Q4 2022 Trupanion Inc Earnings Call
Greetings and welcome to the two opinions fourth quarter and full year 2022 earnings call. At this time, all participants are in a listen only mode a.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Laura Bainbridge Investor Relations. Thank you you may begin good afternoon, and welcome to troop Canyon's fourth quarter and full year 2022 financial results conference call.
Participating on today's call are Darryl Rawlings, Chief Executive Officer, Mark you choose President Andrew Wong Chief Financial Officer.
Before we begin I would like to remind everyone that during today's conference call. We will make certain forward looking statements regarding the future operations opportunities and financial performance of true opinion within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed.
A detailed discussion of these and other risks and uncertainties are included in our earnings release, which can be found on our investor relations website as well as the Companys. Most recent reports on forms 10-K, and 8-K filed with the Securities and Exchange Commission.
Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation variable expenses fixed expenses adjusted operating income acquisition cost internal rate of return adjusted EBITDA and free cash flow.
When we use the term adjusted operating income or margin. It is intended to refer to our non-GAAP operating income or margin before new pet acquisition and development expenses.
Unless otherwise noted margins and expenses will be presented on a non-GAAP basis, which excludes stock based compensation expense and depreciation expense.
These non-GAAP measures are in addition to and not a substitute for measures of financial performance prepared in accordance with U S. GAAP.
Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or on true opinions Investor Relations website under the quarterly earnings tab.
Lastly, I would like to remind everyone that todays conference call is also available via webcast on sure opinions Investor Relations website. A replay will also be available on the site with that I will hand, the call over to Darryl.
Thanks, Lora revenue for the year grew 29% year over year to 905 million, marking another year of strong growth. We ended the year with over 1.5 million total enrolled pets.
The consistency of these results demonstrate the benefits of our monthly recurring business model and a large underpenetrated market.
With inflation in veterinary medicine, continuing to outpace that of our pet owners disposable income the need for our products will continue to grow total adjusted operating income grew 14% year over year to $89 million.
As a percent of revenue our subscription adjusted operating margin was down 100 basis points year over year as the cost of veterinary care grew faster than we initially predicted.
Long term expansion in our adjusted operating income will make it easier for us to deploy greater sums of capital at high rates of return in 'twenty 'twenty. Two we deployed 80 million of these funds acquiring pets and an estimated internal rate of return of 30%. We also invested approximately 16 million.
On to acquisitions again, that's access to continental Europe in doing so we nearly doubled the number of veterinary hospitals in our addressable market.
Further we added two new distribution channels in North America, and continued to work on our new low and medium coverage brands, including significant investments in our infrastructure to support these growth initiatives.
In 2022 our balance sheet and access to working capital provided us the funds to do so.
<unk> will provide additional commentary on the progress against our 60 month planned momentarily.
Although these are very early days, we are pleased to have these initiatives in market with the majority of upfront spend behind us.
As we said before we expect it will take years to build momentum. This is a characteristic we understand well with monthly recurring revenue.
Our low margin other business segment grew revenue by 51% year over year and adjusted operating income was approximately $10 million. As a reminder, we are required to hold cash in the form of capital reserves to support this growth.
In aggregate these capital reserve requirements totaled approximately $60 million, which is more than we have earned in our adjusted operating income for this business segment over the same time period.
In effect, our other business segment has been limiting our ability to deploy capital at higher rates of return.
With this in mind, we've been working towards a long term agreement with our large partner and our other business to more effectively utilize our capital for our subscription business.
Through our new agreement existing policy holders will now stay with true Pan in for a minimum three year period.
We expect the majority of new business to be issued by a different underwriter as early as Q2.
Any new pets that we underwrite moving forward will be at a more reasonable margin.
Looking ahead, we will be prioritizing our capital deployment for our entire business in areas that deliver us the highest returns in.
In 2023, our focus will be on continuing to leverage our veterinary leads in North America and further strengthening our balance sheet as main drivers of value creation with that I'll hand, the call over to Marty.
Thank you Darryl and good afternoon, everyone.
Oh, I can't dial sentiment that it was a strong growth year. If that's your opinion, we deployed $18 million to acquire nearly 260000 pass at an estimated internal rate of return of 30% on a trailing 12 month basis.
We also added approximately 29000 additional paths in the fourth quarter through two acquisitions in Continental Europe .
Excluding these pets on your pet growth of 15% benefited from robust leads led by the veterinary channel and a modest improvement in conversion rate year over year, we delivered this growth while maintaining our strong levels of member retention absent on new products. The average Japan in pet stay with us for approximately 77 months in 2020 chain, which.
We believe to be significantly higher than the industry's average.
Jay will provide commentary on our overall book of business momentarily.
