Welcome to the Trupanion Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Bainbridge, Investor Relations. Thank you. You may begin. Good afternoon, welcome to Trupanion's Q1 2023 financial results conference call. Participating on today's call are Darryl Rawlings, Chief Executive Officer, Margi Tooth, President, and Drew Wolff, 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 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, 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 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, and not a 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. Thanks, Laura. Two years ago, we kicked off our 60-month plan. We are now 28 months in and on track to achieve many of the goals we've set. Since that time, we've grown revenue to above 30% annually, increased our adjusted operating income by nearly 50%, and acquired over half a million new subscription pets at a strong estimated internal rate of return. The number of active hospitals in North America now approximates 16,000. We're paying nearly half of veterinary invoices through our software, and retention rates remain strong. We're seeing consistent levels of conversion and strong growth in pet owners referring friends and adding pets. We've also added new brands and new channels and have laid the foundation to double our addressable market, extending our runway for growth by decades. I provided more detail around these highlights in my annual shareholder letter published in March. The core of our business model is to earn the trust of veterinarians and pet owners. We do this by providing a solution to the rising cost of veterinary care, making it easier for pet owners to budget for their pet's care over their lifetime. Over the long term, the underlying need and demand for high-quality insurance will continue to grow. Last year, the cost of veterinary care increased at an unprecedented rate, with veterinarians raising prices multiple times throughout the year. As expected, we saw veterinarians take additional price early this year, and it is our belief that the long-term sustainability of the veterinary industry will require veterinarians to pass on higher fees in the form of inflation for the years to come. Keep in mind that the cost of veterinary care for Trupanion is a combination of the number of veterinary invoices received and the increase in our average invoice size. As one can imagine, these ongoing rapid rate increases will prove more challenging to uninsured pets compared to those with insurance. As a result, veterinarians and their staff will have greater urgency when introducing the concept of high-quality insurance or answering questions from inquiring pet owners. Long term, the category and Trupanion are set up very well to meet this demand. Importantly, we do not and will not dictate the cost of veterinary care. We are a cost plus model. It is our job to understand the trends in the cost of care and to share the risk appropriately through a granular approach to pricing. Because our product is for the life of the pet, we do not try to predict the cost five, 10, and 15 years out. We simply monitor the cost, the year-over-year inflation, and project out the next 12 to 18 months. In my shareholder letter, I detailed some of the temporary and near-term challenges we faced in accurately forecasting veterinary costs throughout the course of 2022. Namely, the ongoing impacts of COVID and the post-pandemic veterinary staffing challenges, the increase in the deployment of our software, the change in our mix of business, and the rapid and unprecedented rates of inflation. In total, we estimated our cost of veterinary care increased by 12% in 2022, twice that of our historical rate of veterinary inflation over our 23-year history. Entering 2023, it was our expectations that the cost of veterinary care for our members would persist at the elevated rate of 12% and that our pricing plans would be sufficient to get us back on track to our adjusted operating margin target by year-end. In Q1, we saw our actual cost of veterinary invoices increase by 15% year-over-year, ahead of our previous assumptions. Within our cost-plus model, this means we need to add an additional 3% in pricing to get us back on track with our margin targets. At our revenue run rate, this has a $30 million impact on our adjusted operating income for the year. We've updated our adjusted operating income outlook to account for this step-up in veterinary inflation to 15% year-over-year. Drew will provide more details momentarily. Rapid changes in inflation will continue to challenge our ability to price accurately for our members. Unlike other direct-to-consumer subscription models, within the insurance industry, we are limited in how quickly we can adjust and implement pricing. Typically, in the U.S., it will take us 18 months in order to file for, receive approval, and implement new pricing across the entirety of our book. Over this time period, our members will, on average, receive a higher than usual value proposition. In a world