Q1 2023 Trupanion Inc Earnings Call
Which exclude stock based compensation expense and depreciation expense.
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Lastly, I would like to remind everyone that todays conference call is also available via webcast on true opinions Investor Relations Web site.
<unk> will also be available on the site.
Thanks, Laura three years ago, we kicked off our 60 month plan. We are now 28 months in and on track to achieve many of the goals. We set since that time, we've grown revenue to above 30% annually increase our adjusted operating income by nearly 50% and acquired over half a million new subscription pets at a strong estimated <unk>.
Hurdle rate of return the number of active hospitals in North America now approximate 16000, we're paying nearly half of veterinary invoices for our software and retention rates remained strong we're seeing consistent levels of conversion and strong growth in pet owners, referring friends and adding pets. We've also added new brands and new channels and have laid the foundation to double.
Our addressable market extending our runway for growth by decades, I provided more detail around these highlights in my annual shareholder letter published in March the core of our business model is to earn the trust of veterinarians and pet owners. We do this by providing a solution to the rising cost of veterinary care, making it easier for pet owners to budget for their Pets' care.
Their lifetime.
Over the long term the underlying need and demand for our high quality insurance will continue to grow last year the cost of veterinary care increase at an unprecedented rate with veterinarians raising prices multiple times throughout the year as expected we saw veterinarians take additional price early this year and it is our belief that the long term sustainability.
The veterinary industry will require veterinarians to pass on higher fees in the form of inflation for the years to come keep in mind that the cost of veterinary care for Trapan. Ian is a combination of the number of veterinary invoices received and the increase in our average invoice size as one can imagine these ongoing rapid rate increases will prove more challenging.
LNG to uninsured pet compared to those with insurance as a result, veterinarians and their staff will have greater urgency when introducing the concept of high quality insurance or answering questions from enquiring pet owners long term the category entry opinion are set up very well to meet this demand.
Importantly, we do not and will not dictate the cost of veterinary care. We're a cost plus model. It is our job to understand the trends in the cost of care and to share the risk appropriately through our granular approach to pricing.
Our product is for the life of the pet we do not try to predict the cost 510, and 15 years out we simply monitor the cost the year over year inflation and project out. The next 12 months to 18 months in my shareholder letter I detailed some of the temporary and near term challenges, we faced and accurately forecasting veterinary costs throughout the <unk>.
Course of 2022, namely the ongoing impacts of Covid in the post pandemic veterinary staffing challenges the increase in the deployment of our software the change in our mix of business and the rapid and unprecedented rates of inflation in total we estimated our cost of veterinary care increased by 12% in 2000.
22 twice that of our historical rate of veterinary inflation over our 23 year history.
Entering 2023, it was our expectations that the cost of veterinary care for our members would persist at the elevated rate of 12% and then our pricing plans would be sufficient to get us back on track to our adjusted operating margin target by year end in Q1, we saw our actual cost of veterinary invoices increased by <unk>.
15% year over year ahead of our previous assumptions within our cost plus model. This means we need to add an additional 3% and pricing to get us back on track with our margin targets at a revenue run rate. This has a $30 million impact on our adjusted operating income for the year, we've updated our adjusted operating income outlook to occur.
For the step up in veterinary inflation to 15% year over year drew will provide more details momentarily.
Rapid changes in inflation will continue to challenge our ability to price accurately for our members. Unlike other direct to consumer subscription models within the insurance industry. We are limited in how quickly we can adjust and implement pricing typically.
Typically in the U S. It will take US 18 months in order to file for receive approval and implement new pricing across the entirety of our book over this time period. Our members will on average receive a higher than usual value proposition in a world where veterinarian and members confirm this is an okay outcome over.
Over the long haul well managed insurance providers sticking to their values and diligently growing when and where it is prudent to come out stronger in the years. Following a period of margin compression between then and now the team is energized and working hard to restore our margins as soon as practical with that I'm going to hand, the call over to drew to discuss our Q1 results.
And outlook in greater detail Mark <unk> will then provide more context around our performance and our plans to hit our key financial targets.
Thanks, Darryl and good afternoon, everyone.
Today, I will share additional details around our first quarter performance as well as provide our outlook for the second quarter and full year of 2023.
Total revenue for the quarter was $256 3 million up 24% year over year and ahead of our expectations revenue performance was driven primarily by strong pet additions and sustained high levels of monthly retention in our subscription business and continued growth in our other business.