With our territory partners consistently back in a failed in 2022, and the rising cost environment, making high quality medical insurance more relevant than ever we still good engagement and returns from the veterinary channel puzzle.
Positively we also saw a notable uptick in battery adoption and the use of our software solution that enables us to pay member invoices directly to the hospital at the time of Checkouts.
This was especially prevalent in the second half of the year as inflationary pressures took hold and we ended 2022 with our software and approximately 8000 hospitals across North America.
It's up over 24% from the prior year, the highest rates of deployment yet.
Our territory partners and our relationships with veterinarians and their staff is a cool moats around our business in November we hosted our first in person territory partner conference in three years, we were thrilled to be together again in person to celebrate wins and setup execution for the year ahead.
As a reminder, our Pac spend it all inclusive and our estimated internal rates of return for the fourth quarter, a 31% reflects the costs associated with the conference.
Absent this spend our estimated IRR would've been about 2% higher.
This is a trade off we're happy to make with much of the anticipated benefits still to come.
I'm encouraged by the discipline the team shaved with Pac spend in the quarter, particularly in light of the margin pressure, we face in the back half of 2022.
Willing into this discipline, even further in 'twenty three as we look to drive IRR to the higher end of our guardrails.
We also continue to take actions to get ahead of the changes we're seeing in battery medicine.
Since we last bag, we have an additional 4% pricing increase approved including a preload was N. Two key states absent the impact of changes in mix. We now have a total pricing increases of 15% flaring felt that exiting this quarter with another 3% imminently planned.
As a reminder, pricing changes are applied immediately to me pass the floor to our existing back over 12 month period.
In December our average pricing increase was 8.5% in January it was 11.2% in February we expected to be 13.1 and March 14.4%. This will continue to build through the year. The team is working diligently to get back to a 15% margin target by the end of this year.
With pricing actions, taking effect with focusing on our member retention efforts to get ahead of the anticipated pressure on this metric.
We've yet to see any material impact should these rate changes come through given the 12 month roll on but we fully expect them to.
Nevertheless, the auto increases, resulting from these rate adjustments should more than offset any impact to revenue more importantly pricing increases will hold us so our pricing promise of 71% Ulf.
Ultimately, it's this promise of value that will enable us to keep our members for the life of that patch.
We remain steadfast in our mission to help personalize budget and care for their pets.
In the years ahead, the need for our products will only grow and continue to focus on our mission will ensure we're able to support as many pets as possible.
And speaking of such support in the final days of 2022 we used to pass the milestone of having paid out over $2 billion in veterinary invoices.
This is a milestone no other provider has reached as quickly as we have and it's a testament to the problem. We're solving how many of those paths would not have survived without Japan in the couponing brand. The main focus of my commentary thus far remains the primary engine behind our approachable performance.
As Darren mentioned in 2022 we also made progress against the other 16 months upon initiatives, including advancing our lower cost products ph to interact in fact end market launching our powered by a suite of products with Aflac and chewy and building on our international F. S.
Collectively today these initiatives are small and.
In 2022 on new products in North America represented just 3% of all new patents with these initiatives meeting after development, we now turn our attention to optimizing these revenue streams for growth, we will be disciplined in our approach rolling out in a way that allows us to step up into growth and our pricing well within our IRR guardrail.
In 2020 Chi we significantly expanded our addressable market acquiring a foothold in continental Europe with the addition of Europe , we estimate our reach to be doubled to over 50000 veterinary hospitals base.
Based on the nature of its revenue contribution from our European acquisitions is relatively modest as a reminder, D. C businesses currently operate like marketing organizations selling insurance products that are papered for another underwriter.
In the quarter revenue from these two acquisitions was approximately $200000, but more importantly, the acquisitions come talent technology licensing and relationships that will drive ease of entry in these regions.
In addition in November we announced a joint venture with Aflac and Japan and are working hard on our go to market plan.
This will approximately and a further 10000 battery hospitals to our addressable market.
As a reminder, all go is to bring a Japan analyte product into Europe , and Japan This year with.
For the first 24 months of US 16 months plan in the rearview mirror, we have made substantial strides across many of our strategic initiatives. Some areas are further along than others, but we have built a strong foundation for growth.
Throughout this we've demonstrated a solid track record of disciplined capital allocation, especially when faced with recent inflationary pressures we.
We still have work to do but I expect that as we emerge from today's inflationary environment. We will do say from a position of competitive strength, having solidified our pricing promise and commitment to delivering the highest sustainable value proposition in the industry both of the vats and the paths with that I'll hand, the call over to Jerry.
Thanks, Marty and good afternoon, everyone.
