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spk03: Hello and welcome to Thorne Health Tech Inc's fourth quarter 2021 earnings call. My name is Lauren and I will be coordinating your call today. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star two. I will now hand you over to your host, Thomas Wilson, to begin. Thomas, please go ahead.
spk07: Good morning, everyone. Thank you for joining Thorne Health Tech's fourth quarter 2021 earnings call. With me today to share our results are Paul Jacobson, our CEO, and Scott Wheeler, our CFO. Tom McKenna, our COO, and Michelle Crow, our Chief Marketing Officer, are also available for questions. Before we begin, please note that today's discussion contains forward-looking statements that are subject to risks and uncertainty. Actual results may differ materially from those indicated by our forward-looking statements. More information about potential risk factors can be found in our annual report on Form 10-K, which we anticipate filing after market today, and in other SEC filings. Also, in addition to U.S. GAAP reporting, we will be discussing financial measures that do not conform to GAAP. We believe these non-GAAP measures enhance the understanding of our performance because they are more representative of how we internally measure our business. Please note, these non-GAAP measures should not be considered in isolation from or as a substitute for GAAP measures. A reconciliation of GAAP to non-GAAP results is available in the earnings press release we issued last night and in the supplemental investor presentation posted to our IR website. With that, I'll turn the call over to Paul.
spk08: Thank you, Thomas. Good morning, everyone. And thank you for joining our fourth quarter earnings call. 2021 was a record year with significant accomplishments across the board for Thorne Health Tech. The company's strong financial performance was driven by our simple focus on delivering the highest quality solutions to customers. while continuing to execute on the key growth strategies we outlined during our recent IPO process. I'll share some of the main highlights and then turn the call over to Scott for additional details. For the 2021 full year, we delivered 185 million in sales, a 34% increase over the full year 2020. We grew our base of active subscriptions by 66% to approximately 257,000. We expanded gross margin by 580 basis points to 52.6%. We grew adjusted EBITDA by 34% to $20.6 million. And lastly, we earned GAAP EPS on a diluted basis of 10 cents and adjusted diluted EPS of 27 cents. These solid results add to our long track record of growth. I'm also pleased with the continued operating efficiency improvements we are making as we expand the scale of our vertically integrated operations. We are achieving new levels of sustainable profitability and innovation. Our talented workforce is resilient. I've remained impressed by how well our people have continued to deliver through the uncertainties presented by the pandemic. As you know, Q4 was our first full quarter as a public company. Our IPO in September not only brought us sufficient capital to accelerate funding for our long-term growth initiatives, but it quickly puts us on a bigger stage to drive awareness to Thorne as a leading personalized scientific wellness company. With the IPO behind us, it has been exciting to fully focus on the vision we laid out to accelerate our growth journey and our long-term value creation for shareholders. Our financial successes for Q4 are similar to that of the full year, achieving high sales growth with increasing net profit. Fourth quarter net sales accelerated to $50 million, a 38% increase over Q4 2020. Our gross margin expanded 340 basis points to 51.5%. Adjusted EBITDA grew significantly to $5.4 million. And we achieved gap EPS of one cent per share and adjusted diluted EPS of seven cents per share. Let me expand on some of the drivers behind the favorable results for both Q4 and the full year. Our marketing initiatives remained efficient and impactful, enabling us to continue building the Thorne brand, which is already admired by customers and is trusted by a growing network of health professionals, athletes, and brand partners. Our Better Health Olympic brand campaign reached millions of people with over 850 million unique impressions, and it drove significant new customer acquisition in the second half of the year. The campaign resulted in a 36% lift in new weekly DTC customers during the 20 weeks following the campaign, compared to the 20 weeks just before it launched. More broadly, in terms of brand awareness and traffic, The number of page views represents customers who click to view a content page on any of our e-commerce platforms. For 2021, our digital properties led to over 37 million page views, up more than 47% year over year. Our full year D2C revenue growth of 38% and related KPIs demonstrate how effective the campaigns and our engagement efforts have been at producing high value customer conversion and retention. For 2021, our net promoter score was 69. In addition, we achieved customer acquisition costs of $39 with a lifetime value of $177. This resulted in an LTB to CAC ratio of 4.5 times, all while spending under 14% of sales on marketing. As a percentage of sales, we believe our 14% spend is far below that of some of our consumer health growth-oriented peers. Our professional B2B revenue also experienced strong growth of more than 31% for the year. This growth was primarily driven by broad-based demand across our professional and performance partners. Of note, online dispensary revenue grew 37%. These dispensaries enable health professionals to digitally expand their practice and, by extension, our base of loyal customers. It's also exciting to see continued increases in the retention metrics of our network of over 45,000 health professionals who provide trusted advice to their customers and patients. Higher retention rates are fueled by the holistic approach we provide not only to our D2C customers, but also to these health professionals with infrastructure for sales and support. As of December 31st, the retention rate of our health professionals increased to 88%. up from 85% as of December 31, 2020. Our network has also increased by more than 3,000 health professionals since our Q3 call, providing further building blocks of trust, third-party validation, and scale. As we scale, we have also continued investing in innovation and new product development to meet unmet wellness needs. On the product front, we launched two new offerings in Q4. First, we launched Collagen Plus, a formula combining collagen, nicotinamide riboside, and skin-enhancing polyphenols to provide customers with a more effective solution to combat the physical signs of aging. And second, utilizing multiple layers of insight from our AI product development system, we also launched Metabolic Health, which targets healthy metabolism, cholesterol, and blood sugar levels. These new products are a direct result of our close relationship with customers. We listen to their health goals in order to then meet them on their personal journey. By launching these products, we are also further demonstrating our commitment to bringing innovative, clinically proven ingredients and solutions to the field of healthy aging. We are a leader in the field now, which we view as a massive long-term opportunity and one that spans the full spectrum