Chit Chat Stocks - A Stock to Play the Nicotine Pouch Trend? With Spencer Cibelli

Episode Date: November 30, 2023

Haypp Group operates as an online retailer of tobacco-free nicotine pouches and snus products in Sweden, Norway, the rest of Europe, the United States, and internationally. Listen as Brett and Ryan ask questions about the company, its business model, and its valuation. Enjoy the show! ***************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ⁠⁠⁠⁠⁠ibkr.com/info⁠⁠⁠⁠⁠ ****************************** Want updates on future shows and projects? Follow us on Twitter: ⁠⁠⁠https://twitter.com/chitchatmoney ⁠⁠⁠ Subscribe to our Substack to receive free show notes and charts for our Tuesday episodes: ⁠⁠⁠https://chitchatmoney.substack.com/⁠⁠⁠ Interested in more from Spencer Cibelli? ⁠⁠⁠⁠https://www.linkedin.com/in/spencer-cibelli-836b37152/ Contact us: [e-mail] Timestamps Haypp | (2:37) Competition | (12:04) Industry Shift | (24:08) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we interview an analyst to discuss a single stock or industry. And in this case, we're talking about a company most people are probably not familiar with, but it was really fascinating. It's something that we have a little bit of experience as shareholders in before, just through the nicotine pouch space, a little bit of exposure there, which I guess is a little bit of a spoiler alert. The company is called Hape Group, and our guest is Spencer Cibeli. Spencer is an investment associate at Rabadi and Company. We've had Bob Rabadi on the show and Spencer on the show before, so feel free to go check

out those episodes if you want. Bob talked about Sub C7, and Spencer talked about Playway, a Polish gaming company. But this one's really fascinating. It's a small cap, I think 120 million market cap, USD, somewhere around there. So kind of keep that in mind. It's illiquid. You might not have access to it on certain brokerages. So kind of do your research before buying or anything like that.

But I guess without further ado, here's our interview with Spencer Cibeli. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Anything discussed on Chit Chat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right. Today, we are joined by now second time guest, Spencer Sibeli. He is an investment

associate at Rabadi & Co. I've also met with Spencer in person once, but this is now the third time kind of meeting and talking last time we spoke about playway a gaming company based in it was turkey right or no not turkey poland poland and it's done pretty well i think up kind of 35 plus since we last spoke about it and had a little dividend in there too we're going with another sort of oddball type stock in that i'm guessing most of our listeners haven't heard of it because i actually hadn't heard of it until you uh sent something over so we're talking about hape group h-a-y-p-p group they are based in sweden i believe but i'll just kick things to you what is hape group and then can can you describe where they operate yeah um so you know hape is

the world's largest uh online retailer of nicotine pouches and you know swedish snus which right is you know tobacco based pouch products they've been popular in sweden for a while um but you know i think of it as a as a marketplace between you know brand owners and the most active and loyal consumers in the industry uh they exclusively retail third-party products right they don't manufacture anything themselves uh and in their mature markets you know that they own all their infrastructure right warehouses distribution fulfillment centers things like that uh and yeah it's pretty simple right they're just ordering nicotine pouch products directly from manufacturers sending them to their distribution fulfillment centers and then selling

them to the end consumers um you know in less mature markets hate relies on third-party solutions so so they're doing all that they they ship to a third-party facility who does the packing uh and then shipping to the end consumer you know it's also the world's leading insights and data provider two manufacturers of nicotine pouches so that's probably a high single digit piece of the business today and growing very nicely but you know they basically sell licenses to buyers uh you know gives them front end access to data as a one-off annual fee per market and they also offer kind of bespoke solutions so they you know they offer focus groups product tests surveys and kind of do that on a on an ad hoc basis for individual customers uh in general think it's it's important

for the the major manufacturers uh they just have this treasure trove of data uh and can really market that um and i think since the jewel scandal right you're not going to see uh you know zen ads on new york city taxis and during you know tv commercial breaks i just think the manufacturers themselves have been very hesitant to deal directly with consumers uh so you know hape has sort of developed into this go-to vehicle uh you know for also promoting and testing out new products and and doing the focus groups and all that um you know so hape operates 10 different websites in seven different countries uh so they're in sweden norway the uk germany switzerland austria and the u.s um and you know give you some perspective right in the last 12 months think

