Q3 2022 Thorne Healthtech Inc Earnings Call
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Welcome to the Sun Health Tech third quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A brief question answer session will follow the formal presentation and to ask a question at this time. Please press star one on your touch Vinci patch.
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And for operator assistance at any point it stops Eli.
Thank you.
Now, let me turn the call over to Thomas Wilson, Vice President Investor Relations. So Thomas you may begin.
Good morning, everyone. Thank you for joining Thornhill Teck's third quarter 2022 earnings call with me today to share our results or Paul Jacobson, our CEO and Brian <unk>.
Tom Mackinnon, our CFO and Michele CRO, our CFO are also available for questions before.
Before we begin please note that today's discussion contains forward looking statements that are subject to risks and uncertainties actual results may differ materially from those indicated by our forward looking statements.
More information about potential risk factors can be found in our 2021 annual report on Form 10-K, and our upcoming Form 10-Q, which we anticipate filing aftermarket today and another equity balance.
Today. In addition, with U S. GAAP reporting we will be discussing financial measures that do not conform to GAAP. We believe these non-GAAP measures enhance the understanding of our performance because they are more representative of how we internally measure the business.
non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures.
Reconciliation of GAAP to non-GAAP results is available in the earnings press release, we issued after market closed yesterday and in the supplemental investor presentation posted to our IR website. Finally in three weeks, we will be participating in the Evercore ISI.
Conference and holding Investor meetings, a webcast of the event will be accessible on our IR site and we look forward to meeting with you with that I will turn the call over to Paul.
Thank you Thomas Good morning, everyone. Thank you for joining our third quarter earnings call today.
I'll summarize our strong financial performance for Q3 with record sales and strong profitability discussed how our consumers are holding up in the current environment.
Through a handful of recent developments and opportunities on the testing and R&D sides of our business and round out my prepared remarks, with our outlook to close out 2022.
Brian will provide further discussion of our Q3 performance and capital deployment in this prepared remarks lastly, additional details can be found in the earnings release and supplemental investor presentation that we issued after the market close yesterday.
With that let's dive it during Q3, we remain focused on a few core areas of our operations that drive strong performance for the business.
These included ensuring seamless operations from ingredient sourcing to distribution and area, where we are beginning to see certain supply chain improvements.
Continuing to deliver the highest quality products innovations and thoughtful engaging content to our customers and supportive of their health journey.
And our cutting edge health tests, and remote sample collection capabilities, which significantly improve user experiences over current industry norms and are presenting significant business development opportunities in multiple fields of health and wellness.
We are also preparing to further scale the supplement business as we move closer to expanding manufacturing and fulfillment to support continued growth and anticipated future demand.
With the expansion, we will be able to drive increased efficiencies for better margins and industry, leading turnaround types.
On the demand front, let me take a moment to highlight a few trends, we're seeing relative to customer strength and behavior in this market, which contributed to our strong Q3 results and helped informed our updated full year outlook.
In addition, while we do not normally refer to business performance on a sequential quarter basis ill provide some color through that lens given the challenging nature of the current economic backdrop.
Thus far darn customers continued to be resilient.
Our total number of customers in active subscriptions continues to climb.
Our unit economics, such as typical order size and order value are up Q3 year over year.
Unit Economics also held firm from Q2 to Q3 and remained solid through October .
We've experienced increased demand for our products containing ingredients that have been relatively more impacted by global supply chain disruptions such as certain bulk powders like creative team.
We forward bought a large quantity of global supply and lower margins in order to be able to serve our customers ahead of anticipated shortages.
While we continue to see strengthened our typical high end consumer we do not expect to be insulated from economic conditions that will impact certain pockets of our consumer base as.
As we progress through Q4 and into next year.
That said, we are generally encouraged by recent trends holistically in the early implications for 2023.
Now with consumer health backdrop in mind I'll transition to some of the financial highlights for Q3.
Starting with the topline I am pleased with our record net sales of $58 4 million representing growth of more than 21% for the quarter.
