Chit Chat Stocks - Swedish Match (SWMA) with Phillip Martinelli

Episode Date: October 14, 2021

Swedish Match is a Swedish company that produces ZYN, snus, moist snuff, and chewing tobacco. The company focuses on smokeless tobacco, however, Swedish Match is much more interesting than just cigarettes. Phillip brings his expert knowledge of Swedish Match for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Subscribe to 7investing with the code "CCM": https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Phillip's work? Follow him on Twitter: https://twitter.com/WealthOrDie?s=20 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Swedish Match | (4:32) International Expansion & more | (28:52) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is Thursday, October 14th, if you're listening on the Thursday. And we are talking Swedish Match with Philip Martinelli today. It's our first time meeting him. It was a lot of fun to have him on the show. Do you have any favorite parts from it? Yeah, so we should say we're talking about Swedish Match. I think we should just explain that it's not a Swedish dating company. A lot of people like ourselves think at first they're in the nicotine category. they're actually not in cigarettes so if you're kind of in the you know tobacco companies are anti-esg i would never invest in them this is not like that they actually have a product called zin which is in the nicotine pouch category a lot of people have maybe seen those around and a

lot of younger people are into those nowadays and they own a couple of other assets that philip explains but they're a swedish company like the company name says they've had some tremendous long-term performance i think they're not exactly a hundred beggar since their ipo or when they they started listing in the late nineties, but the performance has been pretty damn good. So management team is strong. We should have a disclosure that we do have a position in them at this time. So this is a pitch on them. But again, I just wanted to say that it's not some boring cigarette company. It's a lot more than that. It's very interesting. They're going to do a spinoff as well. We cover everything there is to know about this business with Philip. Well,

he covers it. We just ask him the questions. Am I missing anything? We even talked about the history of the company, which is a lot of fun. A lot of fun. Very fun. I knew that much about. So I really liked that part. But before we get to that, we want to talk about our sponsor, our friends at quarter. They are the investor relations app all in one. It's what I like to call it. And basically you can get your conference calls. You can get investor presentations, transcripts all in one place. You can listen to them at two times speed. We've, we've talked about this before a million times. We actually, this is a sponsor that I

really like talking about because I'm genuinely a user and it's a really good platform. They've got a lot of updates coming out too soon. So we'll be talking about some of those changes next week. Within the coming episodes. Yeah. You'll hear all about those. If you haven't tried it out already, it'll get even better. And it's almost earnings season. So I don't know how you're going to get through it without downloading quarter. You can get it on iOS, Android. It's a hundred percent free. They include companies from everywhere. Just go ahead and follow them on Twitter at quarter underscore app. It's Q-U-A-R-T-R, no E, underscore app. Without further ado, let's get to the interview. Welcome to Chit Chat Money. On this show,

host 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. Ryan and Brett are also general partners at Arch Capital. And Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right. Today, we are welcomed by Philip Martinelli. We met through Twitter around talking about Swedish Match, which is the company we're going to talk about today. But why don't you give a little bit of background about who you are and I guess how you got into finance to begin

with? So I'm a lifelong investor. My dad was a banker at JP Morgan. And literally one of my first experiences in life is sitting down, reading the Sunday newspaper with him, probably like five, six years old, going through every stock in the paper. You know what I mean? When they used to print them. So we used to go through, see what was going on, talk through all that stuff. So I've been actively investing my entire life almost. So I've been doing this a long time. I'm not a professional investor. I went to college at Boston University, graduated degree in economics, went to work at Northrop Grumman Defense Contracting after that, and then recently took a job working for an auto body company doing a levered roll-up strategy. So that's my

background, you know, as my adult life has gone on, I've become more and more serious about investing. And that's kind of led me down the path of trying to start my own RIA and, you know, managing money for myself, friends, and family. All right. And you have some nice research on Swedish Match. It's a really old company. Do you want to talk about that and the background and the history of the company before we get into business now? Sorry. So I want to give you guys a little bit of a background because it's actually a super interesting company with a very um like long history to it so in the year 1915 sweden nationalized all the tobacco production plants in the country and they founded ab svenska tobaccus monopolet which is a government-run

