Thorne Healthtech, Inc.

Thank you for your patience. The Thorne Health Tech third quarter 2022 earnings call will be starting shortly. Thank you for your patience. Welcome to the Thorne Health Tech third quarter 2022 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation and to ask a question at this time please press star 1 on your touch phone keypad. If you change your mind at any time please press star 2 and for operator assistance at any point it's star 0. Thank you. Now Let me turn the call over to Thomas Wilson, Vice President of Investor Relations. So, Thomas, you may begin.

Good morning, everyone. Thank you for joining Thorne Health Tech's third quarter 2022 earnings call. With me today to share our results are Paul Jacobson, our CEO, and Brian Conley, our CFO. Tom McKenna, our COO, and Michelle Crow, our CMO, 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 and our upcoming Form 10-Q, which we anticipate filing after market today, and in other SEC filings. Today, in addition with 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 in isolation from or as a substitute for GAAP measures. The reconciliation of GAAP and non-GAAP results is available in the earnings press release we issued after market closed yesterday and in the supplemental investor presentation posted to our IR website. In three weeks, we will be participating in the Evercore ISI Health Connects Conference and holding investor meetings. A webcast of the event will be accessible on our IR site, and we look forward to meeting with you. With that, I'll turn the call over to Paul. Thank you, Thomas. Good morning, everyone.

Thank you for joining our third quarter earnings call today. I'll summarize our strong financial performance for Q3 with record sales and strong profitability. discuss how our consumers are holding up in the current environment, step through a handful of recent developments and opportunities on the testing and R&D sides of our business, and round out my prepared remarks with our outlook to close out 2022. Brian will provide further discussion of our Q3 performance and capital deployment in his prepared remarks. Lastly, additional details can be found in the earnings release and supplemental investor presentation that we issued after the market closed yesterday. With that, let's dive in. During Q3, we remained focused on a few core areas of our operations that drive strong performance for the business. These included ensuring seamless operations from ingredient sourcing to distribution, an area where we are beginning to see certain supply chain improvements. Continuing to deliver the highest quality products, innovations, and thoughtful, engaging content to our customers in support of their health journeys. and our cutting-edge health tests and remote sample collection capabilities, which significantly improve user experiences over current industry norms and are presenting significant business development opportunities in multiple fields of health and wellness. We are also preparing to further scale the supplement business as we move closer to expanding manufacturing and fulfillment to support continued growth and anticipated future demand. With the expansion, we will be able to drive increased efficiencies for better margins and industry-leading turnaround times. On the demand front, let me take a moment to highlight a few trends we're seeing relative to customer strength and behavior in this market, which contributed to our strong Q3 results and helped inform our updated full-year outlook. In addition, while we do not normally refer to business performance on a sequential quarter basis, I'll provide some color through that lens given the challenging nature of the current economic backdrop. Thus far, Thorne customers continue to be resilient. Our total number of customers and active subscriptions continues to climb. Our unit economics, such as typical order size and order value, are up Q3 year over year. Unit economics also held firm from Q2 to Q3 and remained solid through October. We've experienced increased demand for our products containing ingredients that have been relatively more impacted by global supply chain disruptions. such as certain bulk powders like creatine, where we forward bought a large quantity of the global supply at lower margins in order to be able to serve our customers ahead of anticipated shortages. While we continue to see strength in our typical high-end consumer, we do not expect to be insulated from economic conditions that will impact certain pockets of our consumer base as we progress through Q4 and into next year. That said, we are generally encouraged by recent trends holistically, and the early implications for 2023. Now, with consumer health backdrop in mind, I'll transition to some of the financial highlights for Q3. Starting with the top line, I'm pleased with our record net sales of 58.4 million, representing growth of more than 21% for the quarter. Sales performance was driven by 47% growth in our direct-to-consumer channel, primarily from continued traction, growing brand awareness. including from our Healthy Aging brand campaign, which occurred during the second quarter of this year. Our growth was broad-based across third-party marketplaces and Thorne.com, in line with our approach to meet customers where they are. The strong D2C performance was underpinned by 60% year-over-year growth in subscription sales, which increased to 37% of direct-to-consumer sales. We experienced a 41% year-over-year increase in transaction sales, although Q2 transaction sales dollars were greater than both Q1 and Q3, which we mainly attribute to heightened transaction volumes stemming