Within our subscription business revenue was $165 2 million in the quarter up 18% year over year.
On a constant currency basis subscription revenue would have been up 20% year over year or $167 2 million.
Total subscription pets increased 23% year over year to over 906000 pets as of March 31 calculated on a trailing 12 month basis, our average monthly retention across all of our North American subscription products was $98 six 5% compared to $98 seven 5% in the prior year period.
Equating to an average life of seven four months.
Monthly average revenue per pet for the quarter was $63 58.
Which was largely flat year over year on a constant currency basis on that same basis cost of veterinary invoices per pet increased nine 5% over the same time period. This increase per pet is attributable to both an increase in the number of veterinary invoices received as well as the higher average invoice size using insights from Q.
One data we also increased the size of a reserve for veterinary invoices by $1 2 million for prior periods, primarily Q4.
As a percentage of subscription revenue variable expenses were 10, 1% up 10 basis points from the prior year period.
Slight year over year increase reflects investments and maintaining our member experience initiative shifting out of development.
Fixed expenses as a percentage of subscription revenue were four 7% down from four 9% in the prior year period as the team continued to drive efficiencies throughout our business to offset our elevated loss ratio. After the cost of paying veterinary invoices variable expenses and fixed expenses, we calculate our adjusted operating income our subscription business.
<unk> delivered adjusted operating income of $12 6 million or seven 6% of subscription revenue.
As Darryl noted veterinary invoice expense outpaced our expectations in the quarter.
Now I'll turn to our other business segment, which is comprised of revenue from other products and services that generally have a <unk> component and a different margin profile than our subscription business in.
In total our other business revenue was $91 1 million for the quarter, an increase of 37, 7% year over year due to primarily to an increase in pets enrolled.
As discussed last quarter, we anticipate slowing growth throughout the year in our other business segment as our partner transitions to an additional underwriter for their new pets <unk>.
Adjusted operating income for the segment was $2 9 million in the quarter.
In total adjusted operating income was $15 5 million in Q1, a decrease of 28% over the prior year period.
During the quarter, we deployed $19 6 million to acquire over 74000, new subscription pets for North America. This resulted in a pet acquisition cost of $247 for the quarter and an estimated 30% internal rate of return for a single average pet. We also invested <unk> 9 million in the quarter on development costs as a percentage.
Of revenue development expenses was 35 basis points compared to 61 basis points in the prior year period. This step down reflects the shift of some of our new initiatives to variable fixed and pet acquisition expenses within our subscription business. Adjusted EBITDA was a loss of $4 9 million for the quarter as compared to $1 2 million.
In the prior year period.
Depreciation and amortization was $3 2 million during the quarter, an increase of <unk> 5 million from the prior year period total stock based compensation expense was $12 $3 million during the quarter inclusive of compensatory arrangements for departing officers, we expect stock based compensation to be around $7 million per quarter for the remainder of the year.
As a result, net loss was $24 8 million or a loss of <unk> 60 per basic and diluted share compared to a net loss of $8 9 million or a loss of 22 per basic and diluted share in the prior year period, turning to our balance sheet. We ended the quarter with over $253 million in cash investments, which was up from around $230 million at year end last.
At year, we held approximately $104 million and debt was $40 million available under our long term credit facility.
In terms of cash flow operating cash flow was negative $6 9 million in the quarter compared to negative $3 6 million in the prior year period capital expenditures totaled $5 2 million in the quarter. As a result free cash flow was a negative $12 million I will now turn to our outlook for the full year of 2023 after adjusting for Q1 performance.
Formats, and updating our forecast we're expecting to grow revenue in the range of $1 $47 million to $1 billion $76 million, representing 17% growth at the midpoint. This reflects Q1 outperformance in our other business segment.
We continue to expect to grow subscription revenue in the range of $700 million to $720 million. This is 19% year over year growth at the midpoint. We now expect total adjusted operating income to be in the range of 65 million to $80 million. This is largely reflective of the cost of veterinary invoices outpacing our earlier expectations as Daryl described.
Just at the midpoint of the range. This implies expansion in adjusted operating margin in the second half of the year as our pricing actions flow more meaningfully through our book of business.
For the second quarter of 2023 total revenue is expected to be in the range of 260 million to $264 million, representing 19% year over year growth at the midpoint subscription revenue is expected to be in the range of $171 million to $172 million or 18% year over year growth at the midpoint total adjusted <unk>.
