Good morning, welcome to the Q4 2022 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star and zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star and two. Please note this event is being recorded. I would now like to turn the conference over to Gavin O'Dowd, CEO. Please go ahead, sir.
Thank you very much. Good morning and welcome everybody to Haypp Group's presentation of the interim report for the Q4 of 2022. Today we will walk you through a brief overview of our business and comments on the operational and financial performance for the Q4. The interim results and results presentation is available at the investor relations section of our corporate website. Presenting today, in addition to myself, is Svante Andersson, our CFO. Moving to slide three in our results presentation. Here we state our higher purpose of inspiring healthier enjoyment to millions, which is predominantly moving people from cigarettes to safer alternatives. That traditionally was snus, and in more recent years, nicotine pouches. Moving to slide four, we have a chart presenting the spectrum of nicotine products and their relative harm versus cigarettes.
Haypp Group's current focus on nicotine pouches and snus lies in the lower end of the spectrum. The scientific body of research around modern harm reduction alternatives to cigarettes has come a long way in recent years. In addition to nicotine pouches and snus, products such as tobacco heating devices and vaping are widely accepted as carrying a significantly lower level of harm than traditional cigarettes and other smoking products. On slide five, we can see the smoking rates across a range of European countries. Sorry. In slide five, we can see what smoking rates are like across a range of European countries. Sweden, with a strong tradition of oral nicotine, is below one-third of the European average of smoking rates. In Norway, where oral nicotine products were introduced some 20 years ago, smoking rates are at similarly low levels to Sweden.
On the right-hand side, we can see how smoking rates collapsed between 2005 and 2020 in Norway, especially among the younger part of the population. There is an almost perfect correlation between that and the uptake of nicotine pouches and snus among the same age groups. It is this impact on public health which we wish to bring to other countries. Turning to slide six, we can see the outlook for the market we laid out in 2021 in connection with our IPO, and we believe it is equally as valid today. We see a global market size for nicotine pouches and snus, which will increase from SEK 27 billion in 2020 to SEK 60 billion in 2025.
All of this growth is going to be delivered by nicotine pouches, which will increase from share from 30% again in 2020 to 80% in 2025. Since the market outlook was prepared, nicotine pouches has been tracking in line with our expected CAGR of 41% per annum. It is also worth noting that Haypp has been growing significantly faster. Due to the harm-reduced nature of this category, it carries lower excise taxes and hence there is quite a significant profit pool to be divided between manufacturers and retailers of circa SEK 48 billion. The category is very well suited for online, and we see online penetration increasing for every quarter that goes by, and we expect online to increase at healthy levels. Moving along to slide seven, we lay out the key factors behind the growth in nicotine pouches.
The primary driver is strong consumer demand for less harmful products, which is greatly supported by regulators in general, which are adopting a principle of harm reduction in their legislative approach to nicotine pouches. This in turn has led to significant investment in the category from the industry players. Both large tobacco companies and many credible new entries are driving innovation. These are the drivers for the growth which we see on the right-hand side. On slide eight, we have a picture of the competitive landscape for online in our category. While there is a significant number of players, many of whom come and go over time, they never reach the scale that we are at, and we are currently about 10x the size of our largest competitor online.
On slide nine, starting off with Sweden, we are continuing to grow market share within nicotine pouches. And as nicotine pouches continues to grow its share in the total market, our share of the Swedish market has lifted from 10 percentage points that we stated in 2020 up to the early to mid-teens. As discussed in previous earnings calls, we have struggled in Norway since the border and the duty-free channels reopened post-COVID and contracted the domestic market. However, we turned around the development in the Q4, we saw strong growth in the nicotine pouch volume, which brought our total volume growth in Norway into positive low single digits.
We estimate that our market share within the domestic market has been holding strong throughout 2022 and accelerated in the Q4, especially within nicotine pouches. In our growth markets in Europe and the U.S. We have invested to grow market share both within the online channel and within the total market during 2022, and we continue to do so in the Q4. Moving along to slide 10, you will see an overview of our logistics infrastructure. Convenience remains one of our key USPs, and the ability to offer our customers across the markets fast and reliable delivery sets us apart. We completed the first phase of our warehouse expansion plan in Q2, and we are now operating six warehouse locations across our core and growth markets. We have managed this expansion while continuing to maintain healthy inventory turnover of 15x in the past 12 months.