they've had you know over 900 000 active customers uh you know so you need customers who place an order through one of the websites uh if in the u.s you know the websites are the northerner.com and nicokick.com so you can check those out just to give a bit of history uh you know so the company was started by two entrepreneurs uh in the 2008 2009 time frame uh they launched their first site in sweden called snusbolaget uh they grew that over time into the number one online player there uh and then 2017 the current ceo gavin o'doy joined and you know he joined the business from british american tobacco you know 12 weeks after he joined they went into norway and bought the number one player there so that's you know early 2018 uh in 2019 they entered the u.s they bought

the northerner and that owned the northerner.com and nickelkick.com which are hape's kind of two main websites in the u.s uh and then they also had some some legacy sites in the in the dock region uh you know it's interesting that was a pure share deal and and the northerner kind of you owns all the shares so he owns uh the guy behind it around nine percent of hate today uh in 2019 they they organically entered switzerland uh and then the most recent kind of big move they made is they raised debt to buy the number two and number three players in sweden uh which were older sites about eight nine years old as well uh and bought those i think on the same day actually and yeah so part of the reason for the ipo actually was to pay off uh some of that debt

and then you know have proceeds uh to begin their expansion plan into new markets um but yeah i mean it's a it's a pretty simple business and you know they have sort of dominant market share in all their markets we'll get into that uh more a bit later um but you know that's half as a as a group so yeah i should say for anyone this is a small cap um the ticker is a micro micro cap yeah i we should disclose that. And the ticker is H-A-Y-P-P for anyone, just because I know sometimes it can be hard to find these things, but let's talk unit economics. This is a somewhat unique business as, I mean, some people run this model for the other things, but it's unique as it's the only one really doing this or one of the few. So how do the sites make money? What are the major

costs? Like how much, how does it drop to the bottom line? Are they just taking a cut of every sale and managing this stuff but any details you can provide yeah i mean so it's actually it ends up being pretty simple uh right so basically hey you know they're buying large quantities of pouches directly from suppliers directly from philip morris directly you know they're buying zin pouches from them on from atria or whatever the you know the the brand is uh you know they're shipping those to their own warehouse or a third party warehouse they package them they sort them and then they just ship them direct to consumer. It's not a super high margin business.

Gross margins are running around 12% right now in the core markets, a bit higher in the growth markets. And they actually expect the growth markets gross margin to be decently higher than the core markets. But basically for $100 worth of merchandise they're selling, they're buying that all in for 88 bucks. Maybe they get the pouches for less, but you got to factor in uh you know different costs so that gross margin line right you're

including the cost of buying from the supplier the cost of shipping to the warehouse cost of filling and sorting it and then shipping costs to the consumer so that's all kind of baked in there and that's where you get sort of 12 percent uh off revenue uh and then you know below that gross margin line there's not much uh you have some fixed opex costs uh which you know when launching in new markets requires a decent upfront investment, but scales really nicely with higher top-line numbers and generally has good operating leverage. But typical FIS costs, like lease rent payments, utilities, equipment in these facilities, corporate office space, personnel expenses, some website server costs and that sort of stuff.

um and then you know in their core markets they're doing about eight nine percent EBITDA margins um you know so that's sort of the the delta I guess four percent OPEX right going from 12 to eight nine uh and you know that's actually getting pulled down though for the group as a whole because the the growth markets piece is still burning cash uh you know so face valuation uh EBITDA margins are probably like low 3% right now. But, you know, the business at scale should be doing at least 8%, 9%. And once you get there, there's really a high conversion to free cash flow. In general, it's a very low CapEx business.

You know, CapEx typically runs around 2% of sales annually. You know, there's no need for large inventory purchases as well. Kind of like some retail companies at a year end. you know they're fully turning their their warehouses every two to three weeks continually throughout the year uh so that's pretty consistent um so yeah i mean you know ebitda is generally a pretty good proxy for uh for free cash flow uh when we talk about valuation and you know there's there's some working capital items recently and you know they're doing this sort of like back-end infrastructure overhaul and you know overhaul their esp systems their erp

systems and things like that uh but you know generally you get a pretty high conversion so You know, maybe they do mature 8% EBITDA margins, you know, less 2% maintenance capex and, you know, pre-tax sort of free cash flow kind of around that 6%, 7% range. But, you know, the margins could go up over time. I guess we'll talk about that later, you know, going into the growth story a little bit. But, yeah, it's a pretty simple business. They're just buying these pouches in bulk, shipping them to the warehouse, you know, sorting them, fulfilling them, and then sending them to consumers. And then, you know, you have the media insights piece as well, which pretty much all drops to the bottom line because it's, you know, existing sort of data that they're collecting anyway. Chitchat money is brought to you by Interactive Brokers, but we'd like to call them by their ticker symbol IBKR.