As Darryl and Marguerite covered many of our 2022 financial highlights I'll focus my commentary on our fourth quarter performance as well as discuss our outlook for the first quarter and full year 2023.
Total revenue for the quarter was $246 million up 27% year over year and led by strong pet enrollment in our subscription business. In addition to growth in our other business.
Within our subscription business segment revenue was $158 6 million in the quarter up 18% year over year, our business experienced a larger than typical year over year impact from the U S to Canadian exchange rate.
On a constant currency basis subscription revenue would've been up 20% year over year or 161.1 million in the quarter.
Total enrolled subscription pets increased 24% year over year to over 869000 pets as of December 31st.
This includes approximately 29000, new pets. They were added in the fourth quarter is the result of our European acquisitions.
Excluding the new pets from acquisitions total enrolled subscription pets increased 19% compared to the prior year period.
Across all of our products, our average monthly retention, which is calculated on a trailing 12 month basis was $98 six 9% compared to 98.74% in the prior year period equating to an average life of 76 months.
Monthly average revenue per pet was $63.11, which is up 0.5% year over year on a constant currency basis.
On that same basis cost of veterinary invoices per pad increased 2.8% over the same time period.
As we've noted in previous quarters, our poo and cost of veterinary invoices continue to be impacted by a change in mix of business included accelerated growth in our lower ARP who areas.
Our loss ratio was 72.7% the quarter, which is down 80 basis points from Q3.
This reflects seasonally lower claims period.
Variable expenses as a percentage of subscription revenue were 9.6% down from 9.8% in the prior year period.
Fixed expenses were also down to 4.1% of subscription revenue in the quarter compared to 4.9% in the prior year period.
Combined variable and fixed expenses as a percentage of subscription revenue declined 100 basis points year over year as the team continued to drive efficiencies throughout our business to offset our elevated loss ratio.
As a result subscription adjusted operating income was 21.5 million an increase of 6% over the prior year period.
On a constant currency basis. This would have been an increase of 9% our adjusted operating income of $22 2 million.
For the quarter, our adjusted operating margin was 13, 6% up sequentially from 12, 8% in the prior quarter.
Now I'll turn briefly to our other business segment, which is comprised of revenue from other products and services that generally have a beta be component and different margin profiles than our subscription business.
Total other business revenue was $87.4 million, an increase of 45% over the prior year period led by growth in new pets.
We anticipate growth in our other business segment to slow in 2020 three as our partner transitions to an additional underwriter for their new book of business.
We currently expect growth in this segment to approximate 10% in 2023, but keep in mind that timing may shift.
Adjusted operating income for our other business segment was $3 3 million in the quarter.
In total adjusted operating income was up 11% over the prior year period to $24 8 million.
We invested $20 3 million or 15% more year over year to acquire approximately 66000, new subscription pets, excluding those added from acquisitions.
This resulted in a pet acquisition cost of $283 and an estimated internal rate of return of 31% for a single average pet is calculated on a trailing 12 month basis.
We also invested an additional $2.1 million in the quarter or 7.8 million for the full year of 2022 on development costs.
As Mark noted earlier 2022 it's a significant foundation setting year for our long term efforts, including international expansion as well as new products and distribution channels.
Moving into the first quarter. Some of these expenses will shift out of development into variable or fixed within our subscription business.
Adjusted EBITDA was 2.2 million as compared to $3 5 million in the prior year quarter.
Depreciation and amortization was $2 9 million for the quarter.
Total stock based compensation was $8 4 million for the quarter in line with our expectations.
Net loss was $9 3 million or a loss of 23 cents per basic and diluted share compared to a net loss of 7 million or a loss of 17 cents per basic diluted share in the prior year period, turning to our balance sheet. We ended the year with over $230 million in cash and investments we hold them.
<unk> 69 million and that was 75 million available under our long term credit facility.
Shifting to full year cash flow operating cash flow was a negative 8 million for the year compared to a positive $7 5 million in 2020 one.
Capital expenditures totaled $17 1 million in 2022.
A step up from $12 4 million in 2020 one.
Largely reflecting investments in our next generation policy administration platform.
As a result free cash flow in the year was negative $25 1 million.
Since 'twenty 'twenty and the approximate $200 million strategic investment from Aflac, we've been able to operate outside our previous guardrails of positive free cash flow invest in increasing our addressable market with much of our foundational investments now in place, we intend to prioritize cash flow generation in 'twenty two.
'twenty three.
With this in mind I'll turn to our outlook.
Keep in mind that our revenue projections are subject to conversion rate fluctuations, most notably between the U S and Canadian currencies.
For our first quarter and full year guidance, we used a 75% conversion rate in our projections, which was the approximate rate at the end of January we.