Furthermore, the warehouse expansion has led to improved consumer retention rates, which I will come back to in a moment. Having successfully completed the first phase during Q2, we have progressed to another phase where we are enhancing our infrastructure and back end. In addition to supporting scalable future growth in our current markets, it will also enable us to efficiently move into new markets. Moving along to the operational highlights of Q4 on slide 12, and starting with our performance in nicotine pouches. The growth in consumer demand for significantly less harmful nicotine products remains unabated and continues to gain support from regulators. As I touched upon in the earlier slides, effectively all growth for the combined nicotine pouch and snus category is coming from nicotine pouches. With this in mind, the nicotine pouch volume is our primary measure of growth.
In addition to the overall nicotine pouch category growth, Haypp continues to grow market share across all of our markets. Our nicotine pouch volume increased 42% year-on-year for the group, driven by solid growth across all geographies. Our stellar performance in the category in recent years is the result of relentless efforts and focus from our team, who I would like to take the opportunity to thank. Despite a turbulent environment with firstly COVID-19 and secondly, the terrible invasion of Ukraine and the effects of the macroeconomic environment, we have grown our nicotine pouch volume by 574% since the Q4 of 2019. Nicotine pouches now accounts for 44% of the group volume, and this compares to 36% in the Q4 of last year.
We continue to play a pivotal role in launching products in the nicotine pouch category, which in turn accelerates the migration from cigarettes. During Q4, 20% of our nicotine pouch volume relates to products which were launched in the past year. As I briefly mentioned earlier, our investment in three local fulfillment centers in the U.S. and the U.K. in the first half of 2022 have resulted in a material improvement in customer satisfaction and retention rates. While the relatively low volume in these warehouses initially means lower margins, the increase in volume is rapidly releasing benefits of scale and will support our EBITDA over time. With that, I'll pass the word over to Svante for comments on our financial performance.
Thank you, Gavin. With that, let's flip to page 13 and the financial overview for the group. We reported a net sales increase of 19% for the group in the Q4. In constant currency, the net sales increased by 15%. Effectively, all of the growth is attributable to our progress with the nicotine pouches, and we're recording solid growth rates for nicotine pouches across all markets, including Norway. The underlying trend of gradually increasing gross margin that we've seen throughout 2022 is driven by our performance with the nicotine pouches and the strength of our value chain position within the category. Our volume performance in the Q4 further amplified this trend, and we increased the gross margin by 3.1 percentage points to a higher than normal 13.9% gross margin.
Adjusted EBIT for the quarter grew by 36% versus last year and amounted to SEK 60 million, corresponding to an adjusted EBIT margin of 2.3%, up by 0.3 percentage points versus last year. The drivers behind the EBIT margin uplift is higher volume and gross margin, partially offset by higher adjusted OpEx from investments in the organization to support further growth. Our cash flow from operating activities during the period was negative SEK 32 million due to the planned temporary inventory buildup in Sweden ahead of the excise tax increase on snus on the 1st of January. Adjusting for the inventory buildup, underlying cash generation remains strong. Now turning to page 14 and zooming in on our core markets. Reported net sales for the segment grew by 12% during the quarter and amounted to SEK 565 million.
Our nicotine pouch volume grew substantially more at 41%, with both Sweden and Norway showing strong performance. In Sweden, the net sales for the quarter increased by 19%, driven by continued strong performance in the nicotine pouch category. In Norway, we saw results from our efforts turn around the previous negative trend, and net sales increased by 1% versus last year. On a sequential basis versus Q3, net sales increased by 20% in Norway after having seen declines sequentially in earlier quarters of 2022. The profitability for our core markets continues to increase, and on a full year basis, we generated SEK 174 million of EBITDA in the core markets. The EBITDA margin increased in the Q4 to 8.4%, up by 1.2 percentage points against last year.