Designed for active traders and sophisticated investors, Interactive Brokers offers trading assets in 150 markets with 27 different currencies, charges USD margin loan rates from 5.83% to 6.83%, rated the lowest among margin fees, the ability to trade stocks, bonds, options, futures, commodities, and more with high interest rates paid on instantly available cash balances, and the ability to lend your eligible stock shares to earn passive income all on one single unified platform. restrictions may apply for more information visit ibkr.com member sipc open an account with ibkr today okay question that's probably coming to mind for a lot of listeners microcap 10 you said 10 different websites uh yeah all selling similar products i'm guessing people are thinking about the competitive set basically like where do they fit in here so who are the big competitors who are they fighting for customers with and then like what advantage does hape have over any of their uh competitors in the industry okay so i mean there's sort of two big facets to this question you know the first being i guess the advantage hay pads versus other online platforms

um and then you know the advantage hay pads versus brick and mortar because they're really competing with both uh you know in general i'll just start off right they have a very sticky customer base uh in fiscal 22 i think it was like 85 percent of sales were from returning customers you know average customer is 33 years old uh skewing slightly you know more towards male, but it's, it's pretty, uh, you know, pretty even mix, especially compared to other nicotine products. Uh, and what they found, right. Is that they, you know, once they get a consumer to order, uh, about 70% of them will return and order another time within, you know, the first, uh, 90 days from that first order. Uh, once they get that second order, they generally stay for

good. So, you know, it's just a pretty sticky business overall, especially once they get that, that first order so you know in terms of the online landscape right hape i think they're you know 10 plus times bigger than the next biggest competitor uh it's this group called make webo um and you know we'll talk about them a bit but i guess the most important advantage is hape scale right so so being so large they have quicker delivery times right i think you know most consumers get their products in 24 or 36 hours they have the widest assortment sort of by far uh i think you know websites have typically 800 to 1200 skews per website uh and then they have the lowest prices too because they're ordering them in bulk you know larger sizes

and volumes of their competitors and they also have the media insights piece which is important so you know i think suppliers generally treat them well and give them favorable terms uh so that's a big competitive edge they've had any of that that's shown right so they've built incredible market share in all of their markets um you know currently hape will have one local competitor in each market that has a high single digit percent share i'd say with the exception of of doc so germany uh austria switzerland make webo the the competitor i talked about has a you know bigger position there uh but in sweden hape is 90 percent market share in norway hape is about 80 percent market share in the uk they have about 90 percent uh in the u.s they have 75 percent of the legal

market so there is a sizable gray market for like importing untaxed um you know licensed products from europe uh so if you include that ape is about 55 percent um but excluding the gray market and kind of like zin dtc ape is like 90 93 percent market share in the u.s uh and in doc you know it was historically around 30 percent but you know the ceo noted to me he thinks that they're gaining share because they have a better position in nicotine pouches to make Weibo traditionally had a big presence with traditional sort of snooze. So he thinks they could be 40% to 50% now in that Germany, Austria, Switzerland area. But the big thing is that new entrants into the space have a very difficult time acquiring new customers, right? So all major social media sites,

Facebook, Instagram, TikTok have a strict no-nicotine, no-tobacco advertisement policy. It's basically all organic Google search and different search engines. HAPE dominates the top three organic search results in all of their markets. They prefer to have multiple websites so the top one, two, three are all HAPE. The top three really receive all the traffic. It's a very defensible position uh and you know it's it's basic sort of seo stuff but there's sort of

four pillars right so their site performance how easy is it to navigate your site how easy is it to load content like quality of content is your content unique uh do you know users engage with it over time conversion rates this is a big one and you know buying existing sites and in the age of the platform really helps so i think they're eight percent globally for hape right how many website visitors are actually going to check out uh which is higher i think than a percent they're mature markets and then you know average e-commerce site is about three percent across the board and then traffic right so google monitors how much traffic you generate uh over a period of time and you know that's important as users keep coming back google senses that uh and pushes

up your organic ranking how do you oh sorry go ahead yeah yeah you have a question go ahead yeah Yeah. I guess, how do you think about, you mentioned that risk of DTC, like with some of the big brands. I know Zinn here in the US has like, I think 70% plus share. How do you kind of think about that? Is that maybe the big elephant in the room here? Is that the biggest threat to HAPE's business? I mean, I don't think so. So, right. So I said, since the Jules scandal, it's been, you know, sort of iffy, right. Dealing with consumers. So I think they want to take a hands-off approach and they're they're pretty hesitant uh selling and marketing directly to consumers um you know at the same time i think the bigger thing is with zin's sort of dtc and

