Haypp Group AB (publ)

Good morning everybody and welcome to our Q1 2024 interim results. Starting with the operational highlights, I would like to begin with our nicotine patch first quarter volume growth of 40%, which remains robust despite Easter falling in the first quarter. If we run our NP volume performance, out to year-to-date end of April, i.e. reflecting the Easter effect in both years, you can see that our NP performance accelerated to 42% over that four months. NP accounted for 58% of our total volumes for the year, up 12 percentage points versus the first quarter of 2023. And the trend continues, and our NP share was over 60% in March. We're particularly happy with the continued strong performance for NP in our growth division, which has also moved into profitability for the first time. The snooze category moved into overall decline, overall market decline during 2023, and this is expected to continue for the foreseeable future. These changing dynamics have reduced the brand owner's appetite to invest in either new snooze launches or snooze promotions. Our consumers greatly value our ability to display new products and our competitive prices. The absence of both has resulted in a decline in our snus sales slightly faster than that of the overall market. While snus is not a strategically important long-term category for us, we have taken some actions to bring our decline back in line with the market. The increase in our EBIT margin from 2.3% to 3.5% reflects the benefits of scale throughout our business, particularly in our growth markets. This 3.5 percentage points includes an additional 0.8 percentage points, which has been reinvested into emerging opportunities. And our infrastructure transformation continues on track and will be key to our effective continued expansion. Moving to the next slide and taking a look at our emerging market segment. In the capital market state, our primary is the fastest growing of the three produced product categories globally. And our existing markets currently account for the vast majority of total energy global volume. also recognize that only 4 million of the existing 100 million users of risk-reduced products are in our current target. This is why we plan to expand into adjacent RRP categories and new countries. We have first expanded into vape in some of our existing European markets, which covers an additional 6 million risk-reduced product consumers. While our existing infrastructure and skill set gives us a material boost, our granular understanding of the vape category and establishing organic search positions will require persistence over the coming years. We also appreciate the strong relationship between nicotine pouches and vape, with many NP consumers either previously been vapers or even still being dual users. Finally, we recognize that a wave of regulation regarding disposables is potentially on the horizon in Europe and may alter the landscape for the BAPE category. In general, we view this disruption as a long-term opportunity and shall dedicate our resources towards this opportunity with a clear appetite to have an economically sustainable slice of the market over the longer term. Moving along to our infrastructure improvements, We are building our total company infrastructure with the principles of sustaining growth in our current markets and ensuring efficient expansion into both adjacent categories and new geographies. We continue to make strong progress in this transformation. During Q1, we replaced our ERP and middleware in Sweden and growth Europe, bringing all of our European operations onto the destination architecture. This facilitates the migration of our e-commerce stores to V3, our upgraded system. In addition to the new launch of Vape Globe, the Vape Globe store in Germany in late 2013, we have also successfully migrated our first Norwegian store in recent weeks with minimal disruption. Moving on to our warehouse structure, we plan to automate our Texas warehouse in the latter part of 2024. This will harmonize our warehouse equipment and software, which is working efficiently in our European warehouses. In summary, the team are executing in line with our plans. Moving along to regulation, the new national regulatory initiatives in Sweden reinforces the principle of tobacco harm reduction. In addition, we support potential initiatives which could deter youth access, including restrictions on private persons, retailing products, and reinforcing product standards, which we at Hype Group have self-imposed many years ago. In Norway, there has been minimal movement on regulation, and we remain confident that Hype Group will not be negatively impacted by the potential regulation. In the US, the regulatory framework remains very stable, despite some recent concerns from a prominent senator. Youth consumption remains extremely low for nicotine patches. While the upcoming legislation is somewhat later than we initially expected, we generally welcome the legislation and believe that Hype Group is well positioned to benefit from it. At an EU level, TPD3 appears to be even further delayed. This has encouraged more member states to start to regulate NPs themselves. This continues to add even more weight towards appropriate category regulation at an EU level. With that, I will hand over to Peter for more depth on our commercial performance.