of an individual's life. Now turning to our operations and manufacturing. Our operations team marked its most successful year ever in 2021. Because we manufacture our own products, and we do that here in the US, we have been able to effectively manage costs. We have also been able to avoid material shortages by successfully navigating through the global supply chain uncertainties thus far. The business continuity initiatives we enacted early in the pandemic paid dividends by helping us mitigate against potential workforce disruptions. In summary, for 2021, Our production of bottled finished products grew 39% from 2020. Our average bath size increased 28%. And overall, production efficiencies resulted in a 20% annual reduction in average bottle costs, which helped fuel our gross margin growth. As many of you know, we hit a major milestone in June when we transitioned fulfillment and shipping to a new 115,000 square foot facility. In addition, we continue to see benefits from our new West Coast Distribution Center, which has increased fulfillment capacity in that region by about three times. Lastly, on facilities, in December we broke ground on construction of a 360,000 square foot warehouse adjacent to our facility in Somerville, South Carolina, which we currently expect to begin occupying in the first quarter of 2023. Like prior years, we were again awarded an A rating by the NSF. which certifies good manufacturing practices for competitive sports. An A rating is the NSF's highest. This prestigious award enables professional athletes who are subject to testing to safely take and trust our products. While I'm pleased with the rating, we view best of breed ingredients and processes as table stakes for our brand, given the high quality products individuals expect from us. I will now turn to our guidance. For the 2022 full year, we are currently projecting net sales of between $240 million to $250 million, gross margin of between 53 to 55 percent, adjusted EBITDA of between 30 million to 35 million, and adjusted diluted EPS of between 28 cents to 38 cents. Additional details and assumptions related to our guidance were provided in our earnings release and investor deck issued yesterday. They should provide high-level color on how we are thinking about the phasing of sales and costs over the course of 2022. Our guidance details also provide certain assumptions we are currently making for adjusted EPS, since we are introducing EPS guidance for the first time this year. Let me provide some color on a few key drivers for continued success in 2022. I'll start by pointing out that our healthy baseline of sales continues to grow in a steady trajectory following a great year of expanding our brand awareness. Now we will be layering on top of that a campaign in each of Q2 and Q3, and that will have some trending impacts over the course of the year and weight sales towards the second half of 2022, which I'll get into. I'm incredibly excited about the potential of these campaigns. First, in Q2, we will be launching a campaign with a focus on redefining healthy aging by empowering people to live longer, healthier lives. We have a series of offerings being introduced, including our Kids Plus multivitamin that leverages the patented printable dissolvable disc technology we acquired at the end of February. Our Gut Health Wipe, the first to market microbiome wipe that significantly improves the sample collection experience. Our Thorne Advisor one-on-one chat service where customers are able to chat with advisors for personalized product recommendations. And the Thorne Kiosks in connection with our CrossFit partnership. These interactive self-serve kiosks provide a solid reach into an established network that we think could be a great opportunity once it has had time to scale across that operation. Our second campaign in Q3 will focus on innovations and healthy aging highlighting all key product launches during the year. For example, we'll be launching an innovative new product called Daily Greens Plus, packed with functional greens with nicotinamide riboside for healthy aging, endurance, and focus. We believe there is only one major competitor on the market, and we feel great about the opportunity Daily Greens Plus will open up for us with our differentiated approach to its development. Daily Greens ingredients have been clinically tested to support energy and recovery. In addition, once launched, customers will notice the full transparency over what those ingredients are. This scientific rigor and transparency are important to us and our customers. Lastly, the launch of Daily Greens Plus is a testament to one of our core growth strategies to launch differentiated products and expand our current high-value offerings. While Q1 has been relatively quiet for us, as we planned, we expect the campaigns to generate sales that will start to pick up in Q2 and then again in Q3. We expect we will continue to grow the underlying healthy base of revenue from these efforts. I will point out that we have not projected any significant sales from these product launches in our guidance. These new products will allow us to expand further into adjacent markets such that we are expecting that it will take time for these new offerings to become a meaningful contributor to our base. The most closely associated costs to these campaigns are for marketing. As you know, the timing of that spend is generally tied to the timing of the campaigns, so these costs will be heavier in the middle to latter half of the year. I look forward to updating you on the campaigns and launches during the year. With respect to advancing of our drawbridge device, Our development efforts are proceeding well. We can now report that the device's state-of-the-art plasma separation cartridge has been transferred to manufacturing and it is on target for initial production in late Q2 or early Q3. As we've previously said, we believe the device's impressive separation and collection capabilities will set a new industry standard. For example, we will be offering the ability to collect more challenging biomarkers using either dry blood spot or serum separation cartridges without the extra need for cold storage during shipping. However, as this development is underway, it's important to note that we have not assumed any revenue in our guidance for the drawbridge device. And lastly on guidance, while we feel good about our expected growth trajectory for the year, as reflected in our guidance, I will caution that given the uncertainties in the global markets, including the events in Europe, there are incremental uncertainties we are monitoring closely that could have an impact on our plans and on our currently projected results. Now let me turn it over to Scott to step through additional financial detail, but first to wrap up. We remain laser-focused on our mission to bring deep scientific rigor to the preventive space to help people reach peak performance and live healthier for longer. We empower our customers with education, testing, and supplements to support their health journey at any age and life stage. Our balance sheet is in stronger shape than ever, We have continued to scale and we're poised to continue delivering high growth on the top and bottom line. I'm proud of our team's dedication to our mission and the results we shared with you today. I will now turn the call over to Scott for more color on the financial results.
