Q3 2023 Trupanion Inc Earnings Call
Hello, and welcome to the true pinion third quarter 2023 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a.
You May press Star then one on your Touchtone phone. Please note. This event is being recorded I would like now to turn the conference over to Laura Bainbridge Senior Vice President of Corporate Communications. Please go ahead, good afternoon, and welcome to true opinions third quarter 2023 financial results conference call.
Participating on today's call are Darryl Rawlings, Chief Executive Officer, and chair of the board.
Archie tooth president.
Wally corporate controller, and SVP of finance and for what Karachi to opinions Chief Financial Officer.
For ease of reference we've included a slide presentation to accompany today's discussion which is available on today's webcast before we begin I would like to remind everyone that during today's conference call. We will make certain forward looking statements regarding the future operations opportunities and financial performance at your opinion within the meaning of the safe Harbor provisions of the prime.
But securities Litigation Reform Act of 1995.
These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed.
A detailed discussion of these and other risks and uncertainties are included in our earnings release, which can be found on our investor relations website as well as the Companys. Most recent reports on forms 10-K, and 8-K filed with the Securities and Exchange Commission.
Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation variable expenses fixed expenses adjusted operating income acquisition cost internal rate of return adjusted EBITDA and free cash flow.
When we use the term adjusted operating income or margin. It is intended to refer to our non-GAAP operating income or margin before new pet acquisition and development expenses, unless otherwise noted margins and expenses will be presented on a non-GAAP basis, which excludes stock based compensation expense and depreciation expense.
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 the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or on true Pinions 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, it over to Daryl.
Thank you Laura I'm happy with the sequential progress within our key financial metrics in the third quarter. The recent improvements are a direct reflection of the team's execution and Margarita leadership over the past seven months for the benefit of what appears to me to be an increasing number of new people interested in our story our goal is.
To earn a 15% profit margin from our existing clients with these pretax funds, we can choose to reinvest in our growing business and our large and underpenetrated market by adding new pets, or alternatively pay dividends or repurchase shares after taxes, we refer to this profit margin as our adjusted operating income.
The primary drivers of our adjusted operating income are the monthly revenues, we collect from our subscription members minus the costs, we incur to pay veterinary invoices on their behalf and to a lesser degree our variable and fixed expenses, we need to operate our business.
And our 23 year history, the cost of veterinary invoices or our measure of veterinary inflation has grown consistently in the range of 5% to 6% per year, our historical track record of pricing to these levels of inflation was equally consistent delivery within a percent or two of our 71% target value proposition.
Year after year.
Coming out of Covid in 2022 the cost of veterinary care began to quickly accelerate within a period of less than 10 months veterinary inflation increased an additional 900 basis points over historical norms well. This rapid rise in the cost of veterinary care was unprecedented in 50 plus years at true Panyard.
We were slower to react than I would've liked the extra 900 basis points of inflation had a material impact adding to this challenge. Our current policy terms means it takes US 12 to 18 months to reprice, our existing members in 'twenty 2020 'twenty, one our annual adjusted operating margin for our core.
Subscription business was 13.9 and 14.3% respectively. After this rapid change in veterinary inflation. This same margin compress sequentially four consecutive quarters until we hit a low of seven 6% in Q1 of this year.
Compared to 'twenty 'twenty. One this was a 670 basis point compression to our margin to our core business and it should go without saying made operations more challenging today's slide presentation includes these details.
Over the past seven months the team has executed well against our mandate of restoring our target margins. We are managing the business on a much more granular basis empowering our team through a more decentralized operating structure, and making tough but necessary decisions to improve our overall operating efficiency.
The actions taken were deliberate and meaningful and in the quarter translated into what I believe is a significant sequential improvement in our adjusted operating margin and free cash flow.
We have work still to do in getting back to our long term margin targets, but I am encouraged by our progress with that as a backdrop I'll hit the key financial highlights for Q3.
Total revenue was up 22% year over year, marking our 39th consecutive quarter of 20% plus revenue growth since going public in 2014.
Adjusted operating income was 24 million in the quarter. This is up over 40% sequentially over Q2 free cash flow was 7 million an improvement of approximately 15 million from our Q2 results.
7 million positive free cash flow equates to approximately two 5% of total revenue. It is our current expectation we will target at or around this baseline of positive free cash flow on an annual basis to avoid dilution or additional debt. While we continue our growth in this large and underpenetrated market for the years and decades to.
Come.
And with that I'm going to turn it over to Marty to provide more details about the actions taken and this quarter's accomplishments margay.
Thank you Daryl and Hello, everyone.
To reiterate revenue growth was a strong 22% year over year with our subscription business the primary driver behind our performance.
Kato subscription paths, including European pets were up 20% year over year.
Average revenue per pet, which does not currently include our European book of business was up 3.2%. Please keep in mind that unless otherwise noted all per pet metrics are reported on a blended basis and will increasingly reflects mix of business. For example, the year over year increase in I'll pay for the average coupon and member was higher than the blend.