We expect this will amount to 1% to 2% year over year foreign exchange headwind, particularly in the first half of 2020 three.
For the full year of 2023, we're now planning to grow revenue in the range of $1.032 billion to $1.064 billion.
This is approximately 16% growth at the midpoint.
We were planning to grow subscription revenue in the range of 700 million to $720 million, representing 19% year over year growth at the midpoint.
We expect total adjusted operating income to be in the range of 99 million to $108 million or 16% growth at the midpoint.
Yeah.
As Marty noted it will take time to floor pricing through our book because of this we expect to see a step back and adjusted operating margin sequentially in Q1 before building back towards our 15% subscription adjusted operating margin target by year end as our pricing actions take hold.
Of our adjusted operating income, we'd expect to invest approximately $80 million to $85 million in acquiring pets within our subscription business we.
We intend to closely monitor the broad market environment and leverage the team's strong track record of adjusting Pac spend up or down in relation to market opportunities as needed.
Development expenses are expected to be around $5 million in 2023.
As for the first quarter total revenue is expected to be in the range of 249 million to $253 million.
Subscription revenue is expected to be in the range of 164 million to $165 million.
This is 18% year over year growth at the midpoint.
Total adjusted operating income is expected to be in the range of 21 million to $23 million.
Thank you for your time today with that I'll hand, it back over to Darryl. Thanks drew.
Wanted to take a moment to remind you that we're quickly approaching two of our marquee investor events for the year on May six we will once again be hosting our annual Q&A in Omaha.
On June 7th marketing I'll be joined by our team at our headquarters in Seattle for our annual shareholder meeting.
This once a year event is your opportunity to hear directly from the leaders responsible for executing the initiatives and our 60 month plan and a Q&A focused format <unk>.
Additional details for both events can be found on our Investor Relations website, we hope to see many of you there.
In the next few weeks, we will also be publishing my annual shareholder letter for 2020 two.
For those looking to better understand our business and how we think I encourage you to read it.
With that we'll open up the call for questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please only call for our questions.
Our first question comes from Elliot Wilbur with Raymond James. Please proceed with your question.
Yes.
Hello are you there.
Yes can you hear me.
We can now thanks Elliot.
Okay. Thanks.
First question for Mark I guess, given that you just came out of here.
National sales our territory partners meeting wondering if you could just talk in.
In general terms about.
The plan in terms of territory partners for 2023.
The number of.
Targeted hospitals, you expect to be calling on and whether or not you anticipate any changes in.
Calling patterns, meaning territory, reshuffling or or or reallocation of resources.
Hi.
So yes.
Yes.
That's one in three years that was great to have it growing back together and that the rail cohorts that having that conferences face to celebrate what we achieved in the year private almost everybody today pointed to this here and tenants of our strategy. We're absolutely. Thanks, Don on doing what we know we did well we'd be nine months back in the field back back in last March and consistency of that.
Whole pattern.
The the development.
Relationships nights and nights that hospitals, that's really that two thing a big uptick in that lead a big uptick in software and so for US we know that works and we're continuing on the same call.
The Cherokee that right as seen by the general managers and such I imagine from the Cherokee upon is that doing a great job blocking and policy. It together to continue to deepen that might say.
No no different to what we've always been doing I think we can look forward to 12 months of solid activity, we get to 25000 of that hospital several times in any given year stay the way that the market is cost out that really allows us to have one on one conversations alright discussion to support guys hospital, when they need us and they do and will.
To do the same thing as the voice on it's working for US right now we're happy to get back into that group.
Okay.
And that will see the numbers in a couple of weeks with the shareholder letter, but just yes.
Thinking about our call frequency.
Well, I guess, where are we now or exiting the year versus pre pandemic levels.
Yeah.
There was a little bit more detail on the shareholder lessor, which will be coming out with you say in just a few weeks in terms of our April call. We are back on track actually little bit ahead of where we were prior to the pandemic. There now we have more people in the field than ever before we crossed 160, Mark which which is fantastic because it means we're able to go get out there more frequently than that.
You said more frequent conversation just in terms of the overall number of hospitals, where he is saying, we just said that we're at and 8000.
Hospitals with our software and we've been watching it over 16000 hospitals on a regular basis I think that when we think about those numbers as they continue to build that's pretty through that ongoing education conversation that we're having them and you can expect to see that continue to ramp up as we make sure that we have all the territories occupied over the next I would say six months or so.
Six to nine months.
Okay and I wanted to ask a question on inflation trends is well I mean, it sounds like.
Pricing flow through is essentially consistent with what you discussed.
Three Q results, maybe maybe slightly different in terms of timing, but I guess sort of the aggregate level as well.
Roughly consistent but looking at some of the inflation numbers out over the last couple of months I mean clearly.
