Thorne HealthTech, Inc. (NASDAQ:THRN) Q3 2022 Earnings Conference Call November 10, 2022 8:00 AM ET
Company Participants
Thomas Wilson – Vice President, Investor Relations
Paul Jacobson – Chief Executive Officer
Bryan Conley – Chief Financial Officer
Michelle Crow – Chief Marketing Officer
Conference Call Participants
Elizabeth Anderson – Evercore
Sean Dodge – RBC Capital Markets
Max Rakhlenko – Cowen and Co.
Operator
Welcome to the Thorne HealthTech Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Thank you.
Now, let me turn the call over to Thomas Wilson, Vice President of Investor Relations. So, Thomas you may begin.
Thomas Wilson
Good morning, everyone. Thank you for joining Thorne HealthTech’s Third Quarter 2022 Earnings Call. With me today to share our results are Paul Jacobson, our CEO; and Bryan Conley, our CFO. Tom McKenna, our COO; and Michelle Crow, our CMO are also available for questions.
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 2021 Annual Report on Form 10-K, and our upcoming Form 10-Q, which we anticipate filing after market today and in other SEC filings.
Today in addition with US 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 closed yesterday and in the supplemental investor presentation posted to our IR website.
Finally, in three weeks, we will be participating in the Evercore ISI HealthCONx Conference and holding investor meetings. A webcast of the event will be accessible on our IR site, and we look forward to meeting with you.
With that, I’ll turn the call over to Paul.
Paul Jacobson
Thank you, Thomas. Good morning, everyone. Thank you for joining our third quarter earnings call today. I’ll summarize our strong financial performance for Q3, with record sales and strong profitability discuss how our consumers are holding up in the current environment, step through a handful of recent developments and opportunities on the testing and R&D sides of our business, and round out my prepared remarks with our outlook to close out 2022. Bryan will provide further discussion of our Q3 performance and capital deployment in his prepared remarks. Lastly, additional details can be found in the earnings release and supplemental investor presentation that we issued after the market closed yesterday.
With that, let’s dive in. During Q3, we remain focused on a few core areas of our operations that drive strong performance for the business. These included ensuring seamless operations from ingredient sourcing to distribution, an area where we are beginning to see certain supply chain improvements continuing to deliver the highest quality products, innovations and thoughtful engaging content to our customers in support of their health journeys, and our cutting-edge health tests and remote sample collection capabilities, which significantly improve user experiences over current industry norms, and are presenting significant business development opportunities in multiple fields of health and wellness.
We are also preparing to further scale the supplement business as we move closer to expanding manufacturing and fulfillment, to support continued growth, and anticipated future demand. With the expansion, we will be able to drive increased efficiencies for better margins and industry-leading turnaround times.
On the demand front, let me take a moment to highlight a few trends we’re seeing relative to customer strength and behavior in this market, which contributed to our strong Q3 results and helped inform our updated full-year outlook. In addition, while we do not normally refer to business performance on a sequential quarter basis, I’ll provide some color through that lens given the challenging nature of the current economic backdrop. Thus far, Thorne customers continue to be resilient.
Our total number of customers and active subscriptions continues to climb. Our unit economics such as typical order size and order value are up Q3 year-over-year. Unit economics also held firm from Q2 to Q3 and remained solid through October. We’ve experienced increased demand for our products containing ingredients that have been relatively more impacted by global supply chain disruptions such as certain Bulk powders like creatine, where we forward bought a large quantity of the global supply and lower margins in order to be able to serve our customers ahead of anticipated shortages.
While we continue to see strength in our typical high-end consumer we do not expect to be insulated from economic conditions that will impact certain pockets of our consumer base as we progress through Q4 and into next year. That said, we are generally encouraged by recent trends holistically and the early implications for 2023.
Now with consumer health backdrop in mind, I’ll transition to some of the financial highlights for Q3. Starting with the top line, I’m pleased with our record net sales of $58.4 million, representing growth of more than 21% for the quarter.
Sales performance was driven by 47% growth in our direct-to-consumer channel, primarily from continued traction growing brand awareness including from our Healthy Aging brand campaign, which occurred during the second quarter of this year.
