Q2 2023 Trupanion Inc Earnings Call
[music].
Good day and welcome to the true Pan in second quarter 2023 earnings call all participants will be in listen only mode.
Do you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.
I would now like to turn the conference over to Laura Bainbridge with Investor Relations. Please go ahead.
Afternoon, and welcome to trip Canyon second quarter 2023 financial results conference call participating on today's call are Darryl Rawlings, Chief Executive Officer, Margaret tooth precedent and Wally interim Chief Financial Officer before we begin I would like to remind everyone that during today's conference call, we will make certain forward looking state.
Regarding the future operations opportunities and financial performance of true opinion within the meaning of the safe Harbor provisions 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 detail discuss.
And 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 company's 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 expense.
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 the U S. GAAP investors are encouraged to review. These 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 true opinions Investor Relations website, a replay will also be available on the site.
With that I'll hand, the call over to Darryl.
Thanks, Laura.
Two months ago, we hosted our annual shareholder meeting I'll touch on a few of the highlights today and encourage you to watch our annual meeting highlight video available on our Investor Relations website.
Among the highlights shared where three key priorities first expansion of our adjusted operating margin second deploying capital efficiently and third returning to free cash flow positive by Q4 of 2023.
In Q2, we saw early signs of progress in each of these areas I'll elaborate on these now.
Adjusted operating income was $16 8 million in the quarter. After an extended period of margin compression I'm encouraged to see margins not only stabilize but sequentially expand assuming the rate of veterinary inflation remains consistent with our expectations as it did in Q2, we expect further margin expansion in the second half.
For the year as our pricing actions continue to take hold.
In the quarter, we deployed 19 million to acquire over 75000 gross new pets, I'm thrilled with the team's ability to add 23% more pets year over year, while deploying 6% less in acquisition spend in my opinion. This is a strong result.
On a per pet basis, the cost to acquire a pet was 24% lower than the prior year period, managing acquisition spend in relation to pet lifetime value is our hone skill of the team and why do we will continue to refine it extremely granular levels I'll elaborate on this point momentarily.
The combination of early margin expansion and efficiencies in our pet acquisition spend helped drive a 3.9 million sequential improvement in free cash flow in the quarter additional actions taken in the quarter to reduce spend are expected to further advance us towards our goal of achieving free cash flow positive in Q4.
Overall I'm encouraged by the progress the team has made over the past four months. This progress is evident in our results, which are once again more closely aligned with our expectations. We have more work to do but the team is focused on executing diligently through a dynamic environment.
Long term our goal remains to grow adjusted operating income and deploy increasing amounts at high internal rates of return as we manage through this near term period of margin compression, we're throttling back on spend and allocating capital to those markets and geographies in which we are more accurately price to our value proposition.
This decentralized approach delivered strong new pet growth in the quarter, while furthering our progress towards our margin expansion and free cash flow goals.
We will maintain our granular approach as the business grows from one to many P&L allocating capital to products channels and geographies that deliver the highest rates of return.
Understanding and managing our spend in relation to how we believe these pads will perform over their lifetime with us will be critical in doing so.
As we've discussed frequently a pat and their corresponding lifetime value can and will vary dramatically based on the individual characteristics of that Pat that's before introducing varying levels of coverage products like Perkin N. P. H I direct our suite of offerings with chewy, and Aflac and new markets.
Continental Europe as.
As our mix of business evolves. Our goal is to report on the internal rate of return for our new mix of pets in a more granular way.
Historically, our calculation was based on an average assumed every new pet behaves similarly to our existing book of business. For example, it assumed pets, regardless of product channel and geography has the same <unk> and margin profile and with the equal retention to our existing book now for many.
The years is it mostly single line business. This was an appropriate and improperly conservative way to talk about it with new products channels and geographies, becoming a more meaningful portion of new business. These assumptions have become less relevant. This is not a new concept for us recall I discussed this in.
A greater detail in this year's shareholder letter I further shared an example of continental Europe , where new pet our pool is approximately $30 compared to that of our total book at approximately $64. If we were to use a simple consolidated average as we previously reported the estimated return.
On her spend to acquire these European pets would be overstated. This too would be the case with our newer products. If we were to assume equal retention to our existing book, our newer products with less coverage have retention similar to what we believe the industry average retention is of approximately 30 months compared to Japan Yens.
70 months as you've heard me say before less coverage drives lower retention with this in mind moving forward, we intend to provide increasing levels of granularity into the returns of our various products channels and geographies and underlying assumptions behind those expected returns Margo.
We'll provide some more detail momentarily.
Stepping back I believe the changes we've made over the past several months are proving out and set us up well to deliver improved performance moving forward.
We're starting to see signs of margin expansion, we are investing our capital prudently and we're making progress towards our goal of free cash flow positive in Q4, we're seeing good growth and scale in our new initiatives and through our international efforts, we're meaningfully expanding our addressable market. Most importantly, our decentralized management approach is taking.
Hold with the team delivering stronger and more predictable results.
