Thorne Healthtech, Inc.

Hello, everyone, and welcome to the Thorne Health Tech fourth quarter 2022 earnings call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. I will now hand over to our host, Thomas Wilson, VP of Investor Relations, to begin. Thomas, please go ahead.

Good morning, everyone. Thank you for joining Thorne Health Tech's fourth quarter and full year 2022 earnings call. With me today are Paul Jacobson, our CEO, Tom McKenna, our COO, Michelle Crow, our CMO, and Anne Blake, our corporate controller, who is available for questions. In addition, Chalani Vama, our new CFO, who we are delighted to have joining next week, is also with us today. 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-K, which we anticipate filing aftermarket 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 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 after market closed 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. Thanks everyone for joining the call. Today, I'll discuss our full year and fourth quarter 2022 results, update you on progress we've made against core growth strategies shared during the IPO process, provide our outlook for 2023, including financial targets for the year, I will also share a few comments related to our longer-term positioning, including the expansion of our vertical operations with a new world-class facility that will add new capabilities and bring capacity online to fuel efficient long-term growth. As Thomas mentioned, additional details can be found in the earnings release and investor supplement issued after market closed yesterday. With that, let's dive in. 2022 was a pivotal year for Thorne. It was our first full year as a public company. Our team navigated well through a challenging macroeconomic backdrop and seized opportunities to grab market share. Our customers proved resilient in the face of inflationary pressures all around them. We saw the consumerization of healthcare continue and the increasing awareness of the benefits of a healthy lifestyle fuel meaningful growth across our end markets. Executing our core strategies has enabled us to significantly outpace market growth rates, and we are well positioned to benefit from lasting industry tailwinds and continue to do so. Now I'll share some of our financial highlights for the full year. First, I'm pleased to add another solid year to our history of strong profitable growth. For the full 2022 period, we achieved sales growth of 24.1% and our adjusted EBITDA grew 19.1%. During the IPO process, we established our intention to drive higher sales while continuing to grow profitably, which we have done. In fact, zooming out to a three-year view, our sales are up roughly 30% over 2019 on a compounded annual growth rate with adjusted EBITDA of 44.2%. Second, our full year 2022 growth in the D2C channel was 44% over last year. The D2C space has been a significant growth catalyst for Thorne with channel sales over 40% of our total business mix. We have benefited from a 45% increase in the number of active subscriptions year over year. The trust customers have in our solutions to help optimize health and performance continues to show up in our routinely strong net promoter scores, which came in at 69 for 2022 compared to 69 in 2021. Our test, teach, and transform model continues to gain traction with customers and we're confident improvements to the user experience of certain health tests along with personalized product support through our recently launched Thorne Advisor will continue enhancing the value of our flywheel. Third, the professional and B2B business grew 11.8% for the year, despite the disruption of sales through certain of our international distributors to end consumers in Ukraine and Russia. We continue to work closely with our partners in that region. On balance, our growth in the professional and B2B channel was primarily from the combined strength of our network of more than 47,000 health professionals, which offer Incremental credibility and validation is a common entry point for nutritional supplement consumers. Steady growth in the early innings of online dispensary sales to patients and individuals under the care or supervision of health professionals in that network. And the success of our direct sales force, which engages health professionals in addition to pro sports teams, athletes, and influencers. Moving down the P&L, gross margin fell to 50.2%. The benefit of a normal cost of living price lift in January and a subsequent more targeted raise in August was mostly offset by the sell-through of lower margin products like creatine and certain other bulk powders. As we stated during the third quarter call, the decline in gross margins stemmed from our decision to seize an opportunity to lock up supply ahead of other market participants that were experiencing supply chain difficulties. By doing so, we will hopefully gain incremental lasting market share. As expected, that raw material cost pressure has begun to unwind from the sell-through of those materials, and we are now operating under new supply agreements. Turning to operating expenses, we continue to be efficient with our R&D spend, which is relatively flat as a percentage of sales. The increase on a dollar basis was primarily from costs associated with the redesign and relaunch of our approved gut health test and further development of our one-draw collection device, which I'll touch on later. Our marketing costs were 12% of sales, slightly less than our guidance, and relatively flat as a