Average, increasing 4.3% year over year.
Since inflationary pressures kicked in over 12 months ago and accelerated at an unprecedented rate. The team has been hard at work taking pricing actions that will put US ahead of the rising cost of care I am very pleased to see the output of their efforts and the rate flow. We are now starting to experience.
During the quarter, we had an estimated 20% price adjustment flowing through the book a pricing power with existing and target members remains high.
Across our blended book of business, which as a reminder is a combination of all north American products within our subscription model. The average subscription pet stayed with US 69 months, reflecting the impact of new products and mix of business.
Isolating retention to our couponing and branded business. The average life of that your panel member with 72 months more than double that of the industry average. We believe this is a good result against the backdrop of our pricing actions in the quarter.
We're seeing highly favorable effects of our pricing increases outweighing impacts on customer retention and anticipate this will continue to be the case as we progress through the remainder of this year.
As a point of comparison, the lifetime value of couponing members with an estimated 25% higher in quarter three than in quota team. This was driven by a $2 increase in ARPA and an approximate 2% improvement in profit margin, partially offset by a full basis point dip in retention. This positive result, notwithstanding we remain laser focus.
And our efforts around member attention and service levels. Additionally, we also began to realize benefits from actions taken earlier in the year to improve efficiency in our operating expenses throughout the quarter.
When combined with the improvement towards our value proposition subscription adjusted operating margin expanded 190 basis points over 10% in the quarter with pricing actions flowing through our book and assuming cost of cat increases remain consistent we continuing as anticipated towards a 15% margin target by the end of next year al.
Reiterate that in a large and underpenetrated market, we prioritize growing adjusted operating income or the funds available to us to invest in growth more funds means we're able to help more pads and support more pet parents, we continue to identify opportunities to invest these funds at a high internal rates of return of 30% to 40% Mezz.
On an extremely granular level here is more context in the quarter adjusted operating income was $23.8 million up over 40% over Q2, we made the deliberate decision to deploy $16 million of S and acquired approximately 71000 pets with its investment compared to the prior year period, It's Rob.
[noise] presents virtually the same number of pets added with 20% less spend.
Against the backdrop of a rising cost of care. The veterinary channel continues to prove highly efficient. Despite the reduction in pet acquisition spend veterinary leads were up in the quarter and continue to comprise the majority of our leads we believe this metric reflects the urgency with which veterinarians can speak to the benefits of high quality medical insurance and.
<unk> conversion and the battery channel also remains strong this lead and conversion performance are leading indicators of our pricing power within our target market.
Turning to our new distribution channels. We also saw strong continued contribution from base on new products and geographies in the quarter nearly 19% of our new pets came from these new initiatives.
As discussed last quarter, given the increasing contribution from our new initiatives moving forward, we'll be breaking out growth metrics related to key areas of growth by our Kochi Pandean branded product in North America on new products, all in North America, but not primarily branded as couponing and all international geographies not only do we believe this best.
It aligns with our decentralized approach to execution. It provides a new level of transparency to our growth metrics and the April performance of the business as our business continues to expand blending or metrics into one no longer provides a fair measurement of impact and returns on dollars invested for ease of reference. We've included the details in today's slide presentation.
Nate across our P&L, we are updating our IRR methodology to be more reflective of our expectations of how these new pets will perform over their life with us by segment. We will also continue to report IRR under our prior methodology for a period of time.
Within our core coupon to branded business. We spent just save a $14 million to add approximately 57300, new pets in the quarter at an average new pet all paid of $66.26.
We are seeing these pets will stay with couponing for a period of 76 months consistent with our three year average and deliver an adjusted operating margin over the life of 12%, which today, we believe to be the most appropriate assumption. This is also in line with our three year average, but below our long term goal of 15%.
Combined this results in an average lifetime value of $616 for new pet symbol with couponing in the quarter. The average costs are quantities paths with $229, which translates into an estimated internal rate of return of 42% outside of outgrowth guardrails of 30% to 40%.
Turning to our new North American products are varied collection of products not primarily branded Japan in the metrics are materially different and given the increasing size of these products. They impact till April makes more significantly than before for example of the 9400, New Paas. We added this quarter the average new pet RP with 37.
Dollars and 83 cents today these past stay with us on average for 17 months similar to Chew pontoons co product in the early years. These products have not yet reached operating scale, resulting in a negative adjusted operating margin on a per pet basis, the cost to acquire these pads with $111. This is below the internal rate.
Over time, we would typically target and for this reason, we only spent $1 million in the quarter or about 6% of our total Pac spend here long term. Its all go to operate these products at a 15% adjusted operating margin and within our 30% to 40% internal rate of return Guardrails and we remain confident we can get that until then however, we.
To maintain relatively low levels of spend in this area.