Operating income is expected to be in the range of 14 million to $17 million.
As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U S and Canadian currencies for the second quarter and full year 2023 guidance, we used a 74% conversion rate in our projections, which was the approximate rate at the end of March.
Before handing the call over to marquee as this will be my last earnings call at your opinion I wanted to take a moment to express what an honor. It has been to work together with the team I am grateful to have had the chance to be a part of this incredible mission and I look forward to continuing to work with the team to help recruit my successor and ensure a seamless transition.
Thank you for your time today, I will now hand, the call over to Margaret.
Thank you Jay good afternoon, everyone. Following the recap of the quarter I'll provide more context, while Q1 results and our plans to deliver against our key financial targets.
It was another quarter of strong Pat Grace that your opinion, we acquired over 74000, new subscription pets, including 4000, new pets from Europe , while the cheap Hahnium products remains the primary engine behind our approachable performance. We're excited that our new initiatives, including international markets are starting to positively impact our growth.
Excluding European activity on a per pet basis, we enrolled 18% more subscription pets at an average cost of $247, which is $54 less than the prior year period.
Encouraged by the overall efficiency of our spend which was especially impressive given the margin headwinds faced throughout the quarter.
Both within our core coupon name products remained robust led once again by the vet channel.
We also continued to see strong growth from our members, referring their friends and adding pets that family.
Member retention for the quarter remained at healthy levels and on a trailing 12 month basis. The average coupon impact stayed with us for 75 months.
Necessary pricing continuing to roll Tropic, we're doubling down on our price to communicate our value proposition and to deliver on our pricing promise.
We remain encouraged by our ability to sustain high levels of retention within our Japan product, but can we expect to see some pressure throughout the year as pricing relative to our total book.
That said, our expected opex increases should more than offset any revenue impact from this pressure.
After several quarters of foundational work with finally, saying price take effect as a reminder, in January we had 11, 2% pricing improved I'm starting to see the business in February It was 13, 1% and in March It was 14, 4%.
Back to exit April at 15, 8% may with 16% and June at 17, 4% approved and flowing through.
Does that have an additional 6% thoughtful which if successful would equate to 23% pricing action signed three by the end of 2023.
This additional pricing action is reflective of the step up in veterinary invoice expense, we saw in Q1 as well as some additional proactive pricing actions.
As a reminder, pricing changes are applied immediately to knee pads that play to our existing back over a 12 to 18 month period, depending on state approval timing for this reason and accounting for the ongoing impacts of mix of business. We do not expect to get the full benefit at this pricing action in RP, we will continue to take a proactive stance to get ahead.
A future increases in the cost of veterinary catch returned to our margin targets as soon as feasible between then and now the team will remain disciplined in acquiring pets when my activity price to our value proposition allocation countless hotel, most efficient channels and all pricing, while within our variable and fixed cost structure.
They found that he and the team is watch while temporary about operational efficiency during the quarter. Despite the additional 50 basis points of expense shifting out to development. The team executed well to hold combined variable and fixed expense margins in line year over year.
A few weeks ago, we took important steps to reorganize the way our teams are structured this decentralized approach moving from one to multiple P&L with a core component of our 60 month plan and is expected to provide us with greater visibility into our data, allowing us to identify emerging trends more quickly and such a thought to act with greater speed and precision we further expect.
These changes to strengthen our data collection and inspection process improve our level of full costing build on a regulator relationships unfold for unapproved our pricing needs much closer to real time already this approach is providing us with greater insights reporting and decision, making as G&A change with recent in depth analysis of our data we increased our reserves for <unk>.
And current periods by approximately $4 million.
We'll continue to build on this in the coming months applying more refined approaches to both pricing and great EMEA or a hedge we expect solid growth in subscription pets and revenue with the bulk of this growth to come from categories, we're achieving our target loss ratio of 71%.
<unk> categories, while we have yet to achieve the necessary rate adjustments will have pace of growth stage or pause until we can confidently offer a value proposition consistent with our brand and our pricing promise.
Okay.
Remarks that we have no intention of trying to control the cost of veterinary care.
We will maintain a cost plus approach that is especially challenging in the current environment that inflation has increased at times and in amounts that we haven't seen in the past 20 years.
We have and always will target the highest sustainable value proposition in the industry, which drives high retention high lifetime value and greater alignment with veterinarians. We are confident we'll come out with its inflationary payment it's stronger than we entered it.