where veterinarian and members come first, this is an okay outcome. Over the long haul, well-managed insurance providers sticking to their values and diligently growing when and where it's prudent come out stronger in the years following a period of margin compression. Between then and now, the team is energized and working hard to restore our margins as soon as practical. I'm gonna hand the call over to Drew to discuss our Q1 results and outlook in greater detail. Margi will then provide more context around our performance and our plans to hit our key financial targets. Thanks, Darryl. Good afternoon, everyone. Today, I will share additional details around our Q1 performance, as well as provide our outlook for the Q2 and full year of 2023. Total revenue for the quarter was $256.3 million, up 24% year-over-year, ahead of our expectations. Revenue performance was driven primarily by strong pet additions and sustained high levels of monthly retention in our subscription business and continued growth in our other business. Within our subscription business, revenue was $165.2 million in the quarter, up 18% year-over-year. On a constant currency basis, subscription revenue would have been up 20% year-over-year or $167.2 million. Total subscription pets increased 23% year-over-year to over 906,000 pets as of March 31st. Calculated on a trailing 12-month basis, our average monthly retention across all our North American subscription products was 98.65% compared to 98.75% in the prior year period, equating to an average life of 74 months. Monthly average revenue per pet for the quarter was $63.58, which was largely flat year-over-year on a constant currency basis. On that same basis, cost of veterinary invoices per pet increased 9.5% over the same time period. This increase per pet is attributable to both an increase in the number of veterinary invoices received as well as a higher average invoice size. Using insights from Q1 data, we also increased the size of our reserve for veterinary invoices by $1.2 million for prior periods, primarily Q4. As a percentage of subscription revenue, variable expenses were 10.1%, up 10 basis points from the prior year period. This slight year-over-year increase reflects investments in maintaining our member experience and initiatives shifting out of development. Fixed expenses as a percentage of subscription revenue were 4.7%, down from 4.9% in the prior year period as the team continued to drive efficiencies throughout our business to offset our elevated loss ratio. After the cost of paying veterinary invoices, variable expenses, and fixed expenses, we calculate our adjusted operating income. Our subscription business delivered adjusted operating income of $12.6 million or 7.6% of subscription revenue. As Daryl noted, veterinary invoice expense outpaced our expectations in the quarter. Now I'll turn to our other business segment, which is comprised of revenue from other products and services that generally have a B2B component and a different margin profile than our subscription business. In total, our other business revenue was $91.1 million for the quarter, an increase of 37.7% year-over-year due to primarily to an increase in pets enrolled. As discussed last quarter, we anticipate slowing growth throughout the year in our other business segment as our partner transitions to an additional underwriter for their new pets. Adjusted operating income for the segment was $2.9 million in the quarter. In total, adjusted operating income was $15.5 million in Q1, a decrease of 28% over the prior year period. During the quarter, we deployed $19.6 million to acquire over 74,000 new subscription pets. For North America, this resulted in a pet acquisition cost of $247 for the quarter and an estimated 30% Internal Rate of Return for a single average pet. We also invested $0.9 million in the quarter on development costs. As a percentage of revenue, development expenses was 35 basis points compared to 61 basis points in the prior-year period. This step-down reflects the shift of some of our new initiatives to variable, fixed, and pet acquisition expenses within our subscription business. Adjusted EBITDA was a loss of $4.9 million for the quarter as compared to $1.2 million in the prior-year period. Depreciation and amortization was $3.2 million during the quarter, an increase of $0.5 million from the prior-year period. Total stock-based compensation expense was $12.3 million during the quarter, inclusive of compensatory arrangements for departing officers. We expect stock-based compensation to be around $7 million per quarter for the remainder of the year. As a result, net loss was $24.8 million or a loss of $0.60 per basic and diluted share, compared to a net loss of $8.9 million or a loss of $0.22 per basic and diluted share in the prior year period. Turning to our balance sheet, we ended the quarter with over $253 million in cash investments, which was up from around $230 million at year-end last year. We held approximately $104 million in debt with $40 million available under our long-term