Ladies and gentlemen, welcome to the business Brew.
I am your host, Bill Brewster. As always, this episode features
Spencer Sabelli. It's a good one.
They're all good ones. I know they're the best.
Anyway, Spencer stops by to discuss HAPE Group.
HAPE is they operate an online distributorship.
They distribute mainly tobacco free nicotine pouches and snooze
products in Sweden, Norway and the rest of Europe and the
United States. If you did not know that, you
might know it by looking at your screen, which features the
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If you're fine being mediocre, then don't use it again, fiscal
dot AI forward slash brew. Anyway, as I said, this episode
features Spencer Sabelli. We're talking HAPE group I think
Spencer Sharp. I like the idea.
I don't own it but I am inclined to like it, so apologies if I go
all confirmation bias on this idea.
Anyway, nothing in this podcast is investment advice.
Everything is for entertainment purposes only.
Please consult your financial advisor before making investment
decisions and do your own due diligence.
All right, enjoy the episode. All right, ladies and gentlemen,
thrilled to be joined by Spencer Sabelli, son of Mario, disciple
of Bob Rabadi. I don't, I don't know if
disciples a little bit too too emphatic of a term, but works
for Rabadi. So Spencer, thank you for
joining. And we could have done it in a
more timely fashion if I had listened to you and you said,
why don't you look at this right now?
But alas, I am. I am slow.
But eventually I learned. It happens.
Yeah. Well, if I'm right, we'll, we'll
have a long runway left. So we'll, we'll, we'll see.
Yeah. Well, we dabbled a little bit in
the products at A at a event that we attended.
So that was that was Funnish. I think I gave you that, that
hot cherry flavor that. Yes, which I liked, though these
things set my my head spinning. It's I have enough vices in my
life so I tend to avoid them, but I did like that flavour that
was. Decent just once a year.
Mark Kelly, you can do them. That's right.
Yeah. All right.
So anyway, we are going to going to chat about HAPE today and
it's it's one of the more interesting companies that I
I've heard pitched. When did you first pitch this
2023? I think fall of 20, no.
So we first met them spring at 23 and I, you know, I think we
started buying early fall. Like when I did my first write
up and stuff I sent around that was 2023.
So, yeah, coming up. On for those that don't know,
they're a distributor of nicotine patch pouches.
And I don't know, when you first ping me, I was kind of like,
well, you got the, you know, why not just lay it through the, the
nicotine companies and we'll, we'll see into that.
But do you want to, you know, set the stage for what HAPE is
and and exactly what they do and why they're unique?
Yeah. So, so through the the world's
largest online retailer of of nicotine pouches and then
traditional snooze products. So those are the tobacco pouches
that are, that are in Scandinavia and are popular
there, but but they're in seven different markets, you know, at
about 1.1 million active customers and 24.
So they're currently in Sweden, Norway, UK, Germany, Austria,
Switzerland and in the US. And I, I'd really describe it as
like an Amazon like equivalent in the space, you know, so
family and nicotine pouches that they have a small vaping and
heat not burn business as well, but they exclusively retail
third party products. They don't manufacture anything
themselves, but they're ordering in bulk.
They order directly from the manufacturers.
Most of their warehouses are in house where they'll, you know,
pack them and ship them to the end consumer.
And that's under appreciated. Part of the business is the
median insights business. So that's about 10% of revenue
today and and a larger contributor to to profit.
But, but that's basically tailored data insights,
predictive analytic service catered towards the
manufacturers, you know, mainly like tobacco companies, but also
brands as well. And that's very unique service
that they've spent a lot of money on and and now I've gotten
it to scale. So when when you say that you
know what's what Unique I or potentially unique about
pouches, I'm not even sure the market is mature enough to make
definitive statements right. But at least historically, the
traditional cigarette brands are very consumer loyal and it seems
that there is more willingness to switch among pouch users.
Now if I look at like some of the some of the European
countries, I, I'm going off memory, I should have it in
front of me. But anyway, I think I'm pretty
sure Sweden is dominated by Vilo.
The market shares are reasonably simple stable at the top, are
they not? At the high end, I'd say, so I'd
say that the top five brands have a have a decent chunk of
the market. I think, you know, Vilo probably
is half the the European market as a whole.
I think sort of within that they're very competitive.
So per skew, you know, sort of HAPE released a market report on
their on their sweetest websites news blog.
Anyone could view it and it sort of shows how the top five brands
are sort of the same, but the the skews are sort of changing
marketer positions all the time. And then, you know, yeah, the
tail end is very competitive. Too, So HAPE can go to British
American and say, hey, this Velo flavour is really pop it off in
like this jurisdiction. You may want to lean into that
or or something. Is that kind of what they do on
the data analytic side of the business?
Yeah, so it, it's actually very interesting.
I I viewed the product at the Capital Markets Day, they're
sort of demoing it while people were there.
But you, you can track like 4000 data points per customer.
You can track and you know, every individual SKU you could
see it's market share on any given day, any time frame, you
know, down to the zip code or region.
You could filter by, you know, consumer demographic.
You could look at women in, in northern Sweden in the past 30
days and you know, see all the, the top brands there, what's
moving, what's changing. And so it's, it's a really
extensive product portfolio that they can view.
You know, I, I think there's a very predictive element to it
too. So HAPE has the most mature, I'd
say knowledgeable consumers. And so HAPE generally says that
trends online on their website to develop, you know, 18 months
before they happen in store. So I think a lot of the big
companies are are predicting to or you know, trying to see where
the market's going on on Hape's websites and you know, I guess
tailor their their product innovation or sort of marketing
efforts to that as well. But it's a very extensive
product. Did they talk about why they
think that they lead sort or kind of see trends before they
occur at retail? Yeah, I, I think it's just an, a
very experienced consumer. They like trying new products.
So I know on, on HAPE sort of Swedish websites like they, they
average close to three brands on an average order.
The average consumer will try 7 into 9 different skews per year
often between like 3 to 5 different brands.
So I think they just have a very experienced consumer like trying
new things. And I think a, a, a big part of
it too is HAPE has become the go to player for product trials
because the median insights piece and then product launches.
So they're responsible, I think for 2/3 of all product trials in
Sweden. And then you know of any product
launched within the past year, I think they're responsible for
2/3 of sales of those products, including Tel as well.
So a lot of companies will will test out products on on Hapes
website. See early feedback from this
experience consumer. This consumer likes trying new
products and there's new innovations being brought to
market all the time, new flavorings like there's now
nicotine release patterns, new textures and different things
like that. So products are constantly
getting better and I think it's they've created this flywheel
where they have this experience consumer like trying new
products, you know, in turn they become product trial service as
well. And I think for that reason, the
big companies kind of really pay attention to to what's going on
there. Yeah, I mean, that makes sense.
Now for for the uninitiated in this, in this idea, do I just go
to hape.com? How does this work?
So there's it's interesting, they have I think 11 different
domains across their markets. So hape.com is actually one of
their European sites. Their US websites are are
nicokick.com and then the northerner.com.
But it's pretty interesting. So they'll have multiple, I mean
they list them all on heaps IR websites, you get the full list
of websites, but they choose to have multiple websites with
different URLs per market. And the reason for that is 7% of
traffic comes from organic search results basically.