The pricing environment is not without its challenges, but it also greatly reinforces the need that your opinions in the market, helping pet parents to budget and catheter pet becomes sick or injured.
This need has and will only continue to grow in the years ahead.
I look at our business long term I couldnt be more excited as further detailed in our recent shareholder letter the cost of veterinary care is going to continue to escalate at rates higher than ordinary inflation.
Self insurance, our biggest competitor is under pressure with the cost of carrying for unexpected accidents on analyst days outpacing patch on their savings accounts.
Our international expansion is doubling our addressable market and the number of pets and the veterinarians. We can help the most we have been building for decades, along with the values that we live by continuing to resonate with all constituents.
Target customer the loving and responsible pet parent continues to strengthen our bond with our four legged family members. We do what we can for our pads are part of our family.
So before I hand, it back over to Daryl I want to take a moment to recognize and thank him for his time with your opinion.
Are you is the amount of great character and is well respected by the finance team. We thank him for his assistance in ensuring a smooth transition in finance leadership, including handing the reigns over to Wei Lee who will step into the role of interim CFO on June 1st we are.
In the process of conducting a comprehensive search for permanent CFO . However, in the meantime, Daryl and I have the utmost confidence in way in its ability to lead the finance team until a permanent replacement is named thank you again dream with that I'll hand, the call back over to Darryl.
Daryl.
Thanks, Marquis at Japan yen, we value trust and transparency these values form the basis of our interactions with all stakeholders, including pet owners veterinarians and their staff state regulators team members and you our shareholders we value. The trust you have placed in us and.
<unk> recognized the importance of delivering on our promises.
This in mind, we invite you to join us for our two upcoming investor focused events.
This weekend, Marty and I will be hosting our annual Q&A following Berkshire Hathaway's annual shareholder meeting in Omaha. This is a great forum to connect with long term likeminded investors.
On June 7th we will host our annual shareholders meeting at our headquarters in Seattle. This once a year event is your opportunity to hear directly from the team members, leading the execution of our 60 month plan and an open Q&A Forum, we hope to see you there.
More details, including registration are included on our Investor Relations website with that we'll open it up for questions.
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 let's see what I'd like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for question.
Our first question comes from John .
John Barnidge with Piper Sandler. Please proceed with your question.
Good afternoon, and thank you for the opportunity can you talk about the decline in retention experienced in the quarter is there any signs that.
Insureds are shifting to lower price products in the face of pricing increases not just in Japan, but industry wide.
Yeah, sure Hi, John its nagi.
In terms of retention overall, we saw some really strong we saw a strong performance.
Uh huh.
Now slide three at the end of Q1, 14 point full close to 15% what the right and we saw a very minor adjustment in I'll call. It bucket.
74 months average retention for the corporate finance subscription.
We still feel very encouraged by that we now got additional rate flowing through in April and we haven't seen by the science about lowering so I think overall.
Given the right and we've talked about anticipating a slight adjustment to our attention based on this increase in Oh, okay.
Saying that.
Any any degradation to a degree that would offset the opex increase that we have that.
I don't think we really have any visibility on.
The category as a whole, but I can't say the category as a whole are taking large rate increases.
Yeah.
Thank you and then as a follow up you talked about the other partner migrating to a new underwriter do you have any update on timing of that or the capital in that other business. Thank you.
Sure this is true.
To reiterate.
This is something we've been working on for many years transition pets best I think.
Let's go back to 2019, we're really happy with how that came out.
We what we agreed was that they would transition or.
Are they would add a new underwriter they can continue to underwrite business with us.
We have more line of sight to that and that's why we're raising revenue so.
We continue to think they will have some business with us and that's kind of updated and our outlook.
It does.
Free up significant amount of capital.
For us and we.
We lock in the book that they have with us for three years and the new business that stays with US is at a higher margin. So overall really positive and reflected in our guidance is an update on how that transition will look.
Thanks for the answers.
Our next question comes from Marina Rep with Canaccord. Please proceed with your question.
Great. Thanks, so much for taking my questions I wanted to go back to the reasons, you're sort of outlining your shareholder letter in terms of wireless ratio has been impacted in the near term, including higher than expected frequency the ongoing mix shift in the business and sort of more claims being processed through our software so while changes in frequency.
Coming out of Covid kind of seem to be one time in nature could you maybe talk about whether you're making any adjustments in terms of the pricing strategy and framework to enable us to manage these factors going forward.
