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spk07: Good afternoon. Thank you for attending today's Thorne HealthTech, Inc. First Quarter 2023 Earnings Call. My name is Hannah 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 1. I would now like to pass the conference over to our host, Thomas Wilson, VP of Investor Relations. You may go ahead.
spk02: Good afternoon, everyone. Thank you for joining Thorne Health Tech's first quarter 2023 earnings call. With me today are Paul Jacobson, our CEO, Jelani Farma, 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 material from those indicated by our forward-looking statements. More information about potential risk factors can be found in our 2022 annual report on Form 10-K and our upcoming Form 10-Q, which we anticipate filing in the next couple of days, 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. Finally, next week, we will be participating in the RBC Capital Markets Global Healthcare Conference in New York and holding investor meetings. Webcasts from the conference will be available on our IR website, and we look forward to meeting with you. With that, I'll turn the call over to Paul.
spk10: Good afternoon. Thanks, everyone, for joining the call. Today, I'll provide a brief strategic overview of Thorne's unique positioning and first mover advantage in the growing field of personalized scientific wellness and how our strategy puts us on a pathway of sustainable value creation for our shareholders. I'll then discuss key accomplishments during the quarter and then review our progress in our core growth strategies, including key pipeline programs and key milestones we expect to achieve in 2023. I'll then touch on our first quarter financial results and outlook for the rest of the year. And finally, Saloni will provide a detailed review of our first quarter 2023 financials. As Thomas mentioned, additional details can be found in the earnings release and investor supplement issued after the market closed. With that, let's dive in. The overarching takeaway from the quarter is this. Our operating performance in the first quarter was strong, and we executed well against our internal plan and the targets we laid out during our last earnings call. As a result, we are reaffirming our full year guidance for 2023, the details of which we'll discuss a bit later on. Before delving into specifics on our first quarter performance, I'd like to first begin by describing Thorne's unique first mover advantage in advancing solutions for personalized scientific wellness. There is no other company that is creating and delivering the level of science and technology-driven personalized wellness solutions across such a broad range of health channels and individual historic health tech. We are truly at the forefront of personalized wellness, bringing the scientific rigor of biopharma and applying the latest technology, including AI-based analytics, to generate a highly differentiated product portfolio. And the quality of our product portfolio continues to improve increasingly supported by rigorous clinical trial data that gives us a significant advantage relative to pure supplement suppliers. Our diverse and expanding client base reflects the success we are experiencing in the marketplace, from D2C customers to healthcare professionals to professional athletes. Our deep portfolio of personalized offerings provides individualized data, educational resources, and products that support specific health goals and needs at every age and life stage. These customized solutions are clearly resonating with our customer base, enabling us to grow and build our brand awareness across multiple channels. Importantly, we're maintaining this competitive advantage by making targeted R&D investments in technology that will increase the next generation of personalized wellness solutions. Our investment in generating clinical data and applying AI-based learnings to extract significant insights across large data sets confers a major and sustainable competitive advantage to Thorne relative to other companies who are limited to operating a pure distribution model. To put the Thorne advantage in perspective, our comprehensive R&D strategy has produced a multi-phase pipeline that now comprises more than 30 active clinical trials, three NDI filings over the last three years. With this level of investment, we anticipate continuing to launch three to four new products each year which should enable us to maintain a competitive advantage for the foreseeable future. Many of these products are developed using our bioinformatics platform as a cornerstone of R&D. It often includes the data from the tests taken by our customers. I want to assure investors that we understand our story is a bit complex. But to accomplish our goals and bring deep personalization to the scientific wellness space, we need to continue to assemble the pieces that not only bring excellence to the customer journey, but are backed by science and data, and this unfortunately takes time. We need to prove that our products and devices work as advertised. This is the primary criticism of the supplement space and even some companies in the consumer testing space. We are dealing in regulated markets where short-term decision-making could lead to trouble and believe that by doing things the right way over time is the only way to create real moats around our business platforms. We also believe that this is the best way to maximize shareholder value, but we understand that we need to communicate our story across a broader spectrum of investors so we can hopefully inform them in the same way that both new and existing customers have become devoted to our products. Turning to recent developments, Q1 was a busy and productive quarter for Thorne. In early April, we announced significant positive findings as a result of a collaborative trial with Mayo Clinic and Health Tech Connects. This randomized, double-blind trial studied the effects of the dietary supplement Synequel on brain function and structure in junior A ice hockey players. As a reminder, in January, we acquired the rights to Synequel through our acquisition of Precon Health, which strengthened our brain health