monopoly for tobacco at the time it's world war one um they needed the money to fund the military as well as the national pension system. So tobacco is a particularly attractive target, right? Because very profitable and it's pretty simple in terms of operations. So meanwhile, in the year 1917, only two years later, a Swede named Ivar Kruger found Svenska Tandstix Atiki Bladgett. Okay. So essentially he found Swedish match company. Now, by expanding through acquisitions, especially buying other government-run monopolies across the globe, he turns that company into the world's largest match producer by 1930. In fact, he controlled 60% of the global supply of matches only 13 years after founding the company. Now, if you know anything about Ivar Kruger, he's also known as potentially the largest con man or Ponzi scheme guy that the world's ever known.

So in 1932, he actually commits suicide because his empire is essentially collapsing. And when that happens, everything starts to dissolve with the Swedish Match Company. and essentially the company gets dissolved you know assets are sold off and it kind of disappears into nothingness just about now in the 1960s you know the tobacco monopoly separate company has gone on in sweden it's done well and the government decides to start deregulating the sector so it allows that company to start expanding operations making you know its own independent decision-making to a certain extent. And so it goes and buys, you know, a couple other companies, a Dutch cigar company named La Paz, the American tobacco manufacturer, Pinkerton Tobacco,

which is the manufacturer of Redmond chewing tobacco, very famous brand. And they also buy another Dutch cigar producer named Wilhelm II. So the company is emerging to kind of have more global ambitions at that point and kind of take on a little bit of independence. But it's only in 1992 or in the 1990s when the company actually becomes independent, lists publicly on the Stockholm Exchange. And it's during that time where the tobacco company purchases the remnants of Swedish Match, the actual lighters and match company. Now, they immediately assume the brand name. I don't know why, just because it has such international fame due to what Ivar Kruger did in creating that Ponzi scheme. But they take the name because they think it's great branding.

And that's essentially the Swedish match we know today is the combination of Ivar Kruger's old Swedish match assets and this tobacco company. So they start to operate in pure autonomy. And in 1999, they actually decide to spin off the cigarette division of the company. And this is actually something like if you follow any tobacco companies, this is like radical. You know what I mean? Like no one spins off the cigarette vision because it's like the cash cow of the company. But it really puts Swedish Match on this like trajectory to say, we want to be a company that is not focused on cigarettes, not focused on people smoking. We actually want to be the tobacco company or the nicotine company of the future in a cigarette-less world because we know those are bad for people. So that's in the 1990s. In 2010, Swedish Match spins off its branded cigars business. So those are probably cigars that you pay a decent amount of money for.

Maybe they're from Cuba, the Dominican Republic, other things like that. they spin that off and essentially what it leaves is this shell of a company where they're really just focused on lighters and chewing tobacco um so this might be a good point to just talk about their uh products pretty quickly because one of the things you're going to need to know about Swedish Match is the different types of chewing tobacco so in Scandinavia everyone consumes a product called snus which is a form of chewing tobacco very similar to american dip but it's actually like heated and treated in a certain way that makes it like much more palatable so in scandinavia that's like a maybe 200 300 year old tradition of them consuming this product

almost more than cigarettes to a certain extent so it's very very popular there now at the same time, there's another country that has a very similar culture of consuming tobacco orally, which is America, right? So they own an American chewing tobacco brand named Longhorn. And also, like I said, the Redmond brand as well. So it's not a huge difference between those two, but it's just kind of important to know that people are consuming different types of products across the globe and Swedish Match is there as really the leader in the oral category. But the hallmark of Swedish Match today is a product called Zin, which I'm sure you guys are familiar with, but it had developed from snus, which is, you know what I mean?

