Thorne Healthtech Inc
NASDAQ:THRN
Earnings Call Analysis
Summary
Q2-2023
A story of strategic growth unfolds as the company raises the lower end of its full-year 2023 guidance for net sales and gross margin. Improved forecasts suggest net sales between $285 million and $290 million and gross margins between 50% and 52%. The increased midpoint for marketing investments indicates expenditures will constitute 14% to 15% of net sales to back the 'Build to Last' campaign. Meanwhile, EBITDA guidance holds steady at $30 million to $32 million. EPS guidance is refined to $0.26 to $0.32, reflecting adjustments for a lower anticipated tax rate. Major strides in the manufacturing plant expansion, set to conclude by Q1 2024, fortify the company's production capacity to potentially support sales up to $750 million. The expansion underpins long-term efficiency gains and anticipates enhanced gross margins arising from economies of scale and operational enhancements.
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Thank you for standing by. My name is Dina, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Thorne HealthTech, Inc. Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you.
Now, I would like to turn the call over to Thomas Wilson, VP of Investor Relations.
Good afternoon, everyone. Thank you for joining Thorne HealthTech’s second quarter 2023 earnings call. With me today are Paul Jacobson, our CEO; Saloni Varma, our CFO; and Tom McKenna, our COO.
Before we begin, please note that today’s discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those indicated by our forward-looking statements. More information about potential risk factors can be found in our 2022 Annual Report on Form 10-K and First Quarter 2023 Form 10-Q, as well as our upcoming Form 10-Q, which we anticipate filing in the next couple of days as well as other SEC filings.
Today, in addition to U.S. GAAP reporting, we will be discussing financial measures that do not conform to GAAP. We believe these non-GAAP measures enhance the understanding of our performance because they are more representative of how we internally measure the business. Non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. A reconciliation of GAAP to non-GAAP results is available in the earnings press release we issued after market close and in the supplemental investor presentation posted to our IR website.
With that, I’ll turn the call over to Paul.
Good afternoon. Thanks, everyone, for joining the call. Today, I’ll briefly touch on our second quarter financial results and operating performance. I’ll discuss our key accomplishments during the quarter. I’ll provide updates for a few select products, and then I will turn to our updated 2023 guidance. Finally, Saloni will provide a detailed review of our second quarter 2023 financials, and we’ll open up the call for questions after that.
After posting a very strong first quarter, I am pleased to report that our business momentum continued into the second quarter. We reported record sales of $72.7 million in Q2 on solid growth across all our sales channels, which represents year-over-year growth of 33.1%. Our direct-to-consumer business generated sales of $36.8 million, an increase of 39.3% over the second quarter of 2022.
Our professional and business revenues came in at $35.9 million and grew 27.3% year-over-year. On balance, our total portfolio continues to grow across our diversified customer base, which underscores the strength of our science-backed product offerings and trust in our high-quality brand. The strong top line performance was driven mainly by our direct-to-consumer or D2C business, which continues to perform well and exceed our internal expectations. Over the last several quarters, the strength of Thorne’s D2C portfolio has enabled us to increasingly shift into a more predictable sales model.
We continue to acquire new customers efficiently with an LTV to CAC ratio of 4.0, and our net promoter score of 68 remains well above industry norms. Through this success, we have experienced strong growth in subscription volumes. Thorne.com subscriptions are up approximately 60% on a year-over-year basis from strength in both daily foundation products, as well as more unique and targeted products for sports performance and metabolic health. We also continue to see healthy retention rates, which is not surprising as the more often a customer uses our wellness products, the more likely they are to remain with us.
I’m also pleased to note that we are starting to see growth in our Asia Pac business. While Asia Pac remains a nascent part of our overall sales mix, there is no question that this region is poised to become an increasingly important component of our growth, and we’ll be making appropriate investments where necessary to capitalize on this long-term opportunity. These dynamics underlie our strong top line performance as we generate a sustainable and more predictable income stream from our growing loyal customer base around the globe.
In addition to strong sales growth, we also saw a nice improvement in our margins. Second quarter gross margin of 55.9% represents a more than 100 basis point improvement over Q2 of last year. That expansion was driven by one-time benefits of lower overhead and some better channel mix favoring our direct-to-consumer business, leading to favorable impacts from pricing. We have made it a strategic priority at Thorne to invest in technology and manufacturing that should enable us to realize improved gross margins over time. And we’ve explained, 2023 is a big investment year.