portfolio and has provided us access to world-class scientific advisory board members. We're very pleased with the results of this study, which provides clear clinical evidence that a multi-ingredient nutritional supplement such as Cinequel, can support healthy brain structure and cognitive function. This area remains a core focus within Thorne's product portfolio, and in a few minutes, I'll provide more details on the significance of these findings. We also strengthened the ranks of our senior management with the appointment of Saloni Varma as the chief financial officer. With over 20 years of experience across multiple finance and accounting functions, Saloni brings a wealth of talent and expertise to Thorne, and we're very happy to have her on board. I'm also pleased to note that we were named to Fast Company's annual list of the world's most innovative companies for 2023. As I said at the beginning of my remarks, Thorne is positioned at the forefront of personalized scientific wellness based upon our ability to apply advanced technology that results in high-value wellness solutions that can be delivered across a diverse and growing customer base. Recognition by Fast Company for our achievements and innovation, specifically within the wellness category, is an honor and reflects the success we continue to have in transforming our consumers' approach to health and wellness. Finally, we announced that the U.S. Appeals Court issued a final ruling upholding Thorne's prior challenge of a nicotinamide riboside intellectual property claim. As a reminder, this ruling relates to a previously issued patent referred to as the 086 patent that attempted to broadly cover pharmaceutical compositions of nicotinamide riboside isolated from either a natural or synthetic source. With the favorable court ruling behind us, Thorne continues its highly successful expansion into the nutritional supplement marketplace with its nicotinamide riboside malate suite of products. RNR has a great safety profile and is the subject of several ongoing clinical trials related to healthy aging, cognition, and human performance. I'd now like to briefly discuss some of our key programs and upcoming catalysts as milestones for the remainder of 2023. We remain very excited about our unique blood collection device called OneDraw, a device that we believe is poised to redefine the blood draw experience. OneDraw is an FDA-cleared, small, lightweight, single-use device that attaches to the upper arm with a hydrogel adhesive and vacuums. By pressing two buttons on the device, a virtually painless capillary blood sample is collected on the cartridge within the OneDraw blood collection device, which uses advanced technology to preserve the sample without requiring cold chains processing and storage. A stable, dry blood sample within the cartridge is then mailed to a third-party lab for analysis, and the results, insights, and recommendations can be viewed on our health intelligence platform by the patient and their healthcare professional. In short, OneDraw enables better health for patients by removing the obstacles that prevent individuals from taking better control of their health, ultimately offering an improved experience. Patients in a large clinical trial with thousands of participants reported OneDraw significantly had less pain and greater ease of use in capturing a high-quality blood sample. In addition, OneDraw allowed us to conduct studies remotely, enabling us to increase the reach of future health research studies and making participation more accessible to those previously would have been difficult to recruit as some struggle to attend an in-person clinic. OneDraw has also been used in President Biden's Cancer Moonshot Project and in the space program led by SpaceX. As I mentioned in my opening remarks, technology lies at the heart of our portfolio of health and wellness solutions. To underscore that point, on May 3rd, we were proud to announce that the OneDraw device won the prestigious 2023 MedTech Breakthrough Award for Best Overall Medical Device. The mission of the MedTech Breakthrough Awards is to honor excellence and recognize the creativity, innovation, hard work, and success of digital health and medical technology companies, services, and products around the world. To put this award in context, this past year MedTech received almost 4,000 nominations globally for its awards program. So for OneDraw to be recognized among so many potential devices is an amazing achievement, which speaks to the level of innovation and potential for improving healthcare that this device embodies. As noted on our prior earnings call, we are currently studying additional applications of OneDraw, including the application of a new plasma separation cartridge, which will expand Thorne HealthTech's portfolio of lab tests while preserving convenient cold chain free sample transport. With respect to upcoming catalysts, we expect to hear back from the FDA on the potential approval on draw for unsupervised medical use during the third quarter. We believe this can unlock a massive near-term opportunity for direct-to-consumer utilization of the device. Looking further out, we anticipate the device will not only contribute to our core focus of healthy aging, longevity, and personalized wellness, but also into increasingly patient-centric healthcare settings from telehealth to decentralized clinical trials. Needless to say, we are looking forward to the next phase of the One Draw program, as it's critical to bringing a differentiated, personalized approach to scientific wellness. I'd now like to provide a brief overview and update on our Synequel program. Synequel is a nutrient blend that has been co-developed with neurologists at Mayo Institute for supporting brain health structure and function, especially for athletes and other individuals engaged in high contact activities. More specifically, it has been designed to support brain cell metabolism, enhance cognitive function, and support post-concussion recovery, as well as to help prevent concussions arising from sub-concussive impacts. As I noted earlier in April, we were pleased to announce positive results that evaluated Sinequel in a