Our growth was broad-based across third-party marketplaces and Thorne.com in line with our approach to meet customers where they are. The strong D2C performance was underpinned by 60% year-over-year growth in subscription sales, which increased to 37% of direct-to-consumer sales.
We experienced, a 41% year-over-year increase in transaction sales although, Q2 transaction sales dollars were greater than both Q1 and Q3, which we mainly attribute to heightened
transaction volumes stemming from the campaign running in Q2. Rounding up direct-to consumer channel growth drivers, we continue to achieve superior customer satisfaction stats that are significantly higher than the average digital retailer.
For the quarter, our Net Promoter Score was 72% compared to a retail average of around 35%. We also recorded an LTV to CAC ratio of 7.8, inclusive of the benefits of the Q2 campaign
spend that did not reoccur and therefore drove CAC down.
Turning to the professional and B2B channel. We continue to experience comparability challenges from the impacts of previously disclosed, lost distributor sales to its end customers in Ukraine, Russia and Eastern Europe. Despite the impact arising from that conflict, professional and B2B channel sales increased almost 6% over Q3 of last year driven primarily by a continuation of steady growth in professional sales led by the combination of our sales force efforts and continued growth in online dispensary sales.
As a percent of sales, direct-to-consumer channel sales and professional and B2B channel sales were 46% and 54% of total net sales, respectively. On a go-forward basis, we continue to expect our annual sales mix to be closer to 50-50 split from direct-to-consumer channel growth outpacing professional and B2B channel growth near-term.
With respect to gross margin, there are a couple of primary factors to unpack that drove margins down yearover-year. First, in the last two quarters we highlighted our advanced purchases of raw materials to mitigate against potential supply chain disruptions.
As a reminder, many but not all of our ingredient purchases are, governed by preexisting supplier agreements. However, to further ensure supply continuity amidst the current economic conditions, we proactively identified second procurement sources, which resulted in higher average material cost than historical norms. In Q3, those higher raw material costs flowed through our cost of sales line concurrent with our strong revenue growth driving gross margin down.
Second, many of the ingredients and products that have been the most impacted by global supply chain disruptions, have lower gross margin profiles such as creatine products and Bulk powders. Our second source pricing and margin levels have not been where we would prefer under long-term supply contracts, resulting in an unfavorable mix shift to margins. However, we are currently entering into agreements with these suppliers as needed.
This month for example, we entered into a new supply agreement for creatine, which will significantly reduce our per unit cost starting in 2023, after cycling through remaining higher cost inventory in Q4.
Moving down the P&L to operating expenses. R&D decreased slightly year-over-year to $1.8 million mainly from lower third-party spend, which can vary depending on in-flight research project activities. Marketing costs of $4.5 million decreased significantly to about 8% of sales in Q3 compared to 22% of sales in the prior year. That decrease was due to the combination of the change in timing and related costs of our major brand campaigns, which occurred in Q3 of last year compared to 2Q of this year.
And the decision we highlighted on our last earnings call, to prioritize delivering on our full-year profit goals and by extension reduce the level of full-year spend by deferring the follow-on marketing campaign originally planned for Q3 2022.
As expected the reduced external spend resulted in slower new customer growth. I would highlight, however, that excluding the quarters associated with these last two major campaigns, our marketing run rate has been about 10% to 11% of quarterly sales for the last two years, a level which has historically been effective in driving meaningful growth.
The deferral also provided some insights that allow us to deepen our understanding of consumer behavior in a challenging environment on a more organic basis and therefore helps us inform our go-forward strategies. I’ll provide directional commentary on our near-term marketing
approach in connection with our updated 2022, outlook shortly.
Moving along, SG&A increased by almost 36% year-over-year primarily due to continuation of increased selling costs from the combination of top line growth, a more normalized run rate public company cost pool including a full quarter of stock-based compensation in Q3, as we completed our IPO in September 2021.
Bryan, will provide more color in the individual components in selling, distribution, general and administrative expenses in his commentary, which will show favorability we are seeing as a percentage of sales on a trended basis.
Turning to profit from these results. Our adjusted EBITDA grew significantly to $8.3 million with expanded adjusted EBITDA margin of 14.6% for the quarter. Rounding out the bottom line, GAAP EPS grew to $0.07 and adjusted EPS grew to $0.12.