spk05: Thank you, Paul. We delivered solid financial and operating results this quarter, and I am pleased to report on these outstanding results for our first quarter as a publicly traded company. The continued growth of our business demonstrates the strength of Thorne Health Tech and continued execution against our operational and strategic initiatives. The structural economics of our business continue to strengthen, driven by robust demand across all channels. Gross margin accretion, disciplined cost management, improving adjusted EBITDA, and continued strategic investment in the Thorne brand and our integrated offerings. Net sales for the fourth quarter were a record $49.9 million, up 13.7 million or 37.8% from the same period last year on double-digit increases across all sales channels. The record fourth quarter completes a record year of sales of 185.2 million, up 33.8% over the full year 2020, Fourth quarter subscription sales in our D2C channel grew 45.8% compared to the fourth quarter of 2020, now representing 9.8% of our total sales and 25.6% of our D2C sales, which continue to reinforce consumer trust in our brand. Additionally, our direct-to-consumer sales continue to grow during the quarter, increasing $6.9 million or more than 56% year over year to 19.1 million. And our professional B2B sales grew 6.8 million or 28.5%. Fourth quarter gross margins were 51.5% of net sales, an expansion of 338 basis points or 7% over the same period last year. Our record sales and our increased gross margins led to a record quarterly gross profit of $25.7 million, up 47.5% over the fourth quarter of 2020. These numbers reflect that we have thus far minimized the impact of inflation and supply chain challenges that are impacting many businesses today. Moving to SG&A, we're managing expenses efficiently while continuing to strategically invest in both our brand as well as our long-term growth opportunities. As expected during the fourth quarter, SG&A expenses were $23 million, up $6.5 million higher than the same period last year, driven primarily by our planned investment in marketing as we continue to strengthen and grow the Thorne brand. Adjusting for our investment in marketing, SG&A during the fourth quarter was 35.9% of net sales, compared to 31.9% for the fourth quarter 2020. Research and development expenses were 1.7 million during the fourth quarter, as we continue to invest in a number of strategic initiatives. Fourth quarter earnings were one cent per share on a fully diluted basis, which is 12 cents per share higher than a year ago. Fourth quarter adjusted EBITDA excluding special items was 5.4 million, which is higher than last year's 1.4 million, primarily driven by an 8.3 million increasing gross profit driven by sales, of which 1.7 million was directly attributable to continued gross margin expansion. This was offset by increased shipping costs of 1.6 million related to increased sales volume, incremental headcount costs related to the longevity and drawbridge mergers of $1.3 million, and incremental costs of becoming a public company of about $1 million. For the full year 2021, net sales increased $46.8 million, or 33.8%, to $185.2 million. led by a 26.6 million or 31.3% increase in our professional B2B sales. Four-year D2C sales increased 20.2 million or 37.7%, 6.8 million of which was attributable to continued growth in our D2C subscription sales. We remain focused on optimizing our production processes and material costs. the benefit of which have seen materialized through a continued gross margin expansion during 2021. Gross margin for the full year 2021 was 52.6% of sales, an increase of 580 basis points, or 12.3% compared to 2020. These operational efficiencies and disciplined cost management approaches have guided our gross profit higher by 30%. $2.6 million or 50.3% over the prior year. For the full year 2021, SG&A expenses grew $20.6 million or 34.5%, consistent with the revenue growth for the period driven by increased marketing and advertising spending of $14 million. As we continue to invest in our marketing strategy and promote the Thorne brand, Excluding the incremental spending on marketing, SG&A as a percent of sales declined from 35% to 29.6%, which is a 531 basis point reduction or 15.2% lower than the 2020 as we leveraged our fixed cost component in our SG&A. Research and development expenses were 5.9 million during the full year 2021. Fully diluted earnings for 2021 were 10 cents per share, an improvement of 44 cents per share compared to the full year 2020. Adjusted EBITDA for the full year 2021 increased 5.2 million, or 34%, to 20.6 million. Turning next to our cash flow, our cash flow continues to highlight major corporate actions, as well as the benefits of a very strong adjusted EBITDA. On September 27, 2021, we achieved a major milestone for the company by completing our first initial public offering, selling 7 million shares at $10 each. After paying for underwriting fees and other costs, Net proceeds from the offering were $60 million. As of December 31st, 2021, we had a cash balance of $51.1 million. Operationally, during the full year 2021, we generated $9.1 million of cash from operating activities, while spending more than $14 million on marketing and advertising and growing our inventory, including raw material, by $8.9 million. to support