With that I'll hand, it over to Marty to add additional context around our quarterly performance and execution of our six months plan.
Marty.
Thanks, Daryl good afternoon, everyone I'm pleased to share the ongoing progress that has been made since the annual shareholder meeting just eight weeks ago. The team has remained disciplined in capital allocation leaning into our most efficient channels. During the quarter. This strategy enabled the delivery of yet another solid quarter of deliberate and meaningful gray well.
Having our balance sheet, we added over 75000, Gracie pets and of course that this is particularly strong great when considering the intentional reduction of pet acquisition investment, which was down 6% year over year.
In the quarter, we began adjusting and it places reducing our acquisition spend to ensure we are aligning our investments to areas with the strongest lifetime value in geographies, where we're able to provide value to our members consistent with our brand and pricing promise.
Our estimated internal rates of return was 25% in the quarter. As a reminder, we use IRR to predict the estimated future cash flows from our newly acquired paths.
I'll tell you retention and adjusted operating margin all key inputs into this calculation.
In Q2 on trailing 12 months margin was 10%, which is temporarily reduced given current inflationary pressures.
As you'll see in here, we've made progress on our pricing actions and are beginning to see early signs of margin expansion a trend. We expect to continue this year and into next.
Moving forward, we will be contemplating an adjustment to a IRR calculation that we believe will more appropriately and conservatively reflect the new pet RP retention and margin contribution from each line of business and align to a more decentralized approach.
Recall, we talked about this more granular approach to capital allocation and our most recent shareholder letter and also at our shareholder meeting.
I'll be providing this updated metric in our Q3 earnings release.
Overall, we view the returns on a new book of business is strong in the current climate and moving forward. We will continue to use our multi angled V. When assessing our pet acquisition performance for the quarter. We continued to benefit from my deepest mate that centric approach in today's inflationary backdrop, the conversation around Japan is resonating more clearly than ever before.
Let me leads are up year over year, and we continue to see solid levels of conversion.
As we continue to increase the penetration of this market. We look forward to the day that I've asked me partners that are freed up from financial conversations and instead are able to practice the very best medicines. They studied and trained for ultimately we look forward to ending economic Keith in Asia.
With this in mind throughout the course that we maintained our focus on retention, where the average coupon in members staying with US an estimated 74 months given the increase in rate now flowing through consistently to our members. We are pleased with this level of retention. We believe it's a reflection of strong execution in today's environment now, let me touch on our pricing efforts in <unk>.
P J the pricing refinement and rate adjustments across North America continued with us securing additional rate in over 30 safe the average rate flowing through in Q2 were 16.3%.
By the end of this month, we expect to have 20.8% pricing flowing through up but keep in mind. This rate will be immediately applied to new members I'm row, three the vote cast policies for new by the end of September this should increase to 22.9% and by the end of October to 23.9% a rate. We currently expect to hold through year.
And.
As an example, this means we're nearing policies in October we'll see a 23.9% average rate increase this increase is relative to what these members are currently paying which was set last what type of if these policies.
In more detail in our annual shareholder meeting we are constantly monitoring the overall costs across the industry to ensure operating assumptions remain true. We're pleased to report that in the second quarter growth and cost of care remained consistent with the first quarter and in line with our assumptions should this change we will be poised to take additional action as needed in the coming months.
As a result of the increased weight flywheel over 60 basis points of sequential improvement toward our value proposition target during the quarter at all times is our goal to return to our target value proposition of 17, 1%. So while we still have some what to do there I am encouraged by the team's progress towards this critical target metric we.
We also saw a 60 basis point sequential improvement in our subscription adjusted operating margin in the quarter with cost of CAD currently increasing in line with our 15% year over year operating assumption, we continue to see a path to a 15% adjusted our pricing margin target towards the end of next year.
While Chipotle remains the primary engine behind our performance, we continue to see solid contribution from our newer products and channels collectively with these products ramping in market, we're making solid efficiency gains in Q T. G. We expanded that comprehensive and proactive marketing campaign to entergy, Sir insurance product line to them millions of pet parents following there.
Tennessee, we've been pleased to see lead greater this channel accelerate in addition, we continue to see increasing contribution from our European endeavor as we added approximately 4000, new pads during the course and very shortly we'll be launching in Poland, adding an additional 8000 hospitals to our addressable market, which tasteless Ava 50000 <unk>.
And in Continental Europe for Japan in light product, which is known for its broad coverage and Beth centric approach remains high we're excited to bring it your canyon product to a handful of countries in continental Europe by year end.
Product channel and international market expansion on key tenants of our 60 month plan.
If you're a period of upfront investment many of our new initiatives are in market and beginning to contribute more meaningfully to our growth in the quarter approximately 13000 of our Grace nepad ads or about 17% came from money 60 months upon initiatives are.
If a site for sustainable growth in our Underpenetrated market has not changed and yes, we will maintain discipline in our approach at all times with all products in all markets bouncing on appetite to greatest market place with a desire to live within our guardrails.