And so they try to dominate the the top three in any
jurisdiction. And so they'll have multiple
different websites all feeding into the to the same back end
and distribution network. But they really, because I think
the top three get like 90 something percent of all the
traffic. So they have a smart, you know,
system where that's, it's basically a rescan website
feeding into the same back end, but they're just capturing smart
traffic. But yeah, it's simply you just
go on. Appearance of competition.
Right, right, yeah, I think like 5 Hour Energy or or one of those
kind of companies did that where they they bought the other
brands. And so you know, they sort of
dominated all the the shelf space.
So I think that's where strategy as well.
But I mean, there that's why their, their market shares are
extremely high. I think like I have the numbers
here in, in Sweden, they have about 85% in the online market,
Norway 80%, UK about 65%, US 85% and then the dock region about
40%. And so it's, it's very hard to,
to acquire customers. I mean, you can't acquire
customers, but it's very hard to get customer traffic and and
compete with them. So ignoring the scale
advantages, let's say I, let's say I buy a bunch of of of the
of Velos or whatever and I want to sell them online.
Why can't I just go and and get Google Adwords and go and
compete with these guys? So that I mean that's the the
most interesting thing of the business.
You technically can't. You can get in some paid AdWords
on Google. So paid is about 3% of all
customer traffic. It it's technically a loophole.
So, you know, basically every major search engine, social
media site has a ban on paid advertisement for, you know,
addictive products. So nicotine and tobacco fall
under that. So you can get in some pay is.
OK, which makes no sense, but I digress.
Yeah, yeah. That's a whole.
That's a whole another topic. The worst ones, OK, but yeah,
yeah, the other ones are not all right.
But you, you basically can't pay to acquire customers.
So, you know, nicotine pouches aren't fully shut down from an
AdWords perspective. But if you type in any search
term for vaping, like buy vapes online, there's absolutely no
sponsored ads at all. So that's where the, the
market's going to go. But beyond committed adword
opportunities for, for keywords in certain markets, like there's
no paid advertisement opportunities.
So you can't do any Instagram, Facebook, TikTok ads and Google.
So as the market gets big enough, we'll we'll shut down
all paid keyword opportunities. And so for that reason, it's,
you know, very difficult to acquire customers.
And I don't think they'd be able to sustain their current market
shares, like 85% of the US market, 85% of Sweden could just
pay and swell customer traffic. So it, it's very difficult.
And yeah, and, and they estimate that like, so it's 97% is or
organic search, but it's hard to parse out because some people
are. So they estimate that 40% of all
customer traffic are, are people who are referred by a friend or
family member and then maybe they'll type it in on Google.
So it comes in as an organic search result, but it's really
not. So there's a a very strong sort
of network effect as well. Yeah, how, how do you what when,
when you're thinking about key risks, just the business's long
term potential to grow, how much attention are you paying to sort
of Google's policy changes on that, if any?
Yeah, I mean there's two different ways that I mean it.
It's just risky, I guess being so relying on on one company or
source for traffic, which they are.
So they're susceptible to to algorithm changes that happened
with vaping. So, you know, Google, you know,
basically took a sledgehammer to the online vaping business and
you know, they'll put all these like.org and informational pages
and then maybe the 4th or 5th result is a place where you can
buy vapes online. So they, they could really start
the organic search part of the business.
Ape's absolute position would be worse off, but I guess their
relative position would be better because it, you know,
it'll, it'll hurt competition a lot more.
Some of the, some of the smaller sites, right?
I mean, they, they, their organic search rankings are sort
of impenetrable, right? They, they have the oldest
website, so they very high existing conversion rates, a lot
of history. They're fully MI is kind of UI
wise and very easily like navigable.
And then they have highest existing traffic as well.
And they've, you know, been operating for, for over a
decade. And then on the flip side, you
could say that like there's changing perceptions in nicotine
and that causes Google to allow sponsored ads and allowed
customers to, to do AdWords and pay for traffic.
Is that another risk? I, I think that's, you know,
pretty unlikely. I think it's more likely they
they go the route of vaping those sort of diminish online
retailers put more informational pages up top, which you know
will hurt customer traffic, but I think kind of their relative
position will will improve. At least as it pertains to
vaping. The irony of making the the
decision to push someone like Hape down the page and
potentially drive people to bodegas, at least over the last
five years. We'll see how the next five
years go. I mean, all of a sudden people
are sucking in illegal Chinese vapes into their lungs as
opposed to having like a real product that's been vetted,
right? Which is a unintended
consequence, right? Yeah, I, I think they're,
they're starting, well, I know they're starting to go after the
the illegal vape category, but you know, online is just a, a
more clean, like better process. There's multiple steps for age
verification. You know, you have to hold a
picture of you with your ID and they cross reference that with
the DMV. And then, you know, most states
are a lot of states really. Yeah.
Yeah, that's so I don't. Just like say, hey, I was born
here, I'm this age, you actually have to show.
Yep. Yeah.
And then in a lot of states, you have to throw age verification
at point of delivery as well, not just point of sale.
And so I mean, they claim it's about 100% age guarantee versus
going to a convenience store and showing a fake ID or not being
Ided at all. And so they have a lot of data
showing that. And I know they're, you know,
working with manufacturers and regulators to just to prove how
online is is viable kind of shit way to buy pouches.
That's pretty smart. Yeah.
They they cross reference to the DMV, that's intelligent.
And even if you can somehow manage to get pouches delivered
like you got parents at home, there's there's that.
It's just very difficult for an underage or.
Yeah, you ask your teenager, Why are you getting so many Yeah,
packages from? Yeah, what's what's
nicokick.com? That's right, it'd be.
Tough. Interesting to see.
Them try to weasel the way out of that one.
Yeah, yeah, it's dad. It's a new shoe company.
Oh, OK, OK yeah, it's all right. Anyway, that that's, that's sort
of the setup. Let's get back into the let's
get back into the, the outline that you had because I don't
want to get too sort of outside the weeds.
But one thing that I find really interesting about this idea and
I, I'd be curious how you, like got there.
I had friends back where I lived and they came back from a guy's
trip, a golf trip and they were like, dude, we were ripping Zens
all week and gave them to some of our friends in the military
and like, they were totally into it.
And that led me to Swedish Match, which actually I'd read
about like 2 years prior Gabelli pitched it in Barons and I paid
no attention to it like an idiot.
But anyway, that like, that's where I went.
How did you get to the distributor in your research
process? Well, I, I sort of found it by
chance. So I was just going through a
list of kind of post COVID IP OS in Europe.
You know, there's about 400 names.
Hape was on there and as a as a Zen user, I saw, you know,
online distributor of nicotine pouches and I was like like
shit, this is great. Yeah, I I can get this.
Yeah, so I I found it sort of by chance.
I really liked I was pureplay, right.
Swedish match was the only one out there, you know, BTI and
Phil Morris, you're still not getting it.
You're getting to be combustibles exposure.
And then I I sort of got comfortable with the distributor
idea, just that I think consumers are a lot more loyal
to the experience in the space. And, and we mentioned this a
little bit, but you know, like I know on and Zen and Sweden were
first movers, you know, so they're, they're first movers
with their dry pouches. What are the pouches we have of
theirs in the US today? And on is like less than 1% of
the market. Now.