In Europe, we spent roughly $800000 to add approximately 3900, new pets in the quarter. Today. These products are not fully underwritten by Japan in long term. However, it is our intention to underwrite our European businesses, including actively selling at Japan in light product.
It is our goal to operate this business at our target, 15% adjusted operating margin and deploy capital at a 30% to 40% internal rate of return keep in mind. However that the offer of these pads and thus the lifetime value and target acquisition spend will be very different to that of our existing book for example, the average passionate enrolling in Europe too.
Today is paying $25 per month, if we were to assume these pet stay with us for a period of 74 months and deliver an adjusted operating margin of 12% both consistent with our three year average, we could spend approximately $95 per pet to in our lifetime value of $226, resulting in an estimated <unk> <unk>.
Total rate of return in line with our targets overall, we view these returns on a new book of business is strong by breaking down. These results in a more granular level as we have done today, we can dive deeper into our mix of business experience, which as you can now see can and will vary dramatically depending on product types and geographies looking.
[noise] ahead, we will continue to be disciplined in our approach to growth allocating capital prudently prioritizing margin expansion and driving efficiencies in our expense structure.
Over the past several quarters, we've taken deliberate and meaningful action in each of these areas, which helped propel us to free cash flow positive in the quarter with a baseline of modest positive free cash flow established we intend to stay that way building on our track record of flexing, our operating leaders to hit our business objectives.
This achievement is a testament to the dedication and focus of our team and it sets a solid foundation for our financial stability moving forward. The health of the veterinary profession remains critical to our success veterinarians and their staff continue to grapple with increasing inflationary pressures and structural challenges affecting the delivery of high levels of care as a rig.
<unk> a cost plus model is deliberately designed to be a solution to these financial pressures supporting veterinarians and their teams remains at the heart of what we do.
In a moment I'm going to hand, the call over to way to discuss our third quarter results in greater detail, but before I do so I want to thank him for stepping up over the past year. It has been a pleasure to partner with you way and you've been a tremendous leader to the team. We appreciate all you've done and look forward to your continued contributions across the business.
I also want to officially welcome for what it's fantastic to have you on the team and I look forward to working closely alongside you already you have proven yourself to be a great addition to Japan.
With that I'll hand, the call over to Wei.
Thanks, Marty and good afternoon, everyone.
Today, I will share additional details around our third quarter performance as well as provide our outlook for the fourth quarter and full year of 2023.
Total revenue for the quarter was $285 $9 million up 22% year over year with.
Within our subscription business revenue was $182.9 million in the quarter up 20% year over year and ahead of our expectations.
Subscription pets increased 20% year over year to over 969000 pets as of September 30th 20 twenty-three.
This includes approximately 38000 pets in Europe, which are currently underwritten by third party underwriters.
<unk> average revenue per pet for the quarter was 65 dollar and 82 sets up 3.2% over the prior year period either.
As a reminder, this is inclusive of all north American subscription products and that will reflect mix of business.
Highlighting this mix average new pet a pool for these products was $62.25 in the quarter.
Breaking down our year over year subscription revenue growth of 20% for the quarter, 18% of this growth was driven by our core two panning branded business.
Pacifically pet growth contributed 14% pricing increases added 13% while mix reduce it by 8%.
Lastly, foreign exchange reduced revenue growth by 1%. Additionally.
Additionally, our new products in North America contributed 1% to revenue growth with the remainder coming from Europe.
Subscription business cost of paying veterinary invoices was $138 $9 million in the quarter, resulting a value proposition of 75.9%, a 110 basis point sequential improvement towards our target over the last quarter.
As a percentage of subscription revenue variable expenses were 9.5% in the quarter down from nine 7% in the prior year and prior quarter periods, reflecting cost efficiencies.
Fixed expenses as a percentage of revenue were four 4% in the quarter up slightly from 4% in the prior year period.
Reflecting the shift of pre revenue initiatives out of development and into fixed expenses, but down from 5.1% in Q2.
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 $18 $5 million or 10, 1% of subscription revenue. This is up from eight 2% in the prior quarter or approximately 190 basis points of sequential margin expansion.
This reflects a 110 basis point reduction in veterinary invoice expense and 80 basis points of scale in variable and fixed expenses.
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 $102.9 million for the quarter, an increase of 27% year over year.
Adjusted operating income for this segment was $5 $2 million in the quarter. This included a onetime annual true up of approximately $2 million that we don't expect to recognize in the future years as.
As we have said before last year's revised agreement with one of our partners in the settlement provides us higher margins at higher growth rates, which now makes this partnerships sustainable moving forward.
In total adjusted operating income with $23.8 million in Q3 ahead of expectations. This was up 42% from Q2 and up 8% from the prior year period during the quarter, we deployed $16.1 billion to acquire approximately 71000 new.
Subscription pets, excluding the approximate 3900 European pets. This translated into a pet acquisition cost of $212 per pet in the quarter. This compares to $268 in the prior year period and 236 in Q2.