from the campaign running in Q2. Rounding up direct-to-consumer channel growth drivers, we continue to achieve superior customer satisfaction stats that are significantly higher than the average digital retailer. For the quarter, our net promoter score was 72 compared to a retail average of around 35. We also recorded an LTV to CAC ratio of 7.8, inclusive of the benefits of the Q2 campaign spend that did not reoccur and therefore drove CAC down. Turning to the professional and B2B channel, we continue to experience comparability challenges from the impacts of previously disclosed lost distributor sales to its end customers in Ukraine, Russia, and Eastern Europe. Despite the impact arising from that conflict, professional and B2B channel sales increased almost 6% over Q3 of last year, driven primarily by a continuation of steady growth in professional sales, led by the combination of our Salesforce efforts and continued growth in online dispensary sales. As a percent of sales, direct-to-consumer channel sales and professional and B2B channel sales were 46% and 54% of total net sales, respectively. On a go-forward basis, we continue to expect our annual sales mix to be closer to 50-50 split from direct-to-consumer channel growth, outpacing professional and B2B channel growth near term. With respect to gross margin, there are a couple of primary factors to unpack that drove margins down year over year. First, in the last two quarters, we highlighted our advanced purchases of raw materials to mitigate against potential supply chain disruptions. As a reminder, many but not all of our ingredient purchases are governed by pre-existing supplier agreements. However, to further ensure supply continuity amidst the current economic conditions, we proactively identified second procurement sources, which resulted in higher average material costs than historical norms. In Q3, those higher raw material costs flowed through our cost of sales line, concurrent with our strong revenue growth, driving gross margin down. Second, many of the ingredients and products that have been the most impacted by global supply chain disruptions have lower gross margin profiles, such as creatine products and bulk powders. Our second source pricing and margin levels have not been where we would prefer under long-term supply contracts, resulting in an unfavorable mix shift to margins. However, we are currently entering into agreements with these suppliers as needed. This month, for example, we entered into a new supply agreement for creatine, which will significantly reduce our per-unit costs starting in 2023 after cycling through remaining higher cost inventory in Q4. Moving down the P&L to operating expenses, R&D decreased slightly year-over-year to $1.8 million, mainly from lower third-party spend, which can vary depending on in-flight research project activities. Marketing costs of $4.5 million decreased significantly to about 8% of sales in Q3, compared to 22% of sales in the prior year. That decrease was due to the combination of the change in timing and related costs of our major brand campaigns, which occurred in Q3 of last year compared to 2Q of this year. And the decision we highlighted on our last earnings call to prioritize delivering on our full-year profit goals and by extension reduced the level of full-year spend by deferring a follow-on marketing campaign originally planned for Q3 2022. As expected, the reduced external spend resulted in slower new customer growth. I would highlight, however, that excluding the quarters associated with these last two major campaigns, our marketing run rate has been about 10 to 11% of quarterly sales for the last two years, a level which has historically been effective yet driving meaningful growth. The deferral also provided some insights that allow us to deepen our understanding of consumer behavior in a challenging environment on a more organic basis, and therefore helps us inform our go-forward strategies. I'll provide directional commentary on our near-term marketing approach in connection with our updated 2022 outlook shortly. Moving along, SG&A increased by almost 36% year-over-year, primarily due to continuation of increased selling costs from the combination of top-line growth, a more normalized run rate public company cost pool, including a full quarter of stock-based compensation in Q3, as we completed our IPO in September 2021. Bryan will provide more color in the individual components in selling, distribution, general administrative expenses in his commentary, which will show favorability we are seeing as a percentage of sales on a trended basis. Turning to profit from these results, our adjusted EBITDA grew significantly to $8.3 million, with expanded adjusted EBITDA margin of 14.6% for the quarter. Rounding out the bottom line, GAAP EPS grew to $0.07, and adjusted EPS grew to 12 cents. That wraps up my prepared remarks related to Q3. Before looking ahead to guidance, I'll share a handful of updates related to our health tests and blood sample collection technology with a few comments on our scientific team's brain health work. Starting with gut health, after relaunching our proprietary test, which revolutionizes longstanding user experience to microbiome testing, our customers who take these tests for deep insights into their health have opted to use the new technology despite our ongoing support of the legacy test. This fact pattern is effectively in-market evidence of the user preferences we confirmed during the white technology study. As awareness of the importance of microbiome health grows, which it certainly is on a global stage, our first mover advantage in IP creates lasting