Sales performance was driven by 47% growth in our direct to consumer channel primarily from continued traction growing brand awareness, including from our healthy aging brand campaign, which occurred during the second quarter of this year.
Our growth was broad based across third party marketplaces and torn dot com in line with our approach to meet customers where they are.
The strong DTC performance was underpinned by 60% year over year growth in subscription sales, which increased to 37% of direct to consumer sales.
We experienced a 41% year over year increase in trends transaction sales.
Although Q2 transaction sales dollars were greater than both Q1 and Q3.
Which we mainly attribute to heightened transaction volumes stemming from the campaign running in Q2.
Rounding up direct to consumer channel growth drivers, we continue to achieve superior customer satisfaction stats that are significantly higher than the average deep digital retailer for the quarter. Our net promoter score was 72 compared to our retail average of around 35.
We also recorded an LTV to CAC ratio of seven eight.
Inclusive of the benefits of the Q2 campaign spend that did not reoccur and therefore drove capped out.
Turning to the professional and B to B channel.
We continue to experience comparability challenges from the impacts of previously disclosed lost distributor sales too.
To its end customers and Ukraine, Russia and eastern Europe .
Despite the impact of rising from that conflict professional on BTB channel sales increased almost 6% over Q3 of last year, driven primarily by a continuation of steady growth in professional sales.
Led by the combination of our sales force efforts and continued growth in online dispensary sales.
As a percent of sales direct to consumer channel sales and professional.
<unk> channel sales were 46% and 54% of total net sales respectively.
On a go forward basis, we continue to expect our annual sales mix to be closer to 50 50 split from a direct to consumer channel growth.
Pacing professional one <unk> channel growth near term.
With respect to gross margin there are a couple of primary factors unpack that drove margins down year over year.
First in the last two quarters, we highlighted our advanced purchases raw materials to mitigate against potential supply chain disruptions.
As a reminder, many but not all of our ingredient purchases are governed by preexisting supplier agreements.
However to further ensure supply continuity amidst the current economic conditions, we proactively identified second procurement sources, which resulted in higher average material cost than historical norms.
In Q3, those higher raw material costs flowed through our cost of sales line concurrent with our strong revenue growth driving gross margin down.
Second many of the ingredients and products that have been the most impacted by global supply chain disruptions have lower gross margin profiles, such as creating products and ballparks are.
Our second source pricing and margin levels have not been where we would prefer under long term supply contracts.
<unk> and an unfavorable mix shift to margins.
However, we are currently entering into agreements with the suppliers as needed. This month. For example, we entered into a new supply agreement for creating which will significantly reduce our per unit costs. Starting in 2023 after cycling through remaining higher cost inventory in Q4.
Moving down the P&L to operating expenses R&D decreased slightly year over year to $1 8 million, mainly from lower third party spend which can vary depending on in flight research project activities.
Marketing costs are $4 $5 million decreased significantly to about 8% of sales in Q3 compared to 22% of sales in the prior year that decrease was due to the combination.
The change in timing and related costs of our major brand campaigns, which occurred in Q3 of last year compared to <unk> of this year.
And the decision we highlighted on our last earnings call to prioritize delivering on our full year profit goals and by extension reduce the level of full year spend by deferring a follow on marketing campaign originally planned for Q3 2022.
As expected the reduced external spend resulted in slower new customer growth.
I would highlight however that excluding the quarters associated with these last two major campaigns are marketing run rate has been about 10% to 11% of quarterly sales for the last two years, a level, which has historically been effective at driving meaningful growth.
The deferral also provided some insights that allow us to deepen our understanding of consumer behavior and the challenging environment on a more organic basis, and therefore helps us inform our go forward strategies.
I'll provide directional commentary on our near term marketing approach in connection with our updated 2022 look outlook shortly.
Moving along SG&A increased by almost 36% year over year, primarily due to continuation of increased selling costs from the combination of topline growth.
A more normalized run rate public company cost pool, including a full quarter of stock based compensation in Q3, as we completed our IPO in September 2021.
Brian will provide more color and the individual components and selling distribution general and administrative expenses in his commentary.