Annualized increases have continued to decline so I'm wondering what you're seeing in your book of business versus what you discussed.
Last call and sort of relative to what Youre planning to do in terms of rate increases.
Yeah, I can I can start this off and then hand it off.
Well if you can provide some more context, but just in terms of why we whereas we mentioned.
There are no surprises going into this year I'd say that everything is as we expected. We are when we went through with a pricing change it towards the back half of last year. They roll on gradually as you know so what we see is we'll see a slower rollout of the gate as I mentioned in the call by the end of its course, we don't say about 15% with another three points coming true.
We treat the rest of the year that is that we what we forecast salaries in line with what we're seeing and we're trying to get a little bit ahead of that to make sure that we had had enough for them and that's a great range of any potential future increases.
I would say that it is as expected right now which is good and we will be paying particular attention to this especially after last year, we're watching it very closely and I'm ready to kind of making sure that we're looking at a frequency and severity on a very regular on a very granular level basis. So I think all things being equal we're in good shape here. We've got good data that we've got good lens on it.
One of things that Gary typically backs will raise that rate now once a year usually in January February March same kind of thing that this trend country.
And I think where we're at.
Twice now cheap I would take action if anything changes, but at the moment, we feel happy with about 18%.
Jay what would you add.
Okay.
I guess, the only thing I'd add is just that dynamic that market describes our rates come through linearly.
And we tend to see step changes in that pricing.
And then where they take prices early in the year, it's one big dynamic and so that's why we take a step back in margin, but thats.
Totally consistent with the outlook, we gave in Q3 and the pricing that we talked about that that is all in line as expected.
Okay, and just last question on monthly.
Our retention rates.
Yeah.
Very modest.
Sequential decline can you just.
Maybe talk about sort of what you think is is is driving that is it in fact.
Related to the level of price increases in our book of business.
Yes, yes.
And you get it in the annual letter to the bucket with 20% plus increases being more negatively.
Hmm.
The churn, but you know I'm not sure necessarily those levels that we're seeing are impacted.
The churn rates and I guess, just sort of given the you know the context of just the higher inflation levels.
Are you actually seeing more policyholders present, and look to or for the option.
Canceling policies and you've just been able to more effectively.
Dreadful and retain the business or has that actual number of policyholders.
Presenting you were considering potentially canceling that really changed with the recent increases thanks.
Yeah, So I mean.
We say highest level that'd be nice surprises going as we expected from a retention perspective and to your point you know when you look at the macro environment, we have seen a slight decline, but let you know.
If a contract 77 months, we believe it is probably true that the industry average. So you know we're coming at a very high retention level anyway.
You know I would say that as we look at the April volume that we've got coming in the pipeline. It's not it's not dramatically different hence that just that slight drop that but we also haven't yet well trade all of those pricing changes so as they come along we do expect to see some cement patria attention and yet we still believe that we'll be keeping up at twice as long as the industry average.
That said, we are expecting to see a over the course of the next six to 12 months as we get to the bulk of the thing that I think treatments for all three we will see a little bit of a hit that just in terms of I mean, Jay can speak to the numbers.
In terms of what that impact us.
Sorry for all that anything that we operating truecar attention sorry, if somebody from an RP with Vantiv as prices increase we do believe it's going to offset their attention and that and it's necessary for us to make sure that we're living up to the value proposition and we can sustainably profitable keep our membership for the life of the pet.
Drew.
I'd just add.
Good morning, good data point as we look back at our history in 2019, we had almost 20% of members got a price increase greater than 20%.
And back then we had a retention rate of 770 months roughly in the low seventies, and so and we've got a lot better at retention since then.
But that gives you a point of reference point of what it might look like.
I think one of the other.
The teams are thinking about as well to add to that as we see the right come through and we see more of our members falling into that 20% plus bucket.
We do have a we internally where fashion with our pricing promise and what that says basically we're trying to price to stay in line with that with the expenses that are coming through that invoices in the event that we priced ahead of that we are committed to being able to rebate to our members and some cyclical instead with again change that value proposition the retention message, we're not trying to change anything.
From a member or a promise that we made to limit and that commitment is holding true as we roll these price that's right.
Okay.
Operator, you want to take the next call.
Uh huh.
Operator are you there.
Alright.
Our next question is from.
Yeah.
John Barnidge. Please proceed with your question.
Thank you very much I appreciate the opportunity I had a question around the term loan and plans to draw it.
I know in the prepared remarks, there was a comment about.
Increase reserve requirements with state regulators, so curious about that and plans for that to draw on that term loan. Please. Thank you.
Okay.
Sure I'd remind everybody what we have to say.
Revolving credit facility is a long term five year facility that totaled $150 million.