Yeah, sure Hi, Maria stages for taking on that piece by piece to provide more context in terms of frequency youre right kind of private with the one time impact on our business. We haven't seen before really pets I guess, they're getting all oh that during a period of time, what we noticed with our frequency is to see impacts of soft forever any influences the arrival of invoice.
Yes.
But in terms of where we are right now and kind of the mix shifts when we take price we take price in that period and it takes 12 months to roll through.
And at the moment as I walked through in the in the earlier remarks by the end of Q1, we're at 14, 4% of what's rolling through antennas are all paid we will be at the end of this year at 23% that staggered through the year, which is an average of 18%.
Well what happens with the mix of patients that we say if you have an average increase of 18. There are a couple of things that happened with that.
First thing you have a buy down say typically what that is someone will get their increase and they will call us naval contractor and I'll ask can I hold what I'm paying on a monthly basis, which means I may adjust my deductible entertainment luxury that with him when he was about 2% or about 18.
And then beyond that you have a mix shift which is about 10% so that mix shift related to a product.
Distribution strategy geography. So if you think about international business. That's also going to start to play into that as well. So as we manage that moving forward. We're doing is we're making sure that we are pricing appropriately by geography by category. So we can hit that 71 and what that means is you guys have more frequent number of filings with the regulators so shall we.
Say on top of that and monitor that cat pricing increase that we see coming through we have an operating assumption right now that we will see a 15% that inflation year over year for the coming year.
With that operating assumption, we are required to make sure we are on.
On top of that data reviewing that they said, we're looking at it in different ways and we build up to that.
Mostly which will allow us to get ahead of those changes and make sure that we are having constant adjustments lets say at 71% level in terms of our loss ratio.
Did that answer for your question, Sarah it's something that I can touch on them all.
That's very helpful. Thank you very much and then secondly, sort of given your lower Oi guidance. When do you expect your sort of margin by the end of this year and any thoughts on when you think you may return to 15% margins for your core subscription business.
So our working assumption is 15% that inflation year over year in 'twenty three 'twenty four 'twenty five if the rate of inflation is flat at that level. It takes us 12 to 18 months to reprice.
So with that assumption.
Looking 12 to 18 months to get back to our original target.
Got it that's very helpful. Thank you both.
Yeah.
Our next question comes from Josh Shanker with Bank of America. Please proceed with your question.
Yes. Thank you if we go back in time about a year ago to June <unk>.
Investor Day.
We're definitely first acknowledge that you saw inflation above expectations in the numbers it would've come a bit in the <unk> numbers and certainly around the country. There was a lot of inflation it would've been really present in the back half of the year. The rate actions. We were taking really didn't have any impact in the back half a year. They are really starting to come through now.
Why are we seeing the spike in the loss ratio now in retrospect, it looks like things were really well managed in the back half of the year.
Given there was a lot of inflation not a lot of right. Now you are getting the right through in the loss ratio is going up why is happening with <unk> and then we didn't see it in the back half of 'twenty two.
Yeah.
So when we think you said the back half of 2000 and say what happened in 2000 changes to take a little bit of a step back because they were right. When we thought I think at analyst day.
There were some inflationary pressures in the business outside of it.
Recognize that in the face of that with the midpoint of 22 in place and ready to kicked off at the back end of Q1. So what we saw in 2002 with a series of inflationary periods, but we had never seen before so typically on average 6% inflation, we saw inflation come through and in March we saw at three months place that on again on again, so that's four stages.
High inflation started to put pressure treated book and Youre right. We react too quickly a team increased the number of filings putting trade, we got the rate approval and to the point, we get one month at a time that it takes a good period to really start to impact we started to see that rate at a volume in Q1 is that coming into this year.
<unk>, what I'll say as we were pricing our strategy in 2022, we are anticipating a 12% increase in VAT inflation.
It went up another 300 basis points to 16.
We were still playing catch up from 2020, K sellout rates as we file it you need to look forward to somewhere between 12 to 18 months before that impact. Okay. So you've got a compounding impact of <unk> 22 and 2023.
What you're seeing now is the catch up which we're doing we're now looking at our rates for 2024 today, because we know it's going to take us time to catch up on that on the the biggest shift in Q1 with acknowledging the fact that we thought we were seeing it from a 12% assumed.
Pardon me inflation to 15% and then we they reserve adjustments because we saw the higher rate.