Which will show favorability, we are seeing as a percentage of sales on a trended basis.
Turning to profit from these results our adjusted EBITDA grew significantly to $8 3 million with expanded adjusted EBITDA margin of 14, 6% for the quarter.
Rounding out the bottom line GAAP EPS grew to <unk>.
And adjusted EPS grew to <unk>.
That wraps up my prepared remarks related to Q3.
Before looking ahead to guidance I'll share a handful of updates related to our health tests and blood sample collection technology with a few comments on our scientific teams brain health work.
Starting with gut health after re launching our proprietary test, which revolutionized his long standing user experience the microbiome testing our customers who take these tests for deep insights into their health have opted to use the new technology. Despite our ongoing support of the legacy tests.
This fact pattern is effectively in market evidence of the user preferences, we confirmed during the wife technology study.
As awareness of the importance of microbiome health growth, which.
Which it certainly is on a global stage, our first mover advantage and IP creates lasting competitive moats.
The recent interest we've been getting from potential early <unk> adopters, albeit still low volume from Nascency has expanded into broader discussions that put a spotlight on the level of science, we deploy across the business.
I believe these holistic business development opportunities that showcase our science and range of solutions provide levers to drive a continuation of our above market growth longer term.
We've also made great strides in bringing our one draw blood sample collection device to the consumer market.
Our recent progress is positioning us well to capitalize on AMOLED business development monetization opportunities spanning from our own D to C ecosystem to decentralized clinical research in the near term.
In August we achieved a significant milestone upon receiving D to C medical device clearance from Japanese regulators.
We believe that validation is significant to our upcoming work with the FDA to deploy a new product that will be accessible to anyone because of the high hurdles required by Japanese regulations.
As we push ahead to D to C clearance in the U S. We have not slowed our efforts to expand one draws capabilities, which should lead to earlier and more significant new business once the devices in market.
For example, we're continuing development of a serum separation cartridge to expand the range of device applications. In addition to health panels related to conditions consumers can't test for today.
We're working with a partner lab to improve DNA preservation and extraction, we identified a process that allows for cold chain free sample preservation that optimizes retrieval of DNA from the device the sample strip the results of which have been superior to our current methods.
With that I will turn to guidance and as Brian has a packed agenda I want to leave plenty of time for your questions.
As we look to the future we continue to evaluate our marketing spend we believe we have an opportunity next year to thoughtfully increase our investment to drive efficient new customer acquisition and support long term brand equity.
In addition to further investing in a diversified paid media strategy we.
We'll also strategically scale, our influencer marketing efforts. Our goal is to take advantage of the broad community of differentiated customers to build deep personalization and content and use this network to build user generation generated content cost effectively.
Performance data from 2022 has shown us that the inclusion of influences on our marketing generate better returns for paid owned and earned tactics are more strategic approach to influencers, starting in 2023 will be applied across the business, including in more cutting edge R&D areas, where influencers has not been deployed before such as <unk>.
Our brain health platform.
We also know that a personalized customer experience or helping the customer answer the question, what do I taken why increases engagement and drives better conversion.
In 2022 customers that are engaged with quizzes and health test had a higher conversion rate and greater lifetime value.
We will continue to prioritize our personalized customer experience by expanding our capabilities with dynamic web content scaling Zoran adviser and adding a more interactive approach for our customers with various key Influencers. We're building plans to move away from some of the more traditional marketing tactics to deploying a more.
Data science, driven approach to our community of customers and customer Influencers.
We believe we are positioning ourselves for continued significant profitable growth over the long term.
Far above industry market rates.
Such as the six 3% estimated CAGR.
The global nutritional supplements market from 2022 to 2030.
For our recent Tam study by Grand view research.
With respect to our brain health initiatives, our scientific team continues to produce cutting edge research and insights that can be transformative.
How certain conditions our approach.
For example, we received summary results from our placebo controlled clinical trial conducted with Mayo clinic.
The objective of that trial was to measure the decline in cognitive processing speed and efficiency and whether there was a rise in protein indicative of injury, even in the absence of concussion symptoms.