<unk>. This may mean, throttling back or a G thing spend and prioritizing the strength of our balance sheet. We believe this is the right thing today.
In the quarter, we took very deliberate actions to ensure we are operating as efficiently as possible across all areas of our business. The intention of this action was to reduce costs many of which were centered around some of our long term test initiatives that derive limited immediate or short term benefits.
While many areas of the organization were able to improve efficiencies. These reductions were predominantly in fixed expenses and pet acquisition and no scenarios Derik de responsible for supporting our members or partners.
In further support of our efforts to enhance the effective deployment of our capital. The team has made some very meaningful progress in the development of our long awaited next generation policy administration and claims adjudication platform.
As we approach the final stages of a migration, we should see reduced capital expenditures next year subsequent to quarter end. We also launched on mutual Canyon website designed to be more interactive and easier for members and prospective members to learn about MRO and engage with Japan in in totality, all combined actions across pricing encapsule deployment and proven abilities.
Throttle back growth that's needed to further position us to deliver a solid second half performance related to our key priorities as well as on our goal to achieve positive free cash flow in the fourth quarter F. S. Here.
With that I'll hand, it over to way to talk you through our Q2 results and outlook for the remainder of the year.
Thanks, <unk> and good afternoon, everyone. It's great to speak with you all on my first earnings call as interim CFO today, I will share additional details around our second quarter performance as well as provide our outlook for the third quarter and full year of 2023 total revenue for the quarter was 270 <unk>.
One 6 million up 23% year over year and ahead of our expectations within our subscription business revenue was $173 3 million in the quarter up 19% year over year total subscription pets increased 23% year over year to over 943000 pet.
As of June 30th 20, twenty-three calculated on a trailing 12 months basis, our average monthly retention across all of our North America's subscription products was 98 point, 61% compared to 98 point, 74% in the prior year period, equating to an average life of 72 miles.
Unless otherwise noted the metrics I'm sharing today are presented on a consolidated basis and it will be influenced by our mix of business, including new products channels and eventual herc for fees as Mark discussed our European pets are currently underwritten by third party underwriters and are therefore.
<unk> not included in our per pet metrics today.
<unk> average revenue per pet for the quarter was $64.41 this quarter and moving forward. We will also break out new pad, our pool average new pet our pool for our subscription book of business in North America was $61.49 in the quarter.
Breaking down our year over year subscription revenue growth of 19% for the quarter Pat growth contributed 19% pricing increases at a 10% while mix reduce it by 9% Lastly, foreign exchange reduced revenue growth by 1%.
Subscription business cost of paying veterinary invoices $133 $4 million in the quarter, resulting in a loss ratio of 77% a 60 basis point sequential improvement over the last quarter.
As a percentage of subscription revenue variable expenses were nine 7% in the quarter down from nine 9% in the prior year period and down from 10, 1% in the prior quarter, reflecting some cost efficiencies fixed expenses as a percentage of revenue were 5.1% in the quarter.
<unk> up from four 3% in the prior year period, and four 7% in the prior quarter fixed expenses include costs related to our new subscription products in North America, and Europe within fixed expenses for the quarter or approximately 700000 of one time expenses absent. These.
Costs fixed expenses as a percentage of revenue would have been largely flat quarter over quarter.
After the cost of paying veterinary invoices variable expenses and fixed expenses, we calculate our adjusted operating income.
Our subscription business delivered adjusted operating income of $14 1 million or 8.2% of subscription revenue. This is up from 7.6% in the prior quarter or approximately 60 basis points of sequential margin expansion.
Now I'll turn to our other business segment, which is comprised of revenue from other products and services that generally have a b to b component and a different margin profile than our subscription business.
Our other business revenue was $97.3 million for the quarter, an increase of 32% year over year.
Adjusted operating income for this segment was $2 $6 million in the quarter.
In total adjusted operating income was $16 8 million in Q2, this was down 19% from the prior year period, but up 8% sequentially.
During the quarter, we deployed 19 million to acquire over 75000, new subscription pets, excluding the 4000 European pets. This translated into a pet acquisition cost of $236 per pet in the quarter. We also invested point 9 million in the quarter in development cost as a percentage of.
Revenue development expense was 34 basis points compared to 92 basis points in the prior year period. This stepped down reflects a shift of some of our new initiatives out of development and into variable fixed and new pet acquisition expenses within our subscription business.
Adjusted EBITDA was a loss of $3 2 million for the quarter as compared to a loss of 1.7 NOLA in the prior year period, depreciation and amortization was $3 3 million during the quarter.
Stock based compensation expense was 6.5 million during the quarter. We continued to expect stock based compensation to be around 7 million per quarter for the remainder of the year. As a result, net loss was $13 seven milling or a loss of 33 cents per basic and diluted share the same as the prior year period.
In terms of cash flow operating cash flow was negative three point formula in the quarter compared to negative $3 1 million in the prior year period capital expenditures totaled $4 7 million in the quarter. As a result free cash flow was negative 8.1, Milli, a 3.9 million improvement from the first quarter.
