Trupanion, Inc.

Good day and welcome to the Trupanion second quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the call over to Gil Melchior, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to Tupanian's second quarter 2024 financial results conference call. Participating on today's call are Margie Toof, President and Chief Executive Officer, and Fouad Qureshi, Chief Financial Officer. For ease of reference, we've included a slide presentation to accompany today's discussion, which will be made available on our Investor Relations website under our quarterly earnings tab. Before we begin, please be advised that remarks today will contain forward-looking statements. All statements other than statements of historical facts are forward-looking statements. These include, but are not limited to, statements regarding our future operations, opportunities, and financial performance, pricing and veterinary industry inflation, and our ability to remediate our material weaknesses. 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 today's earnings release, 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, cost of paying veterinary invoices, 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 a 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 in addition to another 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. With that, I'll hand it over to Margie.

Thank you, Gil. Good afternoon, everyone. After over a decade with the company, I am honored to join you all today for my first call as the CEO of Trupanion. I look forward to spending time with many of you at our upcoming Investor Day in September, where I'll be joined by leaders from across the business for an extensive Q&A session. Now, moving on to our results. Quarter two is a strong quarter for the company, as shown in our key financial markets. Our subscription business remains the financial engine behind our business, and in the quarter, revenue from this segment increased by 20%. Breaking down the components of this growth, ARPU increased by 11% year over year, a record pace since we became publicly traded 10 years ago, and pet count increased by 8%. Within our core Tupanian brand, RPO expanded even faster at 13% year-over-year. Modulating between growth and pricing is a focus of the team as we continue the work to achieve our target value proposition of 71% in our subscription business. In our large and underpenetrated market, adding and helping more pets remains a guiding mandate. However, we will only do so when we're confident that we can deliver on the member experience for which Trupanion is known. In the quarter, we had approximately 24% pricing rolling through our book, and veterinary inflation remained consistent with our expectations at 15%. Against this backdrop, retention in the quarter was strong, with the average pet staying with us for over 60 months. This also includes our lower coverage and thus lower retention products. We're pleased with these results, a reflection of our efforts to communicate our value proposition and improve upon our member experience. Within our core Trupanion product, approximately half of our Trupanion members have received a pricing increase of 20% or more over the last 12 months. Retention of this cohort continued to perform well in the quarter and was up both sequentially and year over year. These results demonstrate our focus on the member experience and early benefits from the migration to our new technology and automation platforms. This new claims administration system has been in development for some time and we're pleased to see some initial benefits leading to a higher proportion of our claims being paid directly to the veterinarian and with record reimbursement timelines for those being paid in a more traditional way. We expect to provide you with more details on these investments, the early performance metrics, and our ongoing member experience roadmap at our upcoming Investor Day in September. We recently received meaningful rate approvals in two of our largest states that are beginning to take effect. While these new rates will take time to run through our book, they should enable us to increase acquisition spending and pet growth in these regions now that we've re-established pricing that allows for estimated returns between 30% to 40% on new pet acquisition. Adjusted operating income represents the funds we have to invest in growth, and in the quarter, these funds grew 48% year over year. Adjusted operating income for our subscription segment grew even faster at 63% and represents an acceleration from the 55% growth we reported in the first quarter. As a percent of revenue, subscription adjusted operating margin expanded 280 basis points to 11% in the quarter, marked progress towards our goal of 15% adjusted operating margin. As for what we'll communicate, we remain on track to hit this target in the fourth quarter. Operating our business within our target margin profile and IRR guardrails ensures the sustainability of our business, positioning us to help pets, pet parents, and veterinarians for the decades to come. The health of the veterinary profession remains critical to our success. Two years ago, we highlighted the growing burnout of veterinarians and their teams due to the rising cost of care, staff shortages, and overwork. At the time, we noted the need for 30 to 50% pricing increases, an estimate that has since been validated by Veterinary Industry Inflation. Our members put their trust in Trupanion 24-7, and the value proposition of our core product is designed with a unique aged enrolment pricing approach. This removes the need for guaranteed annual rate increases simply because a pet has had a birthday. We've created a solution that's designed to last, that can be relied on with the same dependability as our pets provide to us. Yet this past quarter, recent reports from across the pet insurance landscape demonstrate that not every insurer can or will be there in the same way. The rate of veterinary inflation has tested the most established of players and now over 100,000 pets are without coverage due to mispricing. This outcome is very unfortunate, both for the pets without coverage and the industry overall. It underscores the importance of Trupanion's approach to lifetime coverage and our simple, sustainable Cost Plus model. Unlike competitors who attract customers with low prices but limited coverage, we prioritise delivering the best value by offering comprehensive coverage and higher claims payouts. This approach ensures pets receive the care they need, resulting in higher customer satisfaction and exceptional lifetime value. By adding a fixed margin to our comprehensive plans, we maintain a sustainable business model with long-term benefits for our members, their pets, and the veterinary community. With low single-digit penetration across our addressable markets, we have a long way to go to make the difference we aspire to. As margins move sequentially closer to our goal of 15%, we're pleased to be turning our attention back to growth. With that in mind, moving back to the second quarter, we acquired 64,300 pets at an estimated internal rate of return of 37%. This represents a 15% decrease in new pets year over year on a reduction in pet acquisition spend of 17%. While we're not yet maximizing our uses of adjusted operating income for growth, our margin expansion afforded us the opportunity to deploy approximately 6% more impact versus Q1. Our newer initiatives, including our Powered BioSweeter products with Chewy and Aflac, our medium and low ARPU products, Firkin and PHI Direct, and our products in continental Europe comprise approximately 17% of our gross new pet ads in the quarter. We deployed 1.8 million against these opportunities, just 11% of our pet acquisition spend. A conservative amount of capital given these products are early in the lifecycle and subscale. Our continued discipline on acquisition spending, coupled with our increase in margin, led to $4 million of free cash flow in the quarter. In summary, we're pleased with the quarter. The team's hard work and solid execution is showing good results, which bodes well for our margin and free cash flow goals. With less than 4% of pets insured in the US, Puerto Rico and Canada, and an equally low number across most of Europe, our mandate remains to enroll more pets. we will continue to do so prudently, gradually scaling up our acquisition spend and prioritizing accordingly across cohorts as margins expand. Now, before I hand over to Fawad, I'd like to briefly touch on an important update to underwriting factors in the property and casualty risk-based capital calculation that were recently approved by the National Association of Insurance Commissioners, the NAIC. These updates significantly decreased the capital intensity of our balance sheet. Although pet insurance continues to be subject to the same risk-based capital requirement factors as special property, within this update, pet insurance was designated as its own line of business. After more than two decades of discussions to recognize pet insurance in its own right, this is a big step forward for Trupanion and the category at large. With that, I'll hand over to Fawad to provide a detailed overview of our Q2 results.