We also invested $1.6 million in the quarter in development costs as a percentage of revenue development expense with approximately half a percentage point compared to 1% in the prior year period. This stepped down reflects the shift of some of our new initiatives out of development and into variable fixed and.
New pet acquisition expenses within our subscription business stock based compensation expense was $6.6 million during the quarter keep in mind that most of our stock based compensation is performance based and vest over a four year period, approximately $4 $5 million of the stock based.
<unk> expense recognized in the quarter related to grants for performance in 2019, 'twenty 'twenty and 2021 as a reminder, we did not have a performance grant in 2022.
As a result, net loss was $4 million or a loss of 10 cents per basic and diluted share compared to a loss of $12 $9 million or 32 cents per basic and diluted share in the prior year period.
In terms of cash flow operating cash flow was $11.4 million in the quarter compared to negative $2 $3 million in the prior year period capital expenditures totaled $4 $4 million in the quarter. As a result free cash flow was a positive $7 million and over $15 million improved.
<unk> from the second quarter.
Turning to the balance sheet, we ended the quarter with $265 $9 million in cash and short term investments outside of our insurance entities, we held $37.9 million in cash and short term investments with an additional $15 million available under our credit facility at the end of the quarter.
We maintained $227 million of capital surplus at our insurance subsidiaries, which was 60.8 million more than estimated risk based capital requirement of $166.2 million I will now turn to our outlook for the full year of 'twenty twenty-three, we're increasing our total.
Our revenue guidance to be in the range of one billing 100 milling, two 1 billion or $108 million, representing 22% growth at the midpoint. We're also raising the midpoint of our subscription revenue guidance to be in the range of $711 million to $716 million, which would reprise.
<unk>, 20% year over year growth at the midpoint we're.
We're also increasing and narrowing the range for total adjusted operating income. We now expect total adjusted operating income to be in the range of 80 million to $83 million at the midpoint of the range. This is a $6.5 million increase from our prior outlook as a percentage of revenue. This continues to imply expansion.
<unk> adjusted operating margin in the fourth quarter as our pricing actions flow more meaningfully through our book of business for the fourth quarter of 'twenty twenty-three total revenue. If you expect it to be in the range of 287 million to $295 million subscription revenue is expected to be in the range of 100.
90 million to $195 million total adjusted operating income is expected to be in the range of 24 million to $27 million. As a reminder, our revenue projections are subject to conversion rate fluctuations predominantly between the U S and Canadian currencies.
For the fourth quarter and full year 'twenty twenty-three guidance, we used a 74% conversion rate in our projections, which was the approximate rate at the end of September.
I'm now going to hand, the call over to forward before I do so I want to say it was an honor to serve as our interim CFO for two penny and to get to know many of you I look forward to continuing our conversations in the future.
<unk>.
Thank you Ann good afternoon, everyone I'll be brief and use this opportunity to introduce myself I look forward to getting to know many of you in the coming months.
It's only been a few weeks since I joined and I'm thrilled to find that everything I expected to love about this company is true there.
This company was built to change lives and that passion is evident in my team members and in our goals having.
Having worked with major consumer brands I can confidently say that our consistent growth quarter after quarter and a remarkable 98% monthly member retention rate sets us apart.
I'm also impressed by our team's ability to navigate the business leavers balancing growth and profitability optimizing prices and prioritizing cash flow.
What attracted me to this role was the vast untapped market and the growing demand for our product in the years ahead.
There has never been a greater need for pet insurance and Japan's World class products.
Most importantly, I've enjoyed getting to know the team and witnessing their unwavering dedication to the company's mission.
Positively impacting the lives of pets and their owners and veterinarians and I'm excited to contribute to our mission with that I'll hand, the call over to Darryl.
Thanks, a lot it's great to have you on board and to see you hit the ground running two way. Thank you for your continued partnership and leadership.
Before we open it up for questions I want to highlight though will be moving our investor day historically held in June following our annual shareholder meeting to September in doing so we hope to create some more breathing room in what is typically a very busy spring schedule and drive greater in person participation amongst our investors too.
And in 'twenty four as Investor Day will be held September 18th once again in Seattle. Our event is optimized for in person attendance and those of you who have joined US previously can attest to the quality of conversations. This allows for with this in mind, we hope to see many of you in September with that we'll open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're 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 will pause momentarily to assemble our roster.
Yeah.
The first question comes from Maria Rips of Canaccord. Please go ahead.
Great. Thanks for taking my questions and for what congrats on joining the company.
First our adjusted Oi was stronger than expected this quarter and you'll get the raised your full year guidance is there anything incremental to highlight in terms of your progress in closing that adjusted till I get and I guess, how does your progress sort of this quarter impact your goal of achieving 15% margin by the end of next year I guess.
Could we see that happening sooner and maybe just a quick clarification I think you mentioned the one time chop a payment.
Did that impact adjusted toys, maybe you could clarify that.
Hey, Maria this this way.