double-blinded placebo-controlled trial that measured the brain function of 30 junior ice hockey players over the course of their seasons. The purpose of the study, performed in collaboration with the Mayo Clinic, was to determine whether a nutritional supplement designed to address specific mechanisms of action associated with head impact could favorably affect those functions over the course of a hockey season. Participants went through baseline brain function testing at the beginning of the season, then consumed either Thorne's Cynaquel or a placebo daily for the duration of their season. At the end of the study, the same brain function tests were repeated and compared. The study included brainwave latency, specific selective attention and focus, and visual processing speeds. For all participants, those with and without a history of prior concussions, the Sinequel group showed notable improvement over the placebo group in important measures of brain function and brain processing speed. In participants who had a history of concussions, there were significant positive changes when comparing the Sinequel group to the placebo group including neurofilament light levels, which assess neuronal damage from sports-related impacts, and the processing of stimuli, which includes visual and auditory words, pictures, and gestures. This well-designed study provides the first clinical evidence demonstrating Cinequel's positive effect on brain health in athletes engaged in a contact sport. Generating high-quality clinical data through well-controlled studies is key to demonstrating the value of our products, and our CINEQUAL program has clearly achieved this important goal. Based on these results, we believe CINEQUAL has a significant market opportunity to address the risks faced by many people who are engaged in high-impact sports, members of the military, accident victims, and victims of domestic abuse. It's estimated that between 1.5 million and 4 million people suffer from concussions annually, that Cinecoil addresses a significant unmet medical need, and unlike most natural products, is patented. Let me now briefly mention some of the progress we're making with our microbiome gut health program. Thorne's gut health test provides a detailed analysis and a personalized plan that targets your GI discomfort to optimize wellness. Utilizing our first in-market, patent-pending white technology, the sample collection process is simple, and the test results provide a wealth of information that enable patients to understand the health of their gut microbiome and ultimately discover what meaningful changes can be made to improve it. Importantly, the technology behind our gut health test is supported by published clinical data supporting the use of the product in patients with irritable bowel syndrome, or IBS. This data shows that after taking our supplements based on microbiome data collected from the test, patients experienced a statistically significant symptom score reduction from 160 to 100.9 based on guidance from the American Gut Association. The paper was published in the Journal of Precision Clinical Medicine. Our metagenomic shotgun sequence test provides us with billions of data points from each customer and provides unique insights. This allows us to identify subgroups who react differently to foods or drugs, such as antibiotics, and allows us to build new prebiotics that are more personalized. This has relevance across many therapeutic areas that could allow patients to recover more rapidly from pharmaceutical or surgical interventions. I'd now like to provide a high-level review of financial performance for the first quarter. I am pleased to report total net sales of $65.2 million for the quarter, which represents year-over-year growth of 20.7%. Our direct-to-consumer business generated revenues of $33.8 million, an increase of 41% over the first quarter of 2023. Our pro and business-to-business revenues came in at $30 million and grew about 4.6% year-over-year. We also have more than 400,000 active subscribing customers as of the end of Q1, which represents a 51.8 year-over-year growth rate. Our adjusted EBITDA of $6.1 million and adjusted EPS of $0.06 declined from Q1 of last year, primarily from higher marketing spend and higher selling and distribution costs from our sales growth. To be clear, these higher forecasts were factored into the full year guidance we laid out for 2023, and we expect to see improving operating margins as the year progresses. We remain committed to expanding operating margins where possible, while we see continued sales growth well above market rates. We expect significant margin expansion to occur after completing our plant expansion around the end of the year, as we've outlined in prior calls. We have reached capacity with our current production facility following five years of rapid growth after its construction in 2018, which puts a ceiling on some of our margin expansion goals and our ability to introduce certain new capabilities like unit of use of personalized packaging and in-house liquid manufacturing. It's also caused backorder issues from time to time based on high levels of demand. After completing the expansion, our scale will likely propel us into the top five globally among supplement manufacturers with two and a half times our current capacity. The efficiencies we will gain from the new plant will also support many of our sustainability initiatives and accelerate our ESG program. Turning to our outlook, we expect sales to ramp as we move through the year, driven by traction with our recent product launches, further sales force expansion, progress towards broadening our presently small international footprint, and continuing to increase brand awareness, which will be supported by a marketing campaign that will kick off in the third quarter. As a result, we are reaffirming our previously issued guidance, which calls for net sales of 280 to 290 million, gross margins between 49 and 52%, adjusted EBITDA of 30 to 32 million, and adjusted EPS of 25 to 31 cents. With that, I'll turn the call over to Solani for her prepared remarks on our financial results and capital deployment priorities for the rest of the year.
