Thorne Healthtech, Inc.

Hello and welcome to today's Thorne Health Tech second quarter 2022 earnings call. My name is Bailey and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Thomas Wilson, Vice President of Investor Relations.

Thomas, please go ahead. Good morning, everyone. Thank you for joining Thornton Health Tech's second quarter 2022 earnings call. With me today to share our results are Paul Jacobson, our CEO, and Brian Connolly, our CFO. Kyle McKenna, our COO, and Michelle Crowe, 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 uncertainties. Actual results may differ materially from those indicated by our forward-looking statements. More information about potential risk factors can be found in our 2021 Annual Report on Form 10-K, in our upcoming Form 10-Q, which we anticipate filing after market today, and in other SEC filings. Today, 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 the business. Non-GAAP financial measures should not be considered an 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 after market close yesterday and in the supplemental investor presentation posted to our IR website. With that, I'll turn the call over to Paul. Thank you, Thomas. Good morning, everyone.

Thank you for joining our second quarter earnings call. I'm pleased to report that we had another successful quarter on our journey to becoming the leading company for healthy aging and personalized scientific wellness. We entered the quarter with an aggressive agenda that included our largest ever marketing campaign aimed at driving significant brand awareness, a slate of important new product launches that span across multiple health areas, and the continued advancement of our proprietary wellness tests. which we expect will further differentiate our holistic offerings and help us build a competitive moat around areas of the wellness space that have not existed before. Today, I'll highlight milestones related to these topics and discuss some of our more recent activities before turning to our updated guidance. But first, let me share some of the details of our financial performance for the quarter. Record net sales of 56.1 million grew by more than 30% over Q2 of last year, led by an increase of nearly 70% in direct-to-consumer, or DTC, sales. Our strong growth in this channel was underpinned by 74% growth in subscriptions, and I'm pleased to say we now have served over 5 million customers since 2018. We continue to benefit from high customer engagement and a routinely strong net promoter score, which was 69 for the quarter compared to the average digital retailer score of 35. Excluding distributor issues, our pro and B2B sales channel was significantly up over the last year's second quarter. However, total sales in this channel were impacted by the previously disclosed reduction of distributor sales into international end markets from the conflict in Ukraine and Russia. As a reminder, our exposure to those end markets through our U.S.-based distribution partners was higher than we were aware of entering the year. and the actual impact of Q2 was slightly higher than we anticipated last quarter. We now expect our annual sales mix to be closer to 50-50 split between channels on a go-forward basis. The mix shift, the benefit of successful targeted pricing actions for some products this year, and further efficiencies from increased scale have helped offset the inflationary pressures in our cost of sales. As a result, our gross margin expanded over 260 basis points to 55.9% for Q2, which is above our original full year guidance range. Despite landing above that range for the quarter, we have not revised our full year gross margin guidance since we expect some higher cost raw materials secured in Q2 to move through our cost of sales line with the related product sales in the second half of the year. Moving down the P&L, Our adjusted EBITDA loss was $1.4 million for the quarter. In addition to the reduction in international distributor sales, the loss was mainly driven by planned marketing spend related to our Redefining Healthy Aging brand campaign. As our largest campaign in history, marketing costs for Q2 were just above 30% of sales. Now with the major campaign behind us, the rest of the year marketing spend as a percentage of sales will be much lower than it was in Q2, which will push marketing costs below our original full-year guidance range into our revised full-year guidance range, which I'll touch on shortly. In addition, SG&A costs as a percentage of sales tick slightly higher during Q2. As we approach the one-year anniversary of our IPO, with better insight, into the run-the-engine costs of recently acquired companies and the formation of the Asia JV, we expect to see some corporate cost efficiencies emerge that will help us deliver our full-year profit goals. Rounding out the P&L, our GAAP loss was $0.11 per share for the quarter with an adjusted loss per share of $0.05. Brian will provide more details on our Q2 financial result in his remarks. I'll now step through some of our other operational highlights. First, circling back to our healthy aging campaign, we have been pleased with the results today. The campaign was designed to highlight how the aging process can be more controllable at a personal level and how our solutions can help individuals make more informed decisions aimed at living healthier for longer. Our 12-week full funnel campaign was aimed at increasing brand awareness and driving new customer acquisition. Our core messages centered around a few key themes. Personalized in power, specifically that we equip individuals with tools to lower risk of chronic disease and take proactive steps towards optimized health through our test, teach, and transform model. Scientifically driven solutions, where we highlighted our suite of solutions for every age and life stage, because health needs change over time, no matter where an individual is on the aging spectrums. The benefits of owning your own health. We amplified our view that health is the new wealth and how the benefits of everyday investments in one's health can accumulate over time, like investing in one's retirement. Over the course of the campaign, which ran from March 28th through June, we generated over 1 billion unique impressions. In addition, our digital properties doubled the number of webpage views over Q2 of last year to nearly 15 million, in total between Thorne.com, our mobile app, and Amazon. These views significantly outpaced volumes we achieved during our Olympic campaign in Q3 of 2021. We saw a dramatic increase in page