continued growth of our business and protect our supply chain. As we move forward, we expect to continue to invest in the various strategic sales and marketing initiatives, research and development activities, and operational enhancements of our production facility. As previously mentioned, with our IPO, we planned on repaying a $20 million revolving line of credit with proceeds from the transaction. And I am pleased to announce on October 4th, 2021, we repaid and terminated the 20 million revolving line of credit. We will continue to remain diligent in our sourcing and allocating of capital in the most efficient manner possible while maintaining a strong balance sheet. In closing, we are very proud of our continued success of delivering record results this quarter and remain excited about the future ahead for Thorne Health Tech. I want to thank our entire team for all of their tremendous efforts and valued contributions. Your dedication makes all the difference in elevating Thorne Health Tech as a leader in health and wellness space. We could not be more excited about the opportunities ahead. And with that, Operator, please open the lines for questions.
spk03: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from the line of Elizabeth Anderson from Epicor. Elizabeth, please go ahead.
spk01: Hi, guys. Thanks so much for the question this morning, and congrats on finishing your first full year as a public company, or first four years as a public company. One thing I was wondering about was, could you talk a little bit more about the nutritive acquisition? I know you called out that it was maybe 1% to 2% of revenue contribution for the year. I was just wondering if you could go into more detail in terms of why you were interested in that asset and Anything you can say sort of on the margin profile there? Thanks.
spk08: Okay. Hi, Elizabeth. It's Paul. So first of all, there's a number of reasons why we were interested in bringing Nutrativa inside of Thorne. First of all, it reduces the use of plastic. So there will be no plastic in the packaging at all. It uses less water in manufacturing. It lowers shipping costs overall. So the more we can scale production into this type of technology, the more cost efficient we become. Our hope is that this becomes a big growth area for us, but we're going to launch in sort of pilot form. We're going to launch in two separate ways. First is under direct-to-consumer technology. where we're going to go first with the children's vitamin. We think it's a big opportunity because our competition is basically gummies. And we spent a significant amount of time surveying mothers to figure out what sort of things they would like to see in the product, and we formulated accordingly. We also have a fairly significant business in the prenatal space, so we think it's a great pairing of products for the children's vitamin business. And we think we'll have the best product on the marketplace anywhere. We're also going to be launching a prebiotic that was formulated working on microbiome tests in humans and a sleep formula. And then we're going to be building out a B2B business with this as well. So our goal will be to reach out to big companies, take reverse inquiry, and see what sort of products they're interested in making. And we're going to do two pilots there. First, a healthy aging formula, which we'll be using our nicotinamide riboside in a partnership with a company in California that we'll be selling at Sephora. It will be private labeled. And we will also be selling a product in partnership with a UK-based online pet company. And this one is actually a dental hygiene disc formulated to be dropped inside the dog's water bowl because animals don't swallow pills very easily. So we have a lot of hope for this, not only from an environmental standpoint, but also the ability to develop really unique products and compete against other different forms.
spk01: That's super helpful and anything you can say on the margin profile there.
spk08: I think that it's going to excuse me. It's going to take time to develop. Obviously, our goal is to have very high margins in this business, but just like, you know, which is true all manufacturing business. It takes scale to do it. So our, you know, we'll, we'll launch. not in scaled version. We will be profitable on the products from the day we launch, but it won't be anywhere near the kind of scale that we're going to be looking for later on. So hopefully the answer is a higher margin business than we've had.
spk01: Okay, on a scale basis. That certainly makes sense. And then a couple questions on the marketing spend. Obviously, that sort of kicked down in the quarter, and I was just wondering if you could comment on on sort of how you thought about the cadence specifically in terms of the fourth quarter and what was going on there. And then why you sort of, I know you obviously are sort of accompanying that around the new product launches. So that makes sense there. I was just wondering if you could talk about sort of mix of marketing spend and sort of the efficiency, obviously you've called out the 4.5% out, there's sometimes LTB to cash, but I just wanted to sort of understand sort of the channel and focus that you're thinking about there as regards to 2022.
spk08: Sure. I'm going to turn this one over to Michelle Crow.