This is showing the scalability in our business model and evidencing our ability to reach our long-term financial targets. The EBITDA margin increase in the quarter is mainly attributable to a higher growth margin, partially offset by OpEx investments. Moving on to our growth markets on page 15. Net sales increased here by 56% to SEK 136 million for the quarter on the back of strong performance across both the U.S. and Europe. EBITDA amounted to negative SEK 18 million versus negative SEK 15 million during the same period of last year as a result of continued commercial investment for growth. We continue to invest substantial resources into building strong market positions in these very significant consumer markets, and we have been gaining market shares throughout 2022.
We remain confident that with our current trajectory and market share gains, we will over time be able to deliver healthy profitability from the growth markets, which will support our trajectory towards the long-term financial targets. Lastly here on page 16, we have the selected KPIs. I would like to focus on the balance sheet in particular. In this uncertain macroeconomic environment, we are particularly pleased that our financial position continues to remain strong. We closed the year with a net working capital position of SEK 230 million, of which our inventory accounted for SEK 223 million as we built up stock before the anticipated excise tax increase in Sweden. The fast-moving nature of our products naturally implies high inventory turnover rates. We are already well on the way to have cleared out most of this excess inventory.
On the back of the inventory build, net debt increased at year-end to SEK 185 million, corresponding to a net debt to adjusted EBITDA ratio of 1.8, which we expect to revert down as the inventory is cleared during Q1. With that, I'll hand the word back to Gavin.
Thank you, Svante. Moving on to slide 18. We reiterate our long-term targets of SEK 5 billion net sales by 2025, predominantly through organic growth. We also reiterate our profit target of high single-digit adjusted EBIT over the medium to long term. As you have seen from Svante's material, we are already rapidly closing on this target in our core markets. Due to the growth potential of the category, the board does not intend to issue any dividend in the foreseeable future, and instead utilize our strong cash generation and robust balance sheet to accelerate growth. On slide 19, we highlight the potential which we see for the overall category growth, and also the potential for online to take a larger share of that category, given how suitable the characteristics of the category are for online.
We also reiterate our market-leading positions in all of our key markets. Moving along to slide 20 and our current trading. Overall, market trends for the oral nicotine category remains favorable, and we continue the transition of our business into a nicotine pouch into the nicotine pouch category. On top of that, the online channel continues to grow relevance within the category. In terms of inflationary pressure on inbound costs, we reiterate our previous guidance that inflationary pressure on our cost base remains limited. Given the non-cyclical characteristics of the category, we remain confident that any additional inflationary pressure can be passed on. Looking ahead, we continue to see a solid performance in our nicotine pouch growth. The successful turnaround in Norway creates a solid platform for profitable growth in core markets.
Performance has remained strong despite challenging comparables from the final COVID lockdown during the first weeks of 2022. The strong momentum we have in our growth markets is sustained as we continue to gain share in the total market. Following the flavor ban in California, we have seen an initial uplift in our performance, but we remain conscious that it is still early days and consumers are still settling into the new environment. Given the continued strong performance of both the category and the channel, we have further strengthened our capabilities in key strategic areas. We believe this is broadly sufficient to achieve our medium-term growth ambitions. Our capabilities to attract new customers and retain them with our offer hinged around convenience, assortment, and price continues to perform well in the current macroeconomic environment.
We are on track with our plans to enhance our digital infrastructure, including our back end, enabling further growth opportunities and releasing benefits of scale. Lastly, we are very well-positioned for the current complex environment for consumers. With a strong balance sheet, a non-cyclical product, and a capitalized business model, we are able to remain flexible and strengthen our market position. As I wrap up, I would like to guide you to slide 21. In summary, there is over 1 billion smokers in the world, the majority of whom are looking for healthier alternatives, and nicotine pouches is the fastest-growing category. The category is perfect for online, and we are the undisputed global online market leader, where we're over 10 times the size of our nearest competitor.