whatever on pouches ctc is that they don't want to cannibalize their business partners and retail network so they really don't want to be as price competitive as they can be with hate uh and and really antagonize that relationship so i mean i i checked recently if you go to zin's direct to consumer website versus HAPES like nicokick.com. So Zincans, right, for a roll of five cans are starting at $4.80 on Zin's direct to consumer website. But if you go to HAPES website, Zincans, you know, five cans for a roll is a roll of five cans is $3.80 per can. So you're saving $5 on sort of the minimum order side size on both websites. And you know, for that reason, I think Zin is is really selling a fraction of what uh hape is selling uh so i know you know they're selling 10

15 times more on pouches than on dtc i'm not sure about sin uh but i also think the wider assortment of products is really important uh you know so as the market matures consumers like to try different products new flavors and just different innovations being brought to market uh and hape actually said these websites help them so you know you can go on the back of zinc can and says go to zin.com slash rewards so some will go on the the zen website and maybe order something and then they'll check google and see you can go to a hate website and you know buy the cans for much cheaper uh so i think you know just because you know retail is so big and they don't want to sort of cannibalize that uh they're really not price competitive uh so hate sort of dominates them right now um yeah

do guys love zen rewards i will say that people love i think guys have rewards too you know yeah the uh yeah uh let me you mentioned in your write-up that you sent us that there's a lot of interesting you know as with all the nicotine stuff there's a lot of interesting regulatory things that creates a barrier to entry. So I want to ask, could someone replicate this business? And, you know, why or why not? Or how difficult or easy would do you think it would be? It'd be very difficult. You know, it depends on the jurisdiction, you know, so it's easier in sweden to do uh than the u.s um but in the u.s you know i think you need licenses in most states to uh you know sell dtc nicotine products and there's all these all these rules and stuff that

make it difficult for certain nicotine products uh but to achieve national scale in a place like the u.s is is difficult um and you know that's why hape you know bought into the u.s instead of trying to build it up organically it's just a notoriously uh very difficult market uh but people have tried you know they they mentioned that a lot of people will come in and spend money and try to compete and then leave um so i mean the make webo guys i'm pretty sure they came into sweden tried to compete you know didn't do well and they actually bought shares of hape so the biggest competitor owns like five six percent of hape and they're just like yeah we'll just own this exposure, like through buying HAPE stock. But, you know, the regulatory piece is difficult,

but I really think it's the acquiring customers piece. You know, it's 99% is paid, is organic traffic and 1% is paid. So it's just really difficult. And, you know, the age of the platforms, you know, the super high conversion rates really put HAPE websites at the top three in most of their markets one and two and then sometimes you know three other times maybe a competitor will have the third uh but that that's been the most difficult part uh and you know like they said you know 85 percent of sales in 22 are from returning customers and they have the lowest prices so i mean even if like you know you have price comparison tools right if you have 90 percent market share in sweden like you know they're just going to your other sort of site uh and you know

I also think the margins are like incredibly high that like, you know, everyone's just rushing in and saying, you know, I got to, you know, make a business that's 12% gross margins. And, you know, I just don't think it's, you know, attracting that sort of competition. But yeah, it's pretty defensible. And I think the market share numbers kind of show that. Do you think more volumes, do you think a higher share of the nicotine pouch and

snus market will move online over time or do you think it'll probably kind of stay where it's at today yeah so it's about five percent globally um in sweden it's about like 28 30 percent you know in norway it's about a high teens percent in the uk i think it's eight nine percent and in the u.s it's three percent uh so what they found right as the market matures people get more price sensitive right i mean a can of zins uh and maybe this goes into like advantage versus uh brick and mortar like a single can of zin in new york is like seven eight bucks whereas if i buy five on a on a hape website i can get it for three and a half four bucks um you know so it's really it's really sort of a price uh per can yeah yeah okay um right i think prices on average are like

40% lower than convenience and, you know, some crazy sort of number like that. They have 10 times the amount of SKUs that they have in retail locations, right, 8 to 1,200 versus, you know, maybe 50 to 60 on the high end for a retail store. So, you know, what they found is over time, right, you know, online penetration is steadily sort of increasing. And, you know, they think it easily could get to 10% sort of from 5% now. And then, you know, in Europe, it's more likely to convert towards Sweden and maybe the U.S. gets to 10 to 15 percent. But it's so early, it's really kind of hard to know.