Good morning, everyone. Thank you, Gavin. Let me start with a financial overview on a group level. Let me start with sales. So overall, we reported a 12% sales growth on a group level and achieved 888 million SEC sales. If we exclude unfavorable currency impact, the growth would have been 13%. But there are three key elements which I would like to call out to give a bit of a color behind our sales performance. Gavin already mentioned Easter. So during holiday seasons, it's very typical for us to see a lower order intake. We experience this every time in the Christmas period, every year. That's the usual thing. And this year, because Easter was in March in 23, in 23, Eastern was in April, and now this year in March, we have to better look on year-to-date April performance. We already do have the preliminary sales numbers available, and looking at the year-to-date April sales performance is already at 17%, so we can see the correction in the April months. Then, a second important element to highlight here is the contribution, the sustained contribution of our gross market. We can see that those segments are contributing solidly to our overall growth. However, this quarter, the core market's contribution was lower than historically. And here comes the third part, which Gavin already mentioned, the decline in the smooth segment. If we look at our sales drivers, net sales drivers, then the nicotine pouch remains solid. However, the smooth decline bite heavily into our overall growth. With this, let me move to the profitability, because here I think we achieved a major step towards our long-term commitment of the targets we set down in our capital market base. So our gross margin for the quarter increased by 2.4%. This increase is predominantly driven by the annual commercial renegotiations, and typically such change happens only from Q4 to Q1, and throughout the year it's relatively stable. The margin improvement was partly reinvested into overheads, into new capabilities and capacity, particularly behind the new emerging market segment. And overall, this resulted in an adjusted EBIT of 3.5%, an increase of 1.2% from a 2.3% in Q1 2023. Important to highlight here that the core and growth markets EBITDA was at a 6.1%, 0.8% out of which was invested into the emerging markets. So the total group EBITDA was at a 5.6% with the depreciation resulting the 3.5% adjusted EBIT. I would like to also highlight you the cash flow performance from operating activities because we achieved 122 million SEC positive cash flow. This is a combination of lower inventory levels after year end, but also mainly driven by improved trading terms with our suppliers for the payables. We reported some exceptional costs in this quarter, and these are connected to the impairment of the retired equipment for the Stockholm warehouse, where in previous year we overhauled the entire infrastructure to improve capacity. Moving to the core markets, here the net sales increased by 2% in Q1. In constant currency, the increase was 3%. Again, year-to-date April is an important figure here to bear in mind because that increase is already at an 8% level. We are happy with our nicotine pouch sales performance, which remains strong, and grew 32% in the quarter and 34% year-to-date April. Based on our understanding, this growth is ahead of the market growth, so indicates that we are gaining share. The snooze performance, which was on the weekend in Q1, has to be seen also from a long-term perspective. We do not see the category as part of our long-term strategy. There are not enough innovations, products coming through from the suppliers, and there is a very low level of appetite to invest into the category by the brand owners whose focus is clearly shifted towards nicotine pouches. However, we recognize that the smooth category is not going to disappear completely. So we took actions to mitigate this decline, as Gavin already indicated. The adjusted EBITDA grew 6.5% to almost 54 million SEC and reaching 8.6% up by 0.4% versus last year. This is mainly attributable to a favorable mix impact within the categories. Moving to the gross market, let me start with the sales, which increased by 46%. Here, we saw strong performance across all markets, but especially in the US, where nicotine pouches grew by 59%. In the US, I would like to highlight California and the impact of California, because as we talked about a year ago when we announced the Q1 report, we highlighted that due to the flavor ban, Hydrop also benefited greatly from the increased consumer demand for products which were legally available by online retailers. However, we see that since then, many consumers reverted back using flavor-free nicotine pouches, which created a temporary headwind for Q1 for us. And this is what we evidently see in our sales in California. However, outside of California, we achieved 70% growth overall. EBITDA is another important element and a great milestone what we reached in the growth markets this quarter. From being a clear profit drag for the group, this quarter we resulted around the breakeven result, very slight positive adjusted EBITDA, which is clearly driven by the economies of scale, very partly offset by commercial investment. And obviously, there is a key role here for the annual commercial negotiations which had overall margin performance in this market segment. Last but not least, emerging markets. Here, financially speaking, there is not too much to say. These categories are in their infancy. So as you can see, we achieved an 8 million SEC sales and in overall we invested 7 million SEC on EBITDA level. This 7 million investment is mainly went into capacity and capability in specific parts of the organization, mainly in commercial search optimization and category management. At this stage, I believe that the success of this category is not to be seen through the financial KPIs, but more how we can build or sell positioning and progress in terms of customer acquisition within this segment. Let me move to the selected KPIs. I already told you about strong cash flow performance and strong EBITDA what we had. The combination of these two is resulting in a nice decrease in our net debt to adjusted EBITDA ratio, which is down to 0.8%. As I look ahead, I believe that our business model will allow us to maintain the capital-light structure and maintain our healthy balance sheet, so we are ready for the next phase of growth. With that, I give it back to you, Gavin. Thank you. Thank you.

Moving to our financial targets, we target $5 billion in revenue for 2025 from our core and growth markets. While we recognize that our Q1 overall revenue growth was well below what's required, we would also like to guide you to our overall nicotine patch growth of over 40% despite some one-off impacts, and that nicotine patches now accounts for over 60% of our sales. Continued strong performance in NP will continue to lift the overall revenue growth. Regarding profitability, we guide investors towards an adjusted EBIT for core and growth segments in the range of 5% to 7% in 2025. During Q1, our adjusted EBIT for these segments was 4.3%, an increase of two percentage points versus Q1 23. We would like to remind you that our operating model tends to reflect the benefits of scale as we transition from one calendar year into the next. As such, I expect early 2025 to be the next time when we experience a material uptake in our EBIT margin. Moving to our final slide, I would like to reflect the dynamics underpinning our continued performance. Our operating model is a substantial mode for our business, which in turn is built on robust processes and systems. However, our overall progress is a result of an excellent team and culture that they have fostered and their connection to our higher purpose of inspiring healthier enjoyment to millions. I would like to take this opportunity to thank the team for their commitment, dedication, and overall performance. And with that, I will hand over to the operator for questions.