We have a symbiotic relationship with our suppliers, where in addition to being a partner of choice for new launches, we are also one of the largest providers for consumer insights. We often benefit from it. Our unit economics continue to improve as we scale, and this is already evident in our core markets. We have a highly engaged team with core competencies across both nicotine industry and e-commerce. With that operator, I would now like to open up the line for questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your headset before pressing the keys. If at any time your question has been addressed, you will and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily for assemble our roster. The first question come from Niklas Ekman from Carnegie. Please go ahead.
Thank you. Yes, I have a couple of questions. Firstly, if you can elaborate a bit on this excise tax hike, you talk about a significant stock build. Is that something that's also had a positive impact to your sales in Q4? Is it mainly that you built inventory that you're using to boost your profitability? That's my first question.
Good morning, Niklas. This is Svante speaking. Yes, you're correct. We did build a lot of inventory as we talked about. We have not seen that much hoarding effect on our sales from the tax increase. I think there was a bit of that in the last couple of days of the year, so it obviously has very limited impact on the quarterly figures here. As I say, the big effect from the excise increase is that as we have highlighted here, that we build inventories, but limited on the sales side.
Okay, super. Are you using this inventory here to boost your profitability or to gain market share by having lower prices than your store-based competitors?
Yeah. I think we built this inventory with the aim to have the flexibility. I think we are a little bit, we won't comment too detailed on it at this point. I think we'll have to see the exact results when we release our Q1 reports, right? The pricing always kind of depend on competitive activity as well, and so on. We won't say too much about that at this point.
Okay. Fair, fair enough. Secondly, on Norway, this is a business where you've had a fairly sharp decline in the past four quarters. Now it's flat, and this is still a quarter where I think that you are still negatively impacted year-over-year by the shift back to border trade. Is there any way to kind of pick up what is the underlying growth in Norway? Do you have any estimate of what the underlying growth is when you kind of adjust for this, the COVID impact and what it's done to border trade?
Maybe just to give a little bit of context around this one, Niklas. When COVID hit, we had a robustly growing business quarter-on-quarter up until COVID hit. When COVID hit, we came close to tripling our business in Norway quite rapidly. Then we saw the unwind of that, as we going through the early stages of 2022. What we can see now is that our business in Norway has shown robust quarter-on-quarter growth during Q3 and continued with robust quarter-on-quarter growth during Q4, and particularly driven by nicotine pouches, where we are seeing quite substantial year-on-year growth during Q4. And bearing in mind that for Q4, in 2021, there was a lockdown in Norway for the last circa 5, 6 weeks of the year.
We did face some high comparables for that period in Norway, as we are facing for the first four weeks in January 2023, where we also had a lockdown in Norway for that period. We are showing, you know, we continue to show strong performance within Norway. We view it very much as though not only have we turned the corner in Norway, but we are showing material growth, and we are doing it now for a couple of quarters consistently.
Would that, in your best estimates, is the growth in Norway, is that stronger than what you're delivering in Sweden or even the growth markets? Is that the kind of magnitude you're looking at? What kind of underlying growth are we talking about?
No. The quarter-on-quarter growth here is not at a magnitude of what we're seeing in growth markets for the reasons of, you know, it's already a core market. We have a material market share already within Norway, so it is a much higher base to be working from. We are dealing with quite healthy and robust quarter-on-quarter strong mid-single-digits sort of quarter-on-quarter growth rates within Norway, if that gives you some sort of guidance, some sort of construct around the growth rates that we're experiencing there at the moment.
Yeah. Yeah. Sure. Sure. Thank you. Thirdly, just on your margin progression, your, and I'm talking EBIT margins now, up 40 basis points now in 2022. Do you have any best guess for what we can expect in 2023? Particularly considering your medium-term margin targets are for mid to high single digits, operating margins. That would require an acceleration from what we've seen in 2022. Is it reasonable to assume that this margin expansion will accelerate in 2023 particularly now with Norway maybe coming back to good growth?