spk01: Thank you, Paul. Good afternoon, everyone. I'm delighted to be here about a month and a half into my tenure as CFO after serving as Chair of the Audit Committee since the IPO. I look forward to meeting and speaking with you. Today, I'll walk you through our results for the first quarter, provide details on our plant expansion and related financing activities, and share some additional commentary on our expectations for the remainder of the year. But first, let me share a few brief thoughts on why I'm excited to be part of this team. Thorne is the leading wellness company and a highly trusted brand with a strong history of profitable growth. I believe we are still in the early innings of our growth trajectory. People of all ages are changing the face of healthcare thanks to accelerated technology adoption, revolutionary products, and advancements in care. People know that achieving and maintaining an optimal state of health and wellness is a personal journey that can and should begin long before the onset of disease. Our commitment to empowering individuals with solutions grounded in science, and powered by continuous innovation has us well positioned to continue delivering strong growth well above the industry norms and up years. Our best-in-class nutritional supplements and health tests, supported by a relentless focus on personalized products and an engaging user experience, create a sticky consumer journey that evolves with them over time, with additional catalysts from the programs Paul mentioned, like the One Draw, the Gut Health, and the Brain Health. Layered onto our existing flywheel to support the body's healthy needs over time, THON offers much more than nutritional support. We are on a path to create an unparalleled total ecosystem for wellness and longevity with a test, teach, and transform model that meets anyone where they are, regardless of age or life stage. In short, we see ample opportunities to drive extended growth and shareholder value as we innovate, scale, and enter new markets with solutions we know customers want. We have a lot of work to do and I'm excited to get started. With that, I'll turn to the first quarter results. Our first quarter results are largely in line with our internal expectations and consistent with the guidance that we provided for 2023. On the top line, as net sales of 65.2 million at our highest quarterly sales and record, with resulting growth of 20.7% year over year. We continue to see strength in our base of consumers amidst the current economic backdrop, our growth driven by favorable price increases and skew rationalizations, as well as higher volumes across the board. With the strength of our high-end consumer continuing to hold us far, it's clear that while there has been some pullback in spend on discretionary items at the macro level, products that people depend on for their health and wellness goals are more insulated. Our strong sales performance also continues to be underpinned by healthy growth in new customers, which increased approximately 40% year-over-year, with active subscriptions up over 50%. Those increases helped drive a 41% growth in our D2C channel, and our professional and B2B channel sales were also up with approximately 4.6% growth year over year. We continue to build our direct sales force of a traditionally small base to help deliver growth across both customer groups in the professional and the B2B channels. Importantly, our acquisition of new customers continues to be efficient, and our active subscriptions grew more than 50% year over year. In a quarter where we dialed up marketing, we generated a healthy LTV to CAC ratio of 5.6 for Q1 2023. Our net promoter score was slightly down, mainly from having certain products on back orders, as Paul mentioned, due to our capacity constraints. Upon completion of our new world-class production facility, which I'll talk about shortly, the capacity constraints will no longer be a hurdle. Our first quarter gross margin of 52.5% is in line with our expectations. The year-over-year decline of 200 basis points was mainly driven by packaging and raw material cost increases, some level of incremental labor and third-party outsourcing to keep pace with increased demand and a changing product mix. These increases were partially offset by the impact of our price increase and skew rationalization. As we continue to operate at full capacity, we expect some of the inefficiencies to remain with us for the balance of 2023, but will be partially offset by anticipated incremental benefits from price increases taken in Q1, 2023. Turning to operating expenses, R&D costs decreased almost 10% to 1.8 million, representing 2.7% of net sales. That decrease was driven by higher cost in first quarter of 2022 associated with our one raw device ahead of the FDA submission and for the upcoming relaunch of our gut health test with its first in-market wipe technology. As shown by a continued high volume of ongoing clinical studies and product launches born out of our AI-driven insights from our expanding pool of clinical data, our core R&D engine remains efficient and flexible. We significantly increased our marketing spend over Q1 of last year, with costs of $8.9 million, up more than 85% and representing 13.7% of our sales. As stated on prior calls, we expect to deploy marketing dollars more evenly than in the past, although we'll continue to have higher marketing spend as a percentage of sales during our campaign periods. We are also deploying those dollars in a more targeted way with increased focus on personalized tactics. We believe more targeted data-driven strategies will benefit our retention through higher engagement with new customers who may have just purchased the first product and are longer tenured customers without hampering our ability to elevate the brand and drive customer acquisition at scale. First quarter SG&A expense of 23.6 million was up 5.7 million, an increase of 31.5% year over year and represented 36.1% of our sales. The majority of the increase was driven by investment in building our sales infrastructure and an increase in