The trial participants were junior ice hockey players with that cohort, having been selected due to the repetitive head impacts over the course of the season.
The data, which is embargoed at this time will be presented at an international conference on brain injury in early 2023, and the results will be published in a peer reviewed journal around the same time.
Based on the study results are similar study is about to launch it in another category of ice hockey players. The work we have going on around brain health is front and center when we think about being the leading company in scientific wellness and healthy aging.
Based on our year to date performance through October and aforementioned topics. We now expect our full year guidance to be net sales of between $232 million and $235 million Rep.
Representing growth of 25% to 27% over 2021.
Gross margin of between 52% and 53%.
Adjusted EBITDA of between $25 5 million and $28 5 million.
Representing growth of 24% to 38, 5% over 2021.
And adjusted EPS.
Of between 34 and.
37.
In addition.
And our guidance for adjusted EBITDA and adjusted EPS includes the following assumptions.
Marketing costs of between 14% and 15% of net sales.
Depreciation of approximately two 7% of net sales.
And estimate full year adjusted tax rate of 10% and.
And diluted weighted average shares outstanding of $53 million as of December 31, 2022, with that I will turn the call over to Brian .
Thank you Paul and good morning, everyone I am happy to report another quarter of strong financial performance as net sales grew by 21, 7% or $10 4 million to $58 $4 million during the third quarter of 2020 to the.
The increase was led by double digit growth in our DTC channel, which grew by 47, 2% to $8 7 million.
Subscription sales of $10 million continuing to strengthen during the quarter growing 17, 1% over the same period last year.
Subscription sales during the third quarter represented 37% of our DTC sales and 17, 1% of our total sales.
Our transaction based or non subscription DTC sales also grew by $4 9 million or 46% year over year.
In terms of our professional and <unk> business sales during the third quarter were $31 4 million an increase of five 9%.
Gross margins during Q3 were 48, 2% of net sales declining 500 basis points from last year.
And was impacted by short term increases in specific raw material costs and a marginal decline in asps driven by the continued growth in our professional <unk> channel driving an unfavorable shift in sales mix during the quarter.
We continue to remain critically focused on operational efficiency and disciplined cost management and actively review and engage our strategic suppliers to ensure that the short term cost impacts are minimized and long term savings opportunities from scale are realized.
On our Q2 call. We indicated we were beginning to invest in and upgrade our manufacturing facility to maximize production efficiency increased throughput and drive long term cost savings.
During the third quarter, we officially broke ground on the expansion, which will double our maximum manufacturing capacity and set us up for our next leg of growth to be on $500 million in annual sales.
We expect the expansion to be completed during the fourth quarter of 2023.
Looking at operating expenses SG&A grew $4 9 million or <unk> 36, 6% to $18 3 million, representing 31, 4% of net sales.
As a reminder, our SG&A costs are comprised of three primary operating functions.
One selling to distribution fulfillment and three general and administrative.
Selling costs are comprised of the cost of our sales professionals, including commissions and related direct selling costs during.
During the third quarter of 2022, selling costs were $4 1 million or 7% of sales compared to $3 1 million or six 5% of sales in the same period last year.
Distribution and fulfillment costs are comprised of cost to operate our two distribution and fulfillment centers and include fulfillment personnel costs outbound freight and shipping costs and facilities costs.
These costs were $3 $7 million during the third quarter of 2022, or six 4% of sales compared to $3 3 million.
8% of sales last year.
General and administrative costs, which include our corporate costs and general overhead were $10 5 million or 18% of sales during the third quarter compared to $7 1 million or 14, 7% of sales last year.
Adjusted to exclude the impact of depreciation and equity compensation costs general and administrative costs. During the third quarter of 2022 were $7 9 million or 13, 5% of sales compared to $6 4 million or 13, 3% of sales last year.
We continue to remain focused on managing our SG&A expenses and leveraging the fixed cost components of our corporate cost structure.
During the third quarter marketing expenses were $4 5 million or $6 3 million lower than the same period last year, as we reduced and deferred marketing spend and prioritize delivery on our full year profit goals for 2022.