credit facility. In terms of cash flow, operating cash flow was negative $6.9 million in the quarter, compared to negative $3.6 million in the prior year period. Capital expenditures totaled $5.2 million in the quarter. As a result, free cash flow was a negative $12 million. I will now turn to our outlook. For the full year of 2023, after adjusting for Q1 performance and updating our forecast, we are expecting to grow revenue in the range of $1,047 million-$1,076 million, representing 17% growth at the midpoint. This reflects Q1 outperformance in our other business segment. We continue to expect to grow subscription revenue in the range of $700 million-$720 million. This is 19% year-over-year growth at the midpoint. We now expect total adjusted operating income to be in the range of $65 million-$80 million. This is largely reflective of the cost of veterinary invoices outpacing our earlier expectations, as Darryl discussed. At the midpoint of the range, this implies expansion in adjusted operating margin in the second half of the year as our pricing actions flow more meaningfully through our book of business. For the Q2 of 2023, total revenue is expected to be in the range of $260 million-$264 million, representing 19% year-over-year growth at the midpoint. Subscription revenue is expected to be in the range of $171 million-$172 million, or 18% year-over-year growth at the midpoint. Total adjusted operating income is expected to be in the range of $14 million-$17 million. As a reminder, our revenue projections are subject to conversion rate movements predominantly between the U.S. and Canadian currencies. For the Q2 and full year 2023 guidance, we used a 74% conversion rate in our projections, which was the approximate rate at the end of March. Before handing the call over to Margi, as this will be my last earnings call at Trupanion, I wanted to take a moment to express what an honor it has been to work together with the team. I am grateful to have had the chance to be a part of this incredible mission, and I look forward to continuing to work with the team to help recruit my successor and ensure a seamless transition. Thank you for your time today. I will now hand the call over to Margi. Thank you, Drew. Good afternoon, everyone. Following the recap of the quarter, I'll provide more context for our Q1 results and our plans to deliver against our key financial targets. It was another quarter of strong pet growth for Trupanion. We acquired over 74,000 new subscription pets, including 4,000 new pets from Europe. While the Trupanion product remains the primary engine behind our reportable performance, we're excited that our new initiatives, including international markets, are starting to positively impact our growth. Excluding European activity, on a per pet basis, we enrolled 18% more subscription pets at an average cost of $247, which is $54 less than the prior-year period. I'm encouraged by the overall efficiency of our spend, which was especially impressive given the margin headwinds faced throughout the quarter. Growth within our core Trupanion product remained robust, led once again by the vet channel. We also continued to see strong growth from our members referring their friends and adding pets to their family. Member retention for the quarter remained at healthy levels and on a trailing 12-month basis, the average Trupanion pet stayed with us for 75 months. With necessary pricing continuing to roll through our book, we're doubling down on our approach to communicate our value proposition and to deliver on our pricing promise. I remain encouraged by our ability so far to sustain high levels of retention within our Trupanion product, do expect to see some pressure throughout the year as pricing rolls through our total book. That said, our expected ARPU increases should more than offset any revenue impact from this pressure. After several quarters of foundational work, we're finally seeing price take effect. As a reminder, in January, we had 11.2% pricing approved and flowing through the business. In February, it was 13.1%, and in March it was 14.4%. We expect to exit April at 15.8%, May with 16%, and June at 17.4% approved and flowing through. We also have an additional 6% filed for which, if successful, would equate to 23% pricing action flowing through by the end of 2023. This additional pricing action is reflective of the step-up in veterinary invoice expense we saw in Q1, as well as some additional proactive pricing actions. As a reminder, pricing changes are applied immediately to new pets, but flow through our existing book over a 12 to 18-month period, depending on state approval timing. For this reason, and accounting for the ongoing impact of mix of business, we do not expect to get the full benefit of this pricing action in ARPU. We will continue to take a proactive stance to get ahead of future increases in the cost of veterinary care to return to our margin targets as soon as feasible. Between then and now, the team will remain disciplined in acquiring pets where we're accurately priced to our