As mentioned on prior calls, we expect our new manufacturing facility to be partially operational in the fourth quarter of this year and fully operational sometime during the first quarter of next year. Following completion of the build, we think this new facility will enable us to improve gross margins by another 500 basis points to 600 basis points over the next several years, which would have a significantly positive impact to our overall profitability, resulting in a longer-term gross margin target of approximately 60% for the overall business.
Turning to operating profit for the second quarter. We reported adjusted EBITDA of $12.5 million, a significant increase over the prior year period loss of $1.3 million, which was driven mainly by improved gross margin, efficient marketing spend and operating leverage. Adjusted diluted EPS for Q2 was $0.15 versus a loss of $0.05 per share in the second quarter of last year.
Now, I’d like to highlight some of our second quarter accomplishments. In June, we announced that our NanoDrop device received the CE Mark certification after successfully fulfilling the European Union’s relevant performance, safety and product requirements. NanoDrop, which is already integrated into Thorne’s OneDraw blood collection system is a virtually painless blood collection device that we believe has the potential to significantly decentralize clinical trials at at-home diagnostic testing.
NanoDrop is a clinical-grade device that uses Thorne’s novel dual nano lancet technology to obtain capillary whole-blood samples. We believe NanoDrop CE Mark certification will open up new testing applications for Thorne by allowing individuals to use the device in their home. Also in June, our 510(k) application for NanoDrop was successfully accepted by the FDA. Soon thereafter, with no comments, we received notice from the agency that was recommended for substandard review.
Our interactions so far have been encouraging, and we expect to have a completed review by August 11. Although even if clearance is granted, we will not be allowed to publicly announce anything until it goes live on the FDA website. This news, together with the clearance of OneDraw in Japan earlier this year, brings us one step closer to being able to achieve broad application across end markets around the globe. As a reminder, OneDraw is an FDA-cleared, small, lightweight single-use device that attaches to the upper arm with a hydrogel adhesive and vacuum. By pressing two buttons on the device, a virtually painless capillary blood sample is collected on a cartridge within OneDraw’s blood collection device, which uses advanced technology to preserve the sample without requiring cold chain processing and storage.
A stable dry blood sample within the cartridge is then mailed to an independent third-party CLIA and CAP-certified lab for analysis and the results, insights and recommendations can be viewed on our health intelligence platform by the individual and their health care practitioner. OneDraw enables better health for individual consumers and patients by removing the obstacles to prevent people from taking better control of their health, ultimately offering an improved experience. We are obviously very excited about OneDraw technology, and believe this highly innovative product has the opportunity to bring significant upside to our future sales growth. And we are not alone in this assessment of OneDraw’s technology.
In May, we announced that OneDraw won the prestigious 2023 MedTech Breakthrough Award for Best Overall Medical Device. With competition from nearly 4,000 other product nominations globally, we couldn’t be more pleased to be recognized among such a large number of cutting-edge technologies and new innovations. Also in May, we announced the research and development partnership agreement with Arome Science, a leader in metabolomics to develop a next-generation metabolomics test. We have seen nice sales growth in metabolism-related offerings and believe that metabolomics is fast becoming one of the most valuable measurements to assess the overall health status of an individual on a real-time basis.
Initially, we plan on conducting a series of validation studies and will collect additional data using our OneDraw device. If successful, this research will be used to support the development of metabolomics commercial test that can be offered across our entire customer base. In early April, we announced significant positive findings from a randomized double-blind trial that studied the effects of the dietary supplement, SynaQuell, on brain function and structure in Junior A ice hockey players.
SynaQuell is a nutrient blend that has been co-developed with neurologists at the Mayo Clinic for supporting brain health structure and function, especially for athletes and other individuals engaged in high-contact activities. The study results provided clear clinical evidence that our patented multi-ingredient nutritional supplement, SynaQuell, can support healthy brain structure and cognitive function. Developing products that support brain health remains a core focus for Thorne, and we continue to work collaboratively with the Mayo Clinic and HealthTech Connex to further advance SynaQuell’s development. We expect to devote significant marketing efforts to this product beginning in 2024.