I think Zen is, you know, maybe the fourth or third largest, you
know, still big, but things, you know, I, I think brands are very
competitive in the space. Products are getting better.
Like if you try the dry sort of Zens versus European V3 Zens or
you know, the, the US Velos versus sort of the the European
Velos, this remarkable difference.
And so I think that got me comfortable as well-being a
distributor and then learning about the median insights
business and this is kind of real flywheel that they've
created. And then I mean, there's tons of
benefits for for being an online players.
And I think, you know, for that, like online penetration in
Sweden is like 36% or something like that.
And so hey, by itself has like 30 to 33%, a little less of the
entire offline online market. Which just when I first heard
that sad, I was like, wow, that's remarkable.
Like why? Why is all my penetration so
high there? This company must be providing a
ton of benefit and so kind of learning like, all right,
everything else is we order online and you know, we order
everything off of them, but we're starting to order grocery,
you know, online and why can't we order nicotine online?
So I, I do think it's one of the areas where, where online
penetration is quite low and we really haven't migrated.
And I think, you know, 10-15 years from now, I don't think
the US will get to Sweden, sell Obama online penetration.
But could we be ordering, you know, 15 to 2015 to 20% of the
market be ordered online. So I really like that aspect as
well. And yeah, and then just, you
know, we met with the company several times and really got
comfortable with management and and their vision.
And then yeah, the the pureplay factor as well.
I, I was stunned by a part of your note.
You showed the primary, well, a primary benefit, I guess you
only have one primary benefit, but a real benefit to consumers
from ordering online and specifically through HAPE is
what prices are on average 40 to 50% lower than if you were to go
into a convenience store. And then you said in New York
City at Canas Inns now retails for $11.00, which I almost fell
off my chair reading. You.
Need to I if you need me to send you some I can do a Florida NY
arbitrage for you. But anyway you get them for
under 6 bucks online in the same state.
So what are we talking about? You got rent savings, Where does
where does the rest of the savings come from?
I mean, there's a ton of small things, but the big thing or the
two big things is you know that they're bypassing wholesalers
and distributors. So there's no middleman, no mark
UPS. They're buying directly from the
manufacturers. Then the second thing is they
have, well, I guess three things.
The second thing is major scale, right?
So they're ordering in large bulbs.
I think they're the largest buyers ends globally.
That's that's including Europe as well.
And then third, I think the median insights business, that's
about 10% revenue wise, you know, larger contributor to
profit. And so that's really, I think of
it as supplemental revenue that allows them to be more
aggressive on pricing discounts And they can make, they can
afford to make a much lower product margin than maybe other
online competitors or, or retail because they have this
supplemental revenue coming in as well.
But it it's really, yeah, it's a remarkable difference.
And you know, I, I think consumers are really price
sensitive. As a market gets more mature
there, you know, they'll be increasingly sensitive and you
know, $11.00 for a can of, of Zen in New York is, is pretty
crazy. Yeah, that's high to quite high.
Yeah, yeah. I mean, down here, it's not that
we're not too far off from like, I don't know, 2 for the price of
5 bucks or something like that. I know you guys did taxes.
They're nuts. Yeah, taxes.
I think the bodega guys too, they, you know, they charge a
very healthy markup as well. It's very.
Especially. People are willing to pay.
Yeah, right. Yeah, there's dynamic pricing at
the at the bodegas. That's fair.
What, what do you sense like is this the type of management team
that is going to attempt to close that pricing gap or are
they going to exploit it in favor of market share growth as
long as possible? Sort of said differently, like
obviously current cash flow matters, but it doesn't like
really, really matter if you're growing, right?
Like how? How's this playbook going to
going to play out in your opinion?
Yeah. I think it's a lever they can
pull at some point and it's in their toolbox.
I think. I think they're going to be very
cautious in doing so. You know, when speaking to
management, they're very adamant on like we're at the first
inning and we want to soak up as much market share as possible.
And especially because online penetration like in the US, for
example, is, is so low. I mean, I think it's 2 to 3%
are, are sold online. And so they, they really want to
just sort of like Amazon in the early days, just soak up as much
of the market as possible and, and just keep product margin
extremely low and, and price varies high discounts to, to
retail. However, I know in Scandinavia
and Sweden, for example, they price at a 20 to 30% discount to
convenience. So they sank in and know that
like if they were to have an equivalently priced discount in
the US, for example, 20 to 30% instead of 40 to 50%, they
wouldn't lose any volume. And yeah, it would make a lot
more margin. But I I think that's something
that they won't do for for a long time.
At the risk of asking a really stupid question, if they pull
that pricing lever, how much of that drops to the bottom line?
Pretty much all of it. Yeah, right.
Yeah, Yeah. So that's that's interesting.
Yeah. And it's it's interesting too.
The product margins in the core markets of Scandinavia and
Norway are, are very low at retail.
So I think they're mid teens sort of level and their margin
and what they could price is really function of retail in a
sense. So if retail's margins really
low, you know their their margins will also be somewhat
low. So retail margins in the growth
market. So mainly the US and UK are are
closer to 50%. So and obviously pricing will
will have to come in for them to achieve this.
But one of the interesting things that that we're thinking
about is like what's the long term margin potential, potential
to growth markets business And there's a reason to believe that
I'll be substantially higher than the core markets of the the
core markets did like, I think a 10% trailing EBITDA margin,
they've guided to 1213% in the medium term.
Like could the growth markets do high teens, you know, low 20%
rate, I don't know, 10 plus years from now.
I think it's, it's quite possible.
You're talking margins? Yeah, yeah.
Yeah, yeah, on top of what they guided to mid teens revenue
growth over the midterm, midterm, right?
Right. Yeah, there's a lot of margin in
this business. When I was looking at, I mean,
Swedish Match, I was like, Oh my God, this is a software company.
I mean, it obviously wasn't, but I was like, these financials are
insane. Yeah, it's a good business.
Yeah. Not too often you see a consumer
products business growing like that, throwing off cash.
Right. Like that's, that's nice.
Yeah, until that. That was stolen by the Morris.
No doubt. Yeah.
What? What?
So I mean, we brought up Amazon. Walmart is crushing it in
e-commerce. How worried are you about some's
competitive threat from one or both of them over the long term?
I'm not really worried at all. You know, you could think in a
very optimistic scenario, maybe it would be half a percent of
Amazon's business at scale and would put them in the hotspot
with regulators and and just would increase regulatory
scrutiny. I just don't think they they
think it's worth it. Yeah, you could say that like
perceptions are changing and people feel, you know, nicotine
is itself is is less harm, harmful than it used to be, but
I just don't think it's worth it for them at all.
Yeah. It might be better to buy them
than mess with doing any like trying to stand your own up.
You want to talk a little bit about the licensing and and the
jurisdictional issues that go along with that?
Yeah, So it, it's different in different markets.
You know, in most states you need a license to sell direct to
consumer. You know, in, in Sweden, like
you, you need a license and I think the municipality where
you're incorporated. So there's, there's different
things. It's it's interesting.