How does this shift towards nicotine pouches benefit? Well, I guess it should. Does it benefit HAPE or is it cannibalizing like a part of their existing business? No, it really does benefit HAPE. and it is pretty much like the main growth driver for the business today um you know so i think hey i think they're now doing 53 of their revenue is is nicotine pouches versus snus um and so you know i think nicotine pouch volume in q3 year over year was like 37 38 percent growth uh you know that core markets piece so there's two segments of the business core markets is

norway sweden the growth markets is us uk germany austria switzerland uh so court the core market pouch volume grew like 29 uh growth markets 53 which is kind of crazy numbers uh and i think in scandinavia you're getting a lot of women and former smokers uh switch from you know cigarettes and maybe vaping to white pouches where they hadn't women hadn't traditionally used snus as much as man the tobacco based pouches so they're really not cannibalizing the existing snooze users and you know i talked to a guy in sweden a couple weeks ago he's like yeah i use both kind of all the time and you know they're pretty interchangeable uh but i still think at the same time their their core like snooze business is probably growing at a you know low single digit rate uh but yeah i mean

the space at large is all is all nicotine pouches right now is there any i'm thinking of the u.s market here which is the big player is zen by by a mile is there any supplier concentration risk for hape or is it kind of a little more diversified over in their core markets yeah i mean you know so so what sort of happened um in sweden i think is is a great example so So I think in 2016, 2015, there's HAPE had three main suppliers in Sweden. And, you know, you fast forward to today, they have 25 unique suppliers. So basically what happened in Sweden, right, as the space sort of exploded in popularity, capital rushed in, right? You had a bunch of new products and flavors come to market.

And basically there, Zain and maybe Ahn, I forget the second brand, were first movers and quite popular. But now you have a ton of new brands, you know, with different flavors, delivery agents, textures, and the market has become extremely fragmented. And I think on now is like less than 1% market share in Sweden. There's just tons and tons of products. So, you know, that sort of developed in Sweden, Sweden's most mature market. So it offers sort of insight into what could happen in the U.S. and other places. And, you know, once the floodgates are open in terms of regulation in the U.S., And I guess we'll go over the regulatory update in a bit.

But you'll see something, you know, akin to what happened in Sweden. You know, basically, he's saying like Zinn will continue losing share. I'm sure it'll be big, but that's sort of their thought. But I think across the business, right, the biggest brand is, you know, high 20% range for HAPE. The second largest is mid to high teens percent. And then the rest is in the single digit space. you know i'm not sure but i'm pretty sure the larger supplier is is in uh and you know but you know it doesn't really matter i'd also say the balance of power kind of lies with them um you

know i talked about the media and insights piece but they're really the the go-to platform and only platform for testing new products uh you know i spoke with turning point brands a couple months ago and they were like launching these cotton ball products like not really pouches but you put them in the mouth. And they said they'll go right to HAPE and test out the product before they go to other websites, before they make a real push for retail distribution. Because HAPE has the most active customers in the industry. And you could buy sort of ad space on a HAPE website. So they'll see it, people will order it, and they'll measure sort of early feedback. So I really think HAPE uh, has so much data and, and, you know, can, can really offer insight and, you know, you could

subscribe if you're a British American tobacco, you could see, you know, where are my consumers from? What are they ordering? Like how often do they cycle between my brand and different brands? Uh, you know, so I think, you know, despite some supplier concentration risk, you know, hate provides a ton of benefit that they're, they're willing to, you know, give up on some stuff to, to please them. So you mentioned the regulatory environment, let's hit that now. Do you think it's a bullish, bearish, how could it impact HAPE and the industry at large? Yeah, so I think, you know, regulation would be great, both for HAPE's sort of absolute and relative position.

And the two big things are, you know, something done by the FDA and the European Union. You know, so the first is being FDA approval and granting of these things. So pre-market tobacco product applications or PMTAs for several SKUs in the space. and he thinks it's highly likely. Basically, now everything sort of operates in a gray area. Basically, the FDA said, right, if you have any products in the market, I think you're selling by 2016 or something like that, you're entitled to keep them in the market as long as you submit a PMTA

by 2020 to the FDA. And that covered tobacco-derived nicotine products. So no new products are basically allowed to come in, right? They saw an explosion in the space. They want to put a halt on new products coming in, have existing ones submit these PMTAs, which are very extensive, and said, let's review the entire thing first. And you had some like synthetic nicotine products come in,

like Frey, and they did the same thing. You know, they said you can continue selling, but you need to, you know, submit PMTAs by X date or else you're cut off. So there's basically like hundreds of these PMTAs outstanding. And, you know, the timeline's uncertain, but, you know, Hape and others really think that they're going to approve these things.