our selling expenses as we continue to drive top-line growth and build the long-term value of our brand. Our warehousing and distribution costs are enjoying the benefits of scale and vertical integration and we continue to optimize our operational efficiencies. Net of stock-based compensation and selling expenses our GNA costs have increased at a slower pace than our top line growth, and we will continue to gain efficiencies in the future as we build further economies of scale. Turning to the balance sheet and specifically our capital structure and liquidity, we ended the quarter with unrestricted cash of 11.1 million. We have another 20.6 million of restricted cash set aside that will be deployed for our plant expansion. And we expect to receive an additional 8 million in tenant allowances that will fund the remaining CAPEX needs for 2023. As of March 31st, we had more than 25 million of available capacity on our revolver with an option to expand by an additional 15 million. As we do not expect to make any further drawdowns on the revolver for our CAPEX program, we feel very comfortable with our liquidity position as of today. As a reminder, we broke ground on the expansion of our primary manufacturing facility in South Carolina in the third quarter of 2022 and expect construction to be complete by the end of this year. As Paul reiterated, after five years of rapid growth following the relocation of our operations from Idaho and construction of the current plan in 2018, Capacity constraints that we are now facing have started to impact our ability to meet demand as efficiently as before. Our projected growth rates and the multiple reasons we need control over manufacturing, like our laser focus on quality control, scaling throughput, need expansion. Upon completion, our world-class facility will be in the top five globally among supplement companies in terms of manufacturing space and capacity. By doubling in size, we'll be able to achieve efficiencies from scale at far superior levels than ever before. Our capabilities will take a leap forward with unit of use products, multiple forms of sustainable packaging like gusset bags, in-house liquid manufacturing, and improving our disc print technology. We are also adding incremental lab space in support of our R&D operations and new product development. All in, we expect the facility to be able to support sales upwards of 750 million, which positions us well for the coming years. In addition to the manufacturing plant expansion, we have almost completed the simultaneous expansion of our new warehousing and fulfillment facility which is adjacent to our current operations in Somerville. We anticipate finishing that project later this quarter, driving incremental efficiencies in our fulfillment operations and doubling down on vertical integration capabilities and setting that function up for the next leg of growth. Moving on to cost, the total project is expected to cost approximately $55 million. As of March 31st, we have incurred 32 million of the total cost with the remaining 23 million expected to be incurred in the balance of year 2023 and early 2024. As you'll see in our 10Q, the value of our CWIP is more than 30 million at quarter end. We anticipate funding the balance needs with 20.6 million of restricted cash on our balance sheet and $8 million in tenant improvement allowances. We do not expect to make any additional drawdowns on our revolver to fund the project. With no significant capital projects in the pipeline, upon completion of the build at your end, our facility-related capital spend will largely be for maintenance. With the cost we have incurred to date and our remaining CapEx spend for full year 2023, we expect total CapEx to be between $38 million and $40 million. This CapEx guidance is supplement to our previously issued and now reaffirmed guidance that Paul Reed created. To reconfirm, net sales of $280 million to $290 million weighted towards the back half of this year, gross margins of 49% to 52%, adjusted EBITDA of 30 to 32 million, and adjusted EPS of 25 cents to 31 cents. In addition to reaffirming our guidance for these headline measures, we are also reaffirming other prior guidance measures for 2023, including marketing spend between 13 and 15% of net sales, peaking in the third quarter with our planned campaign, depreciation and amortization of approximately 2.5% of sales, gradually increasing as new assets come online over the course of the year, interest expense of approximately 1% of sales, an adjusted tax rate of 26%, and diluted weighted average shares outstanding of $54 million. In summary, our pace of innovation and investment in our growth has and will continue to drive growth and lasting value across all our end markets and consumers. We are pleased with our top line results for Q1, which were in line with our internal expectations. We are expecting a sales and an adjusted EBITDA ramp in the second half of the year. And our margins and free cash flows will be compressed relative to historical norms during a planned expansion before moving to the upside once complete. I look forward to updating you on our progress, as well as meeting some of you at the upcoming conferences we are attending next week. With that, I'll open the line for your questions. Operator?
spk07: If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Sean Dodge with RBC. You may proceed.
spk12: Sean Dodge Yep, thanks. Good afternoon and congratulations on the strong start to the year. Paul, in professional and B2B growth, I think you said there was 4.6% in the quarter. What would that have been if you exclude the impact of Russia and Ukraine? And then I guess if you start lapping that, how should we think about growth in that part of the business over the next few quarters?
spk10: So about 15% were not for that. And the way we're looking at professional and B2B is there are some parts of the business that... we've been working on into contracts that are quite significant and we expect them to come up that would fall into that category. We expect them to come on towards the latter part of the year.