That type of tobacco consumed orally, but Zin is a product where they extract the nicotine from tobacco and they put it into a pouch for you to then put into your mouth. This, they really just created in 2015, right? So it's a very, very new product, but it's literally one of the best inventions that's ever been created because up until 2015, there was, if you wanted to consume nicotine, you were also consuming it with tobacco and you were incurring the health consequences of that. So they developed this product that gave you all the buzz that you wanted, but without

any of the health consequences and without any of the problems to your teeth and other things like that. And consequently, Swedish Match has gone on an absolute tear of growth, both in Scandinavia and the US, because they essentially created this entire category just about. Okay. So that kind of covered all the products. How did you even come across Swedish Match in the first place? Okay. That's a great question. So it was senior year of high school. I was in biology class and we were learning about, you know, different types of biological chemicals. And one of the things we learned about was the chemical structure of nicotine. And I, you know,

we were learning about chemistry, biology, and I realized then why is everyone, nicotine is what gives you the buzz in these products and we can easily extract nicotine from tobacco, but instead we're all just consuming a cancerous product. And it was at that point, I was like, why isn't there a product that just gives me nicotine and not tobacco? So at that point, the only product I knew of at the time was Blue e-cig and it sucked. So I had always known that this category needed to exist. And in fact, I went off to college, I was pre-med, I was learning chemistry and biology, and I realized I could make this product. So I went online and I literally ordered a vial of nicotine because I was going to make my own tobacco-free dip because I'd seen tobacco-free

dip before, but it didn't have nicotine. So I bought the nicotine, I was about to make it, and I was like, no, no, no. I was like, I'm not doing this. You know what I mean? It's such a great idea, but I'm not about to mess around with nicotine and mess up a titration or something and poison myself. So I always knew this product needed to exist. And sure enough, one day I walk into a gas station and I see this white tin and I'm like, excuse me, what is that? The guy brings it over. I'm like, there's no tobacco in this. And he was like, nope. Immediately bought a tin, threw in a dip and i was like this is it this is what i've been waiting for and so it actually took me a little bit longer after that to figure out there was swedish match it was listed on the

stockholm exchange and i wasn't quite ready to like take the leap as an investor but eventually i was like okay what am i doing you know what i mean like this is my chance so i jumped on it what uh so when did you first start a position um i want to say sometime in 2019 okay all right that makes sense and yeah i mean the product is i think i looked it up it's only like four ingredients it's really simple right it's just kind of this they they make it sore it's kind of similar to something that is comfortable in someone's you know on someone's gums but they just basically put on some nicotine on top of it uh what is what's the difference between though like what's the difference between this and the other nicotine products and the

reason i think people have this concern and they want to hit this home is that why are customers choosing to switch is it purely for the health benefits or is it more is there anything else to it there is a little bit more to it so i think first and foremost um you know if you're familiar with american dip i think the two brands that stick out to you are grizzly wintergreen right Grizzly Chewing Tobacco in Copenhagen. You throw those pinches in and it delivers an absolutely incredible buzz, right? It's a fantastic product. But if you leave a pinch in for an hour, two hours, your gums are literally going to hurt, right? So it's not just the health benefits of like, wow, if I do this for 20 years, I'm going to get cancer. But you can't even

necessarily consume as much as you want because it's actually so harsh on your body. And then you also have to think, okay, if you're consuming that product, you have to be spitting, right? It's a kind of an ugly product. You carry around a spitter. You can't really do it in public places. People frown upon it. You know what I mean? So there's a couple different aspects of like, hey, if I want to throw a pinch in in class, should I have chewing tobacco and be spitting like some weirdo? Or should I throw in a Zin and just hide it and there's no spitting really? and you're clean and you can kind of do it as long as you want. So I think that is one of the major benefits of the product aside from the obvious health benefits. Right. And I guess

there's one more question we might want to ask now, what countries and regions are they operating in? I know I've read before that Zin started on the West coast of the United States, but have they gone across the whole region and what other countries are they trying to go into? Yeah, that's a great question. So, yeah, they did initially start on the western region in the United States. I'm not quite sure why. One of the graphs that Swedish Match likes to highlight is how, when they expand to a market, how it matures. So on the western half of the United States, I think they say they're up to like 9% of the total like oral category over there. But in the new eastern regions they've expanded to, they're only at two and a half. So they like to highlight that and show, you know what I mean? We started here and this is what the rest of the country is going to look like.

