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 interface of Fiscal AIA, new sponsor of the show, but not really so new because going back in the day, my man Braden sponsored me when it was stratosphere dot IO. So anyway, Fiscal AI, you can see if you're on YouTube or if you're looking at the Spotify machine.
It's got a very, very slick interface here. And you know, I've, I've dealt with Braden for a long time. Fiscal AI is the complete modern data terminal for global equities. The Fiscal AI platform combines a powerful user experience with all the financial data capabilities that professional investors need. Users get up to 20 years of historical financials for all stocks globally that they can easily chart, compare, or export
into their own models. And unlike legacy data terminals where it can take hours or even days, fiscal AIS data is updated within minutes of earnings reports. They do it through automated processes. The second that the filing hits the, you know, the wire, for lack of a better term, they update the financials. The the financials tab is very easy to understand. You click something like I'm clicking total revenues. You get the chart right above. Very intuitive product.
So they've got it all, you know, KP is financials, whatever you'd want. I use it. I was looking to cut down my expenses and this product has really helped. So if you use my affiliate link fiscal dot AI forward slash brew, you will automatically get 2 weeks off of fiscal Pro for free. And if you find that you want to upgrade, my link will get you 15% off paid plans. Again, that's fiscal dot AI brew. Only use that if you want to become the best analyst in the world.
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. I'm interrupting this program to remind you this episode is sponsored by Fiscal dot AI. Fiscal dot AI is the complete modern data terminal for global equities. The Fiscal dot AI platform combines a powerful user experience with all the financial data capabilities that
professional investors need. Users get up to 20 years of historical financials for all stocks globally that they can easily chart, compare, or export into their own models. And unlike legacy data terminals where it can take hours or even days, Fiscal dot AI data is updated within minutes of earnings reports. Fiscal dot AI also tracks all companies specific segment and KPI data, so you don't have to. You want to look at Amazon's cloud revenue, They got it. How about Spotify's premium Subs?
They got that. Google's paid quarterly clicks. They got that bang. This is all you need to become your full self as an analyst. If you have this and you don't become your full self, that's on you. That's not on them anyway. If you use my affiliate link fiscal dot AI forward slash brew, you will automatically get 2 weeks of Fiscal Pro for free. And if you find that you want to upgrade, my link will get you 15% off any paid plans. Again, that's fiscal dot AI forward slash brew.
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.