value proposition, allocating capital to our most efficient channels, and operating well within our variable and fixed cost structure. Far this year, the team has worked well to improve our operational efficiency during the quarter, despite the additional 50 basis points of expense shifting out of development. The team executed well to hold combined variable and fixed expense margins in line year-over-year. A few weeks ago, we took important steps to reorganize the way our teams are structured. This decentralized approach, moving from one to multiple P&L, was a core component of our 60-month plan and is expected to provide us with greater visibility into our data, allowing us to identify emerging trends more quickly and set us up to act with greater speed and precision. We further expect these changes to strengthen our data collection and inspection process, improve our level of forecasting, build on our regulator relationships, and file for and approve our pricing needs much closer to real-time. Already, this approach is providing us with greater insights, reporting, and decision-making. As Drew noted, with recent in-depth analysis of our data, we increased our reserves for prior and current periods by approximately $4 million. We will continue to build on this in the coming months, applying more refined approaches to both pricing and growth. In the year ahead, we expect solid growth in subscription pets and revenue, with the bulk of this growth to come from categories we're achieving our target loss ratio of 71%. Conversely, categories where we're yet to achieve the necessary rate adjustments will have pace of growth slowed or paused until we can confidently offer a value proposition consistent with our brand and our pricing promise. I'll echo Daryl's earlier remarks that we have no intention of trying to control the cost of veterinary care. We will maintain our cost-plus approach that is especially challenging in the current environment, where vet inflation has increased at times and in amounts that we haven't seen in the past 20 years. We have and always will target the highest sustainable value proposition in the industry, which drives higher retention, high lifetime value, and greater alignment with veterinarians. We are confident we'll come out of this inflationary period stronger than we entered it. Today's operating environment is not without its challenges. It also greatly reinforces the need that Trupanion serves in the market, helping pet parents to budget and care for their pet if they become sick or injured. This need has and will only continue to grow in the years ahead. As I look at our business long term, I couldn't be more excited. As further detailed in our recent shareholder letter, the cost of veterinary care is going to continue to escalate at rates higher than ordinary inflation. Self-insurance, our biggest competitor, is under pressure with the cost of caring for unexpected accidents and illnesses outpacing pet owner savings accounts. Our international expansion is doubling our addressable market, both in the number of pets and the veterinarians we can help. The moats we have been building for decades, along with the values that we live by, continue to resonate with our constituents. Our target customer, the loving and responsible pet parent, continues to strengthen the bond with their four-legged family members. We do what we can for our pets. They're part of our family. Before I hand it back over to Darryl, I want to take a moment to recognize Drew and to thank him for his time with Trupanion. Drew is a man of great character and is well respected by the finance team. We thank him for his assistance in ensuring a smooth transition in finance leadership, including handing the reins over to Wei Li, who will step into the role of interim CFO on June first. We are in the process of conducting a comprehensive search for a permanent CFO. In the meantime, Daryl and I have the utmost confidence in Wei and his ability to lead the finance team until a permanent replacement is named. Thank you again, Drew. With that, I'll hand the call back over to Daryl. Daryl? Thanks, Margi. At Trupanion, we value trust and transparency. These values form the basis of our interactions with all stakeholders, including pet owners, veterinarians and their staff, state regulators, team members, and you, our shareholders. We value the trust you have placed in us and recognize the importance of delivering on our promises. With this in mind, we invite you to join us for our two upcoming investor-focused events. This weekend, Margi and I will be hosting our annual Q&A following Berkshire Hathaway's annual shareholder meeting in Omaha. This is a great forum to connect with long-term, like-minded investors. On June 7th, we will host our annual shareholders meeting at our headquarters in Seattle. This once-a-year event is your opportunity to hear directly from the team members leading the execution of our 60-month plan in an open Q&A forum. We hope to see you there. More details, including registration, are included on