On July 25, we kicked off our Build to Last marketing campaign, which is our first ever global campaign and features three-time NBA Champion, philanthropist and entrepreneur, Dwyane Wade, along with his son and professional basketball player, Zaire Wade. The 3-month campaign showcases an inspirational no-shortcuts approach to lifelong wellness, supported by Thorne’s highly tested premium products that are capable of enriching lives at every age and life stage. With our efficient marketing engine, we expect the campaign and our partnership with the Wade family to scale our brand and product awareness in major markets across the globe.
Turning to our outlook. We expect continued momentum across our business as we enter the second half of the year. This momentum is driven by the launch of additional innovative products and expansion to our sales force that is producing more business wins, the growing international presence and increasing brand awareness of the Thorne name. Based on the strength of our first half results, we are raising the low ends of our full-year 2023 guidance ranges for both net sales and gross margin. With these increases to the guidance midpoints, our updated full-year guidance range for net sales is $285 million to $290 million, and our updated full-year guidance range for gross margin is between 50% and 52%.
We are also increasing the midpoint of our guidance for marketing costs, raising the prior range of between 13% and 15% of net sales to a range of between 14% and 15% of net sales. The increase is consistent with our prior commentary, which indicated that marketing costs may approach the high end of the range due to increased investment this year, including from anticipated spend for the Build to Last marketing campaign.
Rounding out our guidance with increased marketing spend, natural growth in selling and distribution cost to meet demand as well as hiring into our plant expansion, we are maintaining our guidance for full-year adjusted EBITDA of between $30 million and $32 million. However, we are raising our full-year adjusted diluted EPS of $0.26 to $0.32 per share from an update to our estimated and annual tax rate in Q2, which Saloni will cover in more detail. We remain confident that based on our continued strength in our business, we can achieve this updated guidance.
With that, I’ll turn the call over to Saloni for her prepared remarks on our financial results and capital deployment priorities for the rest of the year.
Thank you, Paul. Good afternoon, everyone. Today, I’ll walk you through our results for the second quarter, provide details on our plant expansion and related financing activity and share some additional commentary on our expectations for the remainder of the year.
Our second quarter results exceeded our internal expectations. On the top line, Q2 net sales of $72.7 million, represents our highest quarterly sales and record, resulting in growth of 33.1% year-over-year. We continue to see strength in our D2C business, which represented over 50% of net sales for the second consecutive quarter. D2C growth was primarily driven by favorable pricing increases, product rationalization and our ever-expanding customer base. With the trend of our generally higher end consumer, continuing to hold thus far, it’s clear that while there has been pullback in spending on discretionary items at the macro level, spending on products that people depend on for the health and wellness goals has stayed more insulated.
Our strong sales performance continues to be underpinned by healthy growth in unique new customers, which increased approximately 86% over Q2 of last year, with the number of active subscriptions up over 60%. Those increases helped to drive 39.3% sales growth in our B2C channel, which was also up 8.8% on a sequential quarter basis. Professional and B2B channel sales were up 27.3% year-over-year. Our ability to use digital marketing and build out on this direct sales force of a traditionally small base have helped deliver growth across the customer groups captured in the professional and B2B channel.
More importantly, our acquisition of new customers continues to be extremely efficient with a healthy LTV to CAC ratio of 4% for the second quarter. Our Net Promoter Score of 68 when stack up closer to historical norms, mainly from having walked through back order positions for certain products. Once our new world-class production facility is fully operational in Q1 2024, the capacity constraints we experienced from time to time are not expected to be an ongoing hurdle.
Our second quarter gross margin of 55.9% increased by more than 100 basis points year-over-year, as Paul mentioned, that was largely a function of one-time benefits from lower overheads, favorable channel mix as our high gross margin channels continue to deliver significant growth, along with the impact of our price increases taken earlier this year. Some of these benefits were offset with higher raw material costs as we sell through the last of our higher-priced raw materials from 2022.
Looking ahead, in H2, we expect some margin compression from incremental labor and overhead as we walk through capacity constraints that will require temporary use of command to help keep pace with demand, while we complete the expansion over the next few quarters.