We expect cost actions implemented in the second quarter, along with margin expansion to further improve our free cash flow in the second half of the year.
We ended the quarter with 236.1 million in cash and short term investments. We maintained 213.1 knowing of capital surplus at our insurance subsidiaries, which was $57 3 million more than estimated risk based capital requirement of 155.8 meli outside of these insurance entities.
We held 25 point formula in cash and short term investments at the end of the quarter with an additional 40 million available under our credit facility.
I will now turn to our outlook.
For the full year of 'twenty twenty-three, we're increasing our guidance at the midpoint for both revenue and adjusted operating income revenue is now expected to be in the range of one billing and 73 million to one billing and $89 million, representing 19% growth at the midpoint.
Subscription revenue is now expected to be in the range of 708 million to 718 milling, which would represent 20% year over year growth at the midpoint.
Total adjusted operating income is now expected to be in the range of 70 million to 80 million.
That's the midpoint of the range. This continues to imply 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 third quarter of 'twenty twenty-three total revenue is expected to be in the range of 270 million to 275 million subs.
Subscription revenue is expected to be in the range of 180 million to 182 million total adjusted operating income is expected to be in the range of 18 million to 21 million.
As a reminder, our revenue projections are subject to conversion rate fluctuations predominantly between the U S and Canadian currencies for the third quarter and full year 'twenty twenty-three guidance, we used a 75% conversion rate in our projections, which was the approximate rate at the end of June .
Thank you for your time today, I will now hand, the call back over to Darryl.
Thanks way before we open it up for questions I wanted to remind you of our annual shareholder meeting highlight real available on our IR website. In addition, we will be in attendance at several upcoming investor events Mardi will be attending the Canaccord Genuity annual growth conference in Boston next week and next month, we will be in attendance at Lake Street.
<unk> Big Seven conference in New York, and the Jefferies Virtual Pet and Wellness conference, we hope to speak to many of you. There we'll now open it up for questions.
We will now begin the question and answer session ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
Okay.
Our first question comes from Maria Rips from Canaccord. Please go ahead.
Great. Thanks, so much for taking my questions first can you maybe update us on your more recent progress in California with weight increases up to you should have received the approval there.
What's the what's the latest timeline around we filing and is there anything different that you're doing in terms of how you approach. The filing process. This time either in terms of the data that you're presenting to the regulators or anything else and then I have a quick follow up.
Hi, Maria logging.
Yes.
We're all we all pieces of the program in California during the quarter when you take it all secondary or within a month.
And in all segments.
Well, it's going to approximate 21%.
In terms of the.
Right that was approved in June that was based on data in November 2022.
No question about a particular price what we're doing now once we have that second approval.
Alive in market, which will be effective from next week, well start working with them again on the next filing which will really kind of getting to the specifics related to the data that we saw coming through in Q1 and Q2 of 2023.
Last six months.
Being able to sit back and say, hey, buying and well work with them.
The transient thing for California.
To better articulate that.
The need for the rate that we have that insight.
Oh, I think it's a big step forward loss ratio, we now can increase our addressable market in the state of California, where we have more neighborhoods, which we can reignite growth.
And we will continue to dig into off price on a lifetime in California.
But at the collaborative relationship and are looking forward to that next step.
Got it that's very helpful. And then you mentioned, 16% adjusted Oi target towards the end of next year, so assuming inflation sort of remains consistent with your expectations.
Is this pretty Kate it on them on another round of approvals from a handful of larger states or do you feel like you have enough approvals under your belt.
Alright, so we have by the end of it you will have about 23% will be fine.
Focused and essentially what that means is we will have people to hold that rate at the end of the year. So we're not going to continue to go above that rate and I going into more people to expand it well. We are doing now is watching that cost of goods. It's.
David if that 15% inflation hold we will continue to see that 24% play through into next year, which will allow us to catch up on the <unk>, we're getting a higher rate.
That margin expansion.
This month, just gone, we have $16, 3% rate flooding.
Why you saw that margin expansion.
And if that assumption holds true change in the <unk>, we believe that we will have sufficient right.
So you can get us on track by the end of next year.
Monitoring it if things changed and we will adjust our price that we feel confident right now that we have the right plan in place.
Pat.
Got it that's very helpful. Thank you so much market.
Thank you.
The next question comes from sure catch area from Evercore ISI. Please go ahead.
Thank you for taking my question, so if the California rate filing if it does not get approved.
Or if the approval is it once again lower than what you or what do you expect to file for <unk>.
Could you talk about what the alternative is at that point, and then or <unk> or the impact on the overall book of business and then I have a follow up.
Please.
Yeah.
So we for the California rate funding right now what they the latest filing a factory that's allowed us to do.
As I mentioned it a.
A little bit further into California, and we have been so we very deliberately pulled back on we're looking at while we have for our margin.
That's why we didn't have to our margin and we want the whole thing I'll, probably value proposition, we're giving great too and I'll talk.