competitive moats. The recent interest we've been getting from potential early B2B adopters, albeit still low volume from nascency, has expanded into broader discussions that put a spotlight on the level of science we deploy across the business. I believe these holistic business development opportunities that showcase our science and range of solutions provide levers to drive a continuation of our above market growth longer term. We've also made great strides in bringing our OneDraw blood sample collection device to the consumer market. Our recent progress is positioning us well to capitalize on ample business development monetization opportunities spanning from our own D2C ecosystem to decentralized clinical research in the near term. In August, we achieved a significant milestone upon receiving D2C medical device clearance from Japanese regulators. We believe that validation is significant to our upcoming work with the FDA to deploy a new product that will be accessible to anyone because of the high hurdles required by Japanese regulations. As we push ahead to D2C clearance in the U.S., we have not slowed our efforts to expand OneDraw's capabilities, which should lead to earlier and more significant new business once the device is in market. For example, we're continuing development of a serum separation cartridge to expand the range of device applications in addition to health panels related to conditions consumers can't test for today. Working with a partner lab to improve DNA preservation and extraction, we identified a process that allows for cold, chain-free sample preservation that optimizes retrieval of DNA from the device's sample strip, the results of which have been superior to our current methods. With that, I'll turn to guidance, as Brian has a packed agenda and I want to leave plenty of time for your questions. As we look to the future, we continue to evaluate our marketing spend. We believe we have an opportunity next year to thoughtfully increase our investment to drive efficient new customer acquisition and support long-term brand equity. In addition to further investing in a diversified paid media strategy, we will also strategically scale our influencer marketing efforts. Our goal is to take advantage of the broad community of differentiated customers to build deep personalization in content and use this network to build user-generated content cost-effectively. Performance data from 2022 has shown us that the inclusion of influencers in our marketing generates better returns for paid, owned, and earned tactics. Our more strategic approach to influencers starting in 2023 will be applied across the business, including in more cutting-edge R&D areas where influencers have not been deployed before, such as our brain health platforms. We also know that a personalized customer experience or helping the customer answer the question, what do I take and why, increases engagement and drives better conversion. In 2022, customers that engaged with quizzes and health tests had a higher conversion rate and greater lifetime value. We will continue to prioritize a personalized customer experience by expanding our capabilities with dynamic web content, scaling Thorne Advisor, and adding a more interactive approach for our customers with various key influencers. We're building plans to move away from some of the more traditional marketing tactics to deploying a more data science-driven approach to our community of customers and customer influencers. We believe we are positioning ourselves for continued significant profitable growth over the long term, far above industry market rates, such as the 6.3% estimated CAGR for the global nutritional supplements market from 2022 to 2030 for a recent TAM study by Grandview Research. With respect to our brain health initiatives, our scientific team continues to produce cutting-edge research and insights that could be transformative to how certain conditions are approached. For example, we received summary results from a placebo-controlled clinical trial conducted with Mayo Clinic. The objective of that trial was to measure the decline in cognitive processing speed and efficiency and whether there was a rise in protein indicative of injury, even in the absence of concussion symptoms. The trial participants were junior ice hockey players, with that cohort having been selected due to the repetitive head impacts over the course of a season. The data, which is embargoed at this time, will be presented at an international conference on brain injury in early 2023. and the results will be published in a peer-reviewed journal around the same time. Based on the study results, a similar study is about to launch in another category of ice hockey players. The work we have going on around brain health is front and center when we think about being the leading company in scientific wellness and healthy aging. Based on our year-to-date performance through October and aforementioned topics, we now expect our full-year guidance to be Net sales of between 232 million and 235 million, representing growth of 25% to 27% over 2021. Gross margin of between 52% and 53%. Adjusted EBITDA of between 25.5 million and 28.5 million, representing growth of 24% to 38.5% over 2021. And adjusted EPS, of between $0.34 and $0.37. In addition, our guidance for adjusted EBITDA and adjusted EPS includes the following assumptions. Marketing costs of between 14% and 15% of net sales, depreciation of approximately 2.7% of net sales, an estimate full-year adjusted tax rate of 10%, and diluted weighted average shares outstanding of $53 million as of December 31st 2022. With that, I'll turn the call over to Brian.