percentage of sales year over year. We've stayed efficient in managing our customer acquisition costs and maintained a healthy LTB to CAC ratio of 4.6 for 2022 compared to 4.5 last year. SG&A costs as a percentage of sales increased slightly year over year, driven by higher shipping and fulfillment costs in the current environment. We are also seeing some of these costs come down, but they remain elevated relative to last year. Also contributing to higher SG&A costs was an increase in stock-based compensation and public company costs. These cost increases offset some of the efficiency gains made since the IPO in September 2021. Rounding out our financial performance for the full year, adjusted EBITDA grew 19.1% despite higher shipping costs and less drop-through from the gross margin line. which had a corresponding impact on our adjusted EBITDA margins. Lastly, adjusted EPS came in at 32 cents per share. Now turning to some of our financial highlights for the fourth quarter. On the top line, we delivered another record quarter with sales of 63 million, growing 27.7% over the fourth quarter of 2021, which was our strongest quarter last year. We also saw nice sequential growth over the third quarter of 2022, which I'm pleased with considering the macroeconomic circumstances. Our sales performance on the quarter was underpinned by 46% growth in our D2C channel and 17.5% growth in our professional and B2B channel. The strength of our D2C channel during Q4 was mainly for the same reasons I mentioned in my comments in the full year. However, we also saw significant growth in the professional and B2B channel sales with a strong showing in our NSF for Sport product suite as well as our NR suite. relative to Q4 of last year. Some of our more recent high-profile launches like Daily Greens Plus are core to our nicotinamide drive-aside suite. We believe a number of factors help maintain our sales growth trajectory despite increasing inflationary trends that continued through year-end, including, first, our best-of-breed science-backed offerings that support health and performance are inherently more resilient in maintaining wallet share than many other discretionary items, especially as awareness of the benefits of a healthy lifestyle and consumerization of healthcare is accelerating on a global scale. Second, our generally higher end consumer base is likely to be better equipped to cope with inflationary pressure for some period of time longer than the broader population. Although we have been judicious in acting limited pricing actions, maintaining our focus on preserving the trust of our customers, we spent years cultivating. Third, our efficient marketing engine continues to ramp its capabilities and attract new customers on top of providing stability in the percentage of repeat purchasers during the quarter. Fourth, we've experienced steady upticks in the sales volumes of some of our more recently launched higher-priced offerings and have seen favorable volume increases for certain formulations, such as encapsulated products. Lastly, also in line with our long-term strategies, we are slowly beginning to penetrate certain high-growth international markets in ASAPAC, where we have a very limited presence now, but see ample opportunities to make further inroads. Our gross margin of 50.1% declined from the fourth quarter of 2021, primarily from the sell-through of higher volumes of products containing ingredients like creatine, which were more heavily impacted by supply chain disruptions than some other raw materials. As a reminder, much of our significant forward purchase, the then scarcer ingredients, occurred in mid-2022. we substantially finished selling through that inventory in Q4. With respect to operating expenses for the fourth quarter, R&D spend during Q4 of 2022 was up 4.5% over Q4 of last year. The R&D organization continues to capitalize on our deep strategic partnerships to advance key studies in a cost-efficient manner, such as our work with the Mayo Clinic related to Synequel and our brain health portfolio. These types of partnerships showcase our longstanding efforts to optimize productivity in developing both our physical portfolio and knowledge-based assets. Marketing costs for the fourth quarter were also up over last year, mainly from higher personnel and influencer costs, as we followed through with our strategy of investing in our marketing engine to drive brand awareness, efficiency, accelerate new customer acquisition. Our impressive Q4 LTV to CAC ratio of 8.3 reflects a reduction in marketing spend in Q4, following our decision to prioritize profitability closing out 2022 in the face of uncertainties and challenging macroeconomic conditions. That decision did not impact our routinely world-class net promoter score, which came in at 71 for the quarter, far outpacing that of a typical e-commerce company, regardless of the industry. SG&A also increased over the fourth quarter of 2021, but declined as a percentage of sales, I'll remind you that Q4 of last year was our first full quarter post-IPO and therefore included marginally higher public company transition costs. We also saw year-over-year increases in shipping and fulfillment costs that are a natural byproduct of sales growth. Turning to profit, adjusted EBITDA grew an impressive 65% over Q4 of last year. However, our adjusted EBITDA margin of 14.2% was impacted by less drop-through from the gross margin line. Lastly, our adjusted EPS came in at 13 cents per share for the quarter. Turning to the balance sheet, we