially via e-mail. We're now looking at -- we're now testing ways of being able to follow up that via other aspects as well such as calling some of the consumers to let them know that we're back on this. Also, we're doing some postal distribution to send out physical messages to these consumers as well as it's coming through. What we can see is that -- just to be clear on this one, we're dealing with over 100,000 Zyn consumers that came to us in the first 9 months of the 2024, and we're particularly leaning towards perhaps the period between late March and late September. So this is a sizable base of consumers within the U.S. And we see that we've gotten a good activation flow for, perhaps the first 12,000 to 14,000 of those coming back in already. And -- but I think, like I said, there's still a sizable piece out there that we need to see how many of them we can reactivate. We're not naive enough to assume we can reactivate them all, but we are going to continue to expand the channels and the communication to them to get more and more of them in. These are extremely valuable consumers.

Got it. And the final one here before I jump back in the queue. On the -- so gross margin stepped up meaningfully in the quarter, but adjusted EBIT margin did not expand at the same extent, which is reasonable given your investments in the U.S. But how should we think about the sort of operational gearing going into Q4 and 2026, now that it's fair to assume that volumes in the U.S. will pick up significantly?

Yes. So I think the way we're viewing this one is we set out a very clear destination, almost a destination, but perhaps a milestone for who we would be in 2028. But we do expect that we will continue to invest in the U.S., so long as we can see strong returns on that investment that we're putting in. So we're not so much viewing this one from saying, this is exactly what our gross margin and EBIT and free cash flow would be for each quarter as we look out to '26 and early '27, but more a case of, so long as we can see strong return on the capital which we're investing, we -- or we believe that there's strong return coming on the capital that we're investing, with some of the aspects, it's difficult to quantify exactly in advance. We will continue to invest that money. So I think there's probably more of that principle we should be -- you should be doing this one or you should be considering this one through, Johan, with us rather than a set target for what it will be for each quarter.

The next question comes from Niklas Ekman from DNB Carnegie.

Yes, I have a couple of follow-up questions from Johan here. Just -- is there any way you can quantify the current trading in the U.S. market? And obviously, there are 2 effects here. Firstly, that you are -- you come from a period of exceptionally tough comparisons and then the absence of Zyn. And now this completely reverses as we go into Q4. So I'm just trying to get my hands on here. What kind of growth rates are you expecting? What kind of growth rates are you seeing now at the start of Q4, I guess both for the U.S. market and what kind of impact that has on the group? If there's any color here you could give us, it will be appreciated.

Yes. No, exactly. I think you're spot on. So I think there's been many factors coming into it, as you say, firstly, looking backwards, you were dealing with a scenario of not just the shortage of Zyn, but we had also discontinued tobacco, which is not completely ran out when it comes to like-for-like, but it's a small enough part and it's been wound down quite heavily already by October of '24, and then there was the closed states. So then you have that on one hand, all of the closed states were already been reflected into -- were already completed by the end of September of '24 as well. So then if you bring all of that together and you look at the initial growth coming through, I think what we can see here is that, for example, the October numbers are coming in with close to perhaps 60% volume growth in the U.S. Does that give you some form of guidance on where we are here?

Yes. Yes, absolutely. And what kind of impact does that have on the group? What is U.S. roughly [indiscernible] share of sales?

U.S. is making up roughly 20% of the group sales at this point in time, growing substantially faster. So I guess you can reverse engineer back from that as regards to what impact it could have on growth rates at a group level.

Very good. Second question on the same topic, and you reiterated here your guidance or your targets from the CMD in April with growth rates of 18% to 25%, and that's a CAGR. And kind of adjusting them for the weakness that we've seen in the last 4 quarters with growth rates of around 5%. So I guess my question here is, to me, that suggests that you're expecting growth rates in the next 4 quarters to be well above that 18% to 25% range, more in the range of 30% plus given the easy comparison base. Am I looking at this correctly?

Yes, we do expect the growth rates to pick up during '26, yes.

Okay. Good. Fair enough.

Here now Niklas, when I say growth rates, I'm talking about reported growth rates as opposed to like-for-like. So like-for-like will, of course be, like-for-like will be lighter because I'm going to be making the adjustment for having the extra assortment that I didn't have before. So like-for-like.