So a big part of the business, especially in the US is a legal
and compliance aspect. So they'll, they'll have to
track every single jurisdiction down to like the municipality or
zip code and, and check for local restrictions.
And then if you're in a zip code that has a flavour ban, like it
might be a town in like Massachusetts, they would
recognize that and they won't ship the product to you.
It's actually a complex thing in addition to the license also
just staying top of, on top of regular restrictions and, and
different things like that. And I think that, so basically
what happened with was zen.com as they got in trouble.
And I guess this goes in a bit into the, you know, I guess why
the DTC platforms haven't really worked and, you know, aren't as
big as a threat as people might think.
But basically, you know, Washington, DC had a flavor ban
on, on nicotine pouches for whatever reason. zen.com was
legally selling flavored pouches into DC.
So they're, they're put under investigation by the attorney
general and they, you know, they immediately shut it down.
It's been shut down since indefinitely.
So they they ended up sort of settling that the case for a
minuscule fee. But it really showed that like,
you know, that was less than 1% of their US businessand.com.
And they're like, this is going to put us in the, you know, the
hot seat with regulators that we have 99% of the other business
that that's at risk. And they're like, this is just
not worth it. And I mean, you would think a
major company like Phillip Morris would be on top of that,
but I think it's a lot easier for for things to fall through
the cracks. So, you know, they were, yeah, I
guess breaking the law. Yeah.
Well, it it almost seemed in that instance that I if I recall
correctly, they had outsourced the fulfillment or something
like that, right? Yeah, it says Scandinavian
tobacco. Yeah.
So it's like not a big enough part of their business to really
have the eye on the ball. And then it created like a real
headache. Yeah, yeah.
I just think it, it show that it was not worth it, you know, at
all. Anything like VL +2.
They don't have a direct to consumer website in the USI
think ever since the jewel scandal, you know, with Altria,
the the major manufacturers don't want to be seen being too
aggressive with, with consumers and marketing.
And and so they've really been cautious on on building up the,
the DTC part of the business. And I think that's, that's been
one of the bigger questions I've gotten.
Like why isn't like DTCA bigger thing or why is that not a huge
threat to to Hapes business? I really think that's a major
part of it that that could change one day.
So you know that Sam got the 20 marketing grand orders and you
know, maybe, you know, a couple years down the line that they
feel more comfortable again to take a swing at it, but I think
it's really not worth it for them.
Do you know when they're when they're purchasing, when HAPE is
purchasing from the big manufacturers?
Do you know, do they have like volume guarantees or do they
more have a, you know, if you buy whatever 10,000 boxes, you
get a discount. Like how, how does the, I guess
what's the incentive for the manufacturers to give them like
a, a discount relative to what retail pays?
And how does that relationship between the two work?
Yeah, so I think there's sort of annual agreement.
So I think there's volume discounts.
So if they hit a a certain level, you know, they'll they'll
get the product for a lower price.
I still think, you know, so, so HAPE says that the manufacturers
make a 15% higher product margin selling through HAPE rather than
wholesalers or distributors. You know, there's a single point
of delivery, no returns, no sales force.
Oh man. So it's just a clean hate buys
from them, you know, ships it to a hate facility.
So they do end up sort of making higher margins as well.
Be that that's simply how it works.
There's there's annual agreements to step up in volumes
will will cause sort of a a lower price for for hate.
And I view, you know, there HAPE is the largest sort of online
marketplace and like a, a space that is growing rapidly.
And so if you equate it to Amazon and your consumer
products company, like you could have ADT site where, where you
make all the margin, but are you really not going to be listed on
the, on the largest online marketplace, especially as the
space explodes? So I, I think the companies want
to work with HAPE. They, they want to be on there.
HAPE is a, it's a good compliant buyer.
You know, they have 100% age verification, they can track all
this, all this data. And I think they view them as a,
you know, symbiotic kind of partner.
There's a few examples of where to steal Simeon Siegel's saying
DTC isn't all it's cracked up to be, so letting somebody else
deal with the customer acquisition can be a a pretty
beneficial and symbiotic relationship, right?
Something I think it's kind of funny, funny because it's
nicotine that we're talking about, but at least as it
pertains to pouches, you've got far lower incidences of cancer
related from nicotine. Online is cheaper for consumers.
The relationship with the manufacturers is arguably better
through HAPE. It's like kind of a win win, win
business here, huh? Thank you all for listening.
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Yeah, that's, that's what I was saying.
It's I haven't seen a business, you know, in my long career
where everyone's benefits so greatly from their existence.
Are your dad this? Are you like dad?
This is like the ultimate win, win, win.
I I've tried to get him to to buy we're still working on him
but. Yeah.
What's his objections? Well, I don't know that you need
to speak for him, but he no, I think he'd let you.
Yeah, it's small, you know, it's foreign listed.
I think there's, you know, he has some other ideas he's really
excited about. As Bob always says, I I like
your kids, but I like mine a lot better, you know?
Well, I thought, I thought it was a very nice compliment that
Bob paid you when we were hanging out and he said.
Yeah, that was nice. And that's where we came up with
the the phrase. It's the the Nat gas and
nicotine. So that's exactly right.
The Nat gas and nicotine indeed. Yeah, that was bring that back
up. Yeah, I forgot about that one.
That's your podcast title right there.
That's yeah, that's right. That was yeah, that is how.
Yeah. Nat gas.
That's great. All right.
Where were we? Regulatory fears?
OK, why does this? Why?
Why are we not going to get regulated out of existence here?
Yeah. So I I would say the US business
looks good. You had the new administration
right there versus the menthol ban.
There's, you know, things like the overturning of the Chevron
Act, the sort of signalling very positive approach to the space
if the FDA approves excuses in two major things.
They said that Zen was fully getting people off other more
harmful and the tobacco and nicotine and they were staying
on Zen as a single use product. And then youth uptake.
So I think there's a survey in 24 where I think it was under 2%
of high schoolers in the past 30 days and try to pouch where is
the height of the vaping epidemic in 2019 it was close to
like 30%. So you're really not getting
that. And then if you, if you go in
the MGO itself, it actually does mention digital or online sales
as well as digital advertising. So it sets a precedent and sort
of allows the online business to exist, which I which I thought
was which huge, they've set a precedent for the, for the
industry at large. I don't think you'll see any
federal ban or anything like that on online.
I think there will be different state level restrictions.
I think that is a risk if you know, a bunch of states kind of
ban online or, or make it difficult, you know, and the big
part of the US market is is non accessible to to hate.
But I think in in the US at least the regulatory business
looks good. And, and I know they have tons
of data on showing like, you know, with the age verification
process, you know how it's much cleaner, you know, easier to
track better system for preventing underage use.
And so I think, you know, the, the regulators are, are starting
to understand that the other big thing is the EU, which makes me
a little more nervous, you know, because we, we know the, the,
you can, can sometimes not be entirely rational.
They have this thing called TPD 3 coming up to buy tobacco
product directive. So they, every few years they,
they go through this and kind of regulate a, you know, a bunch of
new tobacco products, change excise taxes, different things
like that. So Hape thinks they'll end up
leaving the decision to individual countries.
And so they'll implement in a form standards like caps on
strengths and marketing restrictions, but they'll leave
it up to each member state, which is good.