our investor relations website. With that, we'll open it up for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from John Barnidge with Piper Sandler. Please proceed with your question. Good afternoon. Thank you for the opportunity. Can you talk about the decline in retention experience in the quarter? Is there any signs that insureds are shifting to lower-priced products in the face of pricing increases, not just at Trupanion, but industry-wide? Yeah, sure. Hi, John. It's Margi. In terms of retention overall, we saw a strong performance. I mean, if we're thinking, you know, we've now flowed through at the end of Q1, 14.4, close to 15% worth of rate, we saw a very minor adjustment in our core book of business. We saw a 74 months average retention for the core Trupanion subscription book. We feel very encouraged by that. We now got additional rate flowing through in April, we haven't seen further signs of that lowering. I think overall, given the rate, and we've talked about anticipating a slight adjustment to retention based on this increase in ARPU, we're not seeing that any degradation to degree that would offset the ARPU increase that we have there. Yeah, I don't think we really have any visibility on the category as a whole, but I can say that the category as a whole is taking large rate increases. Thank you. As a follow-up, you talked about the other partner migrating to a new underwriter. Do you have any update on timing of that or the capital in that other business? Thank you. Sure. This is Drew. To reiterate, this is something we've been working on for many years, transitioning Pets Best. I think our, you know, calls go back to 2019. We're really happy with how that came out. We, what we agreed was that they would transition, or they would add a new underwriter. They can continue to underwrite business with us. We have more line of sight to that, and that's why we're raising revenues. you know, we continue to think, they'll have some business with us, and that's kind of updated in our outlook. it does, you know, free up significant amount of capital, for us. We lock in the book that they have with us for three years. The new business that stays with us, is at a higher margin. Overall, we're really positive, and reflecting our guidance is an update on how that transition will look. Thanks for the answers. Our next question comes from Maria Ripps with Canaccord. Please proceed with your question. Great. Thanks so much for taking my questions. I wanted to go back to the reasons you sort of outlined in your shareholder letter in terms of why your loss ratio has been impacted in the near term, including higher than expected frequency, the ongoing mix shift in the business, and sort of more claims being processed through your software. While changes in frequency coming out of COVID kind of seem to be one time in nature, could you maybe talk about whether you're making any adjustments in terms of pricing strategy and framework sort of to enable you to manage these factors going forward? Yeah, sure. Hi, Maria. Just sort of taking that piece by piece to provide more context. In terms of frequency, you're right. Kind of COVID was the one time impact on our business we hadn't seen before. Really, pets don't get sick any more or less kind of during a period of time. What we noticed with our frequency is the impact of software really influences the arrival patterns of invoices. In terms of where we are right now and kind of the mix shift, when we take price, we take price in a period, and it takes 12 months for that to roll through. At the moment, as I walked through in the earlier remarks, by the end of Q1, we're at 14.4% that was rolling through in terms of ARPU. We will be at the end of this year at 23%. That's staggered through the year, which is an average of 18%. When that, what happens with the mix of business that we see, if you have an average increase of 18%, there are a couple of things that happen with that. The first being you have a buy down. Typically what that is, someone will get their increase, and they will call us, a member will contact us, and they'll ask, can I hold what I'm paying on a monthly basis, which means I may adjust my deductible? The team will work through that with them. We lose about 2% of that 18. Beyond that, you have a mix shift with, which is about 10%. That mix shift relates to products for specific distribution strategies, geographies. If you think about international business, that's also gonna start to play into that as well. As we manage that moving forward, what we're doing is we're making sure that we are pricing appropriately by geography, by category to ensure we can hit that 71. What that means is you're gonna see a more frequent number of filings with the regulators to ensure we can stay on top of that and monitor that curve, that pricing increase that we see coming through. We have an operating assumption right now that we will see a 15% event inflation year-over-year for the coming years. With that operating assumption, we are required to make sure we are on