Yeah this quarter, our adjusted operating income.
Came ahead of our expectations I would say that the main driver of our two like we are having margin expansion as we are pricing actions flow through more meaningfully into our book.
And then we're more disciplined in terms of like cost and also our.
Pet acquisition.
So weak.
We continue to.
At dollar margin to.
In the next few quarters through next year, if we had a we.
We had expected.
And along with that we can get to.
Adjusted operating income to two.
To increase in terms of this one time.
Ally from the other business segment I mentioned earlier.
Earlier this is the.
As a reminder, with our pet pets that business partner we have.
Linda the Greenland 12 months ago October one 2022, and because of that we get a higher margin.
A higher growth.
And I think that's worked well for us.
Over the past 12 months.
We got about $2 million incremental margin because they are our growth has been higher than expected.
And yeah.
I wanted to say this is.
One time.
Annual true up for this quarter, we cannot necessarily link the two.
Alright.
And maybe touch model too.
Timing.
Yeah. Thanks, Hi, how are you.
Oh.
Or anything that the result is good execution from the team and then in terms of.
How that's trending favorable.
Our second highest quarter ever.
Its history in terms of adjusted operating income.
We're pleased that we remain on track for me.
And by the end of Q4 at this point, we're not going to expect it to come sooner.
The same operating assumption that we have been for the last two quarters.
Okay.
We haven't seen anything yet to suggest that the pace of change.
And we are priced at that level heading into next year and we're looking forward to continuing to execute with the same level of Thailand.
At the time.
In the interim we will remain very disciplined in terms.
Our approach to capital deployment to maintain them.
Got it that's very helpful. And then secondly could you maybe share an update on the status of your Refiling in California are full and sort of the partial approval. You received earlier this year and are you able to comment on whether you have refiled for the Romanian rate increase and kind of what are your thoughts on how some of the newer data you were.
We're sort of able to provider, we're planning to provide should lead to approval for the remaining rate.
Yeah. So we are continuing our dialogue with California, We mentioned after we got our approval in Q3. We you know we've continued to fall in a number of states. So far year to date, we've had over 90 filings that have been approved are working well across the board with all regulators and we'll continue to be disciplined and focused on getting the right rates are telling your value proposition.
Across the board.
<unk> had very productive conversations with California, and we will expect to file another rate before the end of the year and we have not yet filed that to answer your question directly and between then and now will continue to be very granular in our approach and make sure. We're growing in the right areas across the board not just in California to ensure we can maximize the returns on the capsulate applying them.
Got it that's very helpful. Congrats on the strong quarter.
Thank you.
Our next question comes from Schrader, Kuwait <unk> from Evercore ISI. Please go ahead.
Okay. Thanks for taking my questions.
My first one is for Marty if you could please provide more detail on.
Your comments on pricing power that grouping and has so with the pricing increase going through the books are what gives you confidence in sustainability of your pricing power.
And then of the.
Second question I have maybe for Darryl and his thoughts on the not not a lack of but Oh I see.
Uprising, Lee little buybacks, given where the stock is today by directors not only by you, but just across the board. Thank you.
Thanks.
So I'll touch on that pricing power.
Number of different indications across the person leading estimated statement festival on that really I guess indicators when you see a greater need for our products than ever before all that money into up our conversion rate is strong and nice critically for us all our retention is very much in line with our expectations at this point.
So do you think at this point I'd love to introduce <unk> to the call to really provide a bit of color on contracts from his perspective.
It will be helpful for the audience to understand your observation is coming into the business.
Yeah, Thanks, Marty so a very nice quarter.
I've only been here a short time, but I think one thing that has been notable for me is the pricing power of opinion.
We look at the numbers. This year, there were 209000 customers they receive greater than 20% pricing increases.
I come from that would be a significant increase you'd expect consumers to react in this case, we retained over 90% of these customers.
Consumers of course are the ultimate judge of your value and what that tells me is when consumers engage with the brand they value it.
With us because they evaluate your opinion offers from those pricing increases in the percent increase in revenue within this cohort.
300% increase in adjusted operating income so there's trade offs.
Certainly financially accretive to top line and more impactful to Hawaii.
Yeah.
What are your question.
Surprisingly low buybacks.
I personally had it.
<unk> five one plan and when do you cancel that plan.
I'm not I'm not able to buy shares for approximately six months.
So we'll see what the opportunity that lies ahead.
Okay. Thank you.
Okay.
The next question comes from Josh Shanker from Bank of America. Please go ahead.
Yeah. Thank you very much for taking my question.
This quarter, our average pet acquisition costs was $212 per pet.
Down from a 268, a year ago, you added 71000 pets.
Our gross before contemplating those from the European Commission based pets.
Maybe you don't have to spend as much or to get the pet or would you have a substantially higher pet.
Pet count at quarter end.
Right now you Werent trying to get the margins back to state what have we learned about how much we have to spend per pet in order to.
