Trupanion, Inc.

Good day and welcome to the Trupanion second quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Laura Bainbridge with Investor Relations. Please go ahead.

Good afternoon and welcome to True Panion's second quarter 2023 financial results conference call. Participating on today's call are Daryl Rawlings, Chief Executive Officer, Margie Tooth, President, and Wei Li, Interim 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 at 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 expense. 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 these 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. With that, I'll hand the call over to Daryl.

Thanks, Laura. Two months ago, we hosted our annual shareholder meeting. I'll touch on a few of the highlights today and encourage you to watch our annual meeting highlights video available on our investor relations website. Among the highlights shared were three key priorities. First, expansion of our adjusted operating margin. Second, deploying capital efficiently. And third, returning to free cash flow positive by Q4 of 2023. In Q2, we saw early signs of progress in each of these areas. I'll elaborate on these now. Adjusted operating income was $16.8 million in the quarter. After an extended period of margin compression, I'm encouraged to see margins not only stabilize, but sequentially expand. Assuming the rate of veterinary inflation remains consistent with our expectations, as it did in Q2, we expect further margin expansion in the second half of the year as our pricing actions continue to take hold. In the quarter, we deployed $19 million to acquire over 75,000 gross new pets. I'm thrilled with the team's ability to add 23% more pets year over year while deploying 6% less in acquisition spend. In my opinion, this is a strong result. On a per pet basis, the cost to acquire a pet was 24% lower than the prior year period. Managing acquisition spend in relation to pet lifetime value is a honed skill of the team and one we will continue to refine at extremely granular levels. I'll elaborate on this point momentarily. The combination of early margin expansion and efficiencies in our pet acquisition spend helped drive a $3.9 million sequential improvement in free cash flow in the quarter. Additional actions taken in the quarter to reduce spend are expected to further advance us towards our goal of achieving free cash flow positive in Q4. Overall, I'm encouraged by the progress the team has made over the past four months. This progress is evident in our results, which are once again more closely aligned with our expectations. We have more work to do, but the team is focused on executing diligently through a dynamic environment. Long term, our goal remains to grow adjusted operating income and deploy increasing amounts at high internal rates of return. As we manage through this near-term period of margin compression, we're throttling back on spend and allocating capital to those markets and geographies in which we are more accurately priced to our value proposition. This decentralized approach delivered strong new pet growth in the quarter while furthering our progress towards our margin expansion and free cash flow goals. We will maintain our granular approach as the business grows from one to many P&Ls. allocating capital to products, channels, and geographies that deliver the highest rates of return. Understanding and managing our spend in relation to how we believe these pets will perform over their lifetime with us will be critical in doing so. As we have discussed frequently, a pet and their corresponding lifetime value can and will vary dramatically based on the individual characteristics of that pet. That's before introducing varying levels of coverage, products like Firkin and PHI Direct, our suite of offerings with Chewy and Affleck, and new markets like Continental Europe. As our mix of business evolves, our goal is to report on the internal rate of return for our new mix of pets in a more granular way. Historically, our calculation was based on an average, assumed every new pet behaves similarly to our existing book of business. For example, it assumed pets regardless of product, channel and geography had the same ARPU and margin profile and with the equal retention to our existing book. Now for many years as a mostly single line business, this was an appropriate and appropriately conservative way to talk about it. With new products, channels and geographies becoming a more meaningful portion of new business, these assumptions have become less relevant. This is not a new concept for us. Recall I discussed this in a greater detail in this year's shareholder letter. I further shared an example of continental Europe where new pet ARPU is approximately $30 compared to that of our total book at approximately $64. If we were to use a simple consolidated average as we previously reported, the estimated return on our spend to acquire these European pets would be overstated. This too would be the case with our newer products, if we were to assume equal retention to our existing book. Our newer products with less coverage have retention similar to what we believe the industry average retention is, of approximately 30 months, compared to tropanions over 70 months. As you've heard me say before, less coverage drives lower retention. With this in mind, moving forward we intend to provide increasing levels of granularity into the returns of our various products, channels and geographies and underlying assumptions behind those expected returns. Margie will provide some more detail momentarily. Stepping back, I believe the changes we've made over the past several months are proving out and set us up well to deliver improved performance moving forward. We're starting to see signs of margin expansion. We are investing our capital prudently, and we're making progress towards our goal of free cash flow positive in Q4. We're seeing good growth and scale in our new initiatives, and through our international efforts, we're meaningfully expanding our addressable market. Most importantly, our decentralized management approach is taking hold, with the team delivering stronger and more predictable results. With that, I'll hand it over to Margie to add additional context around our quarterly performance and execution of our 60-month plan. Margie?