ended the quarter with 36 million of cash on hand and 13 million of debt for a net cash position of 19 million. At the end of the year, we had not drawn out on the revolver, but we intend to use borrowing from time to time, primarily for the purpose of our facility expansion. As of March 31st, we had drawn 15 million on the revolver to fund an escrow account for the developer. We are being prudent in our use of cash and financing for this facility and separately for equipment purchases specific to the expansion. Before closing, and outside the financial results, I want to touch on the importance of four areas for our long-term future growth, which include our new plant, the OneDraw device, critical findings in brain health research, and international expansion. Our new plant in South Carolina is a significant bet on our future, and I want to discuss the rationale. By the end of 2023, we will have completed expansion of our current facility, as well as a new facility next door, giving us the capacity to become a top five manufacturer of supplements in the United States. We've had experience doing this before, as our current plant was completed in 2018. a far more complex challenge given that we had to move across the country from Idaho and maintain two workforces simultaneously. Thorne has consistently outgrown the generic supplement industry by multiple fold. In 2022, we grew somewhere between 10 and 15 times the industry average based on which data is most reliable. We remain very confident that we're at the cutting edge of a huge developing trend called scientific wellness, which will require deep personalization. We believe no company can deeply personalize products and testing unless you also control manufacturing. Many companies doing it have no control or expertise in the highly complex areas of formulation and production. Instead, they rely solely on marketing to reach customers. We're steeped in AI on the testing, data, and product development side, where we see all sorts of opportunities for disruption. But it's going to be very hard to disrupt the highly skilled and trained blue collar workforce that knows how to run a large manufacturing operation efficiently when paired with AI and all these other areas. Once the plant is completed, we will have the ability to make liquid fill products, generate personalized packaging, and improve upon our printing operations. It will also lead to increasing free cash flow and higher gross margins. This weekend, at the 14th World Congress on Brain Injury, the findings from a randomized, double-blind, placebo-controlled study using the product Synequel will be presented. These findings are a collaboration between Thorne Health Tech, Mayo Clinic, and Health Tech Connects in Canada. The poster, Non-Pharmacological Supplements, is a potential neuroprotective intervention for subconcussive impairment will highlight the positive findings seen with supplementation in ice hockey players over the season in areas like selective attention and focus, visual processing speed, stimuli processing, and markers of neuronal damage. With one draw, to summarize our regulatory position, we have been cleared for direct-to-consumer use in Japan by the PMDA and in Brazil by Anvisa. In the U.S., we've received supervised use clearance by the FDA, and we are reacting to comments by the FDA for direct-to-consumer use and submitting to the Department of General Surgery relatively soon. Through R&D, we've expanded the cartridge capabilities to include dry blood spot, dried plasma, and a cartridge specifically designed for genetic sequencing, all without the need for cold chain storage. We have also validated a proteomics assay for the US Cancer Moonshot Project. We are getting strong interest overseas based on our PMDA clearance, and we're seeing enough evidence to believe the device coupled with some unique tests we're developing to say that the OneDraw will be an important contributor to our business in the not too distant future. Internationally, we've expanded our e-commerce capabilities in China using a multi-platform approach. In 2022, We were a top 10 brand for a few months towards the end of the year on TikTok, and the business is continuing to expand in 2023. Korea has also been a bright spot for us, utilizing both e-commerce for consumers and developing a dropship business with hospital clinics for their patients. Our Thorne Asia venture with Mitsui has recently led to our first retail relationships in Asia as well, starting in Singapore. And with those updates, I'll now close with our outlook for the full year 2023. Based on recent results, our ability to deliver strong sales growth over a multi-year period by executing our core strategies are increasing capabilities at scale. The position we have centered at the intersection of multiple high growth markets that have also effectively been upsized for the remainder of the decade, we expect our full year 2022 guidance to be net sales of between 280 and 290 million representing growth of 22% to 27% over 2022. Gross margin of between 49 and 52%. Adjusted EBITDA of between 30 and 32 million, representing growth of 22 to 31% over 2022. And adjusted EPS of between 37 cents and 39 cents. 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 2.5% of net sales, interest expense to be approximately 1% of sales, an estimate full-year adjusted tax rate of 27%, and diluted weighted average shares outstanding of $54 million as of December 31, 2023. With that, I'll now open up the line for your questions.