Trupanion, Inc.

Good day and welcome to the Trupanion third quarter 2024 earnings conference 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. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note, we do ask that you limit yourself to one question and one follow-up whilst in queue. Please also note that today's event is being recorded. I would now like to turn the conference over to Gilbert Melchior, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to Tupanian's third quarter 2024 Financial Results Conference Call. Participating on today's call are Margie Tooth, Chief Executive Officer and President, and Farad 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 and 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, key operating metrics, 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, including forms 10-K, 10-Q, 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, all margins and expenses will be presented on a non-GAAP basis and excluding 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.

Thanks, Gil, and good afternoon, everyone. I'm pleased to share the results of a very strong quarter. Most notably, growth in our subscription-adjusted operating income accelerated by 66% over the prior year period. Our subscription-adjusted operating margin reached 14% in the quarter, the highest level since quarter one of 2022, which represents a 390 basis point year-over-year improvement. The biggest driver of this result was the achievement of our value proposition to 71%, a milestone we were pleased to reach against the backdrop of the greatest veterinary inflation seen in a generation. Over the past 18 months, as inflation rolled through hospitals across North America, the team has been working hard to restore the margins in our core subscription business. Getting back on track required us to take some significant rate increases to return to our target value proposition and pull back on our acquisition investments until our pricing and the cost of care were more closely aligned. With strong levels of rate now being earned through our book and ongoing expense discipline across the operations, we are well positioned to achieve a 15% subscription adjusted operating margin for Q4. As a reminder, our goal is to achieve a 15% adjusted operating margin within our subscription business on an annual basis. This has been our guiding objective for many years, and as we move ever closer, it will continue to be our target to ensure that as a low-cost operator, we can offer our members lifetime coverage at the highest value proposition in the market. It takes collective commitment from the teams to operate so close to our long-term model P&L, and after months of significant margin pressure, we are now approaching a sustainable margin position and turning to growth from a position of strength. Our operating model requires us to be efficient, lean, vertically integrated, and focused. This allows us to reduce frictional costs, which in turn creates a white glove member experience, high lifetime value, and greater sums of capital to spend on growth acceleration. Our biggest markets today, Canada and the United States, are still dramatically underpenetrated at approximately 4%. The opportunity is enormous, and with the humanization of our pets continuing, the demand and need to enable access to care increases with it. Back to our results. Revenue for our subscription segment grew 20% in Q3. In terms of our cost of paying veterinary invoices, While the trends in July were slightly better than anticipated, August and September were roughly aligned with prior quarters, leaving the full quarter reflecting a minor deceleration of about one percentage point versus the first half of the year. As a result, we continue to assume 15% veterinary inflation. Over the last 12 months, about half of our book has received a pricing increase of 20% or more, and retention for this group continues to perform well and is trending up year over year, despite many receiving consecutive double-digit adjustments to their new monthly premium. We credit this improvement largely to the focus of the team, evolving communications and enhancing member experience. Our retention for those with increases below 20% also performed well, despite a larger proportion of members now experiencing price increases in the high teens. The strength in both cohorts demonstrates the value and resilience of our product and our member experience. Our efforts now are shifting back to the retention of our members in their first year, which is trending below our expectations. Enhancement of this experience is underway and will continue as the size of this cohort should become larger over time. it's worth noting the nature of any member experience changes take time to take full effect across an entire cohort. I'm pleased, however, to share some tangible results today regarding the evolution of our technology platform. With our claims migration nearly complete, we are seeing significantly improved service levels, continued increases in invoices paid directly to the hospital, and record levels of claims automation, all key elements of an exceptional member experience. Additionally, and importantly, We saw efficiencies in our invoice processing costs, which hit a new low as a percentage of subscription revenue. I am eager to see the benefits this new system will bring to first-year retention and all aspects of our business and member experience. Now, turning to our new pet growth. In the third quarter, we spent $16.8 million, an increase of 4% over the prior year period, to enroll approximately 65,800 new subscription pets. This resulted in an average pet acquisition cost of $243 and an estimated internal rate of return of 36%. Of particular note this quarter, we saw a healthy sequential increase in the number of active hospitals, defined as hospitals that enrolled at least one pet in the prior 90 days. Moving to our broader portfolio, our newer initiatives, including our Powered by Suita products with Chewy and Aflac, our medium and low ARPU products, Firkin and PHR Direct, and our products in continental Europe comprised approximately 15% of our gross new pet ads in the quarter and only 10% of our pet acquisition spend. In September, we launched our first Trupanion-branded product in Europe to the 29 million pet parents in Germany and Switzerland. This launch opens the opportunity for us to bring Trupanion's unique, high-value product to another underpenetrated market. As we now look forward, it will be important to gain momentum in new pet enrollments. While we will not sacrifice our IRR and free cash flow targets to do so, we intend to deploy an increasing amount of our adjusted operating income to acquire pets in the upcoming quarters. After spending so little for the past 12 months, we expect the impact of dining up investment to take some time to truly accelerate growth, and we have room for improvement in our execution. With an increasing lifetime value and the timing lag of our spending, we anticipate per pet spend to increase on a dollar basis as we ramp back up to higher pet ads. Our truly unique offering in the industry presents a much needed reliable solution in making pet care affordable. Our approach to comprehensive coverage, specifically within the core Tupanian product, ensures pets receive the care they need without delay, resulting in higher customer and veterinary satisfaction, as well as exceptional lifetime value. We are proud to lead the industry. The company embraces its role as a leader in this category with purpose and passion, and for years we have been at the forefront of industry discussions to drive fundamental change to the way medical insurance for pets is perceived. While still very much a fledgling industry, we are seeing a shift in how we're viewed and regulated, most notably with the adoption of model law across an increasing number of states in the U.S. and the recent use of the NAIC changes to the underwriting risk factors applied to the risk-based capital requirements calculation. This change alone is a huge development for us, significantly lowering a barrier we experienced historically and ultimately resulting in more funds to grow. These changes are the primary driver of our estimated capital requirements decreasing by 24% since the end of 2023. We anticipate there will be an additional reduction to our capital requirements next year from the already announced 2025 factors. These ongoing developments give us greater confidence in the long-term recognition of our industry and the nature of its risks. Before I hand over to Fawad, I'd like to share news of a very meaningful milestone for Trupanion. In a short time, we expect to cross $3 billion in paid veterinary invoices within our subscription segment. It took us 20 years to pay out the first billion, a little less than three years to pay out the second, and now less than two years to pay the third billion. Crossing this milestone is a testament to the very real impact we're making and the breadth of our coverage, helping and saving countless pets' lives. This achievement is not just a milestone. It's a celebration of the purpose that drives Trupanion every day and a reminder of the progress we're making. With that, I'll hand it over to Fawad to provide a detailed overview of our Q3 results.