And, you know, once you have a PMTA, you basically get a stamp of approval that your product is here to stay and you have a license to sell similar to like a drug and a removal process is you know more complicated and prolonged and then the next thing you look for is like a is mr uh you know tp status so a modified risk tobacco uh product and you know that that allows you to market things like using this product instead of cigarettes you know you have a less risk of cancer you know heart attack things like that uh so the big thing is that in 2019 you know the fda granted several

skews of of uh you know swedish snuff so i think it was swedish matches general snuff brand modified risk status uh and they're allowed to kind of market them as you know a less harmful alternative to cigarettes uh you know so that's a tobacco-based pouch product you know so if they're willing to give you know this modified risk label to a tobacco-based product it's sort of highly likely to approve these white pouch products which are you know much healthier uh there's been you know some other stuff right so this guy mitch zeller he's like the head of the the center for tobacco products at the fda he said that like evidence shows these products could help addicted smokers you know get off cigarettes and and you know do something with with potentially fewer harmful

chemicals so they're you know they're they're sort of you know inching around the topic a little bit haven't fully addressed it uh in general i think it's harder to get addicted uh you know with cigarettes and vapes you get this immediate sort of rush and you know it goes right to your blood stream and i say the nicotine buzz for a zen or a pouch is more drawn out and kind of less in your face uh and as a result you know the youth uptake issue hasn't been nearly uh you know as big an issue as it was for vapes i think it's like 80 85 percent of of pouch users are using it to get off cigarettes vapes and other nicotine products uh you know that is a risk and could change though obviously if youth uptake becomes a huge issue um and then the second one would be the eu wide

legalization of the product so every few years uh few years the eu does this thing called the tobacco product directive or tpd and they basically update their stance on like a bunch of tobacco products any new products coming to the market and things like that uh and the most recent one tpd2 the eu fully legalized vaping you know which offers some some good insight and what what could happen with nicotine pouches you know they put caps on like strength and different things like that nicotine strength uh you've had varying approaches so belgium the netherlands have fully banned white pouch nicotine nicotine pouches and you had denmark italy czech republic austria introduced positive legislation right they're legalizing the category they're taxing

they're putting caps on flavors and nicotine strength and things like that uh you've had phelan ban it and then they're actually moving to unban it and re-regulate it i believe uh and then somewhere in the middle so you have like germany uh they put a halt on brick and mortar sales and nicotine products but they allow uh you to order them online for private consumption um and germany is really the the big market there that's you know most of the band just being such a big country uh but you know hape thinks you know things will go well like the german some institute of health said you know these things are less harmful than cigarettes that was last year uh so you know hape thinks some countries will ban some will have positive legislation but in the end the eu

kind of will legalize them across across the eu uh it's just you know hard to imagine they'd they'd uh legalize vapes and not pouches i mean pouches are definitely healthier than than vapes And, you know, HAPE sort of thinks they're less than 1% of the harm of traditional cigarettes. So, you know, obviously a remarkable, you know, sort of difference. There was some concern that Norway was going to ban the sale of online tobacco products. I think that was mainly, you know, vapes and then unregulated pouch products coming from Sweden and in different markets. So, you know, in every jurisdiction, HAPE only retails products, you know, approved by the Norwegian authorities made in Norway. So it's, you know, products from within the country and they think they're, you know, not going to be included in that ban.

But, you know, it's something to monitor and, you know, was a concern at one point. You know, in general, I think, you know, the health profile is pretty remarkable. uh and you know you kind of really need to embrace uh you know reduce risk products to get people off smoking i mean sweden has like a smoking rate a third of the eu average i think they're at like six percent eu average is like over 20 uh and then the the most recent one is norway so norway had a massive drop in cigarette use uh which strongly overlaps right with pouch use in the country it's like a one-to-one correlation almost uh so smoking rates went from 17 18 percent they're they're under 10 percent now uh but you know i think people know

that there's tons of data on it i mean there's tons of data on traditional snooze that's been around since like the 1800s and people think that's you know like less than five percent of the harm of traditional cigarettes so you know there's a bunch of good data and things to support the the health case here as well um and the youth uptake issue hasn't hasn't been real uh you know thing yet so it looks pretty good yeah it's i mean from our point we kind of have the same view seems like a win-win-win for all parties involved an important thing with small caps and i guess it's with every company but people get worried about this so we like to talk about it and it is management um what are your general thoughts here are they aligned with shareholders they got