That wraps up my prepared remarks related to Q3. Before looking ahead to guidance, I’ll share a handful of, updates related to our health tests and blood sample collection technology with a few comments on our scientific teams’ brain health work. Starting with Gut Health after relaunching our proprietary test, which revolutionizes long-standing user experience to microbiome testing, our customers who take these tests are deep insights into their health have opted to use the new technology despite our ongoing support of the legacy test. This stack pattern is effectively in-market evidence of the user preferences we confirmed during the wide technology study.
As awareness of the importance of microbiome health grows, which it certainly is on a global stage, our first mover advantage and IP creates lasting competitive moats. The recent interest we’ve been getting from potential early B2B adopters, albeit still low volume from latency has expanded into broader discussions that put a spotlight on the level of science we deploy across the business. I believe these holistic business development opportunities that showcase our science and range of solutions, provide levers to drive a continuation of our above-market growth longer term.
We’ve also made great strides in bringing our OneDraw blood sample collection device to the consumer market. Our recent progress is positioning us well to capitalize on ample business development, monetization opportunities spanning from our own D2C ecosystem to decentralized clinical research in the near-term.
In August, we achieved a significant milestone upon receiving D2C medical device clearance from Japanese regulators. We believe that validation is significant to our upcoming work with the FDA to deploy a new product that will be accessible to anyone because of the high hurdles required by Japanese regulations.
As we push ahead to D2C clearance in the US, we have not slowed our efforts to expand OneDraw’s capabilities, which should lead to earlier and more significant new business once the device is in market. For example we’re continuing development of a serum separation cartridge to expand the range of device applications in addition to health panels related to conditions consumers can’t test for today. Working with a partner lab to improve DNA preservation and extraction, we identified a process that allows for cold, chainfree sample preservation that optimizes retrieval of DNA from the device’ sample strip. The results of which have been superior to our current methods.
With that I’ll turn to guidance. And as Bryan has a packed agenda and I want to leave plenty of time for your questions. As we look to the future, we continue to evaluate our marketing spend. We believe we have an opportunity next year to thoughtfully increase our investment to drive efficient new customer acquisition and support long-term brand equity.
In addition to further investing in a diversified paid media strategy, we will also strategically scale our influencer marketing efforts. Our goal is to take advantage of the broad community of differentiated customers to build deep personalization in content and use this network to build user generation — generated content cost effectively.
Performance data from 2022 has shown us that the inclusion of influencers in our marketing generates better returns for paid owned and earned tactics. Our more strategic approach to influencers starting in 2023 will be applied across the business including in more cutting-edge R&D areas, where influencers have not been deployed before such as our brain health platform. We also know that a personalized customer experience or helping the customer answer the question what do I take and why increases engagement and drives better conversion.
In 2022, customers that engaged with quizzes and help tests had a higher conversion rate and greater lifetime value. We will continue to prioritize our personalized customer experience by expanding our capabilities with dynamic web content scaling Thorne adviser and adding a more interactive approach for our customers with various key influencers. We’re building plans to move away from some of the more traditional marketing tactics, to deploying a more data science-driven approach to our community of customers and customer influencers.
We believe, we are positioning ourselves for continued significant profitable growth over the long-term, far above industry market rates, such as the 6.3% estimated CAGR for the global nutritional supplements market from 2022 to 2030 for a recent TAM study by Grand View Research.
With respect to our brain health initiatives, our scientific team continues to produce cutting-edge research and insights that could be transformative to how certain conditions are approached. For example, we received summary results from a placebo-controlled clinical trial conducted with Mayo Clinic. The objective of that trial was to measure the decline in cognitive processing speed and efficiency and whether there was a rise in protein indicative of injury even in the absence of concussion symptoms.
The trial participants were junior ice hockey players with that cohort having been selected due to the repetitive head impacts over the course of the season. The data which is embargoed at this time will be presented at an international conference on brain injury in early 2023 and the results will be published in a peer-reviewed journal around the same time.