Research and development expenses were $1 $8 million during the third quarter down 18, 9% from $2 2 million during the prior year.
Third quarter per share earnings on a GAAP basis were <unk> <unk> per share, which is <unk> <unk> per share higher than a year ago adjusted.
Adjusted EBITDA for the third quarter of 2022 was $8 3 million, an increase of $7 2 million compared to the $1 1 million reported during the prior year.
Looking at year to date results for the first nine months of 2022 net sales were $169 2 million, an increase of $33 8 million or 24, 9% over the prior year.
Growth in sales were led by a $26 9 million or 49, 1% increase in our DTC sales of which $10 7 million was attributable to the continued growth in DTC subscription sales.
<unk> professional sales during the first nine months of 2022 were $87 5 million, an increase of $6 9 million or eight 5% over the prior year period.
Gross margin for the first nine months of 2022 was 53% an increase of 10 basis points compared to 52, 9% during the same prior year period.
During the first nine months of 2022, SG&A expenses grew $17 5 million or 47, 2% to $54 5 million or 32, 2% of net sales drill.
Drilling down into the three primary operating functions of our SG&A cost during the first nine months of 2022, selling costs were $11 8 million or 7% of sales compared to $7 8 million or five 7% of sales during the first nine months of 2021.
Distribution and fulfillment costs were $12 $2 million during the first nine months of 2022 or seven 2% of sales.
Compared to $8 6 million or six 3% of sales last year.
General and administrative costs were $30 5 million or 18% of sales during the first nine months of 2022 compared to $20 7 million or 15, 3% of sales last year.
Adjusting to exclude the impact of depreciation and equity compensation costs general and administrative expenses. During the first nine months of 2022 or $22 9 million or 13, 5% of net sales.
Comparatively.
G&A, excluding depreciation and equity compensation costs for the nine months of 2021.
Was $18 8 million or 13, 9% of net sales.
Marketing expense during the first nine months of 2022 was $27 5 million, an increase of $7 4 million or <unk>, 37% over 2021, driven primarily by the $10 $2 million investment into our 12 week healthy aging campaign aimed at increasing brand awareness and driving new.
Customer acquisition, which ran the majority of the second quarter of 2022.
Research and development expenses were $5 5 million during the first nine months of 2022.
Earnings on a per share basis for the first nine months of 2022 or <unk> <unk> per share an increase of <unk> <unk> per share as compared to the first nine months of 2021.
Adjusted EBITDA for the first nine months of 2022 was $15 6 million, an increase of <unk> 4 million compared to $15 1 million during the prior year.
Turning from operations and focusing on capital and liquidity as of September 32022, we had a cash balance of $27 4 million of which $22 5 million was unrestricted.
Operationally during the first nine months of 2022, we used $8 8 million of cash in our operating activities driven by marketing and advertising spend and growing our inventory, including raw materials, which increased by $13 4 million to support our continued growth new product launches and to protect our supply chain.
As mentioned in my earlier comments during the third quarter, we broke ground on the expansion of our primary manufacturing facility in Summerville South Carolina.
This project will expand our production facility by 74000 square feet and allow us to double the manufacturing capacity to support our continued growth to approximately $650 million in annual sales.
This project has a budget of $32 million for construction and an additional $12 million for manufacturing and production equipment.
We expect the expansion to be completed and online by the end of 2023 and will fund the investment with a combination of borrowings from our revolving line of credit a tenant reimbursement provided by the current landlord and cash from operations.
The $12 million in purchases of long life production equipment will be financed through our current equipment finance facility.
Simultaneous to the expansion project during the third quarter. We also commenced the up fit of a new warehousing and fulfillment facility directly adjacent to our primary manufacturing facility in Summerville South Carolina.
This facility is under a long term lease which will commence during the second quarter of 2023, when we expect to take control and have access to the property.
The budgeted cost for the up fit of the new facility is approximately $11 million, which we also plan to fund with a combination of borrowings from our revolving line of credit.