Bring the pests that you want into Japan, and after you get through this period of.
Of difficulty in achieving a 70, 172% MLR go do you think that your spend per pet will be lower than it's been in the past.
Yeah, Hi, Josh.
If we take off just in terms of the 71 and just want to stress that the message that you had been.
20% reduction in pack and essentially keeping all pet counts consistent year over year is an exceptional exceptionally challenging thing to do and the team made it look quite after this and of course I'm very proud of it but I think to pull that lever back crossed the reason we broke out the until the rates of return by different cohort.
To help give you that visibility into understanding what we will be trying to spend pad capable.
We're not going to deviate from our cash at a 40% until the rates of return and we'll continue to focus on that and that May mean that that Pac spend is the largest increases lifetime value increases, we're able to spend more money to acquire pets at the mainland on margin.
If that's the case that we spend less because we're saying a lower lifetime value that will pick up by the time, it's on launching continues to expand.
Well, our Pac spend it will be different by segment when you think oh by cohort.
About that call.
Description because at that time, well cryo and it's actually higher than you know we've got different parts of the.
The North American market that we can acquire at very different levels, because it's high lifetime value.
Our expectation is that that higher pet count will come as we start to see that margin expansion as we need them to our internal rates of return.
Usually that we've called.
Over the last few months they start to push them back on again, but we will continue to be disciplined I think that's the key thing here and ensuring that we are living within that guardrail attaching it to 40% and in Washington visits Accordingly, once we see that margin expansion and we're seeing that margin expansion now quite started maintenance, it's been a very deliberate execution and.
The large sequential improvement first quarter after quarter, it gets a little bit more leeway to Cushing to more areas that are not priced appropriately unexpected to see the teams have the opportunity to do that again with every quarter that come.
Do you think of the pets being added today have a lifetime MLR of around 71%, whereas that can be elevated because they start from a higher position.
Pets enrolling today.
Yes, all right.
Pass them Rolling today, the fact that we're allowing for the most part are opposite either priced appropriately. So we are being very specific with how we're rolling that out.
As the rates got approved as we focus on why we're growing you'll see that loss ratio and consistent with our target value proposition, which is a 71.
And then I guess in pets enrolled the last few years, we understand the inflation came it changed the numbers. If I was a person who bought average customer who bought the product in 2021 as my average <unk> going to have a 71% MLR will do you think that.
Those cohorts are slightly higher than that because of the inflationary spike.
It depends when he enrolled in 2021 if we think about every every 12 months, we're adjusting people's rates historically that has been adjusting either up or down lately has been adjusting up.
It will be you know across.
Cross said one of the reasons, we've broken out the different the different segments demonstrate everything dramatic difference between individuals pets, whether that's location age operates and our target is to get all BEC.
Larger 71, so I'll call it pricing people with a value proposition that the pace of thing taking rate, where we can fill all cohorts, it's slightly different just depending on.
The renewal rate in the air.
But overall, our target is getting closer and closer to 71 can see that value proposition come down from where it was at 77. He got its come down 110 basis points, that's moving at close to $2 71 in April and that also.
Good question, Josh with with our pricing promise some people don't understand it.
Our what we're charging for new members is the exact same rate that we charge for our renewing existing members, but some of them may be.
11 months behind or something else. So we offer the same value proposition but.
Rates are $65 for a golden Doodle today, that's what the new person is getting and when that person is renewing that they'd get the exact same rate.
Thank you for answering all my questions.
Yeah.
Our next question comes from Jon Block from Stifel. Please go ahead.
Thanks, guys good evening.
The first question it looks like the credit facility draw was $25 million.
Specific to the quarter only $15 million left maybe you could just talk to the decision to draw the 25 million.
If you are decently free cash flow positive in the quarter and I thought I heard way say cash in excess of capital requirements.
Roughly $60 million. So maybe if you could just talk through those dynamics and again I think 25 specific to the quarter was one of the bigger amounts that you've drawn in the facility today.
Hey, Joe.
So.
As a reminder, our credit facility, we entered into back in March 2022 about 18 months ago.
That's the exception, we do 15 year initial term loan.
February 5 million term loan and.
We call it delayed draw term loan.
15 million revolver available, so that 75 million delayed draw term loan.
Expiries date of 18 months, so by the end of September this year. According to the term.
Use it or you either lose it.
So that's the reason like we ended up doing at the end of the quarter, which is in line with our plan I.
I hope that answers your question.
No. That's helpful. I appreciate that I guess I'm still.
We still have your $60 million in X says why even draw the twenty-five Daryl youre, saying you feel comfortable with the two 5% of revenue free cash flow positive going forward, but maybe the answer there is a safety net and you wanted to address it is that fair and then I guess my second question.
Yeah, I mean, it makes it you know when we're cash flow positive.
Our 11 million of operating cash and $7 million free cash flow certainly it makes us a lot easier.