Based on the study results, a similar study is about to launch in another category of ice hockey players. The work we have going on around brain health is front and center when we think about being the leading company in scientific wellness and healthy aging. Based on our year-to-date performance through October and aforementioned topics, we now expect our full-year guidance to be net sales of between $232 million and $235 million, representing growth of 25% to 27% over 2021. Gross margin of between 52% and 53%, adjusted EBITDA of between $25.5 million and $28.5 million, representing growth of 24% to 38.5% over 2021. And adjusted EPS of between $0.34 and $0.37.
In addition, our guidance for adjusted EBITDA and adjusted EPS includes the following assumptions: marketing costs of between 14% and 15% of net sales, depreciation of approximately 2.7% of net sales, an estimate full-year adjusted tax rate of 10% and diluted weighted average shares outstanding of 53 million as of December 31, 2022.
With that I’ll turn the call over to Bryan.
Bryan Conley
Thank you, Paul and good morning, everyone. I am happy to report another quarter of strong financial performance, as net sales grew by 21.7% or $10.4 million to $58.4 million during the third quarter of 2022. The increase was led by double-digit growth in our DTC channel, which grew by 47.2% to $8.7 million. Subscription sales of $10 million continued to strengthen during the quarter growing 17.1% over the same period last year. Subscription sales during the third quarter represented 37% of our DTC sales and 17.1% of our total sales.
Our transaction-based or non-subscription DTC sales also grew by $4.9 million or 40.6% year-over-year. In terms of our professional and B2B business, sales during the third quarter were $31.4 million, an increase of 5.9%.
Gross margins during Q3 were 48.2% of net sales, declining 500 basis points from last year and was impacted by short-term increases in specific raw material costs and a marginal decline in ASP, driven by the continued growth in our professional/B2B channel, driving an unfavorable shift in sales mix during the quarter.
We continue to remain critically focused on operational efficiency and disciplined cost management and actively review and engage our strategic suppliers to ensure that the short-term cost impacts are minimized and long-term savings opportunities from scale are realized.
On our Q2 call, we indicated we were beginning to invest in and upgrade our manufacturing facility to maximize production efficiency, increase throughput and drive long-term cost savings. During the third quarter, we officially broke ground on the expansion, which will double our maximum manufacturing capacity and set us up for our next leg of growth to be on $500 million in annual sales. We expect the expansion to be completed during the fourth quarter of 2023.
Looking at operating expenses. SG&A grew $4.9 million or 36.6% to $18.3 million, representing 31.4% of net sales. As a reminder, our SG&A costs are comprised of three primary operating functions: one selling; two distribution fulfillment; and three general and administrative.
Selling costs are comprised of the cost of our sales professionals including commissions and related direct selling costs. During the third quarter of 2022 selling costs were $4.1 million or 7% of sales compared to $3.1 million or 6.5% of sales in the same period
last year.
Distribution and fulfillment costs are comprised of costs to operate our two distribution and fulfillment centers and include fulfillment personnel costs, outbound freight and shipping costs and facilities costs. These costs were $3.7 million during the third quarter of 2022 or 6.4% of sales compared to $3.3 million or 6.8% of sales last year.
General and administrative costs, which include our corporate cost and general overhead were $10.5 million or 18% of sales during the third quarter compared to $7.1 million or 14.7% of sales last year. Adjusted to exclude the impact of depreciation and equity compensation costs, general and administrative costs during the third quarter of 2022 were $7.9 million or 13.5% of sales compared to $6.4 million or 13.3% of sales last year. We continue to remain focused on managing our SG&A expenses and leveraging the fixed cost components of our corporate cost structure.
During the third quarter, marketing expenses were $4.5 million or $6.3 million lower than the same period last year as we reduced and deferred marketing spend and prioritized delivery on our full-year profit goals for 2022.
Research and development expenses were $1.8 million during the third quarter, down 18.9% from $2.2 million during the prior year. Third quarter per share earnings on a GAAP basis were $0.07 per share, which is $0.06 per share higher than a year ago. Adjusted EBITDA for the third quarter of 2022 was $8.3 million, an increase of $7.2 million compared to the $1.1 million reported during the prior year.
Looking at year-to-date results for the first nine months of 2022, net sales were $169.2 million, an increase of $33.8 million or 24.9% over the prior year. Growth in sales, were led by a $26.9 million or 49.1% increase in our DTC sales, of which $10.7 million was attributable to the continued growth in DTC subscription sales.