spk02: Definitely. It's a great question. So I'll first address the Q4 part of this. So in Q4, there were kind of two main factors that we spent under our historical quarters for 2021. So number one, typically around the holiday season, digital ad costs go up with retailers trying to get attention around Cyber Monday and the holidays. And it's not typically when you see a lot of people really focused on their health and wellness. So to maintain efficiency, we historically have pulled back a little bit in Q4. And then the second factor in this quarter in particular was we had a one-time inventory count plant shutdown of about a week. And so we pulled back on ad spend just to kind of accommodate that. But that wouldn't be a recurring thing moving forward. But as it relates to 2022, we really see the biggest opportunity to grow brand awareness when we look at our marketing spend. So we're targeting between 16.5 and 18.5% of sales to be spent on marketing, really focused on driving profitable acquisition of new customers. When we look at kind of how we're planning to do that, it's both making sure that we have robust unpaid acquisition strategies working for us, but that we're also really data driven in our approach to the paid acquisition as well. So if we kind of look at how we're thinking about 2022 and the spend, we'll continue the 60-40 split between brand building activities and more down the funnel direct response activities. And we'll make sure that we have a diversified spend across both traditional and digital channels. And we'll continue to invest in online video out of home social search display, but also we're looking at increasing our investment in scaling our influencer marketing, podcast advertising, sponsored content, and experiential marketing and event sponsorship. And we really believe that kind of the combination of focusing on unpaid website optimizations, SEO, as well as being really data-driven in our paid spend that we'll be able to continue our efficient acquisition and expand LTV to have an attractive LTV to CAC this year.
spk01: Got it. That's super helpful, and I'll jump back into the queue. Thanks so much, guys.
spk03: Our next question comes from Oliver Shen from Cowan & Co. Oliver, please go ahead.
spk04: Hi, Paul and Scott. Good morning. Thanks, everybody. On the revenue guidance of 30% to 35%, how should we think about it with respect to channel as well as quarterly cadence as we look at the comparisons? And then also, what's in that guidance with respect to pricing versus number of transactions? Also, on your gross margin guidance, which is very helpful, the 53% to 55% would just love some color on why how you might achieve the higher end versus the lower end and key drivers that might be there. And, Paul, you have a lot of really exciting innovation, including the greens and collagen and metabolic health. Which ones would you prioritize as potential upside drivers or the magnitude of some of the new product initiatives that we should focus on in terms of our model in 2022? And I had a follow-up. Thank you.
spk08: All right, so I'm going to start with Scott giving some comments on answering your question on the gross margin.
spk05: Yeah, as we look at gross margin and move forward on gross margin, we believe we can continue to leverage those same things that we used in 2021. In other words, we've got basically a lot of fixed costs in our plant, and as we drive additional volume through that plant and we have very specific Rich D' items that we're going to do that to make that happen as we drive additional volume through the plant it just historically drives additional margin, so it drives our what we call our cost per bottle produced down and as that happens, why, then our margin improves.
spk08: Okay, and now on the cadence and the marketing side, Michelle.
spk02: Yeah, I can address your question as it relates to kind of how we're looking at the D2C sales growth. So if we're kind of looking at how Q1 is shaping up, we're anticipating 45% to 50% of total sales to be generated from our D2C channel, and we're confident that it'll continue to be our fastest growing channel for the year and kind of if we look at the unit economic trends that we expect in 2022 we think that net price will be relatively uh flat year over year with the conflicting forces of we'll be launching higher price products however we're driving a lot of subscription revenue which comes with a discount If we look at order size, that'll likely be flat year over year. However, we're confident in an increase in order frequency as we continue to drive more subscriptions. We've seen year over year in 2021 versus 2020, that was the biggest change in terms of growth. However, the biggest element to our growth model for D2C this year will be increasing the rate at which we acquire new customers, as well as maintaining or slightly improving the retention rate. So really the biggest factor in how we look at growth from a bottoms-up perspective is the number of total purchasing customers.
spk08: And then I'll answer your question on the products. I'm going to sort of differentiate them in terms of where I think the biggest opportunities are going to lie, and I'll take the smallest one first, which is going to be on our metabolic – I think that's going to end up being more aimed at our doctor community. There's a bit of science that needs to be understood, and we expect that this will largely be a doctor-related product. Moving into the middle then would be the collagen product. Again, as you guys probably recall, we're placing a lot of emphasis on the use of nicotinamide riboside in our various formulas. We're manufacturing our own product now. So we have very good margins on this business. We launched a flavored collagen product. It was very successful, mostly in the direct-to-consumer market. And based on customer feedback, there's going to be a neutral flavor that's going to be introduced into the marketplace because a lot of people want to just combine it with other things, essentially in a blender environment. So it's going to be neutrally flavored. And we think it's going to be a continued growth product for us along the lines of our nicotinamide riboside suite. And then on the green side, we have a lot of hope that this is going to turn out to be a big growth product for us. You all know who the largest greens product company is right now. They have sales probably in the $150 million range just on this one product. We've been studying this market for four or five years, largely looking for ingredients that were super clean, that had clinically validated data. and where we could then add our nicotinamide riboside to it so we think it's it's not going to be one of these um proprietary formula based products we're going to be extremely transparent in what goes into the product what the doses are how it should act in the body and i have a lot of hope that this is going to be a very big growth product for us across all of our channels um We've been flavor testing it with consumers, sort of an A-B blinded taste test. This product has come out with a significant majority of favorability versus our competition in terms of taste. Our hope was that we'd at least do 50-50 on surveys because we think their product tastes pretty good. And so far, it's been very favorable. So over time, we're going to launch this the way we usually do. So we're going to go into our normal channels without an overspend on marketing. And then gradually, as the sales build, we'll start pushing more and more. And I think Michelle has this targeted in the second marketing campaign on a more specific basis during the course of the year.