Yeah, I think, I mean, on that one our guidance hasn't changed very much, Niklas. I mean, we I think first of all, we see 2023 as quite a good year as well to continue to really grow market share and advance our market positions in the current economic environment. I mean, we have been sort of guiding, I guess that If you look at our margin in relation to the financial target, it will be somewhat backloaded. I don't think we should expect material uplifting the EBIT margin throughout 2023, but more sort of continued focus on advancing our positions within the markets we are in.
Okay. thanks. You talk about, in the press release here, you talk about a favorable regulatory development. Are you referring to any specific recent events or is that more a general reflection of the year that has passed?
I think it's a general reflection of the year. I know in some of the prior calls, we talked a little bit about what had happened during some of the earlier quarters in 2022, particularly the positive output that we were getting from Germany around this space. I think it's more of a general sentiment rather than any specific event which has occurred within Q4.
Okay. Fair, fair enough. The final question, just you mentioned here, yeah, that your warehouse expansion enables expansion to new markets. Can you elaborate a little bit on what kind of markets you're looking at for future expansion?
Maybe just to give a little bit more context around that one, Niklas, what we talked about was the warehouse expansion was the first phase which we wrapped up by the middle of last year. We now recognize that in order to be able to utilize our capabilities across new markets and new opportunities as they emerge, we are currently in the process of dedicating a lot more of our energy towards building other aspects of our back-end infrastructure around both warehouse management systems, transport administration, ERP, et cetera, in order to prepare us to launch across more markets. Our intent is that these markets are likely to remain within Europe and North America. We don't envisage that there will be much outside of that.
Okay. Are you looking at several markets, several new markets in Europe in the next one or two years, or is it further down the line?
Yes. No, I think it's we're looking at a range of new markets, and that is the timeline that we're considering as well.
Okay, super. Thank you so much for taking my questions.
Thank you, Niklas. Thank you.
Thank you.
The next question comes from Gaurav Jain from Barclays, please go ahead.
Hi, good morning, Gavin, good morning, Svante. A few questions from me. First is around this e-cigarette launch, which has happened in U.K. last month. Can you just tell us what are the initial, sort of, feedback from the market? You know, we had this issue with ELF BAR in the U.K. last week. How do you ensure that something like that doesn't come on your platform?
Absolutely. Maybe just to stand back and give some context around this. We have been standing back. Of course, we've often said over the last number of years that our objective here is to inspire healthier enjoyment to millions and that we're in the harm reduced space around nicotine. What we've seen happen a lot in the last couple of years is that there's been a lot more progress around the product standards within the e-cigarette space, and there's also been a lot more epidemiology around the e-cigarettes, so we can see that it now meets our threshold of sub 5% the harm of a cigarette. We also recognize that as we look across broader markets, not every consumer is prepared to move away from cigarettes towards a nicotine pouch. Hence, we decided that we would launch a test within the U.K.
We're respectively just dipping our toe in very gently to get a sense of what the consumer behavior is within this category and how it interacts with the consumer behavior around their own category we can take learnings. Our primary objective within the U.K. is very much around learnings at this point in time and grasping it. We don't expect it's going to be a material share of our sales for the foreseeable future. This very much needs to be viewed as a test concept in a test market.
Regarding the specifics of products itself, of course, as you may be aware, within nicotine pouches, where the product standards are not regulated by the governments, we test all of our products independently, and unless the products meet our product standards, we refuse to offer them to our consumers. Within the U.K., products themselves within the vaping space are regulated by the government. Every product from the government gets a permit as regards to whether it can sell or not. I think there is a certain degree of noise going through there at the moment regarding some of the products, such as the ones you'd mentioned. We want to see how this plays out as the market stabilizes a little bit more in the coming weeks.
Sure. Thank you. When I look at your growth in the core markets and growth markets, I mean, yes, core markets are growing mid-teens, growth markets are growing mid-20s, but it's not as much of a difference as one would think. Will that gap widen next year and going forward, that growth markets are growing 2x or 3x the rate of core markets? Or will it still be fairly in a narrow band, the growth rates that we see in core markets and growth markets?