$15 million line of credit feature.
And then any.
Draw that we do on it becomes a term loan so we view this as a.
A lower cost way to fund our reserve requirement versus equity.
Kind of our internal data.
Management.
Got guardrails and so.
Yes over time, we will continue to draw on that to fund reserves.
Agreement that we've reached with a large partner or another business really.
Is about more efficient capital.
Usage and frees up reserves inside of our insurance company to allocated towards our higher margin subscription business.
And we.
We view that as a significant upside there, but yes over time, that's how we will fund our reserve requirements.
Okay.
Great. Thank you for that and then I had a question about open enrollment season for the work site.
There's times where a.
A new medical product or can get introduced and theres, a lapse and reissue dynamic that begins to emerge as someone switches maybe from a vet driven channel to a worksite driven channel can you maybe talk about how you're thinking about that for <unk> as that open enrollment begins to take effect. Please. Thank you.
Yeah. So let me just make sure I understand the questions that we are talking here about potential cannibalization of one one channel to another or is that is that fair.
Hey.
Cannibalization might be too strong, but yes, essentially someone that might have had it through the vet channel now has it offered through their employer.
Yeah, Yeah. Thank you for that.
Just in general when we think about the penetration rate I agree with you cannibalization is quite a strong what to use when they call. It 3% penetration I'm definitely in terms of the products and the distribution channels and the partnership with Aflac is really allowing us to reach a new and you are a new type of person or if you will than we typically would see the batch I don't let's say, we don't anticipate thing.
A huge cross like that in terms of the people that we're speaking to are we using our brands because I'm, Brian just learning the vet channel on it now for being able to pay the veterinarian directly at the time of check out and and we believe that through Aflac, we will not necessarily be hitching that same person. So we're not at this point concerned about thing any overlap, we'll cross that and we believe.
The products are designed very specifically for the purposes of which they can see merit shop.
Things that they are in the black side, they are going to be looking for something a little bit different than everything else, Michelle and I think like I know, it's very early days with that with web site.
It isn't a handful of fat and fat and.
Enrollments coming through I think businesses and really what kind of long time talking to see how it can become a meaningful part of what we're doing but nothing.
Nothing nothing more.
Tisch everything at this point related to it but we'll obviously be watching it to make sure that we can we can capitalize on the benefits. We have you got any distribution channel and our strategy.
Okay.
Thank you very much appreciate the answers.
Our next question comes from Corey Grady with Jefferies. Please proceed with your question.
Hey, Thanks for taking my question I might have missed this in the prepared remarks, but did you provide any color on sub count contribution from the pet expert acquisition in Q4, and then what are you expecting in terms of contribution in 2023 from the European acquisitions.
Yes, we are.
The two acquisitions.
Brought in 29000 pets that came with those two acquisitions.
As we mentioned in the prepared remarks once again they are they are marketing companies.
But fully underwritten model that we have on our other business and so the revenue stream from them. Currently is just the marketing Commission now our intent is to move to a full underwriting model.
And that's why they are in our subscription business there are direct to consumer businesses and we will eventually have them.
On a fully underwritten basis.
So their revenue contribution is relatively modest.
Had one month of pet expert which is.
By far the largest of the two and that was 200000 and so on they are growing.
And we intend to bring a Japan like product to them this year.
For 2023, you can kind of back into what the contribution would be.
If you grow off that base.
Yeah, and if I can add some context in terms of the April impact. So we would expect to stay around 10% to 20% upon new pets coming from all of our new initiatives that would that would be interested in international and a new distribution channel.
As we look through 2023 and as we are referring to treat their comment when you think about our pet counts in the coming year, we expect to stay at the 20% increase in our pack count April in terms of gross adds but at the same time spend so that kind of really tells you that we're being very disciplined with our approach we believe that having orange nationally.
<unk> allows us to think rates opportunity such success and we're excited to be able to hold all of our general managers across all of the different countries, where in Bolton to thank God valves. They will be looking to deploy that capital are agnostic of where they are that's the location. They sat at the same levels as the higher rates of return.
Okay.
That's really helpful. Thank you and I wanted to follow up on John's question on the term loan.
On capital reserves can you talk about plans to fund higher capital reserves and do you feel like you have enough cash on hand, or do you need to tap the term loan further.
Let me handle the first and then I'll hand, it off to drew.
The changes that we've recently announced is going to lower our need for capital reserves not increase them.
The in our other business area, where it's been growing at.
At a healthy clip and it has required us to hold about $60 million.
Our reserve capital and in aggregate, we've earned about $20 million of adjusted operating income.
So obviously not a super efficient use of funds as that area. It slows down our total capital requirements will lower and gives us an opportunity to reinvest that same capital in places with higher rates of return.