A tenant allowance from the current landlord and cash from operations.
As of today, we have not drawn any amounts against our revolver and the full $15 million remains available to fund working capital requirements and strategic initiatives such as the expansion of our manufacturing facility and the new warehousing and fulfillment facility.
As we move into the final quarter of 2022 and work to close out our first full year as a public company I want to recognize and thank our team members for all of their incredible efforts and valued contributions you are the foundation of a thorn in the reasonable our customers Trust our brand for their bodies. Your unwavering commitment to excellence continues to make foreign health Tech a leader.
And the health and wellness space, we could not be more excited about the opportunities ahead.
This completes our prepared remarks, we would now like to open the line for any questions. You may have operator can we have our first question. Please.
Thank you.
Our first question comes from the line of.
Elizabeth Anderson with Evercore Your line is open.
Hi, guys good morning.
Thanks, So much further question.
If you could comment on I understand what you're seeing in the quarter about the advanced purchase.
Carrying them.
Can you help us think through sort of the.
The expected.
Timeline that disease.
Purchases cover.
And just sort of how to think about that.
Over the next couple of quarters, and whether you are thinking about continuing to do that and as we get into the fourth quarter.
Yes, Elizabeth how are you doing it's Paul I'll answer a piece of it and then I'll, let Brian or Tom comment.
So the situation.
Is really focusing on.
A couple of ingredients one specifically.
Where there were supply chain problems globally.
We had an opportunity to either do no business in this particular ingredient area, which is important to the sports performance business in particular.
And to those who participate in.
Certain areas of athletics.
Our consumers.
Or to step up and make a major play knowing that we were doing it at low margins and doing it in a way that would protect our business going forward. So we made a.
A significant purchase.
Simply locking up a huge supply chain, where we wanted a few companies able to provide.
The margins were low I think it was around 18 or 20%.
And.
We'll be washing through that supply during the course of 2022 through the fourth quarter.
Where we know that we have the inventory sold.
Our team recently.
The team reporting to Tom.
<unk> recently made.
A significant change in the supply agreement going forward.
Our margins in this ingredient will return back to something that's more normalized and we expect the profitability on this particular ingredient to be good going into 2023, but it'll wash through during this quarter and it affected our overall gross margin.
Got it no that's super helpful.
Can you talk about.
There are sort of pricing strategy in this era of obviously inflation plus more volatile macro.
Okay.
Yes so.
We try to operate under the theory that we have a high end consumer base.
But there has to be some realism baked into the way we price products you can't just continuously rely on price increases and hope people will buy so what we what we have done in the past as we raised prices pretty much across the board.
In the last couple of years.
Sort of a 3% level.
And sometimes.
We can get away with just doing it across the board. This this year at the end of this month actually.
We will finalize.
Our approach towards next year's pricing, but I will tell you that what we're doing is going through an entire SKU rationalization play. So there are there will be products and we expect that we will take a net price increase going forward into next year, but there are products that we think we could drive a lot more sale.
<unk>.
If we dropped the margins potentially from something like 70, or 80% down to something more normalized and raised prices on some other ingredients, where we think we have more pricing power. So we will be taking an increase but we're not going to just slap it out to our customers is an across the board, it's going to be rationalized and done one.
And I think between production and marketing they pretty much finalized the approach going forward.
Got it.
Last question I realize obviously the macros.
But I was wondering if you had any early thoughts on 2023, you could share with us in terms of where you expect particularly on the revenue line.
To come out.
So.
Let me just say.
That so far.
In October .
In the beginning of November .
We've seen very strong demand.
So it gave us some confidence any way the things are going to hold together and maybe improve.
<unk>.
Going forward into next year.
We have not finalized our budgets for the year.
But we anticipate projecting significant growth next year.
And.
We are also looking at ourselves almost as a startup when it comes to to the way that we want to address marketing and Michelle is.
Working with her team to come up with a data science Influencer based strategy that we think is going to be really great for us and hopefully drive sales going forward aggressively into 2023.
Got it thanks, so much.
Thank you.
Our next question comes from Sean Dodge of RP.