a big stake here what do you think of them yeah i mean in general we're very pleased with management um like they are a line of shareholders met the ceo five six times uh and he you know he's been very generous with his time he came to visit us uh in our offices in new york uh you know he's very experienced knows the business well uh he spent his career at bats and he was the general manager of scandinavia before he came to ape so he knows that market very well but i just think he's just very knowledgeable about the space in general he'll be like there's you know three x the amount of vapors in germany versus pouch users in the uk so like this should converge here and that there and just kind of you know just rattle off like random statistics and stuff so he knows

this market well uh and you know kind of gives us confidence uh and you know i think he himself owns around four percent of the company the rest of management you know another percent or two uh and then there's some warrants outstanding so management probably owns you know a couple more percent through those if you would assume all those were to exercise uh and they'd hold the shares um but the original founders right the the two entrepreneurs uh and then the early backer they own i think a high 30 percent range of the company and they have board representation as well then you have the northerner guy uh that's the guy who owns right those u.s websites and you know he had a business in sweden too he owns nine and a half percent the largest competitor that i

mentioned before owns about five and a half percent fidelity owns ten percent and there's some other sort of uh pockets of ownership uh you know not all day decision makers but it's a pretty you know tight cap table uh low float uh and everyone sort of believes in the company and you know, has history in the pouch space and the industry. Uh, so they've all sort of all come together under this, you know, hype umbrella, uh, you know, management incentivized through warrants. Um, it's not per share metrics, but you know, you know, if the share price goes up, that's, that's, that's good. Uh, so, you know, I think if you, if you exercise all warrants outstanding, you'd maybe get seven to 8% dilution. Uh, a bunch of those were granted closer to the

ipo uh so you probably get closer to three maybe four percent uh dilution uh but yeah generally you know we think rancho knows what they're doing and you know building this this sort of market share and you know a competitive uh business is quite impressive and i think their moat has just developed over time through that so they've done a good job brett and i were uh swedish match shareholders, as we were talking about before the show. So we believe in the structural tailwind. We believe in nicotine pouches. We think there's a lot of growth here for HAPE. However, that alone is not going to make it a good investment. Valuation always comes into play. How do you look at the valuation today? Why do you think this is attractive? Can you maybe give

some numbers in terms of how much they're earning relative to their market cap? yeah so i think the valuation is very attractive and it's it's uh one of the best pieces of the story uh you know the underlying profitability of hate is masked by the the growth markets cash burn right now um you know so that's currently burning money uh but you know it'll soon be profitable according to management you know the thing first two quarters of fiscal 24 uh you'll start to see break even in the growth markets piece i think the u.s is actually already broken even um but yeah so in the last 12 months uh you know hape did about like three billion uh swedish kroners in revenue about 110 million kroners in ebitda uh and has an enterprise value of like 1.4 billion

uh a sec uh you know so on the surface right that's like 12 and a half uh times trailing EBITDA. And then if you're to zero losses from the growth markets business, the core markets business generated about 190 million SEC and EBITDA. So take that 1.4 billion enterprise value, right? You're buying just the EBITDA of Norway and Sweden for seven and a half times. And the way I kind of view it is that you're paying seven and a half times for a monopoly direct to consumer e-commerce business that's growing at a low teens rate right for the foreseeable future and a sticky product category that's like very well suited for for e-commerce and you know just repeating customers and things like that then you're getting a quarter of the

business right the growth markets business which most recently grew last quarter 68 percent year top line and it's now kind of a quarter of the overall business so if you kind of do the math with similar growth rates right that soon you know it'll eclipse the eclipse the core market business uh that's not profitable yet uh but i mean you know really getting great operating leverage so i think year over year you had like an 800 basis points uplift in an ebitda margin that growth uh growth markets piece uh and that you know that should slow down so we think that grows more with the nicotine pouch space overall which is you know slated to grow like a 40 something percent CAGR for the next few years. So a little lower than 70%. But HAPE also put

out interim targets. They put out, I think, a $5 billion SEC revenue target for 2025, and then kind of guided towards 8% medium to long-term EBITDA margins. So if they're doing $5 billion top line at 8%, it's $400 million SEC and sort of normalized pre-tax cash flow in 2025. And you take the $1.4 billion SEC enterprise value, you're paying three and a half times EBITDA potentially in 2025. And maybe face valuation is lower because growth markets isn't at 8% yet, or they enter a whole new set of growth markets, which will drain capital as well. But really looking at a mature state of this business, you could be paying low single digit sort of multiple on pre-tax cash flow. And, you know, you just have the monopoly sort of aspect and high barriers to entry, things like that. I think it's important to note, too, you know, not a single Swedish institution was allowed to participate in the IPO.