Judy anything you want to add there.
Okay.
No I mean, there's.
There's a big growth penalty and an insurance reserve calix.
It looks kind of lies our entire book.
That's helpful in terms of more efficient use there and.
Our capital needs.
Totally linked with how fast we grow.
Outlines.
We're being disciplined in allocating capital to our highest return areas.
Should we get margin expansion.
Let's see as we go through the year, then we'll look at deploying more capital, but right now going into the year, that's our posture.
Yeah.
Thank you.
Our next question comes from Ryan Tunis with Autonomous Research. Please proceed with your question.
Yeah. Thanks, good evening.
First question I guess for drew.
First quarter adjusted operating earnings guidance, what are you contemplating in that subscription invoice ratio.
Yes.
And loss ratio I think you'll see us step back up.
But then you know building back towards.
And a step down in <unk>.
Subscription adjusted operating margin, but so starting lower in the year and then building up to 15 in the back half of the year, so embedded in our full year guidance.
Is a 13% to 14% subscription operating margin.
And that's with that is very consistent year over year growth in subscription revenue.
And there's a lot more of a year ago. So as we go through it.
We see margin expansion coming through then we will.
Deploy more capital for more growth.
And I think if I can add to that as well right. When we think about the April cost of goods, we expect to see that coming up about 10% to 12% on and say you know at the moment as a reminder, the amount of rate we have flanker brands between 15% to 18% in all cases.
I get it back to you to kind of where we should be fine from a catch up from last year that she could put it nicely in line or slightly ahead of that curve in terms of the coast.
Got it I guess following up on that.
I guess, just a little bit surprised that that our pud didn't increase a little bit more.
How should we interpret it looks like <unk> was sort of flat on the adjusted basis, how should we interpret that given the rate you're right.
Turning to the book.
Yeah.
We've been talking about this dynamic.
All year and it's a healthy mix, we have so from that the headline like for like rates that Marty was talking about it it makes them drive it down to the lower rates.
We also have significant capex year over year headwinds.
We typically don't talk about it unless there are over 1% while in the first part of the year there are 2%.
But.
What we see for the full year 'twenty three.
For <unk>.
<unk> growth rate is on average for the whole year three to three 5%.
Once again consistent with our outlook back in October and Nothing's really changed other than we've updated mix assumptions now bear in mind mix also plays through to claims because of our cost plus muscle model.
If we have lower all lower ARPA, we're also going to have lower claims.
Those two go together and that's why we're focused on.
At the end of the day, it's about margin and so full year, 13% to 14%.
Margin on average is what's embedded in our guidance.
Got it and then just lastly drew that was helpful. You mentioned.
2019 experience I think you said, 20% of the book.
About 20%.
And when you gave us like a 70 month retention number that was low seventeens.
How should we think about that in terms of reconciling it to kind of at that monthly retention number.
Did she goes.
Yes.
Uh huh.
Daryl I answered it it's in my shareholder letter so youre looking at about a 98, 6% monthly retention rate equals about 70 months.
And that was referencing back to 2019, where we saw about 20% of our new pets at that rate. So it's just the placement.
Place in time for people to go back and take a look at it we've we've been there before and we've been through it.
And we would expect something similar.
Thanks, so much.
Our next question comes from Jon Block with Stifel. Please proceed with your question.
Thanks, guys.
First question Jeremy.
Joe maybe for you just the change in the other revenue strategy I guess those are my words, but you know why now what does it free up capital.
So was there anything in response to regulations change I thought there might have been some regs that were.
Changing or had changed in California. So maybe you can elaborate on that.
Yeah No these conversation.
<unk> over two years ago, and it was to free up free up capital.
I think if COVID-19 didn't happen it might've occurred a little bit quicker.
If we had not got the $200 million cash infusion from Aflac, a couple of years ago. It probably would have moved a little bit quicker.
We were able to spend the time with our partner to come up with a solution that was beneficial.
Beneficial to us and allowed them to kind of.
I have a smooth transition so.
Long term in the planning.
Okay.
You have a little bit.
It didn't change in California on that it just seems like you took this business from 4% of revenue to 30% part of the reasoning was to get leveraging fixed expenses down to 4%. What you did seem to work out I thought it came across Reg changing in California that was it.
That didn't play a role in this.
We had come to this agreement.
Before any rate cases in California, just took us a while to get it all papered.
So no real changes in California did not drive this decision.
Okay.
Drew for you you know my my same sentiments to the prior question on Harpoon I guess, it's an offline I just always struggled with a base of 800000, you add so many thousand pads, how it's not dilutive.
There's also a component where higher RPM pets must be churning off to get the suppression, but maybe just looking forward.