Actuarial team can see any inflation coming through and our software and survival pattern of that claim we our reserve rate reflected that which is why the loss ratio really came in because we were expecting 12% and we go 15.
I think now looking forward confident that the changes we've seen in both the rates, we're taking the rates we're taking action.
How they're affecting out there and the ongoing increase let's say we see that we are April is looking strong we don't see.
I'm, saying anything that is surprising to us in April right now with the data analysis today, and we fully expect to maintain that same rate along with the filings, making sure. We're staying on top of things and we can we can bring it back to margin expansion through the back end of this year and into 2024.
Earlier, you said that your working assumption, which may prove to be better than it turns out is that inflation.
12 month inflation will continue in 'twenty, three 'twenty, four 'twenty, five and Youll price for it.
And that level of inflation the lifetime value of the pets is lower than it was going into this period of time you continue to grow at a very very strong rate.
Is there in your assumption of the lifetime value that it improves at some time youre willing to acquire pets at lower than the 30% IRR.
You will eventually get the pricing right and I guess.
Is $5 41, or $5 47 is that the working assumption youre working with.
Yes, let's go ahead and acquire new pets.
It's a great point.
The way that we've tried to be transparent about our lifetime value is taking a look at the <unk>.
Previous 12 months rolling.
Adjusted operating income, which.
Well just based on the margin and multiplying it by the <unk> and the number of months to create the lifetime value.
The margins that we are.
We're receiving today.
We expect that we'll see in the next six months in the back.
Previous six months.
Are much lower than we would anticipate over the entire life of a pet.
So we are staying within <unk>.
We're staying very focused on getting strong internal rates of return.
But we've always had very historic historically, our margins have been very consistent that inflation has been and that methodology has been very prudent in the past. It is important that we say in the future. What do we think is the best estimate for a lifetime value of a pet and ive previous calculation would under estimated.
Our methodology to estimate it would.
Alright, Thank you for the answers.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Colby <unk>.
Autonomous Research. Please proceed with your question.
Hi. Thank you. Good afternoon. My first question has to do with our too you talked about having about 15 points of rate flowing through in the first quarter, but average revenue per pet really hasn't moved all that much. So I'm wondering why that is and if there's something that's offsetting that much right.
Yeah, sure Hi, Casey.
So I'll, let I'll kick this off and hand over a century.
The contracts as well, but just at the highest level of <unk>.
And you're right we've got a by the end of this year. For example, we have 23% to 23% flying through the back so that that would hit at the end of December .
Full year for 2023 that means an average increase of 18%, 2% would be offset by people that are changing that deductible, because I get a little bit hard to get that monthly cost about the same or a little bit lower so it takes it to 16 and you have about 10% and mix. It makes it a big chunk.
Because that takes out that age that fixing down to six and what's being created and makes sense new geographies by penetrating new geographies that we have not been in before or with the thing and new distribution product say the products that have been working on as part of a 60 month chronic coming into the market. They themselves have a very different profile. So when you.
Put them all together you see that that sandwich.
Dave.
Ultimately that's what they offer ends up for the <unk> trial sizes up to six by the end of the year. So when we think about how that.
Got it.
That's why we're trying to work hard to ensure we get a price that's very on a consistent basis on a rolling basis, but there is absolutely a difference between the filed on the realized Jay do you want to talk a little bit about more at the end of the year sure I mean adjusting for that rate flow view for that positive mix. This pointed into the financial view.
Which we've talked about in the past translating this to what Youll see for the full year.
System is what we said in February and really the rates have been talking about are consistent back to November .
And we've just updated our mix assumptions you can see.
On average of about three 5% for the full year.
Constant currency and obviously that built through the year. So starting from where we are today you can kind of figure out what that would be for Q4, but and then built throughout the year.
Right. Okay. Thank you.
Second question is.
Regarding your operating margin outlook, what's driving management's view that that starts to improve in the second half of the year. It kind of seems to imply that there is going to be a sub 73% invoice expense ratio, but I was wondering if there's any other color you can provide there.
Well the main thing for us is that.
We entered the year.
Assuming a 12% year over year increase in our cost of goods.
Let me go back to Q2 of 2022.
On our earnings call I said, we expected and hoped that the veterinarians would increase the range of 10% to 15% for the next three to four years in 'twenty. Two we saw a 12% increase and we thought that that was the prudent and appropriate assumption going into 15, well it gives us greater confidence today than we even had.
45 days ago.
As we analyze our data we have.