B2B professional sales during the first nine months of 2022 were $87.5 million, an increase of $6.9 million or 8.5% over the prior year period. Gross margin for the first nine months of 2022 was 53%, an increase of 10 basis points compared to 52.9% during the same prior year period.
During the first nine months of 2022, SG&A expenses grew $17.5 million or 47.2% to $54.5 million or 32.2% of net sales. Drilling down into the three primary operating functions of our SG&A costs, during the first nine months of 2022, selling costs were $11.8 million or 7% of sales compared to $7.8 million or 5.7% of sales during the first nine months of 2021.
Distribution and fulfillment costs were $12.2 million during the first nine months of 2022 or 7.2% of sales compared to $8.6 million or 6.3% of sales last year. General and administrative costs were $30.5 million or 18% of sales during the first nine months of 2022 compared to $20.7 million or 15.3% of sales last year.
Adjusting to exclude the impact of depreciation and equity compensation costs, general and administrative expenses during the first nine months of 2022 were $22.9 million or 13.5% of net sales. Comparatively G&A, excluding depreciation and equity compensation costs for the nine months of 2021 was $18.8 million or 13.9% of net sales.
Marketing expense during the first nine months of 2022 was $27.5 million, an increase of $7.4 million or 37% over 2021, driven primarily by the $10.2 million investment into our 12-week Healthy Aging campaign aimed at increasing brand awareness and driving new customer acquisition, which ran the majority of the second quarter of 2022. Research and development expenses were $5.5 million during the first nine months of 2022.
Earnings on a per share basis for the first nine months of 2022 or $0.06 per share, an increase of $0.05 per share as compared to the first nine months of 2021. Adjusted EBITDA for the first nine months of 2022 was $15.6 million, an increase of $0.4 million compared to $15.1 million during the prior year.
Turning from operations and focusing on capital and liquidity. As of September 30, 2022 we had a cash balance of $27.4 million, of which $22.5 million was unrestricted. Operationally during the first nine months of 2022, we used $8.8 million of cash in our operating activities, driven by marketing and advertising spend and growing our inventory including raw materials which increased by $13.4 million to support our continued growth, new product launches and to protect our supply chain.
As mentioned in my earlier comments, during the third quarter we broke ground on the expansion of our primary manufacturing facility in Summerville South Carolina. This project will expand our production facility by 74,000 square feet and allow us to double the manufacturing capacity to support our continued growth to approximately $650 million in annual sales. This project has a budget of $32 million for construction and an additional $12 million for manufacturing and production equipment.
We expect the expansion to be completed and online by the end of 2023 and will fund the investment with a combination of borrowings from our revolving line of credit, a tenant reimbursement provided by the current landlord and cash from operations. The $12 million in purchases of long-life production equipment will be financed through our current equipment finance facility.
Simultaneous to the expansion project during the third quarter, we also commenced the upfit of a new warehousing and fulfillment facility, directly adjacent to our primary manufacturing facility in Summerville South Carolina. This facility is under a long-term lease, which will commence during the second quarter of 2023 when we expect to take control and have access to the property.
The budgeted cost for the upfit of the new facility is approximately $11 million, which we also plan to fund with a combination of borrowings from our revolving line of credit a tenant allowance from the current landlord and cash from operations. As of today, we have not drawn any amounts against our revolver and the full $15 million remains available to fund working capital requirements and strategic initiatives such as the expansion of our manufacturing facility and the new warehousing and fulfillment facility.
As we move into the final quarter of 2022 and work to close out our first full-year as a public company, I want to recognize and thank our team members for all of their incredible efforts and value contributions. You are the foundation of Thorne and the reason our customers trust our brand for their bodies. Your unwavering commitment to excellence continues to make Thorne HealthTech, a leader in the health and wellness space. We cannot be more excited about the opportunities ahead.
This completes our prepared remarks. We would now like to open the line for any questions you may have. Operator, can we have our first question, please?
Question-and-Answer Session
Operator
Thank you. Our first question comes from the line of Elizabeth Anderson of Evercore. Your line is open.