<unk> capital markets. Your line is now open.
Yes, thanks, good morning, maybe.
Maybe just on one of your last comments there Paul about.
The demand holding up well in October and it looks like so far in November .
You said most of your consumer base is pretty insulated economically, but still some pockets potentially of sensitivity there maybe just give us a sense of.
When we think about guidance for 2002, the expectations you've built into there around.
Kind of how your consumer base specifically holds up.
Is everything kind of have to remain strong for you to hit the guidance there or is there. Some some kind of I don't know kushner or wiggle room in there for a little bit of deterioration.
Yeah, I mean I.
Again, that's why I tried to mention something give you a little bit of a heads up on the October and November so so far things look good and we're.
Not quite halfway through the quarter yet.
But.
There are guidance is set that we feel pretty comfortable with it.
We've gotten through some of it already.
But look I don't want to tell you that.
If the world fell apart in December that we'd absolutely lock into everything I mean.
I can't I can't tell but so far from what we've seen it's based on strong demand for our products.
Okay Fair enough and then.
Before you had mentioned some impact from your distributor partners going into Eastern Europe is there any update you can share there has that gotten worse or better and then.
How much how much is eastern Europe at this point contributing to revenue.
Right. So I don't want to I don't want to make excuses here, which is why it and bring it up too much of this but if you look I'll give you the numbers. So we're taking a 2017 or $18 million hit in this from this one particular customer that's an international distributor for us that happens to sell.
In multiple parts around the world, but they got we went they went to zero in as a result of the war.
So were it not for that for that.
We'd be having a blowout year and in the upside.
That's been the growth determinant on our B to B channel and it has been.
It's become virtually.
It's very very hard to forecast what these guys going forward I would say that we've had.
<unk> or so recently, where we had some pick up in business, though.
And but I don't know, whether that's going to be that's going to continue going forward.
And as far as when you begin to lap that as that kind of late February coincident with the.
The Russian invasion is that when that kind of gets dropped out or at least a year over year comparable.
Yeah, Yeah, I would say right around.
Right around the some part of the second quarter.
Thank you.
Your next question comes from Oliver Chen with Cowen and company. Please.
Please go ahead when you're ready.
Hey, guys, it's Max on for Oliver Thanks, a lot for taking our question.
So first on top line just a couple of parts here, but it looks like there was a bit of a sequential.
Now in the DTC segment, both year over year as well as on the two year. So if maybe you can comment on that and then also if our math is right. It looks like guidance implies a pretty large step up.
I guess that speaks to your comments on October and November So just curious sort.
Sort of any comments on what happened in <unk> within DTC and does that mean that demand is actually accelerating sequentially.
Sequentially as well.
Okay, So I'm going to let Michelle answer the first part and I'll answer the second part, yes, so I look at the year over year.
Demand remained strong.
Demand.
70%.
Growth in the number of purchasing customers quarter over quarter and year over year.
But in terms of unit economics after being really tiny increased Warner side is that right.
Yes.
Expert that every App and then really stable order frequency, which we feel is promising given that will continue to acquire new customers.
And in general.
Mercedes just giving our partners we've learned that the category and consumer health is not seen a softening in the other category.
Carolyn and good morning.
Brian .
So all of that is really promising in terms of year over year performance to your question specifically about.
Yeah.
Shell trend.
I'll be around.
That's really a function of scaling back the marketing budget by about $9 million for the second half of the year we actively.
Mitigate the impact of.
Of that scale backed by focusing on key tactics like FBL content marketing scaling around.
Channel marketing tactics.
Alright.
Right.
That did impact the Q.
Q3 web traffic and number of our existing customers.
We're confident that with the strong economics.
The fact that what we feel and again in 2023 that we think you Randall opex even externally.
Exactly.
Yeah.
Right.
Shawn to your question about the guidance being a major step up I would say that.
It is a it is a result of.
Kind of what we've been thinking about when we gave guidance at the beginning of the year that we.
See a step up in the fourth quarter.
I think it would have been a lot more had we not made the marketing cutback that we did.