top of that data, reviewing that data. We're looking at it in different ways than we've looked at it previously, which will allow us to get ahead of those changes and make sure that we are having constant adjustments to stay at the 71% level in terms of our loss ratio. Did that answer some of your questions there or something I can touch on more? No, that's very helpful. Thank you very much. Secondly, sort of given your lower OI guidance, where do you expect your sort of margin by the end of this year? Any thoughts on when you think you may return to 15% margin for your core subscription business? If our working assumption is 15% net inflation year-over-year in 2023, 2024, and 2025. If the rate of inflation is flat at that level, it takes us 12-18 months to reprice. With that assumption, you know, we're looking 12-18 months to get back to our original, you know, to our target. Got it. That's very helpful. Thank you both. Our next question comes from Josh Shanker with Bank of America. Please proceed with your question. Yes. Thank you. If we go back in time about one year ago to June at the Investor Day, that definitely first acknowledged that you saw inflation above expectations in the numbers. It would've come a bit in the Q2 numbers. Certainly around the country, there was a lot of inflation. It would've been really present in the back half of the year. The rate actions you were taking really didn't have any impact in the back half of the year. They're really starting to come through now. Why are we seeing the spike in the loss ratio now? In retrospect, it looks like things were really well managed in the back half of the year, given there was a lot of inflation and not a lot of rate. Now you're getting the rate through and the loss ratio is going up. Why is it happening in Q1, and then we didn't see it in the back half of 2022? Right. Yep. The back half of 2022, what happened in 2022, just to take a little bit of a step back, 'cause you're right. When we first acknowledged there was some inflationary pressures and the business decided to recognize that in the data, that was the midpoint of 2022. The inflation really kicked off at the back end of Q1. What we saw in 2022 was a series of inflationary periods that we had never seen before. Typically, on average, you'll see a 6% inflation. We saw inflation come through in March. We saw it three months later and again and again. Those four stages of high inflation started to put pressure through the book. You're right. We reacted quickly. The team increased the number of filings we were putting through. We got the rate approval, and to the point, we get one month at a time. It takes a good period to really start to impact. We started to see that rate at a volume in Q1, coming into this year. In Q1 also, as we were pricing our strategy in 2022, we were anticipating a 12% increase in vet inflation. That went up another 300 basis points to 15, and we were still playing catch up from 2022. Our rates, as we file it, you need to look forward somewhere between 12 to 18 months before that impacts the book of business. You've got the compounding impact of 2022 and 2023. What you see now is the catch up, which we're doing. We're now looking at our rates for 2024 today because we know it's gonna take us time to catch up on that. The biggest shift in Q1 was acknowledging the fact that we thought we were seeing it from a 12% assumed in veterinary inflation to 15%. Then the reserves adjusted because we saw the higher rates. We saw our actuarial team could see the inflation coming through, and our software and arrival pattern of that claim meant that our reserve rate reflected that, which is where that loss ratio really came in because we're expecting 12% and we got 15%. You know, I think now looking forward, confident that the changes we've seen in both the rates we're taking, the rates that are taking action, how they're affecting our book, and the ongoing increases we see that April is looking strong. We're not seeing anything that is surprising to us in April right now with the data analysis we're doing. You know, we fully expect to maintain that same rhythm with the filings, making sure we're staying on top of those so we can, we can bring it back to margin expansion through the back end of this year and into 2024. Earlier you said that your working assumption, which may prove to be better than turns out, is that inflation of, you know, this 12%-15% inflation will continue in 2023, 2024, 2025, and you'll price for it. At that level of inflation, the lifetime value of the pets is lower than it was going into this period of time, yet you continue to grow at a very strong rate. Is there in your assumption of the lifetime value that it improves at some time and you're willing to acquire pets at lower than the 30% IRR because you'll eventually get the pricing right? I guess is $541 or $547, is that the working assumption you're working with when you decide, yes, let's go ahead and acquire the new pets? Yeah. It's a great point. The way that we've tried to be transparent about our