But we had a day coming out, but we need to make a decision if we want that extra buffer it off it seemed prudent at this time it gives us a lot more flexibility.
That's very helpful. Second one is going to be a little bit longer. So just maybe to move to the gross adds you know they were flat year over year, Mark I think you pointed out but just want make sure I have some of the numbers correct. So euro go 71000 ish gross adds were essentially all like call. It core companion this year, a similar number but I believe.
57000 core true Pan and so the core true, which is sort of the higher end of the white glove that was down you know whatever that is 15, 20% and then the fact that you're bringing on other pads P. H a R <unk> and likely helps suppress that impressive pack of 212.
Maybe if you can just talk to that and confirm it and then part b.
No relation, but more of a question would be can you talk to the sources of cash your free cash flow positive but.
Reserves have been 18 million source of cash today.
Payables was 3 million in the corner are there was one time of $2 million in the quarter. So youre how sustainable are some of those when we think about free cash flow go positive.
Yes.
Yeah, Hi, John.
So you're right. So the 71000 or approximately a year ago that was that that was largely not entirely but largely that the cohorts you kind of subscription business and part of our distribution strategy and the reason we've developed these new products and distribution channels has to provide us with different opportunities for growth in grocery with us and when we can Christy.
The culture of high end products, we have been very deliberate about ensuring our growth is happening in areas, where we know were priced appropriately. The last thing we want to do is bring a member onboard and they have to change the rate I'm quite safely as quickly and we know we're not bringing them on at the right rate that doesn't make sense for us to do that in terms of all our value proposition.
It's a process of being very specific and strategic with how we are taking that in fact, all understand why we should be investing well, let's say this quarter, specifically, we had that goal by the end of Q4 to be free cash flow positive we've achieved that a quarter earlier than we anticipated doing thing, which is really down to us prioritizing that cash and acknowledging that.
Margin, where our margin has been let's see here that's important to us to really be in a position to get control. Eva you know that that operating position and our financial stability to really be able to give us that cushion and then Cushing tank right side failure.
All in all its part of our strategy to ensure that we can get pet grade from any of our different business units really happy to see that extra contribution on it. It just helps us to grow into a feature space at the Peach has a market.
In terms of thinking M P H I.
It's attracting the pack absolutely when we think about that middle bucket that that middle tier that we talked about and you hate me. So that's right on the screen and we were showing how that middle bucket performance very different needs of the core subscription business within that you do have backend ph I cheery and Aflac and they all performed differently.
Individual groups and we mentioned that they are not at scale that scale, it's not related to that pricing. It is to your point related to how much money. We're spending in that comes into pocket or if it comes in to our fixed expenses and we're looking at working to bring those products to scale.
The next several months to.
To make sure that we can continue to push on that as much as possible to say they were very happy about that the deliberate execution and I think that law is sequentially, improving and seeing that 20% production impact just means that the team is that it's pulling nicely. That's the way we want them to I don't know how they are it's a way to talk about the sources of cash way.
Yeah.
So with a free cash flow positive $7 million this quarter.
15 million improvement over the over Q2.
And as.
As we mentioned before our margin continues to expand.
We're getting back to our targeted value proposition.
Here and at worst.
Applying our capital deployment. So we are we're actually very confident about our cash position about the free cash flow to continue to be our.
Positive going.
Going forward on an annual basis.
Yeah.
The next question comes from Wilma burden from Raymond James. Please go ahead.
Hey, good afternoon.
Hum.
As a pretty broad question, but just help me walk me through the cash flow and improved pretty dramatically I know some of it was less pet acquisition spend but maybe just help me think through what led to that improvement.
Yeah, well I'll take that.
Yeah.
Two main components we've had.
The sequential margin expansion.
Largely due to our pricing variable and fixed expenses are generally in line.
And then we were deliberate about spending 20% less total.
On growth. So we can achieve free cash flow of about you know.
This quarter was about two 5% and we want to be modestly free cash flow moving forward. So that we control our destiny and we feel really good about the growth opportunities. One thing that I think is underappreciated is.
The coming year.
We mentioned earlier, we had 209000 pets that saw a greater than a 20% rate increase and after that we had a temporary increase in revenue and adjusted operating income was up 300% over the next year. We have about another 300000 pets that we will have that same opportunity.
So what we're trying to do is to grow revenue year over year, and sometimes we grow with just pet sometimes you do it with <unk> and we're going to be gaining the benefit of having those RPM increases as well so.
Great opportunity for a pet growth ARPA growth.
Margin expansion free cash flow positive and feel good about the future.
Is that a good run rate into for Carolyn.
Yeah, the cash flow.
I'm sorry, what was that we didn't quite catch that Omar I'm sorry. So is this a good run rate into for you on the cash flow side.
I didn't catch that.
So.
Let me make sure we understand the question.
A good run rate for Q4 cash flow.
Yes.
Yeah, we're expecting Q4 cash flow continues to be a positive.
Okay.