From what the demand we're seeing so far through the first half of the first or the fourth quarter it looks pretty good.
Got it Okay. That's very helpful. And then on gross margin obviously, there is a number.
Parts here, both on the raw side Bill.
Building out the supply chain, probably it's going to have some impact I would guess and then also you mentioned potentially taking AUR is down a bit.
So I guess, how should we think about your gross margin both over the next several quarters as well as our long term should the declines be pretty similar to what we saw in <unk> or how should we just model that line.
Okay, sorry, I know its Max snapshot.
So the the margin.
The way, we're looking at margin that we guided towards $52 53 for next year, we're going to have.
We expect the fourth quarter margins to be slightly better.
We are going to run off this.
These purchases of ingredient that we did buy at low margins and do it in size by the probably end of the fourth quarter it might seem a little bit into January .
But in general the guidance that we gave on margin of $52 53 is where we are now there is there is a little bit of an element here.
This new facility coming online that will have some that is having some negative impact on the margin short term, which is why we are forecasting 50 253 once that facility is online.
We see all sorts of reasons that we think the margins can go up fairly dramatically from there and I do want to emphasize that.
This expansion of the facility.
Led by Tom again.
<unk> that.
We have done before.
And this is not we're not new to this.
Not nearly as complicated as what we've done in the past.
So we're quite confident that.
We will be able to drive higher margins. Once this is done going forward. The other thing is that it will allow us to engage in the way we are bringing in new equipment and some of the things we're doing in much more personalization of our business, including <unk>.
Meeting.
Demand that we've had for years for specific unit of use packaging that our customer base has been clamoring for and the only reason we havent introduced it in the past.
It's Ben.
Covid being.
Being such that we Couldnt we have.
<unk> been able to get hold of the new machinery that we wanted.
Got it and then just one quick last one but how should we think about your LTV LTV to CAC going forward obviously, there's.
<unk> was very strong, but it's been pretty volatile just given your marketing campaign. So I think you gave us a number previously so just curious if that should still hold and then Furthermore, how should we think about the right Mark.
Marketing budget for the business going forward say next year and really just longer term.
Let me take the first part is yes.
Yes, no definitely itself in terms of.
Our customer acquisition costs specifically.
We're really striving to be efficient.
Or the whole year and from a housekeeping.
Ratio perspective, our goal is three times or better.
To your point about kind of the.
Fluctuation quarter to quarter and that really is a function.
On the timing of the spend.
In 2023 based on our 60 gig approach, we're going to be having more always on marketing spend which flow kind of level out spend and therefore, it level out our customer acquisition costs impacting <unk>.
The CAC ratios that would be kind of more stable.
And in terms of the overall marketing budget.
So I'd like to emphasize a couple of things first of all Rick.
Risk control because what we're after right now until we see the.
Economy, beginning to turnaround, we're anxious to take risks, but do it intelligently.
We as I mentioned, a little bit earlier, and I tried to allude to this in my prepared remarks.
We are taking.
Michelle's leadership, a very very hard look at what we think marketing should look like on a go forward basis.
Over the next few years.
We are in the process.
Doing a deep dive into bringing more data science approach to the way, we're going to do things inside in house and keep it vertically integrated.
And.
Utilized what we think is an underutilized asset which has been our the community. We built of Influencers over the last several years and try to find new and differentiated ways to deploy that to marketing. So we're in the process of building the budget now.
That means that we're also taking a look as I mentioned at almost like what we'll redo if we were a startup.
And how do we market ourselves given the assets.
Assets, we've already built up over the past.
Half dozen years or so.
So I guess, it's a long winded way of saying that we expect to.
Engage in marketing and in a really intelligent risk controlled way, but but expect us to step it up.
No. That's very helpful. I appreciate all the color best regards and happy holidays.
Thank you you too thank you.
Thank you as a reminder to ask any further question. Please press Star then the number one on your telephone keypad.
We have had an outside the questions. So I'd like to close with <unk>.
Thank you for joining you may now disconnect your lines and have a lovely day.
Okay.
Okay.