In terms of the United States, they recently just completed a very large expansion project at their plant. I think it's in Murfreesboro, Tennessee. Don't quote me on that. But, you know, they just built out their capex and finished the plant expansion that will allow them to produce enough tins to essentially flood the entire country. So they'd actually been production constrained really up until late last year, I believe. And in terms of the international expansion, this is something that I really have a bone to pick with the company. um in the eu nicotine products are very very regulated and uh outside of scandinavia where they kind of had exemptions they banned uh essentially chewing tobacco they banned dip

they banned you know the whole oral category except for scandinavia um you know essentially just because of the health reasons i guess but then again you're allowed to consume cigarettes um recently because of this new category it's technically legal for them to sell nicotine pouches in the eu unless a like a local province has banned it um so i think bti british tobacco is actually starting to sell their product into europe but up until this point swedish match has not expanded zin into the broader european area outside of scandinavia and switzerland end. So I think they're kind of waiting for the regulations that they expect to come to occur before doing that. But it kind of just blows my mind that, you know what I mean? They're not

standing up a huge new factory for a population of a billion people and trying to get in there early, get in there quickly and start expanding. I think that's going to be likely one of their next targets for international expansion, but it hasn't happened yet. Up until this point, They've just been solely focused on making the U.S. happen. So, I mean, we kind of touched on most of sort of the crux of Swedish Match's business. Is there anything else you like about it? Anything, any other reasons that you've invested in this? Kind of any other points to your thesis?

Well, let me just talk a little bit about the thesis a little more in depth. So, in 2019, the traditional oral tobacco market in the United States was 10 times as large as the modern oral category. So, 10% of nicotine users chewed and only 1% used sin. So, part of the thesis that I believe is going to occur is that almost all of that, the majority of those dippers are eventually going to switch to a modern oral tobacco product. So essentially, you see what the Swedish match revenue is doing in the United States. I believe there's the possibility that just on today's nicotine users alone, they can double or triple their sales over time as they shift tobacco users over to newer products.

now the second thing that since doc poppy actually was the one who kind of put this idea into my head but one of the things people don't think about right in terms of the tobacco category is that you know it's been in perpetual decline literally for half a century right no one's starting to smoke you know tobacco use has gone down down down but i think that swedish matches you know oral tobacco business can double or triple from today over the next decade, right? But this is such a great product. I believe that the number of nicotine users may have actually hit a bottom and may start expanding into the future. So in 1965, 42% of adults smoked cigarettes. And by last year, that was down to like 12%, right?

In my opinion, I think that there's a really strong case to be made that if you're able to consume the same buzz without the health risks, I think there's a strong chance that it's not going to be cigarette smoking that increases across the population. But you might actually see this category of nicotine users start to go on a multi-decade growth path. So that's the other piece of my thesis is that we might be at a multi-decade low in terms of the population using this. So I think there's a lot of growth left in terms of the market opportunity here. Are there any metrics that you're kind of tracking just to know whether your thesis is playing out kind of the way you think?

um it's a great question so i think first and foremost um there's probably two things that i'm concerned with and the rest of the market's concerned with and that's pretty much you know what is the sequential growth looking like i think at this point they've been growing users sequentially like quarterly about 10 but people are starting to get worried about their market share, right? Because up until, I think right now, Swedish Match has about 65% of the smoke-free category is just their product, which is pretty much insane to think that, you know what I mean? This market might triple from today and they're going to retain all that market share. So the two things that I just want to monitor in the future is that that market share is holding

up, or at the very least, the overall market in the United States is growing enough to compensate for those market share losses. You don't want to get into a point where the market share is decreasing faster than the category growth. So those are the two things that I would watch. In terms of the rest of the business, I mean, it's a super high quality business. I think tobacco in general, you know what I mean? To a certain extent, there's pretty high barriers to entry. There's not a lot of competition. And if there is competition, it's not happening on price necessarily, which I think is a really good fundamental thing for the industry. And at the same time, this is a business with super high returns on capital. I mean,