spk12: Okay. And then, um, on the active subscribers, the acceleration and growth there is impressive. Uh, the newer ones you're adding, are you seeing any difference in, What I guess would be the quality of the more recent ads? Are there average order sizes? Are those different than maybe kind of more historical cohorts of subscribers? Any indication the life of those churn is changing at all?
spk10: I'll let Michelle answer the question.
spk04: Yeah, so demand volumes are really strong across both Amazon and Thorne DTC. GDC sales are up 41%, and as you mentioned, subscription growth was significant year-over-year, nearly 52%. And then in terms of unit economics, year-over-year, we saw an increase in order size and in net price per unit, with about a 10% increase in average order value year-over-year. So in terms of the unit economics, the consumer is looking really strong, and we haven't seen any degradation of our retention rates. And as you may recall, the second half of last year, we pulled back marketing spend as a conservative move amidst an uncertain macro environment. And then January 1st, we ramped spending back up. And since then, we've seen this rapid, efficient acceleration of new customer growth, and we've seen the health of the customer maintain throughout that.
spk12: Okay, great. And then just last one for me. In gross margins, so Q1 looked very strong. Based on the guidance, it looks like you expect the rest of the year will be lower from there. I know it sounds like a lot of moving parts there. Is this just kind of predominantly from the impact of staffing in the new plants? I guess maybe if you could just give us a little bit of an overview of the dynamics affecting gross margins, why they'd be so much lower from Q1 over the balance of the year.
spk01: Hi, Sean. Saloni here. Nice to meet you. I think what we are seeing is that while quarter-over-quarter inflation is going down and we're seeing some reduction in our cost of raw materials, as you rightly pointed out, we have our second facility, which will be up and coming in the second half of this year. So we will start to incur I'm going to use the word sort of one-time fixed costs because the benefit of this will come fully in the coming years. So we are going to see an increase in our rent expenses and in our labor hiring, which will have some marginal impact in our second half of the year. I think on an average, we feel good about the guidance that we have given. And, you know, we are still positive for being about 50%. But, yes, there will be one-time cost in the second half, which could lead to slightly lower gross margin.
spk12: Okay. That's very helpful. Thanks again, and thanks for the conference shout-out.
spk07: Thank you, Mr. Dodd. Thank you. The next question is from Elizabeth Anderson with Evercore. You may proceed.
spk06: Hi, guys. Thanks so much for the question and nice to meet you officially. You've been great in giving so many details about this plan expansion and sort of how far it gets you on the revenue line and the specific capabilities. I was wondering if you could talk through how you sort of see that translating down to the gross margin line. I know it's early, and if it's a very wide range, that's fine. But I just kind of want to understand, given these additional capabilities, the additional scaling, how does that sort of drop down revenue as you approach that $750 million that you called out?
spk10: So Liz, you're talking about longer term, right? Not short term?
spk06: Yes, yes.
spk10: Because if you're talking short, yeah, all right. So Tom, why don't you take the longer term question on the plant in terms of how we're going to become more efficient and scale margins, et cetera?
spk11: Yeah. So Elizabeth, I'll actually take you to history as a proxy, and then we'll use that to talk about the future. becoming fully operational in the current plant after our move here in 2018, we improved our gross margin by about eight percentage points versus what it was in 2018 at the beginning. It took it down from sort of the low 40s to the then low 50s. And effectively, we're looking to add another Approximately 5 to 6 percentage points on top of where we are now between now and say 2028. So, in the next several years.
spk06: No, that's that's very helpful. Um, and that sort of gives you some perspective on sort of the, the massive opportunity that I imagine some of that drops down to the line too. Right? That's the plan.
spk11: That was correct. Absolutely.
spk06: Absolutely. So, I think you sort of said, and you talked about it in your prepared remarks too, because the macro, you know, you're not seeing really any impact in the macro. How do you think of, like, what the relative differences are between, you know, like professional services, I understand, has the Ukraine and Russia impact in it? Are there any other differences there on the macro front that we should think about as we're thinking about the pacing for the rest of the year?
spk10: Not really. I think the biggest issue we've got is going to be our ability. We're not forecasting it, but we're working very hard on our suppliers as we grow to become a bigger percentage of their business, we gain more leverage and we're working very hard to start reporting price decreases to us rather than holding things flat or even giving any thought to raising it. In some cases, we actually encourage suppliers to hit us with an energy surcharge rather than a price increase so we could track it year to year and it wouldn't become ingrained into the pricing system. So Tom's team is working very hard right now on a plan to see if we can't push these guys lower. That's the only, you know, that's the macro effect we're concerned about right now, just getting pricing back down to something that's more normal.