spk04: Okay, thanks. Very helpful.
spk08: And I'd also mention that it is an extreme – I was just going to add one more thing about this. It is an extremely high-margin product for us since we manufacture all these things.
spk04: Very helpful. As you do obtain new customers and grow your awareness, typically where will these new customers be funneled to and or what products or categories might be the focus or variety of? And then secondly, you mentioned in the presentation leverage big data and AI capabilities to expand partnerships. Paul, could you elaborate on the big priorities there and how artificial intelligence fits into your innovation techniques? Yeah, so Michelle, why don't you answer the first part?
spk02: Yeah, I can take the new customer question. So if we look at our marketing budget for 2022, over 80% of that budget is spent on paid working dollars and that's largely money that's being spent to drive people to thorne.com because that's where we think we can deliver the better customer experience and we have more favorable unit economics. So that's really the focus is delivering the best user experience for customers on our own website. And then as it relates to the products, I think really the most important message that we're focused on communicating to new customers this year is trust. And the fact that we're the most trusted brand for supplements, health testing, and wellness education, and really making sure that people understand the credible partners we have across the leagues, professional athletes, Mayo Clinic, health professionals. And then really leveraging that message for kind of what we call gateway products, which typically are the more simple, easy to understand single ingredient or multivitamin products. And then from there, once we get those customers into our ecosystem, really upselling with our more differentiated high margin formulas.
spk08: And on the AI question, Oliver, I would say that First of all, it's been very helpful on the product formulation side. So we are really looking at this in a way to build better and better products in the three primary testing areas that we've talked about, which are biological age, microbiome, and eventually the brain health platform. We're finding that it's been useful not only in building products, but in making more specific and personalized recommendations to clients. We are, but we are extremely focused on using this in particular for our microbiome work and for our brain health platform. So we've entered a pilot on the brain health side already where we're building out a knowledge base with five or six, I can't remember the exact number, it's five or six medical offices working with doctors who have traditionally focused on dementia and Alzheimer's and the treatment of patients. We're learning from this, and then we'll be deploying it as a direct-to-consumer product probably next year. I think we're going to have to go through the full year on the pilot basis before we can do it. But that's where we're really using the AI platform.
spk04: Thanks, and best regards. Thank you.
spk03: Our next question comes from Sean Dodd from RBC Capital Markets. Sean, please go ahead.
spk06: Yep, thanks. Good morning. Going back to the gross margins, and if we kind of think longer term, Scott, you mentioned the improvement you've been able to drive there by increasing efficiency in your new plant by increasing batch size, reducing change over time. Again, kind of longer term, how much runway do you see being left there? Are you now operating just about as efficiently as you'd hope to be given, I guess, the scale and breadth of your product offerings, or do you think there's still some some room for improvement, leveraging those plant pick costs?
spk05: We think there's room for improvement. We have a fair number of objectives we're trying to achieve on a daily basis, trying to improve our efficiencies, improve throughput. In order to meet our 2022 sales goals with the equipment that we have and with the people we've got, we have to drive additional improvements and we have processes in place to make that happen. The other thing I wanted to mention is that, you know, we took a price increase of about 3% in January of this year. And so I think we have some pricing power. If nothing else, we can drive additional margin through that. And so I think with You know, we're looking at directionally, but I think we're feeling pretty good about where we're going to be in the next three to five years.
spk08: Sean, I would just add a couple things on the margin side. First of all, the channel mix is critically important. And, you know, we do expect substantial growth over the long term in our direct-to-consumer business both on thorne.com and amazon where the margins are higher secondly the product mix is going to be really important and everything we launch that's new has higher and higher margins especially if the products are more differentiated so you know some of the new things we're launching probably are pushing 70 margins thirdly You know, it takes time to introduce new technology, as you know, especially when there's regulatory pathways involved. So, you know, it's been a slog getting the microbiome wipe, you know, through our version of clinical trials, so we know that the sequencing data is accurate. But that will be launched. We've placed our first order, and we expect delivery late this month for launching in April. type of product should impact our gut health sales over time. The same is true on some of the other technologies that we're bringing into the company. So we think the drawbridge health device will drive further business that could be higher margin business. And the same is true of things like the kiosk and some of the software we're introducing for B2B businesses. And I think that our goal has been to drive – you know, in our roadshow, I think we said 56 to 58 was our long-term goal. Our hope is that with the introduction of some of the new things we've been working on for some period of time that, you know, next year, in fact, we'll start seeing significant improvement from some of the newer things we've been working on for the past couple of years.