I think I have it in front of me, but I think their returns on capital is like 50% and it's been increasing year over year as they continue to gain operating leverage. So at a certain point, it's like if you go from 50 to 55 to 60, does that even really matter anymore? At this point, I don't think so. I just assume the business is going to have extremely high returns on capital into the future. And yeah, and to a lesser extent, you got to think about valuation as well. So in front of me, Swedish match right now is trading at about a 5% earnings yield, which is pretty steep, especially compared to the rest of the tobacco space right i think you know british tobacco

and altria are at a 10 earnings yield so it's like twice as expensive uh you know but to me that's okay because you're really focusing more like i said on that future growth that's occurring yeah it seems those i've seen that comparison made before which is like why why the big disparity between Altria, which is obviously more based on cigarettes, and then Swedish Match. It's like the trajectory of the business is completely different, it seems like, at least currently, just because of the decline in cigarettes. The other thing I was going to mention is brand loyalty is strong with tobacco products. Yes.

And that's something that I think is actually super important to touch on, because I think one of the things people really don't realize um with tobacco products is that you actually get addicted not just to tobacco but you get addicted to literally a specific product it's like mcdonald's kind of you know right it's like mcdonald's and burger king you know what i mean like there are people who will only mcdonald's and they hate burger king it's a burger right this is a very similar phenomenon where and i'll tell you guys right now i like zen i've tried on which is Altria's competitor modern oral product I thought it was quite good but it's just not as good I've tried velo I thought it was a bad product those are essentially the same products

like you're putting nicotine in a little pouch you know what I mean it's the same product but it just doesn't hit the same so uh first mover advantage into a market I think for tobacco products is huge because it's not just about the brand. The product literally has an addictiveness to it that you crave in itself. Yeah. No, I totally agree with that. I think the last question we have here before we go to the ad break, because you hit on the valuation a bit, but how important is the management and share repurchases? Because I know that they've reduced the share count by, I think it's like 70% maybe since 2000. So that's very important for the long-term earnings power of this business. So, what are your thoughts on management and their

buyback strategy? Yeah. So, to talk about the buybacks first, they're a very active purchaser of their stock. They buy it like almost every day, which I find to be fantastic. In the past, they had actually, they're generating a ton of cash, right? In the past, they had actually done a lot more special dividends. They have a small dividend right now. They were doing a lot of special dividends and buying back stock. And over the past couple of years, I think the light bulb's gone off for them. And they're like, wait a second, why are we paying out all these special dividends? Let's buy back the stock in a more tax efficient manner. In the tobacco space, that doesn't happen. Management across the rest of the industry, I think is generally very,

very poor. This management team, I think really, really gets it. And they understand the value of their shares, especially like, think about it from my perspective, or maybe management's perspective, if they're as bullish. If you think there's a possibility that this business that they have might 2x or 3x from here, it's probably a good decision to start buying back just about as much stock as you can right now. So one of the things that management just recently announced, which I'm still kind of figuring out, is they're going to spin off their cigar business. So I told you that earlier, they had spun off their branded cigar business, which is like the higher quality stuff. But in the US, they actually have a cigar business of two brands. I think one's called

Graham and Garcia. And the other one is very famous. It's called White Owl, which is like, if you go into a gas station and you want a cigarillo, you buy a White Owl or you buy a Swisher Sweet. They're actually going to spin that business off. They're going to list it as a public company in the United States. They're going to lever it up to at least three times debt to EBITDA at least. And they're going to use the contributions from that spinoff, I believe, you know, at the Swedish match level to buy back even more stock right now. So to me, that seems like, you know, they might want to execute, you know, a very large buyback opportunity, you know what I mean, at a good time. So I'm finding that just that shareholder action

in general, I think that that's super appealing and it shows you management's always focused on trying to create more value for their shareholders. Okay. Well, I think we've got plenty more questions, but we're going to hit a quick break and then we'll be back. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices.