spk06: Okay, great. So you're not seeing it on the like doctor visits or the professional partners or anything like that, it sounds like, right? No.
spk10: No, business demand is very strong across everything.
spk06: Got it. And then how do you think about, like you, I just wanted to understand, I heard what you said about the marketing spend peaking in the third quarter, and then how do you sort of balance that currently with the plant capacity constraints and Like, is it sort of more targeted on certain areas where you don't have as many capacity streams? I'm just trying to understand the pushes and pulls of those two dynamics. Right.
spk10: So I'm going to make one comment and then turn it over to Michelle. So we go through these periods where we have had some backorder issues. And the operations team and the marketing team are in constant communication over this because we know what sort of problems it causes. But the backorder situation for now has been pretty well cleared up. We expect that we're going to have another problem at some point later on. But right now, as of today and this month and et cetera, we've not been having a problem meeting the increased demand. Now, whether we get hit with some other things that are unforeseen or some things that we're sort of planning on, that's all possible. But Michelle, you want to?
spk04: Yeah, I can give a little bit more color to some of the marketing spending and then kind of circle back to your specific question about kind of managing that spend. So for the year, as Solani said, that we're maintaining guidance for coming in between 13 and 15% with slightly higher Q2 and Q3. And as we look at kind of the brand campaign, we're planning to launch our Build to Last brand campaign. And this is going to be featuring our newest partners, NBA legend and entrepreneur Dwayne Wade and his son and rising professional basketball player Zaire Wade. And we're planning to launch July 25th. And it will be a 13-week full funnel campaign, primarily aimed at increasing brand awareness and driving new customer acquisition. So we really see kind of the biggest opportunity for us to unlock growth is increasing brand awareness. Last year, we increased brand awareness more than 50% year over year due to our brand campaign. We went from 4% in 2021 to 6.5% in 2022. So we're confident that this year with our high profile partners and all we've learned about marketing efficiency that we'll have record performance on that front as well. But the good news is, is Over 80% of our marketing budget and spend is working dollars. So that also means it's variable. And because we don't use third-party agencies to do our buying for us, we're very nimble and agile as a team. And we look at the data on a daily basis. So if we need to pivot, we're able to pivot in real time.
spk06: Got it. Okay, great.
spk10: I'll just mention one other thing. We are also, from time to time... outsourcing some of our manufacturing to a trusted source that we've used for many, many years. It affects our gross margin and our profitability, but we do it to meet customer demand. And we'll probably be faced with it through most of this year.
spk06: Got it. Makes sense. Thank you very much.
spk08: Thank you, Ms. Anderson. The next question is from Susan Anderson with Canaccord. You may proceed.
spk05: Hi, good evening. Thanks for taking my questions. I was curious within the supplements, I guess what areas are you seeing the most growth such as gut, brain, etc., or has it been pretty equal across categories? Then also on the testing side, can you give some color maybe on what percent of your sales is now coming from testing versus supplements?
spk10: So on the product side, I'll kind of give you a broad state. So we have a large focus as a portfolio on the whole concept of healthy aging. And so within that context, there's about 30% of our overall sales are targeted in that area. And that's where we continue to see the most growth. So some of the products that contain nicotinamide riboside is an example where I mentioned in my prepared remarks. are growing rapidly. We have a handful of new products coming on later on this year. We're going to use the remainder of the year to seed Senequel. So in other words, there are pockets that we've never sold to before. And so we're basically testing in different markets this year before we spend what I believe will be a significant amount of money next year to market Senequel. We're launching a woman's probiotic We have a pre-workout product that's launching that is probably one of the greatest initial demands we've ever seen for a product. And it's there to address the pre-workout demands of athletes without having to supply them with the sorts of stimulus that most of these products tend to give. And then we're going to be launching what we call immune defense, which is a product out of our print suite, which was the Nutrativa acquisition later on this year as well. Michelle?
spk04: Yeah, I would just add to that on the health testing front in particular, we've been seeing much higher LTV with customers who come to us through a health test. And we've also seen much higher conversion rates. So anywhere between 30 and 40% conversion rates to a supplement purchase directly from a test.
spk10: Yeah, we don't break it out in terms of testing as a percentage of revenue. I will tell you that the gut health test right now is our largest selling test. And when the drawbridge device is cleared for direct to consumer use, we expect it to be a game changer for the entire company and completely revamp and I think really revolutionize a lot of the home kit testing market. Not only because of the device, but because of some of the very unique tests that we're gonna be launching and announcing into the market very shortly, one of them next week.