I think only two countries so far have successfully banned
them and those are in the courts and a whole host of them if
legalize and tax nicotine pouches.
So I do think the regulatory situation, if you asked me a
year ago, I'd say it's a lot more unclear than it is now.
So yeah, that's, I think it looks pretty good.
We won't get movement in the EU for a while.
The big Gray area there is Germany.
So Germany has a ban on brick and mortar sales, but allows
online sales. And so something to look forward
to with, you know, the new, more Conservative government there.
They, they think they'll legalize and, and tax the the
product eventually. And if they can do that before
this TPD three, you know, that will create a lot more political
weight. But, but I, I think it looks
good. And I think that's part of the
reason HAPE is starting to go all out on the US opportunity.
So they've had a major expansion to hiring right there.
You know, they fully automated their their Houston warehouse
that they're spending a lot of money and I think they're seeing
a sea change on the regulatory front.
You know, there's sort of increasing product
fragmentation, which they're hoping for and they cease
product category just, you know, doing really well.
And so I think that was the, the regulatory sea changes, the last
catalyst that they needed. But I think across the board it
looks pretty good. I think there'll be some wins,
there'll be some losses, but in the end, you know, it'll be
legal for, you know, most of the US and then most of the EU for,
for, you know, 5 to 10 years. It's interesting that Germany
allowed online sales but not brick and mortar.
Yeah, it's a de facto ban. It's I know it's in the court
system. It's this weird.
It's, I think it's regulated as a food product.
It's, it's a weird middle ground.
But that's like a €30 billion nicotine market.
And you know, our peas are still maybe mid single digits and
pouches are a tiny fraction of that, so almost non existent.
So they they, they really big opportunities in Europe and
there's countries like, you know, France, Spain, Italy that
are heavy cigarette countries with with no pouch markets and
and very small RP markets. So yeah, I think the opportunity
there should be big. Doesn't make any sense how you
would have nicotine users and say you can't have pouches like
that. Flies in the face of anything
rational. I know France tried to ban them
and they have the high smoking 20 high 20% of the adult
population smokes and they're like trying to ban nicotine
pouches. It's sort of insane.
Yeah, I mean, I I get that you don't want kids to OK, So if
your kids, you have kids, Fast forward, they are chewing on a
pouch. Are you upset with them, or are
you moderately OK with it, given the fact that somebody's bound
to have a vice at some point, at least some people are.
I guess depends how old they are.
Yeah, you don't want them to be 11.
Yeah, but I mean, if they're in high school, you know, I think,
I don't know, I, I think you could try to ban away the, the
category, but kids will always, you know, look for stimulants
and, you know, different things and, you know, making sure that
we have the, the healthiest options.
I I'd be a little upset. But if they're 1718, I'd be
like, yeah, whatever. They'll, they'll learn.
I wonder, I mean, look, I don't, I don't want sometimes my kids
listen to this podcast. I doubt they'd make it whatever
39 minutes in, but if they do hear this, but wait until you're
in college. That said, I see these kids
sucking down Celsius. I don't think that's
particularly great for a child. I don't know which is worse.
Like I have no idea. I I I bet Celsius is much worse.
Right. Yeah, I kind of think so too.
It's like nicotine fully isolated, right?
Without any, you know, whatever byproducts Is it, is it just
like a natural stimulant like caffeine?
So, you know, that could, I guess getting more clarity on
that could, can really change how we think about the, the
product space. And I, you know, I think people,
you know, are starting to think that way, too.
Yeah, well, Huberman's doing his best.
Yeah, yeah. There's that whole, yeah, that
whole sphere of, of people. But yeah, it is, you know, it's,
it's nature's Adderall in a sense.
Yeah. Now, when you pull up a stock
chart of this thing, it it's, it's, it's quite up and down,
largely up for the record, especially long term.
But what has been some of the roller coaster that that maybe?
Why have people gotten shaken out at times?
Yeah, it's sort of been a wild ride.
So basically in March of last year, you had Zinch.
In 2024, you had big Zin shortages in the market.
They'd actually preemptively bulked up on Zinch Supply, so
they're able to to sell while retailers were fully out of
stock. So they had a rush of new
customers. Business is doing well, but then
when he gets to the end of Q3 they they fully ran out as ends
and and basically have been out of stock since.
So reported numbers kind of don't look great right now.
I think at its peak, you know US and accounted for like 3/4 of
the US business. At the same time, there's an
ongoing lawsuit in San Francisco that HAPE and other
manufacturers are involved in. That's what happened last year.
You know, we, we think they'll settle and the, the, this week
grounds for the case to begin with.
But that was headache at the same time due to that and
different kind of state level restrictions and just
unregularities that they stopped sales in a bunch of states, So
California, Alabama, Washington, DC, Minnesota, Massachusetts and
I think a few others. And then they also stopped
selling all legacy tobacco products.
So you had a large chunk of the business go away and I, you
know, I think that was a much bigger concern a year ago, but I
think now we have some more clarity regarding what's going
to happen there. Last year you also had, you
know, they, they lost their snooze license in Sweden to sell
the legacy tobacco products by the municipality that granted it
to them. They actually lowered that.
So I think like a month or two ago they they undid that
revoking and now it's just a warning.
Why they lose it? They cited incomplete age
verification at point of delivery.
Since then HAPE has implemented that, but it's it's hard because
if you're in northern Sweden and you have to rely on a third
party logistics company to age check someone at point of
delivery, it could be difficult. So I think that was some of the.
Reason their ass off while they're delivering it and they
got. Yeah, right.
So I think that was some of the some of the gap there, but they
they lowered that to a warning status.
So that's no longer a concern. And yeah, I think that's what's
been going on. Purported numbers don't don't
look great, but they've singled this and you know, I think the
big thing to look forward to and you know is, is USN coming back.
So they guided they expect that to happen in the in the
second-half of this year. I think they're still working on
some of the kinks with that as it falls under the MGO for
requirements what not. But if that happens, you should
see a large chunk of the business come back.
I think at the end of Q3, USN is about 6% of group volume at its
peak. I think it was closer to like a
mid teens percent of the business revenue wise.
So that's obviously a major thing.
But now that the supply situation is fixed, you know, I
think we should expect that to to come back.
And so the, the markets knows that, but you know, obviously it
coming back is a is a definite thing and you know the
uncertainties sort of longer there, you know.
What, 6 to 10 months ago it didn't know it, now it does.
Yeah, this is when I should have listened to you.
Yeah, so we'll we'll, we'll see. It'll it'll be a major, major
event for them. Yeah.
Huh. So how do you think, I mean this
is the stock has had such a good run, you are a value investing
shop. This I would not classify as a
traditional value investment though I I will not argue that
it is a value investment. I just don't think it fits a
style box that a value firm would would typically hold it.
So how do you think about the valuation?
Yeah, I mean, to be fair, I, I bug, you know the crap out of
Bob for for a long time. He's like, all right, I'll just
buy it, make you happy. But I mean, when we did find it,
the the valuation was very cheap.
So I think it was if you'd sort of zeroed out losses from the
growth markets business, a core Scandinavian business was 7-8
times EBITDA and then you had this growth markets inflecting.