spk06: Okay, great. That's helpful. Thank you. And then, Paul, you mentioned in the prepared remarks global events being – a risk. And I think you said it particularly in Europe. Is that just the possible impact this all has on consumer discretionary spending? Or is there something more specific you're alluding to there? Like, do you source some kind of key ingredients from, from some of the regions being affected or anything else? Um, kind of more specific that, that you're thinking about, uh, kind of macro or globally?
spk08: I'm glad. Yeah. I'm glad you asked that question because I know it's, uh, you know, this forecasting, but you know, at, in the way we forecasted this year, um, it gives us a chance to address the question. So we're not seeing specifics in terms of ingredients. I think the operations team has done an amazing job in sort of examining the things that we think might happen and trying to take the steps that we could to offset them. However, I think it would, and again, if you go back to our long-term goals, From the roadshow, we always said our goals are to grow at 30 plus percent, but to do it profitably. So we've always been focused on doing things profitably, which maybe someday might count. So I would say that it would be naive to not consider a combination of Fed tightening, high inflation and a war going on. that we're not going to get bit somewhere by that. We don't know where it's going to happen, but we're trying to take steps and at least examine it almost every week in group meetings to see where we could get hurt. So we're being cautious about things globally. Whether it could impact our international sales if we were to look for one place, depending on what happens to shipping, or energy prices or anything like that, it could impact our international sales. It's not happening yet, but it could. And that's why we forecast the way we do.
spk06: Okay. That's good. That's good detail. And then you mentioned the benefits results you saw following the summer Olympics campaign. Did you all do something similar for the winter Olympics? And would you expect benefits from that to kind of flow through following a similar timeline? Michelle.
spk02: Yeah, so in terms of the Better Health Olympics campaign, we were really happy with the performance, significant customer growth, engagement, sales. it outperformed the past two brand campaigns that we did. In terms of 2022, this is actually the first year we're going to be launching two brand campaigns. Our first is launching at the end of this month, and then the second is launching mid-July. And the focus of the first campaign is really around healthy aging. We really see, you know, as a brand and as a company, health is the new wealth and believe that we're really well positioned to be the brand that people invest in to help them live longer, healthier lives through our personalized solutions. So that's really kind of the focus of that first campaign. And then the second campaign will really focus on the innovation of the three hero new products that we're launching that Paul mentioned. So Daily Greens Plus, Kids Plus, Gut Health Test. So while we'll continue to support our Olympic team partners, and that will continue to be some of the messaging that we deliver to the market, it's not a focus of the two brand campaigns in particular this year, since we're really focused on that healthy aging messaging, you know, coming out of COVID with everyone thinking about prevention and wellness in a new way.
spk06: Okay, great. Thanks again.
spk03: We now have a follow-up question from Elizabeth Anderson from Evercore. Elizabeth, please proceed.
spk01: Hi, guys. Sorry. I just had two questions in terms of one specifically on the professional channel. Did you guys see an impact? As we're thinking about the cadence for 2022, did you see an impact in the first quarter from Omicron in terms of just a, like, reduced number of visits?
spk08: No, I would say the only impact we're seeing now is a bit of a switch from immune-based products to other products. So we're not losing the customer. They're just tending to switch. If this thing picks up again, we'll probably see a switch back to immune products, but it does tend to float back and forth, and that's really the only thing that we're seeing.
spk05: The other thing that we're seeing is what we – We have what we call our online dispensing. And so a doctor's office may be closed, but the doctor is still selling our Thorne products through our website and using our online dispensing, which we have seen a significant growth this last year as doctors took advantage of that to help their patients stay healthy.
spk01: Makes sense. And then just one follow up on drawbridge. Where have you seen sort of initial interest in terms of customers from that as we get sort of closer to launches and any interesting changes on that front?
spk08: Okay. Just to summarize, level set this. We have an FDA clearance. It's a 510K clearance for medically supervised draw, which means you can have a physician or some healthcare professional present. We are still trying to define if telehealth counts. We don't know, but we're working on it. We've also brought in outside consultants now that are working with us to get direct-to-consumer clearance. And we have a trial that's been completed on 15,000 patients at the University of Cambridge. We have not seen the data, but it was a user experience clinical trial. that trial is being published in a journal, and until it's published, we don't get to see the data. That was the deal. So the first place we see customers coming will likely be contract research organizations and pharma companies who are conducting big clinical trials because one of the big changes we made in the device since purchasing it is to be able to offer two different types of cartridges. One will be a dry blood spot, And the other will be a serum separation cartridge that allows for far more sophisticated biomarkers to be collected, including all the lipid panels, because finger sticking yourself for lipids is not really very accurate. So we see those as the first two places during the course of this year. Once we launch into those two markets, we will begin working with physicians to get some of the devices out there and work with them and potentially into the corporate wellness space. But we really see the big opportunity for us in the direct-to-consumer space. That's been the goal for making the acquisition all along, and that's where we're going to be spending the bulk of our time this year, trying to get it through the FDA for direct-to-consumer clearance.