spk05: Okay, great, sounds exciting. I was wondering, Also, I guess as you continue to gain new customers, have you seen the demographic of your customer base change at all? I guess, you know, is it still kind of higher income? I guess, has the age base changed or anything like that?
spk04: Yeah, so far we've seen, you know, consistently diverse demographic on gender, age, location. So we're still very evenly split between 25 and 65 and still pretty evenly split, you know, 60, 40 female, male. And then on the household income, you know, continue to be slightly higher than average, but nothing has changed materially in the demographic we've been seeing.
spk05: Okay, great. Thanks so much. Good luck the rest of you.
spk03: Thank you.
spk07: Thank you, Ms. Anderson. The next question is from Steven Ma with TD Cowan. You may proceed.
spk09: Great. Thanks for the questions. And welcome, Solani. Good to talk to you again.
spk01: Nice to meet you, Steven.
spk09: I had a follow-up question on the new manufacturing plant. I mean, how should we think about the short-term gross margin impact as a new manufacturing facility comes online? is there going to be a short-term hit to gross margin from the fixed-cost amortization? And if so, when do you think the manufacturing will start to ramp and scale and result in the, you know, gross margin growth from that low point, if there is a low point?
spk10: So, Linda, you want to take it? And, Tom, after so long, if you have a comment, feel free to chime in.
spk00: Yeah, Stephen, I think, you know, as
spk01: As Elizabeth asked first, we had a good quarter in Q1 because we have not seen the fixed cost come to fruition. From Q2 onwards, we are going to have rent and we are going to increase the labor. We are hiring aggressively in Somerville. So for the rest of the year, we will see some level of impact on our gross margins. You know, our guidance is around 49 to 52% in gross margins, and our Q1 was close to the high end of the guidance. So I think for the rest of the year, there is somewhere in the range of 100 to 150 BEPS impact. We are cognizant of that, and that has been built into the budget. I think from a long-term perspective, this plant is going to take us to $750 million over the course of next few years. And we will see progressively that revenue growth come through. And we should see to Tom's point a total cumulative increase of close to around 800 bps as we get to full capacity.
spk00: Tom, please add if I missed anything.
spk11: No, I think also the way to think about this is with respect to the new building that's literally next door. We're looking, if all goes well, to actually get our certificate of occupancy this coming Monday. And we'll begin moving into that facility at the beginning of June with the plan to begin our operations piece of that within the next month afterwards. And what that will begin to do is give us additional capacity at the front end of production, particularly with respect to how we handle materials. And that's even in advance of what we're going to have at our actual production facility here in this building towards more the end of the year. To Solani's point, so that's the good news. To Solani's point, beginning in April, we start paying rent on that new facility. So we pick up an additional cost with respect to our overhead allocation. And so until we sort of catch up to that with we'll call it being fully operational in both places, we're going to take what we feel is a reasonably moderate hit to gross margin, even notwithstanding that.
spk09: Okay, got it. But the manufacturing facility is going to start manufacturing, I don't know if you gave it time, but it's going to be sometime in early 2024, I'm guessing?
spk11: That's correct. Yeah, in the first quarter of 2024. Okay. Okay, got it. Okay. We'll be coming in the late part of this year, but in terms of all of the pieces coming together, it won't be until the first quarter.
spk09: Okay, got it. Okay. All right. That's helpful. And my next question, could you provide any color on the brain health panel timing and launch?
spk10: Yeah. We have completed the prototype of the digital twin product. So we've had a demo. It works, but it's still in beta, and we're going to continue to work. It's really impressive. It basically takes input such as about six to eight blood markers, an online cognitive test, It ultimately then predicts when you will, so it'll show you your health situation based on the test, and then the digital twin, which is completely healthy against you, and it will predict when you will get either dementia or Alzheimer's and what you can do about it. There also will need to be a genetic component added that measures APOE, as you know. and that will be a part of it as well. I expect to have some version of the brain health test launched later this year.
spk09: Okay, that's helpful. And then on your medical devices, is there any updates on any potential business development opportunities for the medical devices? I'm talking about like OneDraw and the microbiome weight. Thank you.
spk10: Yeah, so we are working aggressively with some international distributors and a pharma company. And these are both for business overseas in Asia. We expect to hear fairly soon on the European Union as to whether we're going to be able to get cleared for direct to consumer use. And this should be very soon. And then, as I mentioned in the prepared remarks, we're still anticipating getting cleared this year for direct-to-consumer use. But right now, given that we have B2C clearance in Japan, there's a lot of interest in Asia for the device.
spk09: Okay, great. Thanks for the questions.
spk07: Thanks. Thank you, Mr. Moss. There are no additional questions waiting at this time, so I will turn the call back over to Thomas Wilson for any closing remarks.
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