So I, I'd argue it was a deep value kind of, you know, price
there it's a bit more expensive now on trailing numbers.
So you know, last 12 months ending June 30th, they did about
3.7 billion kroners in revenue, 640 million in, in gross profit,
about 236 in Adjusted EBITDA and about 100 million normalized
earnings. So you got like a 4.4 billion
kroner enterprise value market cap.
You know, they're, they're about 18 1/2 trailing EBITDA and 40
times gap earnings. They have this emerging segment,
so that's vaping and heat not burn in existing geographies.
If you add back the losses from that, you know, hate generated
roughly 280 million kroners in EBITDA on their core nicotine
pouch business. So you know, it's about 16 times
trailing EBITDA of the of the core business.
You know, it's, you obviously want to look at a few years on,
on trailing numbers. It's, it's, it's not that cheap.
There's anyways to to think about it.
It did release guidance. So, they guided towards the net
sales CAGR of 18 to 25% through 2028, adjusted.
Why does that make sense? Because, you know, you hear that
and you say, well, what about the base rates of businesses
this size and how can they possibly get there?
Yeah. So I mean the the market as a
whole in their existing geographies is, you know, slated
to grow about 20%. Now that's including
Scandinavia. So in Scandinavia, it's a much
more mature market. I think they actually broke it
down in their, in their capital markets day that like, you know,
the, the Scandinavian business was going to grow 5 to 9% and
then I think the growth markets business was going to grow like
35 to 45%. And so in, in the growth
markets, you know, kind of the, the category as a whole is
slated to grow. I mean there's different
studies, but you know, mid 20% to mid 30%.
And so they've sort of guided to the high end of the predictions
on the category as a whole to 45%.
So they they should grow at a minimum with the category.
And because online penetration sort of increases over time,
they should most likely grow in excess of that exception of of
Scandinavia because that's much more of a mature market.
So I think they guided 5 to 9% top top line growth in that
through through 2028. But you take that blinded
approach 5 to 9% core, you know 35 to 45% growth markets, which
is USUK, Germany, Austria, Switzerland and I think like 30
to 50% in their emerging kind of vape and HMB segment.
That's sort of how they arrived there.
That would put them in, you know revenue range is 7 to 9 billion
kroners with an EBITDA margin range of 6 to 8%.
So if he takes at the middle point of of that range, you know
they would generate about 560 million kroners in, in EBITDA
and trade roughly 8 * 2028 EBITDA taking the high end of
that revenue range and margin margin target, you get 6 1/2 *
28 numbers and then the low end about 11 times.
They've also guided to 1% of sales being the emerging
segments EBITDA loss. So adding that back and using
the, the midpoint of, of revenue and margin targets, you can get
sort of core nicotine pouch business for about 7 * 2028
EBITDA numbers. And you roughly think that's a
very attractive we're a few years out most of that so as to,
to free cash in a, in a mature state.
So they are, you know, spending a lot on quote, UN quote growth
CapEx. But looking at true normalized
owners earnings, I'd say that's a, it's a relatively good proxy
for, for free cash flow. CapEx typically runs around 1
1/2 to 2% of sales. This past year it was well over
3%, I think close to 3 1/2 because, you know, they're,
they're automating the Houston warehouse and, and sort of
overhauling their, their back end systems.
You, you could do some top down calculations too.
So their, their market nicotine powers, total value in their
current geographies is about 7.7 billion in, in 2024.
That grows 20% through 2028. So that gets about 16 billion.
You know, online penetration goes from 5% to 7 1/2% and you
assume HAPE is like 2/3 of the online market, which you know,
they have more. So you'd be a little
conservative. And that gets you to, you know,
8 billion kroners in revenue in 2028, so kind of the midpoint of
of their guidance. And then another thing is that
it's, you know, and I really like how it's kind of levered
bet on the US market at this point.
So in their base case assumption, they think the US
will be responsible for 65% of incremental revenue growth
through 2028. And they, they put out a great
slide in the capital market state where their revenue will
be in 28 based on different scenarios with the US business.
So in the US they they have 2 1/2% of the total market.
So including both offline and off online.
But by 2028, if the US market were to grow to 26% kegger and
they could get 5% of the total market, that would put them at 9
billion kroners in revenues. So at the high end of that
range. And I mean I I not a.
Huge market share, man. No, no, I like 5.
Percent is not crazy at all. The total market that's of a
yeah, 6 something billion market today, but yeah, it's.
Like one of those setups where there could be actually like a
truly long duration for growth here if e-commerce penetration
in this market follows other types of markets, right?
Yeah. I mean, it won't get to like 30
something percent like Sweden. I just think we're so big, the
big driving car, gas station culture, which is a part of it.
But at the same time they they've done studies.
There's extremely low brand awareness in the US, so people
really don't know the online market exists.
And so I think now that the regulatory situation is more
clear, they're going to be a lot more aggressive on marketing
let. Inflation run like it has been.
People might be looking for savings.
Right, Yeah, it's a counter cyclical business, so maybe a
light recession would help them. They're going my.
Mom, my mom smoked her whole life, and I was like, look, this
is ridiculous. Like, you need to get on Zen.
Yeah, she doesn't love having a pouch in her mouth, but I'm
like, well, you're not going to love getting your gums cut out
or dying of lung cancer either. Damned if you if you don't that.
That I'm certain of, right? Yeah, well, it's, it's
interesting even in in Scandinavia they have for they
use the tobacco base pouches. They have the lowest cancel rate
cancer rates in Europe too. Yeah, yeah.
So just across the board kind of all smoking related illness and
there's a lot of, you know, studies on on that traditional
snooze. And like, I think it's generally
accepted. It's like less than 5% of the
harm of a cigarette in terms like all 'cause mortality over,
you know, I don't know how many years, but so I'd imagine the
white pouch stuff is, is miles better than even that.
So what's the beef? The beef is, it's flavored and
therefore you're arguably selling to children and
therefore we should try to come down on it and not allow that to
happen, right? Yeah, the beef is that like, for
whatever reason, I guess the government really doesn't like
nicotine and especially young kids getting hooked on it.
I mean, marijuana is OK and we can legalize that and all that.
Some states, some states. So it's not federal?
Yeah, yeah, yeah, I'm, I'm, I'm just teasing, but.
Booze is OK. This is the one that's the head
scratcher. That's a whole another podcast,
yeah. Why is alcohol so ingrained and
OK but but I think people always associated nicotine with cancer
because of cigarettes and that's just not the case.
It's not what's causing cancer at all.
It's not known as a carcinogen. It's on the FDA website.
Yeah, it turns out that when you burn something and smoke it,
that's when it's not good for you.
Yeah, tends tends not to be. Yeah.
Well, I don't know. I think it's, I think it's
interesting. I mean the, the what are the
what are the push backs that you get obviously the DTC one.
Do you get why can't Amazon integrate into this ever?
Yeah. OK what are the other big ones?
Like how did how did? If you were to pre mortem it,
how would you kill this idea? I mean, I've thought a lot about
it and one of the big reasons why I like it so much is I think
it's very hard to kill. And I think they're right.
They're they're providing great benefit to the, the consumer and
the manufacturers. And I've got like, why won't the
big manufacturers go DTC and kill the business?