views for our proprietary nicotinamide riboside or NR products, especially Niacel, Collagen Plus, and Resveracel. As a reminder, we normally see campaign results take hold between eight and 20 weeks post-campaign, which spans to mid-November. As a byproduct of the timing of the campaign spend, Our quarterly customer acquisition costs increased meaningfully, which dropped our LTV to CAC ratio for the quarter to 1.8 times for Q2. For the first half of the year, our LTV to CAC ratio was 2.7 times, putting us on pace to achieve our goals of an annual LTV to CAC ratio of 3.0 times or better. As such, we anticipate that ratio to trend back up in the next couple of quarters. During the quarter, we also launched several new offerings that we had previously highlighted on our roadmap for the year. Many of these new products, like daily greens and collagen fit, contain essential ingredients that not only boost performance, but have also been shown to resist the hallmarks of aging in some way, such as NR. In fact, sales of products that contain NR were up 35% over Q2 of last year. We're seeing great traction with the potential for significant growth over time. We also launched an ovarian care product to support women with endometriosis and PCOS with solid feedback so far. We'll be launching our Kids Plus multivitamin offering this month, which leverages the cutting edge technology we acquired from Nutrativa to physically print supplements on a dissolvable wafer. In addition to providing superior efficacy with no sugar or gelatin, this technology requires less water, no plastic packaging, and reduces shipping costs. On the testing front, we continue to build on the positive study results related to our proprietary microbiome wipe and our OneDraw collection device, which were published just before our first earnings call. Starting with the wipe, which has revolutionized the user experience for microbiome testing, we officially relaunched our gut health test with the first market-wide technology in June. That test was already our most popular, and we sold out of our first 500 new kits in three days. We've started working with a few early-adopting biopharma and B2B partners with great feedback thus far, and we're in early-stage conversations with a handful of companies to identify an OEM. Just last week, our wipe technology was highlighted in a CNBC Make It article describing the importance of gut health. The topic is trending heavily on TikTok with gut health hashtags crossing over a billion views. With respect to the OneDraw collection device, we have already started expanding our testing panels and have launched new tests with a partner lab focusing on allergies and autoimmune screening. The team made solid progress developing the plasma separation cartridge we've mentioned before. Manufacturing has started with the first lot of 500 units already shipped to select partners. We've also been able to support extending the shelf life of the device from 12 to 18 months. We are currently negotiating a contract with the National Medical Device Distributor and have received interest from multiple biopharma companies, CROs, and other research organizations for additional trials using the device. We expect to highlight a few more key developments later this year while we continue to work towards FDA approval for unsupervised sample collection to expand the test directly into our wellness offerings and ultimately into increasingly decentralized healthcare settings, including telehealth. Rounding out the more recent updates, last week we announced an extension of our collaboration with AstraZeneca. The collaboration allows AstraZeneca to fully deploy our disease discovery system, which leverages our proprietary multi-omics platform, extensive disease library, and AI models to provide further data-driven insights into underlying novel disease drivers to support their drug discovery program. This technology platform is being utilized internally to help develop new targeted natural products for our own use. With respect to the revised guidance, considering the incremental deterioration of a single distributor of our products into end markets I mentioned earlier, we are now projecting approximately 22 million of lost sales against our original plan for 2022 instead of the 16 million previously disclosed. While we will make up some of it versus the original budget, we have reduced our full year net sales guidance to a revised range of between 235 and 242 million, with the remaining projected net sales for the second half of 2022 expected to be weighted more towards the fourth quarter than the third quarter. We have also reduced our adjusted EBITDA guidance to a revised range of between 28 million and 32 million, and revised our adjusted EPS guidance to a range of between 36 cents and 39 cents. To prioritize delivering on our profit goals, we've decided to defer the second brand campaign that was planned for the third quarter, which will reduce our full-year marketing expense. Instead, we are capitalizing on our first brand campaign and dedicating more resources to unpaid initiatives, such as SEO and automated marketing for new products. While we expect this decision may reduce the number of new customers short-term, we do not expect it to cause a significant deterioration in 2023 sales growth based on the strength of our customer base, a planned expansion of international sales, and a significant business development effort in the U.S. aimed at channel diversification. As a result, we are now projecting full-year marketing costs of between 14% and 15% of net sales. reduction compared to prior guidance of 16 to 18%. Remaining projected marketing costs for the second half of 2022 are expected to be weighted slightly more to the third quarter than the fourth quarter. In summary, while we have experienced higher than anticipated impacts to our business from the conflict in Ukraine and Russia, our brand is growing significantly. and our U.S. and international B2C customers have thus far been resilient amidst the uncertainties presented by current economic conditions. We have made significant progress advancing our health tests and devices and have further strengthened our strategic partnerships. Our core business remains incredibly strong, positioning us well for continued long-term profitable growth. The field of scientific wellness and healthy aging is expected to grow significantly, and we intend to be one of the leaders in the field. I'll now turn the call over to Brian for additional color on our results and outlook before getting to your questions.