Or any thoughts to pull back.
So we've been able to take in.
Either into California, and got a little bit the fact right.
In other areas.
We do see an extended delay on the next call. We'll continue to monitor where we are in fact click on why we have this full margin and we will adjust our operating approach in terms of great strategy, depending on where that might head.
Following that we you know as we look at it in a more granular level, let's say starting to really look at that price.
So management is something that we should be expecting to gain more and more as we really kind of kick in until the centralize the price just in terms of distribution strategy.
It's different geography that well, California is one part of our business.
Okay.
Hey, Brian if we thought about this.
Moving forward to the long term.
We will calibrate well keep checking the data and making sure that we have the right value proposition.
This necessary, but right now as I mentioned, we feel very positive about the relationship with the regulator and we're encouraged by the dialogue and we'll continue to work with them to do what's right for a lender in the state of California.
Okay. Thank you and then you mentioned that you pulled back on some of the initiatives.
Are there maybe for the mid to long term or you weren't seeing the return Justice is expect this part of your cost savings or cost cutting could you talk about which one specifically those were.
Yeah, it's really across the board.
Some things that we can pay that ultimately will help us unlock a key test.
Whenever we look at deploying capital, we try and learn new ways and same thing when you have an easy testing tactics, while I am I would say, there's some channels and building things out with the features that are related to whether it's in fact, it's brito, especially media that bad things that we're doing in partnership with people and hope to having teams their testing and things like that that leveraging.
As much as we can within the existing team that we have today and ensuring that the things we're getting.
I returned today, rather than a tactic that is attack.
Prevent or maybe even driving the results we've been a little bit more stringent in the quarter around that and pulling back. So we can be very deliberate with the deployment of capital.
It doesn't harm I'll call channel. If we stayed very true to that that channel that channel with holding very strong and of course, which is testament to the the impact that the product that we have.
And it just allows us to think we can double down on things that we know will drive.
And that's the thing about capital deployment a rule of thumb.
Thanks, a lot.
All three kind.
23%.
I'm, sorry, but we got a 23% more pets.
Investment so I think in terms of deployment.
We're still being very disciplined and will continue to be at the things that distribution and great anything for it.
Okay. Thanks Marty.
Thank you.
The next question comes from Josh Shanker from Bank of America. Please go ahead.
Yeah. Thank you very much good afternoon.
In terms of thinking about maybe taking California out of the picture for a second what percentage of your business is rate adequate where you've gotten enough approvals or the states did not require a.
Approval, such that you feel very comfortable going forward.
Hey, Josh this is Daryl.
It's a very good question.
When we look at our total.
New pets that have come in we're really breaking the business down into multiple p&l's.
Our kind of our historic subscription business. If he took north America, we break it into about three different market.
Two of those markets the average new ARP, who was about 70 $475 and the other two markets. The average arb, who is about $56.
So you can see that there's a dramatic difference.
The area, where we have the lower ARPA grew about $56 is.
Priced adequately to our value proposition today and is actually the areas with the higher crew that we have had more margin compression over the last.
Six to nine months in addition to that when you look at the the new the new products that we have which represented about 17% of our total new pets in the quarter. Most of those are pretty at adequately price for.
So the biggest challenge for us is.
In.
Some of our core subscription products in some of the more expensive areas in the country.
And that's where our margin and the team have slowed the growth there and as we've had the approvals like we have been receiving in the opening remarks, we've had 30 state approvals in the last quarter.
Now, we're able to put our foot back more on the gas because we're adequately priced so it's something you always have to monitor it but you need to monitor in a very granular way across products distribution channels not just by the state for down to a neighborhood level and for the team to be able to take your average pad pet acquisition cost of $309 and lowered down to 200.
$30 in a single year I think is a testament to the team and pointing those the spend in the right direction.
Really good about the progress.
He brings a better answer and I don't need specific numbers now that you have to give them to me anyways, but when I look at the retention dipping a little bit obviously it should be expected.
He raised prices.
Is the movement coming in the first years as a coming in those receiving 20% or greater rate increases or is it in the majority of the book I guess that 80% of the book, that's neither first year, nor getting a 20% rate increase.
Well.
Drifting because that life and.
In retention, which as a reminder, it's still well over 70 months them over double what we think the industry average that includes our new initiatives.
Thanks.
The new products that have a lower coverage mute distributional channel. If you pulled those ones out I think the retention rate would be very similar to what ours are.
It's been in the last couple of years. So it remains very strong.
Pretty consistent and there are three buckets that we talked about in our shareholder letter to a first year average rate increases the mill could have higher so nothing dramatic change or a bargain.
You have anything to add there.
I mean, I think youre right well, we can stay with a very strong start in Q2 your attention as we get more and more rates.
That's our expectation that we stay a little bit of a softness coming trade, we saw a little bit of that in the end of the call Center in Germany. We felt like the retention has been very strong I think the team has done a very good job in terms of execution and making sure that value proposition is well understood and they have a very.