And I just don't think it's realistic.
Hate us. Also, they do under 400 million
in revenue trailing and Philip Morris is 40 billion.
They really don't view them as some big sort of true global
competitor. Yeah, they're like the fish that
sucks on the shark. Yeah.
And I, I think the median insights piece is so important
because it's, it's really been data that's been impossible to
track. Like, you know, you can get,
it's like at retail, you know, you can get scanned data from
Reuters and stuff, but you can't get like specific data down to
the individual customer and demographic.
And I, I think it's really creating service business or
company for the big, you know, manufacturers where they've
never been able to, to capture this data at such a granular,
like specific level. So I, I really think that's a
revolutionary product. So they like hate, they have
great relationships with hate. They're constantly working with
them, you know, the, the new product and trials and, and all
that. So they have a great symbiotic
relationship. The consumer loves hate because
of, you know, the price, the assortment, the convenience and
all that. I think a big push back I get
is, oh, this is just a normal regular e-commerce business.
Like can anyone come in? It's nothing seems that
proprietary or special about it. But like I always say, I try to
get a call with management, try to really understand the
dynamics of this business and why it's so hard to replicate.
The basic fact is you can't acquire customers like across
the board, you know, 97% is organic and like they would not
be able to have those market shares that they do if like it
was so easy to, to acquire customers.
And HAPE is very smart about having multiple different
websites and URLs and, and trying to get the bulk of that
traffic. You know, like, even with LMS,
like they're very on top of it. They have a whole team dedicated
to LMS. And basically what they're doing
now is like sending as much research as they can to academia
and like legit media institutions and try to get like
mentioned in articles and academic papers.
So the LMS pick that up and like you, HAPE is a credible source.
So they're, they're very on top of this stuff.
The, the thing that could kill it is regulatory.
You know, I don't think it'll kill, kill it.
You know, I don't think the US federally can do anything.
I think the EU doesn't have the political power anymore to ban
the space even if they wanted to.
So I think similar in the EU and the USI think certain countries
in certain states will ban it, but you won't get any widespread
sort of ban at all. And so I it, it really is very
defensible business. And, and they've done an
extremely great job. And it's really hard to know how
long the the runway is, is one of my favorite parts of the
story. I mean, they're starting of, of,
of such a good base. Like online penetration is so
low. Nicotine pouch penetration is so
low. RP penetration is, is so low.
The RP market in the USI think pouches are like quarter of it.
Like in EU and the UK, they're low single digits in Germany,
they're small fraction of it. They're they're 10 times the
amount of smokers in the US then pouch users, right?
Countries like Germany is a $30 billion annual nicotine market
with with no pouch or RP penetration.
Another interesting thing too is in the USI think the average
consumer has two to three pouches a day.
In Sweden it's 10:50 pouches per day.
It's like even with the existing customer base or for not grow it
at all and we can get to surge rates of consumption in Sweden
like the market could triple. So I really.
Don't know anyone that only does 2 pouches a day.
Exactly. Maybe the numbers are are are
not accurate but or maybe we just can.
Do 2 pouches an hour. We hang with a bunch of
degenerates. That's probably when.
It is. It's possible?
It's possible. Most normal people are are doing
two to three. Yeah.
But it's it I think, I think we're in the the first ending of
this stuff. And yeah, you think 20-30 years
out, like, what percent of the population is still smoking at
least? And, you know, sort of developed
Western. Well I hope none right?
I mean that's the thing that I think is so crazy about trying
to ban. I know I've said it now like
twice but or maybe 3 times but I just think it's insane to try to
to ban it. Yeah, yeah.
And I mean, a bunch of data is coming out.
You know, I think, I think it's going to be really hard to to
successfully do that. I know France, I tried to ban it
and then Sweden blocked it under like some EU sort of, you know,
free market law or something like that.
So there's this whole sort of stand off going on.
So it'll it'll be interesting. I think it'll be very difficult
for for countries to to end up doing that, especially as kind
of more data comes out. Yeah, I mean, look, I get like
wanting some utopia where people don't use vices, but that utopia
doesn't exist. And I kind of think this, I
don't actually equate this to subprime lending at all, but I I
kind of think it's got something that rhymes and that like, yeah,
it'd be great if it didn't exist.
But given that it exists, what's the best way to do it, right?
And and how How can we provide people with what they want and
have the least amount of harm while doing so is a a more
appropriate question to ask in my opinion.
Yeah, and I, I mean, I, I think, and I hope it'll, it'll be
viewed more like caffeine, just like a, a normal stimulant.
You know, I think molecularly they're like relatively similar.
And you know, we, we sell caffeine everywhere.
There's all these, you know, drug stores that sell caffeine
and liquid form and no one bats an eye.
So, you know, I think they're, they're not too dissimilar.
And dissociating nicotine with cigarette smoking.
Nicotine hits me different, man. Every time I've done one of
those things, my knees get a little wobbly.
Yeah. What we we gave you the Swedish
products and and Marcal. That was sort of, Yeah.
No, I know. Yeah.
Well, but it's more, it's more than just you guys.
I mean, I've tried it a decent amount of times.
It's just, it's not really my thing, but yeah.
Yeah. Well, the bar, yeah, that was
also we were enjoying ourselves after hours, so it was probably
not the combination was not the smartest thing in the world, but
yeah, got to, got to let, let go sometimes, I think.
Yeah, so. I I got a question for you, not
hate related. So I have I, I don't, I don't
want to represent that I talk to your dad a lot.
But when we do chat, I really. Like that I feel as though he's
pushing me to think longer on businesses.
And as I've gotten to know Bob better, I like how I don't.
I don't think it's just marketing.
I I believe that it is truth that he looks for growth assets
in that their cyclicals coming out of bottoms.
And I'm kind of curious how having those two people in your
life has shaped you as an investor.
Yeah. Well, for the record, I always
tell Bob, he's a growth investor and he just so happens to
traffic and so. He so he stole your thing.
Because that's. What he started to say about
himself in the past two years. Well, it's It's unclear who came
up with the term first, but. OK, well, we'll give it to you.
And this particular podcast, we'll say it's you.
Yeah. So that's, yeah, that's a good
question. So my my dad actually worked for
Bob. So I think part of, you know,
his upbringing was influenced by Bob, you know, although we, we
traffic in different industries, Bob and I, he really, I, I think
being on calls with him and, and seeing the way he asked
questions really helps. And, and regardless evaluation
or what business is in a, he's trying to get to really know
management and understand the team and all that.
That's big. And then BI think, you know, how
the business works, How defensible is their position?
I, I think one of the things that got him around on HAPE is
that like, if you want to get in this business, like you can't,
it's very difficult. So, you know, something that's
very hard to replicate and really thinking of that.
And I think understanding all the qualitative aspects, you
know, we, we don't have a Porter's five horses list, but
understanding who they're dealing with, the customers, the
suppliers, the relationships with both power dynamics and
it's really coming up with a fundamental thesis.
And then my dad is he, he, he views similar, you know, he, he,
I guess, right. He, he grew up with Bob and, and
you know, kind of learned from him.
So he's a similar approach. I'd agree with you.