You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware. Or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are you? all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome back in i'll let brett ask his question yeah so you talked about european um expansion a bit how you're kind of a little

frustrated they haven't started to go after that market but i know you know tobacco nicotine all this stuff is very universal. It's used in every country. How realistic is, you know, Asian expansion, European expansion, and how much growth do you think that could bring to Swedish match? The Asian expansion is an interesting question. I know, you know, one of the markets everyone focuses on is Japan, you know, because it's a relatively wealthy country and they can, kind of afford the higher level products that aren't cheap cigarettes. So my assumption would be that would probably be the first place that they look if they are going to go into Asia. They have a lights business, a match business. So they're kind of a little bit involved with

some companies in Indonesia there. So I think that would be one opportunity for them, 300 million people. It's not as wealthy of a country. So I'm not sure that Zin would be the right product right now. But I think those two countries would probably be first of mind for them. But I do think that in my opinion, if I had to guess, that's probably a little bit farther off just in terms of the pecking order. I think Europe is going to be probably first of mind for them. And then perhaps Australia, targeting wealthier countries who can afford a $4 to $5 tin before taxes. Right. Are they in Canada? Do you know that? I guess we should know that. I don't believe that they're currently in Canada right now. And if they are,

it's to a very limited extent. The people that I've talked to there have not been able to find the product, or at least in certain provinces, they haven't been able to. So there's also a significant opportunity there as well that is definitely underpenetrated. They have 18 other markets that they're testing in right now. They don't list them, but they're actively keeping feelers out there. But I think Canada, that would probably be another one that's probably a natural adjacency. Given that they already have the plant in Tennessee, I imagine that they could probably just ship straight to Canada. what do you think about the uh potential tax uh legislation or the tax rule that came out

we read it and uh surprisingly it didn't seem like the stock reacted to it at all but it seemed like it could hurt swedish match do you want to maybe explain what it is and what you think the impacts could be yeah so i'm not gonna lie to you guys this tax bill literally scared the shit out of me. The proposal in its current form was that a tin of nicotine pouches is going to receive a $9 tax per can, which is insane. So if you're selling the can currently at $5, the price is going to become $14. In my opinion, other people that I've spoken with have kind of rationalized that, hey, maybe it'll be good for them because other competitors won't want to pursue it as much. You know what I mean? They might get a

little bit of a stranglehold on the market. But in my opinion, if that were to go through in its current form, that's a category killer. No one's going to pay $14 for a can of nicotine pouches When at the same time, a can of dip was only going to receive like a $3 tobacco tax. So in my opinion, you have a can of nicotine pouches selling for $14. You have a can of dip selling for, let's say, $6, $7. I don't think many consumers are going to be switching when you're paying that amount of money for this product. So that's truly given me pause.

And I've actually cut my exposure to the stock because of that. I think probably for me, a smarter strategy would have been buying some put options until that legislation goes into place. But it really did scare me just because what was being tossed around was crazy, in my eyes. I mean, I would have thought it would have been the exact opposite. You'd tax, you know, a much more harmful tobacco product much higher than you would a nicotine pouch. yeah it makes sense or if it seemed like if everyone was acting rational the the you know cigarettes would be taxed the most then dip would be a little more or a little less excuse me and then these nicotine pouches either because of the health benefits uh would be not taxed at all or taxed significantly less but it seems like now we're going the reverse strategy however as like an investor you kind of look at and you're like well we can't say what we think is right. If this happens, that's a big variable or big, I don't know. There's a lot of downside

potential there, but I don't know the likelihood of it passing. I think the term health benefits might not be exactly right, but in comparison to cigarette, I mean, there's no reason in my opinion that it should carry a higher tax rate than more harmful products. That seems counterintuitive or counterproductive to what the government's trying to do i guess yeah this isn't like tea or kombucha but it's not it's like a net it's like nothing so it's it's not it's not harming anyone relative benefit right from something much worse what do you think about um like so i guess the tax was on nicotine content rates right so like how much nicotine was in per can i believe yeah yeah what if they just uh did half the half the nicotine level

would that kind of ruin the product so i i use zen six milligrams typically um they already sell a zen three milligram but you know the point that you're putting out there is a great one because the theory i've heard two theories on why the taxes in the current legislation are so high one of which is just like big tobaccos coming at someone else's throat and they're trying to product their products and they're you know hurting this guy the second one i heard is that the government is actually not against nicotine pouches what they are against is these open tank vaping systems where you're buying a lot of nicotine you know what i mean and refilling it yourself and that whole type of thing. And the way they drafted the legislation,