Turning to operating expenses. R&D costs decreased 13.6% to $1.5 million, representing 2.1% of net sales. That decrease was driven by incurring higher costs in the second quarter of 2022 associated with OneDraw ahead of our FDA submission, as well as finalizing the relaunch of our Gut Health test, with its first-in-market wise technology. While we did not have the same magnitude of R&D activities in Q2 2023, our core R&D engine remains efficient and flexible as demonstrated by our continued high volume of ongoing clinical studies and product launches borne out of AI-driven insights from our expanding pool of clinical data.
Our marketing expense for the second quarter was $10 million, down 36.6% and representing 13.8% of Q2 net sales. We have optimized our marketing spend as we continuously evaluate the benefits of our spend on our various businesses. As stated on prior calls, while we intend to deploy marketing dollars more evenly than in the past, we will continue to hold large marketing campaigns periodically, like our recently launched Build to Last campaign featuring Dwyane Wade.
Our goal with the campaign is to inspire customers to feel supported by Thorne’s for a lifetime by our high-quality offerings born from and refined by continuous innovation. With the campaign, we are deploying marketing spend in a targeted way with incremental focus at the product and health area levels, in addition, gaining more visibility for the Thorne brand. We believe more personalized data-driven strategies with high-impact influencers will benefit our retention through higher engagement with new customers elevate the brand and drive customer acquisition at scale.
Second quarter SG&A expense of $22.5 million was up 21.4% year-over-year and represented 30.9% of sales, a decrease of 300 basis points year-over-year. Most of the $4 million increase over Q2 of last year was from higher selling costs, including our growing sales force, increased warehousing and distribution expenses and our commissions expense. On balance, our G&A costs on their own have continued to be extremely efficient and we gain leverage benefits from economies of scale where and when possible.
Turning to the balance sheet and specifically our capital structure and liquidity. We ended the quarter with unrestricted cash of $17.1 million. We had another $15.2 million of restricted cash set aside that will be deployed for our plant expansion. As a result, our total cash position of $32.3 million as of June 30 was slightly above our total outstanding borrowings of $27.9 million, inclusive of finance lease obligations.
The plant expansion creates a low watermark for our total liquidity this year before an anticipated steady recovery next year. As of 30 June, we had more than $30.1 million of available capacity on our revolver with an option to expand by additional $15 million. As a reminder, we broke ground on the expansion of our manufacturing facility in South Carolina in the third quarter of 2022 after 5 years of rapid growth, following the relocation of our operations to South Carolina in 2018. We expect construction to be largely complete by the end of this year and that the expanded area of the facility will be fully operational by the end of Q1 2024.
Upon completion, our world class facility will be ranked in top five globally among supplement companies in terms of manufacturing space and sales capacity. By doubling in size to support sales upward of $750 million, we will be able to achieve economies from scale at far superior levels while expanding our production capabilities and lab space in support of our R&D operations and product development.
In addition to the manufacturing plant expansion, we completed the simultaneous expansion of our new warehousing and fulfillment facility in Q2, which is now fully operational. That expansion is adjacent to our current operations in South Carolina and will drive long-term incremental efficiencies in our production, warehousing and fulfillment. The total cost of our facility expansion is projected to be approximately $60 million. We continue to make excellent progress on our manufacturing facility, comprising purchases of machinery for doubling our production and expanding the building by an additional 74,000 square feet.
We are funding all our CapEx needs through a mix of internal cash from operations, equipment financing, revolver borrowings, and a tenant reimbursement allowance by the existing landlord. Of the total CapEx of $60 million, $40 million has been incurred until end of 30 June, 2023. We anticipate funding the remaining $20 million with $15 million of restricted cash on our balance sheet and $8 million of tenant improvement allowance. With no other significant capital projects in the pipeline, upon completing construction, we expect to reverse the negative free cash flow that we have been experiencing mid-project.
With the costs we have incurred to date and our remaining CapEx spend, our full-year CapEx guidance of approximately $35 million to $38 million is supplemental to our updated 2023 full-year guidance that calls for net sales between $285 million to $290 million, up from the prior guidance range of $280 million to $290 million, gross margins of between 50% to 52%, up from the prior guidance range of 49% to 52%, adjusted EBITDA of $30 million to $32 million, which remains unchanged and adjusted EPS of $0.26 to $0.32, a slight increase to the low and high ends of the range solely from updating our tax rate during Q2.