I think he thinks very long term and, and you know, 10/15/20
years out and in sort of you know, like with this Remitly
like, you know, kind of looking at remittances and you know,
digital or online penetration there is so low and looking way,
way out into the future. And I think they, they both sort
of helped me kind of really take a long term perspective.
And I think that that helped a lot.
And, you know, helps you filter out the, the noise and, and
day-to-day movements of things and, and really focusing on five
to 10 years out. So I got our holding period is,
you know, probably one of the, the, the longest in the, in the
industry, everybody. So he he holds things forever
and it takes a very long term approach.
Yeah, yeah, Your dad on the Uber call, he called that.
I mean, I don't know exactly when he got loud about it and
whatever, but that, that was a cyclical long term, sort of like
winner and a sickler or a cyclical downturn.
And that was, that was very smart.
I I think he pitched that at Markel in like 21 or 22,
probably 22, but yeah, 22. But yeah, I there, there are
two. I, I love, I don't know, I love
listening to both of them talk because I think it's interesting
when you get like, like I, I feel like the pushback from the
value investor community at large on something like hate
would be how can you spend that on a like on a distribution
business? Don't you understand the
valuation matters, yadda, yadda, yadda.
But the ability to believe in the growth and to see 5, three
to five years out. I mean, if, if it is true that
the and market grows at 3025 to 30% and if it is true that
margins have uplift here, it's not too hard to see that this is
not an expensive stock, right? Yeah.
And they should, you know, in theory grow in excess of of the
market and the in the growth market.
And that's. Something we talked about have
they been in the past? Because that's.
That was hard for me to verify and I had and I had written you,
so maybe do you mind talking about that a little bit?
Yeah, they have. So I, I told you in this last
quarter, right, they had that, you know, they had the tough
comparables, right, because they lost the the Zen business in a
bunch of those states. So like reported growth in the
growth markets saw 26% decrease, but can't the like for like
business not including US Zen and States and US tobacco
products that growth markets business so that the rest of the
US business, UK, Germany, Austria, Switzerland grew like
49%. And that's been, you know,
growing like that for a while. I mean, when I first found it,
the growth markets business grew I think 70% year on year, maybe
in 2022 or 2023. The core markets has always been
slower because the business has just been, you know, around in
Scandinavia for a while. The growth markets has slowed.
So it's gone from like 60 to 70%, you know, to high 40s, kind
of low 50s, but you know, they have they're they're growing
with the the category and that in excess of that is reliance
thataly take share. There you have it.
Yeah, because I was trying to, I was trying to verify that just
like based on the data and I was like, I don't know.
So that's that's the answer behind the data.
Yeah. But I mean they're, they're
getting huge surgeon improvement.
So I mean, even though you know, revenue kind of total was down I
think 2.3% last quarter, I think EBITDA grew 20 something
percent. They're really getting the
benefits of scale on their, in their core markets.
The median insights piece helps and then a better product mix
because they make a higher margin on on white pouches for
Succeed tobacco products. And then I think there's a 500%
uplift in gross margin year over year as well.
You know, looking at Q225 versus Q224, part of that is USN going
away where they, you know, they made a much lower product margin
on that. But I mean they're really
stepping out margin wise. And if you can, you know, double
or triple the revenue base in a couple of years in addition to
the margin uplift, you know it'll, it'll, it'll likely turn
out to be very cheap today. How closely do you watch asset
turns? Not, not too closely.
They turn, you know, it's a, it's a, it's a very good
business. So I think they, they turn the
warehouse fully, you know, every two to three weeks.
So I think they're another inventory turn is like 1213
times. Yeah, that's wild.
Yeah. So there's, there's not, you
know, sometimes they'll preemptively bulk up on, on
inventory if there's expected inbound price increases.
But beyond that, right, they're pretty consistent in buying, you
know, their, their products kind of every two to three weeks.
The the business came about as a series of mergers, right?
Like it's a roll up. Yeah, so the IT was, it was
started in in 2008 like out of a garage in Stockholm.
You know, in in 2017, the CEO, current CEO join 2018, they
bought the biggest player in Norway. 2019 is the big merger
with his company called the Northerner.
So they own the two big US websites.
And then they had some legacy sites in Europe.
In 2021, they bought the number two and three players in Sweden.
And so you know that it's a culmination of, you know, kind.
Of and that's why they went public, right, was to get that.
Part of the financing, yeah, Yeah.
And I do think that it could be part of the strategy at some
point, like let's say that you get to a more more mature state.
There are tons of websites that have like these little niche
positions. Maybe it's a vaping website in
Germany or the UK, you know, they could bolt it on and, you
know, get rid of good employees and overlay distribution and,
you know, double earnings power. So I do think that's a, you
know, potential part of the strategy at one point.
I was also intrigued by the the slide in the capital markets
day. I'd I'd think I'm probably over
indexing on AI stuff like the whole world is right now.
But I thought it was interesting how they seem to have a chat bot
that like creates the copy for numerous websites via AI and
what not, which you would think presumably like that's the type
of thing that could help is sort of solidify an advantage, right?
I mean, I don't think it's like some really, really hard thing
to replicate, but if you have some proprietary data combined
with that, it's like solid. Yeah.
And I know they're, they're really trying to spend a lot of
time and effort on optimizing everything and, you know, using
AI for their, you know, website landing pages.
And you know, now they're, they're going to use AI to have
tailored recommendations per individual customer.
Because like if you, if you log in, they have all this data on
you, they know who you are. And so they're getting into the
advance with that. And then I know they're doing
that with the media and insights as well.
Oops they ever need to re rate. They can be hape dot AI and then
do like an etherium treasury strategy and then the moon goes
straight to the moon. Yeah, yeah, I would be upset at
that. That's going to be It's an
interesting world we live in, my friend, An interesting world.
Yeah, I do think it's an AI beneficiary with, you know, if
everything goes to LLMS, you know that they they think it'll
be a winner takes all model and just the largest player.
You know, they'll yeah, maybe it'll spit out two to three
websites and, you know, maybe all three are hey for two to
three of them. So they think they're as well
positioned. Some people view it as a risk,
but I I think they stand to benefit.
Yeah. Well, you would think that to
the extent that it gets harder to discover things, the current
winners may may have their, you know, become more entrenched,
right? Yeah, yes, that's there.
We can throw it in an AI like winners factor.
There you go. I deserves to be there.
There you go. That's huge.
That's sort of like, yeah, that's two turns right there.
Yeah, exactly. All right, well, thank you very
much for popping by and and discussing the idea.
I appreciate it. Not too many single stock ideas
on this pod, but this one I. No, thank you so much for having
me. It's it's been really fun.
And you know, I'd implore everyone to try really
understand why, why Hape's position is very defensible and
you know why the market shares are so high.
And I will say, I think management is great.
You know, they own stock, everyone has history in the
pouch base and I think they, this really got us comfortable
owning HAPE as well. So, you know, if you if you can
talk to them, I definitely recommend that too.
And if you can kill the idea, reach out to Spencer, tell him
why he's. Wrong.
Please do, yeah. Yeah, there you go.
All right, man. Well, take care of yourself.
Thanks for stopping by. Thanks so much, I owe you a
pouch next time I see you. There, all right, have a good
one. See you.
None. The.