You know, just strict, like no nicotine tobacco policy. The only institutional owner is Fidelity. They own about, you know, nine, 10 percent, I think. Um, and then, you know, there's rumors that like the Swedish FSA financial authority has been pressuring institutions to dump small caps. Uh, there's no kind of concrete information on that. Um, but you know, liquidity has tried out for a bunch of small caps and, you know, it's, it's widely undiscovered sort of even within Sweden. Uh, so, you know, that definitely hampers the devaluation as well.

All right. Last question. we ask this on every episode what could go wrong here what's the pre-mortem for hate yeah i think the big risk is obviously regulatory you know so the two major regulatory events i talked about the fda and the eu tbd could end up not happening or you know they take a you know much more negative stance than than we think uh you know it is important to know so the eu has a ban on all oral tobacco products it's like traditional swedish snus is not it's illegal in the rest of the eu it's just like you know when sweden was joining the eu they had this specific carve

out they're like we're not joining unless we can you know have our snus uh so that is you know something to be aware of you know you've had the belgium and netherlands ban uh them and you know they're politically very important within the EU. I know those are in court and, you know, a lot of people are sort of unhappy with that. You know, a second risk is that like competition really ramps up and, you know, HAPE's position is less defensible than we initially thought. You know, maybe margins go up, the space explodes in popularity,

and then you get a rush of competition. You know, there's limited paid search opportunities as well. So, right, getting customers is very hard. uh but you know that still doesn't mean people won't try and they can can lose their edge uh you know even if the market grows grows a ton um but i will push back i say you know once a market gets big enough to track such competition google like completely shut down all paid keyword search opportunities it's like norway and sweden they're basically non-existent uh and you can sometimes get them through in the u.s and other jurisdictions uh but you know that's sort of not really an issue

as a market gets bigger. I think the fourth risk is there's some carve out for online in terms of a regulatory approach in their major markets. I don't think this is an issue in their core markets, right? Norway and Sweden, these sites have been around forever. You know, the governments are friendly towards pouches and, you know, their legal sort of categories. So I don't think that's an issue. I think in the US and potentially in Europe, you know, for example, in the US, online vape uh is you know a disaster right the u.s postal service and ups and fedex won't ship them and you know the youth uptake issue it's just been a mess and you have to you know use private shippers and there's all these like you know things with like crossing state lines and

stuff and paying the appropriate tax it's it's really a mess uh so you know that could happen in the u.s and that would really hurt paid's business uh you know i think in europe despite legalization of the product category right so it's over they legalize vapes uh but you know i think the netherlands and in italy as well ban online sales of vapes so even though the eu you know legalize the product category individual member states could ban them uh so that also could happen but you know i think the margin of safety is that you're paying seven and a half times for norway and sweden uh even if the growth business evaporates overnight you know that's a you know growing double digits and it's it's highly cash generative and you know has 80 90 market share in

both of those markets uh so i i think that's uh you know you know paying that sort of multiple kind of protects you from from a worst case scenario all right that's all the questions brett and i have i think this one's really interesting i'm probably gonna uh look more into it after this uh after after we hop off here but um i guess closing here for anyone that wants to read more of your work read more of anything you have is there any resources any places they can follow along uh i mean i have a twitter i don't really post anything i just you know retweet these podcasts that i do uh that was the last tweet the last tweet 20 2022 uh literally yeah uh but yeah i mean you could reach reach out to me on linkedin uh email me spencer or body.com

uh happy to chat and you know for all the former swedish match shareholders you have a a nicotine pouch pure play kind of you know out there so hoping uh hoping some people kind of like it and delve into it a bit more but yeah i know a few people that would be quite interested in this uh podcast so yeah thanks for coming on thanks so much for having me guys all right with that, I want to throw a disclosure on this and say, Brett and I are not financial advisors. Spencer, I don't know if you're a financial advisor or not, but either way, anything that's said on this podcast is not formal advice or recommendation. Thank you all for tuning in. Thank you, Spencer, for joining the show again, and we'll see you all next time.

You