We're seeing a consistency in our data with our new analysis as well as looking at additional third party sources like the AVMA.
No.
The assumptions hold true that it's 15% the rate.
Flowing through our book will start to get margin expansion.
Thank you.
Our next question comes from Jon Block with Stifel. Please proceed with your question.
Thanks, guys good afternoon.
Darryl the first one is just sort of strategic.
Ah 60 months plan.
Lots of interesting initiatives you guys internationally, you've got new plans in food and other channels.
But the core business is a lot going on right I mean, there is inflation.
We tried to move off pads fast you have got a lot of management turnover and it just seems from the outside that.
It's really a business that's in flux. So is this the right time to pursue all of these initiatives or do you take a step back arguably get their house in order and then pursue everything else everything else in 12, 18 24 months time.
Okay.
John I think.
To put in context.
Rapid change in inflation.
I've been in the business for 23 years. If you go back to a 40 or 50 years veterinarian inflation has never had such a rapid change.
As a single challenge that is primarily focused on a pricing team, but we are now also making sure that the information we're getting from additional data sources include the field help us along with that.
That's a core consistent.
We have been dealing with for 20 years, how to price more accurately by breed by neighborhood core competency what's changed right now it's just the rate of inflation.
And as we've said if that remains consistent at 15% for the next three years, which would be great for the veterinary industry.
That will be much easier for us to price. It was just a rapid change when you think those 12 to 18 months 18 months in the United States to get pricing right through the book.
If you look at our cost of goods the change of inflation in the last 18 months.
It's gone from 6% consistent to 15%.
So I think anybody can understand that with all of our business model, but that's going to be a challenge.
And if I can add to that is why I think kind of as we think about thinking about the funnel in general I think the most highest designed to set us up for a long time. It is a business for a long time, we have a hugely underpenetrated market. Both here in the United States and Canada and across the globally. We believe that we can take our products globally, where no other brand or no other parts its been able to take it to help.
<unk> is a formal veterinarians and trusting that today, we have.
Decentralized basis to allow us to do these things without interruption to the co pay for that.
<unk> point, while we're saying that's at 120 year live we remain incredibly confident about the plan for a long time to be able to see add distressed market and double the addressable market that we have globally and be able to have a lot of leverage across the across the international space and just kind of on that thought to touch a little bit.
What I want to talk a lot about it out here in your opening remarks, but we're making really good progress internationally. We've added around 4000, new pet incredibly good growth in that market. So in Q1, we're able to and Belgium. That's in itself again, it's kind of already taking baby steps that help us to build for the longer term.
Okay. Thank you that was great color and maybe.
Next question I'm going to try to slip into the first maybe I'll ask a question on.
On his last call, but the balance sheet, I think I heard $40 million of draw with the debt. The free cash flow I believe was negative $12 million of loan. This quarter. So is there an estimate for cash burn for the rest of this year and how should we think about the balance sheet is there a potential raise as we exit 'twenty three 'twenty four.
And the part B of this destroyed the question is.
Last quarter I asked a question on California, and rigs there and you mentioned working with Pet's best but I guess I'm confused because as it recently pets best has not been able to underwrite in California until they get a new underwriters. So it just looks it seems unusual to me that there was a.
A cohesive hand off if they can underwrite in the biggest state so were there actually.
<unk> relations from a regulatory standpoint that you had to stop underwriting that as of the end of March of 'twenty three thanks for your time guys.
Oh sure the draw in the quarter was $35 million.
Our long agree draw plan with our lenders because it's delayed draw facility is only open for a certain amount of time.
As I said in our remarks, we've got $253 million in cash and investments on the balance sheet, that's up from $2 30 at year end.
We have been pretty clear about the strategic nature with Pet's best agreement and how much capital that frees up in fact in two.
22 shareholder letter you started to put some quantum behind that.
You also wrote it out in 'twenty, one so embedded in our outlook is.
Operating within our current funding, which we have a strong history of doing.
For most of our lifespan.
On California, we talked about this in the.
In the November call.
There is this prop 103.
Relation that goes to every insurance company.
True Banyan and it was holding up our pricing increases that we needed and we agreed with them and pets best.
We'd find a new underwriter in California.
This is all we have been talking to us about this well before this so this has actually worked out nicely.
I can't speak to operationally why.
They werent able to make that transition, but that was agreed back in the fall.
Okay.
Okay.
Helpful. I'll follow up with you guys offline I appreciate the time.
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