Elizabeth Anderson
Hi guys. Good morning. Thanks so much for the question. I was wondering if you could comment on — I understand what you were saying in the quarter about the advanced purchase and securing a more diversified supply chain. Can you help us think through sort of the expected sort of timeline that these like new purchases cover? And just sort of how to think about that over the next couple of quarters and whether you’re sort of thinking about continuing to do that as we get into the fourth quarter?
Paul Jacobson
Yes. Elizabeth, how are you doing? It’s Paul. I’ll answer a piece of it and then I’ll let Bryan or Tom comment. So, the situation is really focusing on a couple of ingredients. One specifically where there were supply chain problems globally we had an opportunity to either do no business in this particular ingredient area, which is important to the sports performance business in particular and to those who participate in certain areas of athletics that our consumers or to step up and make a major play knowing that we were doing it at low margins and doing it in a way that would protect our business going forward.
So, we made a significant purchase basically locking up a huge supply chain where we wanted the few companies able to provide. The margins were low I think it was around 18% or 20%. And we’ll be washing through that supply during the course of 2022 through the fourth quarter where we know that we have the inventory sold.
Our team recently — the team reporting to Tom, recently made a significant change in the supply agreement going forward where our margins in this ingredient will return back to something that’s more normalized and we expect the profitability on this particular ingredient to be good going into 2023. But it will wash through during this quarter and it affected our overall gross margin.
Elizabeth Anderson
Got it. No, that’s super helpful. Can you talk about your sort of pricing strategy in this era of, obviously, inflation plus like a more volatile macro?
Paul Jacobson
Yes. So, we try to operate under the theory that we have a high-end consumer base. But there has to be some realism baked into the way we price products. You can’t just continuously rely on price increases and hope people will buy.
So, what we have done in the past is we raised prices pretty much across the board in the last couple of years on sort of a 3% level. And sometimes we can get away with just doing it across the board. This year, at the end of this month actually, we will finalize our approach towards next year’s pricing.
But I will tell you that what we’re doing is going through an entire SKU rationalization play. So, there will be products and we expect that we will take a net price increase going forward into next year. But there are products that we think we could drive a lot more sales if we drop the margins potentially from something like 70% or 80% down to something more normalized and raised prices on some other ingredients where we think we have more pricing power.
So, we will be taking an increase but we’re not going to just slap it out to our customers as an across the board. It’s going to be rationalized and done one-off. And I think between production and marketing they pretty much finalized the approach going forward.
Elizabeth Anderson
Got it. And maybe just one last question. I realized obviously the macro is somewhat volatile, but I was wondering if you had any early thoughts on 2023 you could share with us in terms of where you expect sort of particularly on the revenue line sort of growth to come out?
Paul Jacobson
So, let me just say that so far in October and the beginning of November, we’ve seen very strong demand. So, it gave us some confidence anyway that things are going to hold together and maybe improve. Going forward into next year we have not finalized our budgets for the year, but we anticipate projecting significant growth next year.
And we are also looking at ourselves almost as a start-up when it comes to the way that we want to address marketing and Michelle is working with her team to come up with a data science influencer-based strategy that we think is going to be really great for us and hopefully, drive sales going forward next aggressively into 2023.
Elizabeth Anderson
Got it. Thanks so much.
Operator
Thank you. Our next question comes from Sean Dodge of RBC Capital Markets. Your line is now open.
Sean Dodge
Yes. Thanks guys. Good morning. Maybe just on one of your last comments there Paul about the demand holding up well in October and looks like so far into November. You said, most of your consumer base is pretty insulated economically but still some pockets potentially of sensitivity there. Maybe just give us a sense of when we think about guidance for 2022, the expectations you’ve built into there around how your consumer base specifically holds up? Does everything have to remain strong for you to hit the guidance, or is there some, kind of, I don’t know cushion or wiggle room in there for a little bit of deterioration?
Paul Jacobson
Yeah. I mean, I — again I — it’s why I tried to mention something to give you a little bit of a heads-up on October and November. So, so far things look good and we’re not quite halfway through the quarter yet. But I think that there — our guidance is such that we feel pretty comfortable with it. We’ve gotten through some of it already. But look I don’t want to tell you that if the world fell apart in December that we’d absolutely lock into everything. I mean, I can’t tell. But so far from what we’ve seen it’s based on strong demand for our products.
