Trupanion, Inc.

To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Gil Melchior, Director of Investor Relations. Please go ahead.

Good afternoon and welcome to Topanian's fourth quarter and full year 2024 financial results conference call. Participating on today's call are Margie Tooth, Chief Executive Officer and President and Fuad 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, 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 Form 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. 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. I will now hand over the call to Margie.

Thank you, Gil, and hello, everyone. 2024 was a significant year for Trupanion, marked by strong operational and financial execution. We started the year with ambitious goals. To repair and expand our margins and fortify our balance sheet, while simultaneously continuing to enrol pets with less tax spend. Against his guiding mandates, I'm pleased to report we delivered. Here are some of our 2024 highlights. Subscription revenue grew 20% year over year, and we drove meaningful margin expansion in the subscription business, achieving our industry-leading 71% value proposition for the second consecutive quarter. In the fourth quarter, we achieved the highest quarterly subscription adjusted operating margin in our history, more than doubling our margin from a quarterly low point in early 2023. For the full year of 24, adjusted operating income grew nearly 40% to a record $114 million. We also generated $39 million in free cash flow, an all-time high, with the vast majority of the improvement being driven by higher adjusted operating income. In our large under-penetrated market, our focus is on growing adjusted operating income and strategically reinvesting at high estimated internal rates of return to help more pets receive the care they need. Time and again, our team has demonstrated their ability to deliver on this objective, and 2024 was no exception. In line with our mission, we reached a major milestone early in the year, protecting more than 1 million cats and dogs, of which approximately 257,000 were added over the last 12 months. The vast majority of these coming from our flagship Trupanion branded products. Our consistent and proven ability to grow pet count in spite of our purposeful decision to reduce acquisition spend for five consecutive quarters directly illustrates the growing demand and need for our product in support of pet parents today. Trupanion's commitment to our members is at the heart of our business and upholding our value proposition has been and will continue to be the driving force of our team. In 2024, we continue to invest meaningfully to improve our best-in-class member experience, including advancements in our software that eliminates the need for reimbursement. In doing so, we made significant progress across our claims experience with record levels of direct payment and speed of traditional claims payment, resulting in a claims inventory near to all-time lows. Just three months ago, we hit another milestone, surpassing $3 billion in paid veterinary invoices, the last billion being achieved in less than 24 months. This unmatched level of veterinary invoice support directly demonstrates the growing role Trupanion plays in solving the new normal in veterinary care. As we extend our support to an increasing number of pet parents, we remain focused on ensuring members feel confident in the value Trupanion provides. While there is still work to be done refining our pricing across every cohort, such as making necessary rate adjustments where needed and maintaining rates where costs are stabilized, we have reached a solid foundation on which to build. We're pleased to now be largely in a phase of refinement, leading to lower average increases that make budgeting easier for our members. Of course, the real proof of our product is in our member retention, and as we close the year, we saw continued strengthening across all retention cohorts. especially with members receiving a rate increase of over 20%, where most of our business sits today. In fact, fourth quarter retention for this cohort was among the highest rate of retention for over two years. With rate flow normalizing, we've been adjusting our retention efforts to span across our entire member base, including those in their first year, and with rate changes of less than 20%. And we're encouraged by the early improvements this focus is making. Thanks to our strong ARPU growth and margin expansion, we saw a 45% increase in our per pet profit, even with the anticipated pullback in retention. This expansion is what increases our allowable per pet acquisition costs, ultimately setting the stage for greater investment in pet growth. With regards to hospital performance, we ended 2024 with strong veterinary need volume, an all-time high in veterinary hospitals using our direct payment solution, and over 15,000 active hospitals. Building on this foundation, we took a significant stride forward during the year with the launch of our Veterinary First strategy in international markets, with the introduction of the Trupanion brand in Europe. Pet parents in Germany and Switzerland, which is home to approximately 12,000 veterinary hospitals, will now have access to Trupanion's high-value product and unreplicated VetDirect payment solution. We have also continued our minor investment into newer products and channels, with the purpose of reaching pet parents where they are, in partnership with household brands to connect with those with differing consumer needs. In our large, under-penetrated market, these opportunities enhance our long-term growth potential, and with it, our intrinsic value. To summarize, 2024 was a very strong financial year and a turning point for the company. We made meaningful progress and achieved what we set out to do. We've developed a solid and scalable foundation, financially and operationally. So now we'll turn our attention to the year ahead, the final year of our 60-month plan. In 2025, we anticipate steady, sustainable growth in our subscription business. We expect margins to continue to expand and rate changes to normalize, driving increased profit per pet and improved retention. We'll step up our pet acquisition investment in tandem, gradually increasing spend as the year progresses. Our confidence in our margin trajectory is reinforced by recent trends in veterinary inflation, which continue to align with our expectations. Veterinarians typically raise prices at the start of the year, contributing to a seasonal step up in costs that drives stronger margin performance in the second half of the year. While early into 2025, we're seeing this pattern play out and anticipate a similar yet improved margin journey throughout the next 12 months. At the same time, the progress made over the last quarter, increasing active hospitals and veterinary needs, has reinforced our confidence in our team's ability to accelerate pet growth as we ramp up acquisition investment. Our approach to this acquisition spend is designed to reinforce conversations happening within the hospital, creating a brand halo effect that benefits not just the veterinary channel, but all channels. This investment also plays a key role in improving retention, particularly among first-year members, by reinforcing the value of Trupanion post-enrolment. Having scaled back in this area over the past year, we're beginning to rebuild momentum and brand awareness. Similar to prior years, the majority of our pet acquisition dollars will be reinvested into growing our core Trupanion brand in North America. This remains the foundation of our business and our primary growth engine. Underpinning our anticipated growth is our commitment to ongoing investment in our systems and infrastructure. In 2025, we expect to build on the use of new technology designed to elevate the member experience, retire legacy platforms, and strengthen our control framework to ensure long-term scalability and effectiveness. Along these lines, I'm pleased to share that as part of our 2024 audit, we are on track to remediate the two previously identified material weaknesses. This progress towards a successful resolution highlights the diligent efforts of our team in strengthening internal controls and implementing sustainable processes. I want to take a moment to recognize the tremendous work and dedication from everyone involved. In total, if we achieve the growth goal shared today, by the end of our 60-month plan we would expect our compound annual revenue growth rate to be 23%, robust and just shy of our 25% goal. Growth and adjusted operating income would be near to 20%. This last metric, if delivered, will be a significant achievement given the margin erosion caused by veterinary inflation following the pandemic. Exiting 2025, we expect strong fundamental performance across key metrics, including retention, ARPU and margin, with a gradual step-up in pet growth. Growth in these metrics, along with the expansion in our active hospital base and same-store sales, is central to our business model and long-term value creation. By continuing to drive these core metrics, we aim to create even greater value in the year ahead, setting the stage for sustained momentum in 2026 and beyond. While we still have time to run on our current strategic journey, I go into this final year with tremendous gratitude to the team that has made these results possible. Time and again, this team has demonstrated their commitment to our members and those in our ecosystem, and with it, built a strong track record of success. With that, I hand the call over to Fawad.