lifetime value is taking a look at the previous 12 months rolling adjusted operating income, which is based on the margin, and multiplying it by the ARPU and the number of months to create the lifetime value. The margins that we are receiving today, that we expect that we'll see in the next six months and the back, you know, the previous six months, are much lower than we would anticipate over the entire life of a pet. We are staying within, you know, staying very focused on getting strong Internal Rates of Return. We've always had very historically, our margins have been very consistent, vet inflation has been, and that methodology has been very prudent in the past. It is important that we say, in the future, what do we think is the best estimate for a lifetime value of a pet? Our previous calculation would underestimate it, or methodology to estimate it would. All right. Thank you for the answers. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Katie Sakys of Autonomous Research. Please proceed with your question. Hi. Thank you. Good afternoon. My first question has to do with ARPU. You talked about having about 15 points of rate flowing through in the Q1, average revenue per pet really hasn't moved all that much. I'm wondering why that is and if there's something that's offsetting that metric. Yeah, sure. Hi, Katie. I'll kick this off and hand over to Drew to add further context as well. Just at the highest level, if we look at this year, and you're right, we've got, by the end of this year, for example, we'll have close to 23% flowing through the book. That would hit at the end of December. If you look at that full year for 2023, that means an average increase of 18%, 2% would be offset by people that are changing their deductible to take it a little bit higher to get their monthly cost either the same or a little bit lower. That takes it to 16. You have that 10% mix. The mix is the bigger chunk. It takes that 16 down to six. What's included in mix is not only new geographies, so penetrating new geographies that we have not been in before. We're also seeing a new distribution product. The products that we've been working on as part of our 60-month plan are coming into the market. They themselves have a very different ARPU profile. When you put them all together, you see that downward ARPU, ultimately, that's where the ARPU ends up. The 18 transfers itself to six by the end of the year. We think about how that kind of manifests itself. That's why we're trying to work hard to ensure we get our prices through on a consistent basis, on a rolling basis. There is absolutely a difference between the filed and the realized. Drew, do you wanna talk a little bit about more at the end of the year? Sure. I mean, adjusting for that rate flow view, you know, for that positive mix, just pulling it into the financial view, which we've talked about in the past, translating this to what you'll see for the full year. Consistent with what we said in February, and really the rates we've been talking about are consistent back to November, and we just updated our mix assumptions. You'd see, you know, an average of about 3.5% for the full year, constant currency. Obviously that builds through the year. You know, starting from where we are today, you can kind of figure out what that would be for Q4, but it builds throughout the year. Right. Okay. Thank you. Then, my second question is regarding your operating margin outlook. What's driving management's view that that starts to improve in the H2 of the year? It kinda seems to imply that there's going to be a sub 73% invoice expense ratio. I was wondering if there's any other color you can provide there. The main thing for us, Katie, is that we entered the year assuming a 12% year-over-year increase in our cost of goods. If you go back to Q2 of 2022, on our earnings call, I said we expected and hoped that the veterinarians would increase their rates 10%-15% for the next three-four years. In 2022, we saw a 12% increase, and we thought that was the prudent and appropriate assumption going into 15. What gives us greater confidence today than we even had 45 days ago is, as we analyze our data, we are seeing a consistency in our data with our new analysis, as well as looking at additional third-party sources like the AVMA. If the assumption holds true that it's 15%, we know the rate that's flowing through our book, we'll start to get margin expansion. Thank you. Our next question comes from Jon Block with Stifel. Please proceed with your question. Thanks, guys. Good afternoon. Darryl, the first one is just sort of strategic. The, the 60-month plan is a, you know, a lot of interesting initiatives. You've got international, you've got new plans and food and other channels, but the core business has a lot going on, right? I mean, there's inflation. You're trying to move off Pets Best. You've got a lot of management turnover, and it just seems from the outside that it's really a business that's in flux. Is this the right time to pursue all these initiatives, or do you take a step back, you