We still think our pool in 'twenty two 'twenty three is up 5% I know you went through some of the big increases on the column you know in February and March that will start to roll through but call. It realized after we take this mix dynamic into play do we think about <unk> five or <unk> 23 versus 22 in the P&L.
No.
Yeah.
Yeah, No. We're looking at for the full year of three to three 5% and that.
No.
It is driven by mix of geographies the biggest driver of that which then it goes hand in hand with our claims.
And so parts new businesses in the portfolio and parts new businesses below but that's we're pricing to the value proposition and not just for the top line.
And so that's what's driving that dynamic it gives us.
This growth.
It's we continue to have ongoing strong growth, which is driven by the positive mix.
Okay I'll be respectful asked two questions and take the rest offline. Thanks guys.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from sway that had urea with efforts Evercore. Please proceed with your question.
Oh, hi, Thanks. This is Jan freshwater I guess, maybe not to belabor. This point further but or pool, I guess I'm more conceptually beyond this year, how should we think about the progression of this line that like I mean do you expect dismissed mix to continue to drive I put down is there anything that could.
Kind of balance that out if you can kind of talk about the long term I'm thinking on ARPA progression.
Mix is an interesting dynamic.
You know the more successful we are in certain areas.
Has lower op. For example, we were about one decade independent creation right into the United States.
We've been in Canada for two decades, our growth rate in Canada is faster than our growth rate in the United States a lot we've been in market and the faster we grow the more veterinarians recommend us the cost of veterinary care.
In Canada is lower than it is in the United States. So every time, we're growing our higher percentage in Canada versus the U S that lowers our mix when you layer on top of that currency exchange and the U S. Dollar has been growing a lot faster than the Canadian dollar that's another factor, but now you've got to take into effect.
Now added new distribution channels, all those distribution channels have lower cost products and lower coverage. We've also added two new lines of products both of them have lower coverage and that's before we get into going into Europe , and they cost the average cost of veterinary care in Europe is lower but once again we.
We are a cost plus model.
And we our job it's the cost appropriately. It is also to understand the lifetime value of each of those streams of pet and then make sure that we're spending appropriately.
On pet acquisition to get those strong rates of return.
Mark you mentioned earlier.
In Druze implied guidance.
For the year, we're looking to be growing pet growing at 20% year over year, but basically at the same amount of pack daughters that shows you that as mix. It is changing so is the discipline around our Pac spend so our Pac spend is getting also equal I know it's hard for modeling.
But you know as drew said in our forecast. We're currently looking at about 3% in <unk>, although the underlying increase for existing clients can be a 15% to 18% as the year goes on.
But it's the nature of our business lots of categories of pet lots of distribution channel and now multiple levels of products. So hopefully that helps.
Got it very helpful and one other question if I may just on the new distribution channels for this year I think I think Mark you said like 10% to 20% contribution from these channels does that include the chewy partnership and also if you could just kind of rank order, which channel do you expect to be which of the new channels do you expect to be the more significant.
And what's kind of the linearity of that especially just given I'm just thinking of chewy.
I guess the size of that base is quite significant for Japan in but and if you can read from that.
Yeah, No of course, I can't say Youre right I did say, we expect to see somewhere between 10 and 20%, but what are they using child combined so that would be inclusive of a European acquisition chewy Aflac and all that price plans. They are signed back in.
In terms of the contribution when we're operating within the same margin pretty popular with them. We're looking at the thank God well say.
At Frost, we're taking agnostic and the expectation is we're going to get better in all instances.
Learning how to generate needs and sometimes it's about conversion and retention.
Yeah, I would say that all of them have got huge opportunities you know all of them are things that we felt were as we mentioned in last 18 months plan going back a couple of years now something that we would be able to get to your $100 million worth of revenue in five years, It's all saying I think kind of that that's still absolutely true and for US we were ready to kind of getting out of the gate this year and kind.
Putting the.
Pedal to the metal and making sure that we're in a position to start to generate revenue, but I wouldn't I wouldn't want to rank one above the other I think we can expect to see about 10% to 20% and as we go through the year, we'll have a little bit more call it to share on that which ones are leading the pack, but they're all they're all in good position to go forward and that should start to contribute to revenue quite meaningfully over the next couple of.
Years, which is part of the fun.
Great. Thanks, guys.
Yeah.
Yeah. Thank you.
We have reached the end of our question and answer session and this concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Yeah.
Yes.
Okay.
Okay.
Okay.
[music].
Yeah.
Hum.
Hum.
Hmm.
[music].
Yes.
[music].
Yeah.
Yeah.
[music].
Yes.
[music].
Yes.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
[music].
Yeah.
Yes.
[music].