And then could you talk a little bit about the average price of the policy today, both for new business and for the in force.
And how that's how that's changed I mean, I can estimate it but I'm, just maybe give us some color on that.
Yeah. So if we break out anything specifically about the the call she kind of attacks.
We've talked about that that makes me think seller.
Average revenue you can see how about sequentially at four 3% and for all pay which is which is one 1% sequentially nice improvement on the let's say something that we've been trying to push through the year and now we've got that pricing taking hold.
To that last point you know, we got about 209000 cohorts that have now have that larger than 20% increase we're starting to see that really manifests itself in the numbers.
In terms of our existing book of business. So that's a new basis will come on at the right rate existing business to Dow's point is now being private it's priced in line, so you're not going to see a different rates and when.
Making sure that we're able to uphold our value proposition to all of our members consistently.
Okay.
Our next question comes from Kt Circus of Autonomous Research. Please go ahead.
Hi, there. Thank you for the question first I guess to continue the discussion of free cash flow I'm curious you know, what's giving you guys. The confidence that it'll continue to be positive over the next you know immediate couple of quarters and as you think about.
Turning on growth again, what sales pace do you have in place to ensure that as you know.
Complicate the free cash flow story.
Well I think the execution that the team demonstrated is a prime example.
It's completely within our control we understand.
Our margins are expanding so the total adjusted operating income is our available pool of cash that we can reinvest and if we are taking.
Take a couple percentage points off of that and reinvest the rest and then your positive free cash flow so completely in our control our destiny and we feel good about it and as I mentioned before we're also going to get the benefit of our two expansion to help revenue growth in the coming year.
Okay, and then shifting gears a little bit.
Reserve development in this quarter's invoice ratio.
Yes.
Okay.
Hey, Katy this is way yeah.
Minder, our we have our one hour each.
Insurance companies are we have this intercompany Cleveland with our operating company and which makes.
I think the quite the question wasn't river.
I think we have any reserves.
Changed during the quarter.
No actually we didn't have any.
Sure Reserve change or IV are changed during the quarter.
Okay got it thank you.
The next question.
Churn comes from John Barnidge of Piper Sandler. Please go ahead.
Okay.
Good afternoon, and thank you.
I was curious as we think about.
The core business and then think about the new partnerships in all your dimension in them going forward.
How do we think of the persistency level and the state of <unk>.
I know persistency by channels can change, but on a blended basis, where would you think it settles in as the core portfolio.
And kind of reaches that state.
Okay.
So I think I thought it's muggy, yeah, we are really very happy with the performance same store in Q3 in terms of the persistency.
We've got a lot of pets 209000, just to reiterate that number of mandates that have received a higher increase and you know what.
We see that staying power for what I've mentioned earlier, we had 90% of those people staying with that sort of thing in 20% plus increase which is the testament to the value proposition and the power of that your opinion product and across the basin, that's where the king ads or those cohorts, because we always say wouldn't obsess about the member experience.
So that we can make it as good as it can be.
In terms of shaping out we're saying as we look at all for G. I expand that channel continues to be the main driver of leaves the second biggest driver at least two that is our friend our existing members, adding pets that has been consistent throughout this period and really helps us to Cushing, so that efficiency, which then helps us in terms of any type there. So we think that.
Progress and unhappy with how that's working through the April because I think the point in time.
And we'll continue to keep that at all and all Pfizer and in my mind is when you consider the growth interest rate.
Does that answer question.
It does thank you very much I appreciate that and then I totally understand that the European operation is a different underwriting risk profile of the relationship on the P&L, but at some point you'd probably want to take the underwriting.
The Japan yen, how do you think about input cost trend differing in Europe.
Versus the U S, Japan versus the U S. Because I know that's the market you're planning to enter I believe mid next year. Thank you for the answers.
Yeah, I mean, it's interesting when you go globally across the veterinary landscape.
Everyone is seeing very similar trends. So obviously, that's a relativity depending on the economy that we're operating in at that time, but whether we're talking about Australia.
Canada or the U S.
And any parts of Europe, where our pricing in that the veterinary industry is shortstop theyre all under pressure a nice pressures leading to the cost trends that we're seeing because that's have little choice, but to increase the prices by charging to ensure that they can sustain their businesses.
Now that does vary degrees as I mentioned, so you know when we talk about the average I'll pay for a European number at this point paying $25 significantly different to that across North America.
But the value proposition and the value that <unk> brings it is the same no matter, where you all were not changing our approach to that 71 cents on the dollar, but making sure that we can get people a product that will help them to take care of that pack away they need to take care of that Pat.
And as long as that remains our focus we absolutely believe that we have a huge opportunity in front of us and happy to see that starting to take hold in Europe with ice that those countries coming online and you're right at some point, we will have that underwriting for your opinion, that's work in progress, but very happy to get our teeth into what we see there is a tremendous opportunity.
Thank you.
This is the end of the Q&A session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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