know, arguably get the house in order and then pursue everything else, everything else in 12, 18, 24 months' time? John, I think the to put in context, this rapid change in inflation, you know, I've been in the business for 23 years. If you go back to 40 or 50 years, veterinarian inflation has never had such a rapid change. That is a single challenge that is primarily focused on a pricing team. We are now also making sure that the information we're getting from additional data sources, including the field, help us along with that. That's a core consistent challenge that we have been dealing with for 20 years, how to price more accurately by breed, by neighborhood. It's a core competency. What's changed right now is just the rate of inflation. As we've said, if that remains consistent at 15% for the next three years, which would be great for the veterinary industry, that will be much easier for us to price to. It's just a rapid change. I mean, it takes us 12-18 months, 18 months in the United States to get pricing right through the book. If you look at our cost of goods, the change of inflation in the last 18 months, it's gone from 6% consistent to 15%. I think anybody can understand that with our business model that's gonna be a challenge. If I can add to that as well. I think kind of as we think about the 60-month plan in general, our 60-month plan is designed to set us up for the long term, and this is a business for the long term. We have a hugely under-penetrated market, both here in the United States, in Canada, and across globally. We believe that we can take our product globally where no other brand or no other product has been able to take it to help more pets, to support more veterinarians. For us doing this today, we have decentralized our business to allow us to do these things without interruption to the core business. To Darryl's point, while we're seeing this as a once in a 20-year move, we remain incredibly confident about the plan for the long term to be able to add this addressable market and double the addressable market that we have globally and be able to have a lot of leverage across the international space. Just kind of on that, to touch on that a little bit, we weren't able to talk a lot about it earlier in the opening remarks, but we're making really good progress internationally. We've added around 4,000 new pets, so incredibly good growth in those markets. In Q1, we're able to add Belgium. This in itself again is kind of really taking those baby steps that help us to build for the longer term. Okay. Thank you. That was a great color. Maybe the next question I might try to slip in two. The first, maybe I'll ask Drew a question in on his last call. The balance sheet, I think I heard $40 million in draw with the debt. The free cash flow, I believe, was negative $12 million alone this quarter. Is there an estimate for cash burn for the rest of this year? How should we think about the balance sheet? Is there a potential raise as, you know, we exit 2023 into 2024? The part B of this disjointed question is, you know, last quarter, I asked a question on California and regs there, and you mentioned working with Pets Best. I guess I'm confused because as of recently, Pets Best has not been able to underwrite in California until they get a new underwriter. It just looks, you know, seems unusual to me that there was a cohesive handoff if they can't underwrite in the biggest state. Were there actually, you know, stipulations from a regulatory standpoint that you had to stop underwriting that as of the end of March of 2023? Thanks for your time, guys. Sure. The draw in the quarter was $35 million. That was our long-agreed, you know, draw plan with our lenders because this delay draw facility is only open for a certain amount of time. As I said in the remarks, we've got $253 million in cash and investments on the balance sheet. That's up from $230 at year-end. We have been pretty clear about the strategic nature of this Pets Best agreement and how much capital that frees up. In fact, in Darryl's 2022 shareholder letter, he starts to put, you know, some quantum behind that. He also wrote it out in 2021. Embedded in our outlook is, you know, operating within our current funding, which we have a strong history of doing for most of our lifespan. On California, we talked about this in the November call, that there is this Proposition 103 stipulation that applies to every insurance company, not just Trupanion. It was holding up our pricing increases that we needed. We agreed with them and Pets Best that Pets Best would find a new underwriter in California. This, this is all, you know, we've been talking to Pets Best about this well before this, so this just actually worked out nicely. I can't speak to operationally why, you know, that, you know, they weren't able to make that transition, but that was agreed, you know, back in the fall. Okay. I'll follow up with you guys offline. Appreciate the time. We have reached the end of our question and answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.