it actually kind of swept nicotine pouches up with it, right? So whatever the formula is of how they're determining X amount of nicotine per can, some people have suggested they're going to just have to change how the product is essentially packaged, whether that be more pouches per tin or less nicotine content per 10. However it is for them to kind of escape this, I think that that's possible. But yeah, at this time, I haven't looked into it closely enough to know exactly what's going on since it's kind of draft legislation. Right. Okay. And then, yeah, I mean, that's kind of an unknown for us investors. I guess there's not much else we could talk in circles about that all day. But one thing that I think anyone that's investing in a category that just started less

than a decade ago especially a consumer category is you maybe be worried about it as a fat like do you have any dueling stuff like that so you kind of see that within the vaping category there's been some stuff that's gained market share really fast and then totally fallen off do you worry about zin and i guess nicotine pouches in general having durability concerns as a category i don't Um, I truly think that the nicotine pouch and to a certain extent vaping as well, I think that those products are so incredibly durable. And if you throw government trying to get rid of it away, you literally have a product that you can consume almost as much as you want.

We'll give you the same exact buzz as the old products did. So I don't really see it as a fad. In fact, I know Juul kind of had its spike and then fell down, but I will say, I think the product that Juul created was literally one of the best ever made. Even today, I don't really even think that there is a vaping product that hits as hard and feels as good as a Juul. So in my opinion, you're literally dealing with a product that has an addictive property to it.

So I don't think that there's a durability issue at all in terms of the product category. I think, you know, it's going to continue to grow and grow and grow, assuming that the government doesn't step in. Do I guess maybe not all vapes are the same, but do those have tobacco in them at all or is it just nicotine? The vapes that I'm aware of, all of them are non-tobacco. So it's just, you know, nicotine and water, oil, or whatever they put it in. Or, you know, I think Juul uses actually like vaping salts. They turn it into a salt to burn. What do you think is the biggest risk to a Swedish match as an investment?

So there's two things that I'd like to hit on here. So the first one is actually when we talk about durability, I'll backtrack a little bit. um i think what makes the product great is the buzz it delivers you when you smoke a cigarette immediately you feel the buzz right it's instant it's hard it feels amazing instantly that is a much quicker delivery system and it's going to attract more customers right because it it's giving you this dopamine hit much quicker and much more effectively and the method of delivery is better than a nicotine pouch um on the flip side i don't think that vaping is going to like get rid of nicotine pouches because i think that people

the way people like to consume nicotine pouches is very durable because you can throw them in at any time you can be inside and use them you can't jewel you know what i mean when you're at the grocery store you can't jewel when you're at work but you can use a nicotine pouch and i think that's going to draw a huge amount of people in for that reason. So the method of delivery worries me a little bit because it doesn't give you enough of a nicotine hit quickly. The other thing that I'm actually very worried about, but it's a little bit too early to really know what's happening is with their competitors. So I mentioned that I had tried Altria's product, which is called on pouches. I think they're great. I think they're a great product. And British Tobacco

came out with their own. It's called Velo. I think that product currently is much lower quality. It doesn't hit as good. There's powder all over the can. It's kind of weird. It doesn't seem good at all. And then there's a new brand called Rogue, which is expanding very rapidly. So I think to me, that's the biggest worry in this thesis x the government is that cigarettes and other tobacco products were so fantastic and you really really got addicted to craving grizzly or craving a marble cigarette i don't know if there's enough product differentiation between all of these that um you know is really going to drive the uh i'll call it demand elasticity that existed with tobacco. So what I mean by that is, perhaps these products are

more interchangeable than their peers, and therefore, you're not going to have as good of pricing, and you are going to have more competition. That is what really worries me, and I haven't really made up my mind on how that's going to turn out in the future. Yeah, it seems like right now they're going through a bit of, like I said, probably describe it as a moat test or a test of their competitive advantage because uh just i think they each company has this or you can kind of work back through like volume and revenues or whatever but uh altria and british tobacco are severely undercutting zin right now it's like one dollar two dollar per can and they're giving like super big discounts versus the five dollar that zin's

doing do you think that like i don't know how sustainable is that when you saw that information What were your thoughts? Well, immediately I was very worried because I have seen Velo priced at a buck 50 a can for like a year now. You know what I mean? And that's just crazy to me. And those two competitors are very large. They're much bigger. They have better distribution, heavier pockets. So if they want to price at 150 in perpetuity, you know what I mean? They can do that. And that is really going to scare me. Now, I think that eventually prices are going to rationalize because I don't think it's in anyone's interest to really continue to do that. Sorry, I kind of forgot where I was going with that.