In addition to the above updated guidance, we are also updating our guidance for marketing spend to a range between 14% to 15% of net sales, up from our prior range of 13% to 15% of net sales. We are reaffirming other prior guidance measures for 2023, including depreciation and amortization of approximately 2.5% of sales, gradually increasing as new assets come online over the course of the year, interest expense of approximately 1% of sales, and diluted weighted average shares outstanding of 54 million. As mentioned during the second quarter, we updated our estimated full-year tax rate based on applicable jurisdictional release, which reduce our full year expected tax rate from 26% to 22.9%, which results in a mathematical lift to EPS from applications at lower rate.
In summary, we expect our pace of innovation and investments in our product portfolio will continue to drive growth and lasting value across our end markets. We are pleased with our Q2 results across the board, which were in line with our internal expectations. We are still expecting a sales ramp in second half of the year. We also still expect that our margins and free cash flow will be compressed relative to historical norms during our plant expansion before gradually increasing once expansion is complete. I look forward to updating you on our progress.
With that, I’ll open the line for your questions. Operator?
[Operator Instructions] Alright. Your first question comes from Susan Anderson, Canaccord Genuity. Susan, please go ahead.
Hi, good evening. Nice job on the quarter. I was wondering if you could talk about the – I think it was 400 basis points or 500 basis points of margin, gross margin expansion longer-term, which would get you to that high-50% range. I guess, I don’t know if you could bucket maybe just kind of the drivers to get you there.
Hi, Susan. This is Saloni here.
Hi.
Hi. So happy to walk through that. A lot of it is coming from efficiency gains. As we anticipate growing, we are going to double our production capacity. We will go up to $750 million in revenue. So what has happened is this year because of some capacity constraints, we have had to do co-manufacturing and going forward, we expect the benefit of that, that will help us significantly and it will be an immediate benefit in the next 2 years. Beyond that, it would be labor and overheads.
So, our lease accounting, the new standards that are in place make us amortized rent evenly over the course of next – the time period of the lease. However, as we ramp up capacity, the absorption in that works differently and our cost of production will come down significantly. And then from a capacity perspective, our labor costs, while we will be looking to ramp it up slowly, however, full utilization by year 4 will lead to much better overhead absorption. There is some level of product mix in this, but majority of this would come through efficiencies in volume, scale and some level of product mix benefits.
Okay. Great.
Susan, you’re referring to the margin in this quarter, right, not the long – or the long term?
No, longer-term, yes.
Okay. Fine. Yes.
Yes. Correct. Yes.
Okay. Good.
Yes. That was really helpful. And then if I could just add one more, I think the growth in subscriptions, it looks like it did accelerate a bit above 60% now. Maybe if you can just talk about what you think the drivers were in that acceleration?
Yes. I think again, it just that – go ahead. You want to go?
No, I think, Susan, what we have done this year is we have consistently invested in the brand and communicating the benefits that’s behind the signs and the quality of our products. Last year in H2, we were not looking to spend as much. And this year, we, as one of the big reasons is we have increased our marketing forecast for this year. Originally, it was around 13% to 15%. Now we are looking at 14% to 15% because we do want to invest in consumer education. So, one of the biggest drivers is the consistent investment across all channels. It’s not just in on Thorne.com, but even on Amazon and targeting digital marketing for our HCP professionals has definitely helped communicate the message across all channels.
Great. That’s really great. Thank you so much, guys. Good luck for the rest of the year.
Thank you.
[Operator Instructions] Your next question comes from Elizabeth Anderson, Evercore. Elizabeth, please go ahead.
Hi. This is Patrick on for Elizabeth. Congrats on the quarter, guys. Are there any changes or new macro developments we should be considering for the remainder of the year besides those mentioned, whether it be Russia-Ukraine, those impacts extending or anything else high level? Thanks.
Yes. I don’t think so. Everything for us right now is more on a micro basis. So, we’re focused on a lot of new product launches, both device and product that will be coming out later on this year, but we’re not particularly concerned about the macro stuff right now. We’ve already taken the hit and don’t see the Russian-Ukraine situation turning around positively.
Got it. Thank you.
Ladies and gentlemen, that concludes today’s call. Thank you all for joining, and you may now disconnect.