Very robust plan in place for the remainder of the year acknowledging that that rate increase will continue to pick up through the rest of 2023 and into 2004.
We feel confident in the way that they're managing that process and we'll keep monitoring it in those buckets, it's elevated and that and that's a little more granular detail behind the scene and their retention metrics, that's a ways out in terms of the.
70 tailored for the April .
Well you have in there is a real mixture.
Mixture entitlements into products the channels, we see a very different retention experience to the newer products.
Very different retention experienced in different geographies as well so as we see it.
It's starting to tick up 17.
17% that we mentioned earlier, you're going to see a difference in that retention and price all tape type I'll take it and we felt like it.
Please.
Thank you very much for the answers.
The next question comes from Jon Block from Stifel. Please go ahead.
Great. Thanks, guys good afternoon.
First question can you just talk about the path act or the subscriber.
MLR I think it came down 60 bps Q over Q, which was good to see but it's still pretty darn elevated at 77%.
You got some of the Southern California, and New York, How should we think about that trend line call. It into the back half of two weeks 23, sorry.
Back part 23, and even into 'twenty, four and you want to give a little bit more specifics on when you think you can get back to that 71%.
Yeah, sure Hey, when we think about that.
We're happy to see that margin expansion I think it's a factor.
Back to you a little bit more about predictability that we have known and loved over the last 20 plus years.
In terms of the rate that we have going through it they're 16% by the end of Q2, we've got that continuing to increase through that yes, you can expect without rates got margin start to expand even further and bring us closer to our value proposition as you say so.
Still confident with that in mind, we continue to see the 15% increase of inflation across the book of business. If that continues then by the end of next year, we expect to be back towards target.
If it changes then obviously that will change and we'll adjust accordingly, but we feel confident with the plans we have in place and the rates we have flying through combined with a retention that we will see that happen in the back end of 'twenty four.
Okay.
Maybe just ask a differently is there a certain.
Trend line that you need into the back part of this year more in order to hit your free cash flow positive target.
Yeah, sorry for our free cash I personally have we as as we mentioned we've seen some good improvement.
The country of course I've of course that they like.
$3 9 million benefit in terms of our where we are right now in terms of our cash I think in terms of what they expect.
Tyson linked quarter and year I'm, sorry, we still fully expect with the rate we have clothing, and we're making good progress in Q3 and 94.
So very much on track in terms of alcohol.
Okay.
Thanks for that and maybe the second question might have a couple of parts, but first of all from an employee perspective I thought we mentioned some one time expenses I don't know if were 790 okay.
Was that severance and I guess, if it was a it wasn't Daryl can you talk about the employee count at Japan yen, if that's being curtailed and if so where the company is making some of those changes and then sort of follow up on a different topic. There's just more of a clarification I think Dara you said, hey retention is getting hit a little bit from some of those.
Lower end plan to normalize for that retention would be largely unchanged, but just to be clear. Your pack is also benefiting from that right, you're saying, how you've done a great job on pad, but those lower end players I believe have a lower pet acquisition cost I just want to make sure that would be showing up in both places right would be hitting your retention but benefit.
In your pack arguably thanks guys.
Yeah.
Uh huh.
You can enter probably.
Sorry, we got an echo there.
The question on.
Oh sure.
Alright that was me on my I'm sorry.
Okay.
There was.
About 3% a reduction in head count across the company.
During Q2.
There was some severance.
Mark you alluded that in her opening remarks.
Second part of it is yes, just as a reminder, our pack cost.
Was reduced by 6% and yet we had a 23% more pets that we enrolled during the quarter, but all pets are not created equally so some of these perhaps have low ARPA and lower retention other ones have higher <unk> and higher retention. So it's very important that we look at it in a decentralized way in our spending.
The corresponding amount when you see the pet acquisition costs drop as dramatically as it did from Korea to 30, it's an evidence that we're doing that.
The next question comes from will <unk> from Raymond James. Please go ahead.
Hey, good evening.
Maybe you could give us a little bit of color on the time period for the other business to roll off I know it has a little bit shorter retention than the.
Of course your opinion business is it you know.
From what I'm looking at it seems like you know maybe starting in 2024 that would roll off over a period of three to five years, maybe just.
That makes some sense.
Hey, this is way.
I can answer this question so basically in the prepared.
Our prepared remarks.
In the new guidance at the Q4 Q.
Q3 on a full year guidance for total revenue and that's it.
Our revenue in five out of the four other business.
We have been seeing.
The growth has been accelerating.
Got you.
The pace of rolling off of our book I think slower than we had expected.
So are you expecting growth from.
Where to start here in the second half of this year and and looking at 220 24, there's a lot of uncertainty, but we believe.
We will start to decline, but our model right now.
Single digits.
Revenue declined.
Declining for father's day.
And as a reminder.
Margin.
Usually.
Two and 3%.
We do think.
Given the new arrangement with Pakistan will be about 3%.
Going forward, but it's still much smaller than our subscription business.
Revenue projection I would say.