Absolutely, Gaurav. Without being too specific here, I guess the growth markets grew at the rate of 56% in Q4. As we also mentioned here in the current trading section, we're continuing to see solid performance in the growth markets as of where we are today. I think in terms of the core markets, we mentioned today that we've seen a bit of a turnaround in Norway, where we're now growing by 1%, I guess you can call that sort of flattish rates. I think what we need to bear in mind as well regarding Norway is that there was the final COVID lockdown kind of extended a couple of weeks into 2022 as well.
The comparables we're meeting now for Norway are still somewhat inflated, I should say. I mean, in general, I would say that the trends that we are seeing now in Q4 are kind of continuing in the same manner, for this year.
Okay, sure. The final question on this 2025 target, you know, which requires a 25% sales CAGR from here, how confident are you that you will hit that number? Or do you need to bring it down a bit?
We remain committed to our SEK 5 billion. We definitely remain committed to that. We see, of course that, you take a look at a few aspects in this. One is that nicotine pouches in itself is growing by 42% at this point in time. Our base of nicotine pouches and how that has adapted over recent years, it's now 44% of our sales. I think the best way perhaps, and certainly the way that we view this, is not necessarily viewing it on a total group growth level, but viewing it on a growth level per category. I think as we view it on a growth level per category and map it out, we understand it's going to require, you know, strong degree of focus and commitment, but we remain committed to this.
Sure. Thank you.
Perfect. Thank you.
As a reminder, if you wish to register for a question, please press star and one. The next question comes from Fred Johan from SEB. Please go ahead.
Hi, good morning. Just a few follow-ups from me. Starting off with your core markets and the exercise increase there. Could you give us some color on how you acted on the Swedish market in light of this and your pricing of the stock from last year?
Hi, good morning. Yeah, I think we're a little bit reluctant to comment too much around our pricing. That's kind of day-to-day business that we tend not to discuss too much publicly. I think what the, what the inventory build ahead of the year and gave us was flexibility to obviously either invest that benefit, in, into customer, into the customer or keep it for ourselves. And I think, you know, the exact trade-offs there we don't sort of want to publicly discuss too much, given that it's quite commercially sensitive.
I think a more of the general statement, as I said earlier on a question, we're continuing to see strong performance in our core markets, so far into Q1, and then sort of broadly in line with the earlier trend here.
Fair enough. Turning to growth markets then. We saw a relative improvement in margins, but an increase, or increased loss in absolute terms. Going forward, do you expect EBIT to improve in absolute terms as well? I guess and if that's the case, how far away is the reversal there, do you think?
I think it's fair to assume that we will continue to invest behind these growth markets. I mean, these are, I mean, we have to keep in mind that it's quite large consumer markets. It takes a degree of investment to really get to the scale we want to get at. I think it's as I said, fair to assume that we'll continue to do that for the foreseeable future. You sort of overlay that with our financial targets here. We are, we have been, you know, quite clear about the margin kind of expansion from here will become a load of in relation to that, those targets.
Makes sense. Speaking about your growth initiatives, do you have any concrete growth initiatives for 2023? What will be the financial implications of those?
There's nothing at this point in time that we're prepared to share around our growth initiatives for 2023. Apart from that, what I kind of responded a little bit on earlier of over the longer term, we do expect to have a broader geographic base, and we're preparing ourselves for that across a range of markets. There is nothing that we're ready to comment on right now.
Okay. Fair enough. Fair enough. Have you seen any impact from PMI's acquisition of Swedish Match on your operations?
No, I have seen no material impact on that one. Philip Morris didn't necessarily have a huge position within the oral nicotine business beforehand, so it doesn't really alter the dynamic within the category very much. However, I do hope to see that it will accelerate the growth of harm reduced products and oral nicotine in particular, across new geographies in the foreseeable future. I have a strong hope for that.
Yeah. Fair enough. That's all for me. Thank you so much for taking the time.
Great. Thank you.
Thank you.
This concludes our question and answer session. I would now like to turn the conference back over to the management and for any closing remarks.
Thanks for listening, everybody, and we'll catch you again in May when we release our Q1 results. Thank you.
Thank you. Bye-bye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.