Well, something that I find funny is that I had a similar reaction to you, which was if they can be the low-cost provider and these things are pretty interchangeable. They're generating $10 billion a year from cigarettes. It doesn't, you know. Yeah, then you have a problem. But the other thing is sales grew, unit volume grew for Zen even during this. Right. Even while it was low cost.

It's been happening, you know what I mean, for the past year. And they're still growing volumes sequentially at double-digit rates, which is super impressive. So I think at this point, it's a little bit too early to say that that's going to ruin it for Swedish Match. um one of the things i'll say well two things so first of all back in the day i used to chew grizzly wintergreen and i might have paid let's say four dollars a tin swedish match sells longhorn which in my opinion is probably one of the worst dips on the market and they sell it for let's say two bucks a tin i would never even look at that you know what i mean i didn't know anyone who ever looked at that. So for a very long time in a similar product, I was probably paying double

the amount that I could have. And if you guys are aware of Stokers, which is a Turning Point brands product, they'll sell you a bucket of dip for the same price as one little tin. And that's never really caught on either. So I really don't think that price is going to be main determinant and shaping how people consume this product. I think it's more of a first mover advantage. And one of the things that kind of points me to that is, you know, Zinn was the first mover in America by a very wide margin. When they first started, they literally had 99% market share. In Scandinavia, where there's been a lot of other companies that actually got the one up on them. Their Zin product and the other brands that they have, they call it Volt or

whatever. They have a couple of different brands. They have nicotine pouches. It hasn't really caught on for them. They've never really been able to have the growth that they're seeing in the United States. And to me, it seems, you know, that indicates to me that once people get addicted to a certain product and they really like that product and it gains this mass awareness, you You know, you see people on college campuses, you know, consuming Zen, everyone starts to buy that and it just starts through social proof to proliferate. So I'm really not super worried about the competition at this point. I believe that the first mover advantage is going to insulate them for quite a long time.

It is funny because the, like we're asking, we're basically asking the big concern is in the US, are they going to be able to hold market share? But then we're also saying like, it's a shame they can't, they're not, they're not, they can't take market share. They're not moving anywhere in Scandinavia. It's like, well, there's, there's our answer. Right. It's just a more mature market. Yeah. Well, in Scandinavia, yeah. But in Europe, no one dips at all. You know what I mean? It's not even a thing. So that to me is like, well, why aren't you guys going faster? Get it out there and do the first mover advantage that you guys had in the United States. And I have not been able to reconcile why that's not happening, other than the fact that Lars Dahlgren, the CEO, on one of the earnings calls has said, we think that this regulation is coming and it's coming

quite soon. And so I think that that's probably why they're a little bit gun-shy right now. They're going to wait and see how that plays out before they figure out their plan. Right. Yeah. The negative companies, they always seem to know what to do with regulation. They're always in one way or another trying to get on the good side of the regulators. It's very important here. Do you have any more questions? No, I had some more anecdotal evidence about just seeing Zins around town and at baseball games, but we've already covered that. You know, I think everyone knows that they're around. So where can, uh, where can any listeners find you?

Twitter. Find me on Twitter. I'm at wealth or die. That's the hand. All right. Well, say that again. It might've gotten cut out at wealth or die. Okay.

All right. There we go. Yeah. Yeah. You must've, uh, you must've been, uh, been on Twitter early to get that one. all right well i think that's going to do it thanks to philip for coming on the show we want to remind our listeners that we are not financial advisors anything we say or discuss here on chit chat money is not formal advice or recommendation we are however general partners

at arch capital so clients may have positions in the securities discussed in this podcast Thank you guys for listening. We'll see you next time.