Wouldn't impact so much of our bottom line performance.
And I would say in terms of healthier after quite a quite far I would say.
Can it be a pretty long tail.
Our experienced before.
And also as a reminder.
If they are.
They're off quicker than we expected it will be more effective to our.
Our capital position.
Thank you so I guess, maybe the single digit revenue declines but kind.
And it continued for a 2025 and beyond is that.
Hum.
You shouldn't interpret what you said.
That's for the quiet quiet for I'll be honest, we haven't really started the 20th quantified for the other business.
I have too much.
Clarity on that.
But I would say it's going to be.
Early.
No.
Fairly slow decline over the next three to five years.
Yeah, and if I can add as well.
Logging.
Okay.
Alright, great.
Great. If we wanted to be we want to make a call.
And I want to make sure that for me another benefit that we're able to support the business instead of calling us and came to us for them anyway in the first place I D.
They they roll up obviously its dependent on that one and we'll be here to support them.
One thing for us is ensuring that we have sufficient.
From that partnership in terms of the larger which is why it's starting.
That may increase that we didn't foresee saying that a part of it I think that's part of it is longer than we anticipated as upside for everybody and that will continue to say changes that happen when they happen.
Okay, and then one quick one we noticed that you broke out a new line item over the last few quarters.
Pet acquisition expense for Commission based policy that was about 900 million this quarter.
Could you give a little bit of clarity on what that is and is that netted out of the pet acquisition cost at June 36, or how should we think about that thank you.
Yeah. Good question as a reminder, we acquired had at Florida Mall.
Second half of last year.
Then when we.
We report our quarterly results and the key metrics.
Total head count and equipment.
They do include those.
Well in Europe .
As a reminder, there are currently underway.
<unk> paid insurance agent.
Motto, we cannot underwrite those.
Policy underwritten by a third party policies for their revenue.
Our.
Condition.
So that's why if you look at that.
The report we provide every quarter since then the PARP has method.
Specially no do not.
Do not include.
Okay.
European pets.
<unk> underwritten by third party.
So that's the reason when we do the calculations tactfully.
Pet acquisition cost for every average single pad.
$236 per pet in this quarter.
To be concluded.
It doesn't make sense.
Revenue profile totally different.
Underwriting model.
I hope that's helpful.
Thank you.
The next question comes from Kt Sac is from Autonomous research. Please go ahead.
Hi, Thank you it looks like quite a bit more cash moves into the insurance subsidiaries this quarter and two months to go at the shareholder meeting it sounded like you guys felt that the subs were more than adequately capitalized. So I'm kind of curious you know why they move why the increase you know well above.
Minimum RBC requirements.
Okay. This is way again or I have I'm happy to answer this question.
Oh, marvy timing, so, but basically we wanted to provide more of a little bit more clarity about our cash position I wanted to reiterate what.
What I mentioned before is that we're very happy about our cash position I'm increasingly confident about that.
Trajectory of free cash flow has been improving a $4 million is better than Q1, and we expect to be.
Continuing to improve sequentially in the second half of the year and I'm confident about our free cash flow being positive in Q4.
And we do provide a little bit more color on the other.
Cash position between the insurance company and the holding company.
Before looking more pet parents.
And.
As you can see we have.
25 million in cash at the outside of the insurance entity and we also have 40 million credit facility.
And plus we have 60.
$50000 more than the required capital.
<unk> at the insurance company that gave us over 129.
We believe.
Were appropriately capitalized.
The near future.
Yeah, and if I can add a little bit there I thought like I say, it's logging.
Why are they so you're right we are over capitalized and we are actively working on addressing that to ensure that that you know the good news is.
We don't need to continue to put money in and we've already on capitalization of lateral but we have space at all.
Likely we would have to continue to support that.
Hi, Eric.
Ericsson is a range of flying over I had been asked I apologize for the background noise, but.
Oh, Hey phase over the next few months, we will work through our plans in terms of what that capital allocation. That's fine. So we can ensure that we are as efficient as possible. We're just happy that at this stage, we are out of state well about that obviously level, which means that we're not continuing to have to put money and at the level. When we have that combined growth in Japan and the other business.
Segment growing at much higher levels than before.
Okay, and then as a quick follow up question, how much of your marketing expense into Q would you characterize as Cuttable I know you guys talked about you know doing some experimental things on the marketing side, how much of that could potentially be cut if any.
You'd be in the back half of the year to get margins, where you'd like them to be.
Yeah. So when we're thinking about marketing stuff, we're talking about a copay.
Yeah, they're happening from reductions already and in Q2 that really will take us the appointment where they cannot core channels. We can continue to go farther into a pack. We're always looking at the internal rates of return and the key thing here is as we read it in the opening remarks, we're really trying to get granular and decentralized in a way, we're reporting and our internal rates of return.
To allow us to understand what do we need to be spending for a specific area or geography or product that what have we just to start I think I'll say for example, when we talk about cutting expense.
That would imply that we're not gonna be.