spk01: Got it. And then is there, do you have any sense, and I know this is probably somewhat out of your control, in terms of the telehealth, like, whether that counts as supervision or not? Do you have any sort of sense in the timeline?
spk08: Yeah. So I think we'll have an answer to that pretty quickly because we are currently in discussion with the work with several telehealth companies. and to be the wellness provider. And so this has been one of the topics of our discussion, and hopefully in the next couple of months we'll ink something and then be able to focus on it with them.
spk01: Got it. Okay. Well, thank you. That's helpful.
spk03: We also have a follow-up question from Oliver Chen from Cowman & Co. Oliver, please proceed.
spk04: Hi, thank you. Supply chain and inflation has been a hot industry topic. Would love insights there in terms of its potential impact on what you're seeing. Also, the Healthy Aging Conference, I noticed that for Q4. Would love to understand how that may impact and why. And then as we think about Thorne as a platform, Paul, what's on your mind for future M&A? And finally, brand health continues to be a big idea. Just would love you to outline some of the major catalysts and drivers as you think about that and focus on that strategy as well. Thank you. Okay.
spk08: All right. So, Oliver, I'll start with inflation. And, Scott, if you think I'm missing something, step in. So, basically, we've been able to offset the cost increases that we've seen. through a combination largely focusing on manufacturing efficiencies. Again, we have a really great operations team and they have really stayed ahead of this thing. We've also, as Scott mentioned in his section, we've advanced purchase inventories in anticipation of inflation long ago. And so we built a raw materials inventory base that's bigger than normal. And we're not relying on China either, so we're not having to deal with some of the big shipping issues across the Pacific Ocean. I would say that the biggest risk to us from an inflation perspective now, though, is probably on the bottle side, again, due to, you know, we have to have FDA-compliant packaging to meet label claims at the maturity dates. So we do use plastic bottles. One of the reasons we made the nutritive acquisition, though, is to start to wean ourselves from plastic. But really, it's a small portion of the cost of the bottle. So we maybe have seen a, you know, it's maybe 10% of the total cost of the bottles would be related to energies. And we have significant inventory there, so we should be all right. We have wage hikes. uh that have been covered largely by the overall efficiencies of the plant plus the three percent price increase that we took at the beginning of the year and then i'll mention again um you know many companies that you likely deal with that do sell you know physical goods um outsource their manufacturing uh we are completely vertically integrated so during times of inflation it really helps to uh to be set up the way we are and to be able to control your inventories actively, which is something that we've been doing. So that's kind of it on the inflation side. On the conference side, our goal is to not sort of make this a thorn promo conference. It's really to invite leading academics and thought leaders in the field of healthy aging. These could include people from the pharmaceutical area as well as the natural area. We intend to invite physicians who treat athletes or Alzheimer's or dementia patients. And we will actually be extending invitations to the press and to some of our competitors as well. So the idea is to really have an intellectually honest conference versus a simple Thorne product conference. We're not going to focus too much on our own products. The goal is to put ourselves in the position to be thought of as a leader in the field of healthy aging. And in terms of the brain health side and the platform, so I'm going to try to link all of this together. We've spent years now trying to deal with the user experience. You know, we all talk about home kit testing and health care is moving to the home, et cetera. But the big problem with that is the user experience. I don't know if you have finger-sticked yourselves in the past, but it's not a pleasant experience. And, you know, even though companies are coming up with different devices, et cetera, it's not horribly accurate, and it's not particularly fun or painless. So by building this drawbridge device, focusing on the microbiome wipe, And then with brain health, where we will probably, and I'm not 100% sure yet, but we will be offering blood tests, a genetic test, and a cognitive test that will be taken online, all under the guise of having worked with physicians who treat Alzheimer's and dementia patients first before we launch. We think we will have the most sophisticated testing platform that yields real meaningful data for patients healthy aging. That's the goal is to lead in healthy aging so you can start addressing these things early on. The other thing is that we have been building products for brain health. We placed a lot of emphasis on nicotinamide riboside. We also have a product and we're making moves to get closer and closer with these guys called Senequel, which is designed for the treatment both the pre and post treatment and prevention of concussion. This was formulated in combination with a leading neurologist at the Mayo Clinic. He has a sort of a who's who of scientific advisory board members, as well as people from various professional athletic realms and the military all working with us. So the goal here is with our platform, it's the lead in healthy aging to have the products that are the solutions for the three tests that I mentioned. and to build the user experience and improve upon it.
spk04: Very helpful. Sounds a lot more like an elegant experience. Thank you.
spk03: That is the end of the Q&A session today, and this concludes today's call. Thank you for joining. You may now disconnect your lines.
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