Trupanion, Inc.

Greetings and welcome to the Trupanion first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Bainbridge, Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Trupanion's first quarter 2023 financial results conference call. Participating on today's call are Daryl Rawlings, Chief Executive Officer, Margie Tooze, President, and Drew Wolf, Chief Financial Officer. Before we begin, I would like to remind everyone that during today's conference call, we will make certain forward-looking statements regarding the future operations, opportunities, and financial performance of Trupanion within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed. A detailed discussion of these and other risks and uncertainties are included in our earnings release, which can be found on our investor relations website, as well as the company's most recent reports on forms 10-K and 8-K filed with the Securities and Exchange Commission. Today's presentation contains references to non-GAAP financial measures that management uses to evaluate the company's performance, including without limitation, variable expenses, fixed expenses, adjusted operating income, acquisition costs, internal rate of return, adjusted EBITDA, and free cash flow. When we use the term adjusted operating income or margin, it is intended to refer to our non-GAAP operating income or margin before new pet acquisition and development expenses. Unless otherwise noted, margins and expenses will be presented on a non-GAAP basis, which excludes stock-based compensation expense and depreciation expense. These non-GAAP measures are an addition to, and not a substitute for, measures of financial performance prepared in accordance with the U.S. GAAP. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release or on Trupanion's Investor Relations website under the Quarterly Earnings tab. Lastly, I would like to remind everyone that today's conference call is also available via webcast on Trupanion's Investor Relations website. A replay will also be available on the site.

Thanks, Laura. Two years ago, we kicked off our 60-month plan. We are now 28 months in and on track to achieve many of the goals we've set. Since that time, we've grown revenue to above 30% annually, increased our adjusted operating income by nearly 50%, and acquired over half a million new subscription pets at a strong estimated internal rate of return. The number of active hospitals in North America now approximates 16,000. We're paying nearly half of veterinary invoices through our software, and retention rates remain strong. We're seeing consistent levels of conversion and strong growth in pet owners referring friends and adding pets. We've also added new brands and new channels and have laid the foundation to double our addressable market, extending our runway for growth by decades. I provided more detail around these highlights in my annual shareholder letter published in March. The core of our business model is to earn the trust of veterinarians and pet owners. We do this by providing a solution to the rising cost of veterinary care, making it easier for pet owners to budget for their pet's care over their lifetime. Over the long term, the underlying need and demand for high-quality insurance will continue to grow. Last year, the cost of veterinary care increased at an unprecedented rate. with veterinarians raising prices multiple times throughout the year. As expected, we saw veterinarians take additional price early this year, and it is our belief that the long-term sustainability of the veterinary industry will require veterinarians to pass on higher fees in the form of inflation for the years to come. Keep in mind that the cost of veterinary care for Trupanion is a combination of the number of veterinary invoices received and the increase in our average invoice size. As one can imagine, these ongoing rapid rate increases will prove more challenging to uninsured pets compared to those with insurance. As a result, veterinarians and their staff will have greater urgency when introducing the concept of high quality insurance or answering questions from inquiring pet owners. Long term, the category and Trupanion are set up very well to meet this demand. Importantly, we do not and will not dictate the cost of veterinary care. We are a cost plus model. It is our job to understand the trends in the cost of care and to share the risk appropriately through a granular approach to pricing. Because our product is for the life of the pet, we do not try to predict the cost 5, 10 and 15 years out. We simply monitor the cost, the year over year inflation and project out the next 12 to 18 months. In my shareholder letter, I detailed some of the temporary and near-term challenges we faced in accurately forecasting veterinary costs throughout the course of 2022. Namely, the ongoing impacts of COVID and the post-pandemic veterinary staffing challenges, the increase in the deployment of our software, the change in our mix of business, and the rapid and unprecedented rates of inflation. In total, we estimated our cost of veterinary care increased by 12% in 2022. twice that of our historical rate of veterinary inflation over our 23-year history. Entering 2023, it was our expectations that the cost of veterinary care for our members would persist at the elevated rate of 12% and that our pricing plans would be sufficient to get us back on track to our adjusted operating margin target by year end. In Q1, we saw our actual cost of veterinary invoices increase by 15% year over year, ahead of our previous assumptions. Within our cost plus model, this means we need to add an additional 3% in pricing to get us back on track with our margin targets. At our revenue run rate, this has a $30 million impact on our adjusted operating income for the year. We've updated our adjusted operating income outlook to account for the step up in veterinary inflation to 15% year over year. Drew will provide more details momentarily. Rapid changes in inflation will continue to challenge our ability to price accurately for our members. Unlike other direct-to-consumer subscription models, within the insurance industry, we are limited in how quickly we can adjust and implement pricing. Typically, in the US, it will take us 18 months in order to file for, receive approval, and implement new pricing across the entirety of our book. Over this time period, our members will, on average, receive a higher-than-usual value proposition. In a world where veterinarian and members come first, this is an okay outcome. Over the long haul, well-managed insurance providers sticking to their values and diligently growing when and where it's prudent come out stronger in the years following a period of margin compression. Between then and now, the team is energized and working hard to restore our margins as soon as practical. With that, I'm going to hand the call over to Drew to discuss our Q1 results and outlook in greater detail. Margie will then provide more context around our performance and our plans to hit our key financial targets. Thanks, Daryl.