And there were things they were saying, they're not going to drive a ton at any point in time, So we've already Ritchie.
Well go to things like contract spend we've made sure that the teams are clear on the value being driven and direct them to me at Tennessee separately anything yeah, we could take that part down.
Somewhere between 25% to 30% rather than we have done its important day for us if we've got margins, where they need to be so we're not looking at that blanket approach looking at granular level approach. We can see there are lots of areas within our addressable market across North America. Then we can very healthily grow and not a lot of the growth that you've seen and of course that has come from areas, where we have strong.
Larger and we are hitting our value proposition and we have confidence in the internal rates of return to continue to grow that.
We didn't act as quickly as we could have and of course I think we spent a little bit of money in places that we probably shouldn't and we are we didn't invest enough in areas, where we could have so I think when you see in Q3 is further refinement that being said, a 6% reduction in pack and 23% right, saying that distribution strategy really kicking it's taken.
Holton in perspective, you know what we said we would do we would have more of a chance to get to the growth in areas that we have had not had before they went out with new products in the market that allows us to test these strategies and our pricing a slightly lower level from our pac spend or putting everything into our core business. It can be through other products other geographies to bring that pack.
I'm, sorry to bring the IRR within it scar trial sites, we have flexibility we are fortunately able to leverage our distribution strategy, which is really doing exactly what we intended it today and we feel good about the direction, that's moving through the year, especially its when you say margin expansion that it gives us a lot more appetite for growth as we can we can see.
And to the margin compression that we've had to play solitaire.
Yeah, I'll just add one last thing you know this is about smart disciplined growth and free cash flow positive in Q4 those are our goals that's what we're executing towards.
Got it thank you.
The next question comes from John Barnidge from Piper Sandler. Please go ahead.
Yes.
Thank you very much and good afternoon, My question and congrats on the approvals on the rate filings is with ARP, who be coming out a change in dynamic how should we think about this.
Africa, 20% pricing and individual receiving it and then toggle and with the deductible to keep their subscription payment unchanged is that increase in frequency at all.
No it's not actually it's been consistent it is something that we watch and we expected to see that come up since we've been putting these great Detroit three we haven't seen that change it's been consistent for the last last 10 or so years. What is changing now is is as we've mentioned David I'll take forces, we are seeing a different mix of business between where we're acquiring pets.
And when we talk about mix, we're talking about geography were talking the age of pets and still can't breathe in specie.
And that's driving some of the shift in terms of the offer that we ultimately end up.
<unk>.
But in terms of the the rate increases and how we should think about the impact on the the members often what's happening is there is a.
Then maybe a franco entertained by the team we speak to our members if they all looking to cancel they're able to really explain the value proposition that that experience isn't changed I'd say, we're seeing strong retention was saying.
No increase in the number of people at all.
Buy down.
That deductible around.
And and ultimately where we're trying to get to know, it's making sure that we are proactively reaching out to members to help them understand what's happening in that industry. So that they can understand why these prices are moving.
And I think kind of the arcane often makes like I mentioned is really largely coming through that makes the business to say.
As Daryl mentioned earlier, Nicole we have such a difference across North America with Alpha and you've got two areas in North America that have all paid in excess of seven people would tell us that.
Okay acquaintance with 40% upon you pay for that and then you got 50% of all new business coming from areas, where we have a $55. So when you look at those two together you really do you have a client so it doesn't get that blended up it doesn't tell the full story, which is really why we want to go to the next page next courses.
That down and gave us a more granular approach to how we're thinking about growth and how <unk> is one component of that internal rates of return.
I think in terms of the pricing. The good thing is we have got a margin expansion.
Looking for and we'll continue to see that come through assuming that cost of goods, which will then show up in Iceland.
Great we're expecting by year end is that.
I'll answer your question John .
Yes. It does thank you very much.
Then.
You talked maybe about considering semiannual renewals at your Investor day is that still under consideration.
Absolutely I think we're always open to adjusting to make sure. We can give our members the best experience and that was that's what that's in regards to ensuring that there is a way for our members to accurately and budget to their cost of care now that budgeting often for the 97% of the population is uninsured come through really.
Leading into that credit cards savings friends, whatever they can do to afford the cost of care, 93% that are insured a nicer and show what your opinion you know up until recently have been able to budget because they've had a monthly payment that's pretty consistent year over year. If you raise a little different it's different for every insurance provider, it's different for the industry, where we are seeing bigger increases and we feel its more approach.
In fact, we able to say to me than today's increases rather than giving people at 20% plus increase adjustments to our product to always front of mind. We believe we have the best product in the industry, which is why our retention rates are strong as they are.
Less coverage than our attention we have very very high coverage and high retention and I think adjustments such as renewal dates and making them.
Tweaks to that price that's created a period of time.
The needle is important to us that we'll continue looking at that there is nothing right now in market that we're doing towards that goal, but that would be something that will fund over the next year.
Great. Thank you very much.
Thank you.
Due to the time. This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Yeah.
Yeah.
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