Sean Dodge
Okay. Fair enough. And then before you’d mentioned some impact from your distributor partners selling into Eastern Europe. Is there any update you can share there, has that gotten worse or better? And then how much is Eastern Europe at this point contributing to revenue?
Paul Jacobson
Right. So I don’t want to make excuses here, which is why I didn’t bring it up too much of this. But if you — I’ll give you the numbers. So we’re taking a $17 million or $18 million hit in this — from this one particular customer that’s an international distributor for us that happens to sell in multiple parts around the world, but they got — they went to zero as a result of the war.
So we’re not for that. We’d be having a blowout year in the upside. That’s been the growth determinant on our B2B channel and it has been the — it’s become virtually — it’s very, very hard to forecast with these guys going forward. I’d say that we’ve had a month or so recently where we had some pickup in visits though. And — but I don’t know whether that’s going to be — that’s going to continue going forward.
Sean Dodge
And as far as when you begin to lap that, is that late February coincident with the Russian invasion is that when that gets dropped out of at least the year-over-year comparables?
Paul Jacobson
Yeah, yeah. I’d say right around the — some part of the second quarter.
Operator
Thank you. Your next question comes from Oliver Chen of Cowen and Co. Please go ahead when you’re ready.
Max Rakhlenko
Hey guys, it’s Max on for Oliver. Thanks a lot for taking our question. So first on top line, just a couple of parts here. But it looks like there was a bit of a sequential decel in the DTC segment both year-over-year, as well as on the two-year. So if maybe you can comment on that? And then also if our math is right, it looks like guidance implies a pretty large step up. I guess, that speaks to your comments on October and November. So just curious any comments on what happened in 3Q within DTC. And does that mean that demand is actually accelerating sequentially as well?
Paul Jacobson
Okay. So I’m going to let Michelle answer the first part and I’ll answer the second part.
Michelle Crow
Yeah. So I look at the year-over-year trend, demand points did remain strong DTC demand in the quarter up 47% [ph], and we saw a growth in the number of purchasing customers both quarter-over-quarter and year-over-year. But in terms of unit economics that’s where we really saw an increase. So order size is up 25% [ph] year-over-year, and net price per unit up 6% year-over-year, and then really stable order frequency, which we feel is promising given that we continue to acquire new customers further from the core.
And in general through our conversations with our distributor partners, we’ve learned that the category of consumer health has seen a softening in other categories like a parallel and outdoor, and moreover the Thorne in outperforming brands in our specific category. So all of that is really promising in terms of the year-over-year performance.
To your question specifically about the sequential trends, specifically around the transactional that’s really a function of scaling back the marketing budget by about $9 million for the second half of the year. We mitigate the impact of that scale back by focusing on unpaid tactics, so like SEO, content marketing, scaling our master program through own channel, marketing automation tactics, but the $9 million cutback did impact the Q3 web traffic in number of purchasing customers. But we’re confident that would be strong economics despite that cutback that once we scale up spend again in 2023 that we can convert those cutback [Technical Difficulty] potential growth trend.
Paul Jacobson
Right. And Sean to your question about the guidance being a major step up, I would say that it is a result of what we’ve been thinking about when we gave guidance at the beginning of the year that we’d see a step up in the fourth quarter. I think it would have been a lot more had we not made the marketing cutback that we did. But from what the demand we’re seeing, so far through the first half of the first — the fourth quarter, it looks pretty good.
Max Rakhlenko
Got it. Okay. That’s very helpful. And then on gross margin, obviously, there is a number of moving parts here, both on the raw side, building out the new supply chain, probably it’s going to have some impact, I would guess. And then also, you mentioned potentially taking AURs down a bit. So, I guess, how should we think about your gross margin, both over the next several quarters, as well as long-term? Should the declines be pretty similar as what we saw in 3Q, or how should we just model that line?
Paul Jacobson
Okay. Sorry. I know, it’s Max, not Sean. So, the margin — the way we’re looking at margin that we guided towards 52%, 53% for next year. We’re going to have — we expect the fourth quarter margins to be slightly better. We are going to run off these purchases of ingredients that we did buy at low margins and do it in size by the — probably end of the fourth quarter, it might sleep a little bit into January.
But in general, the guidance that we gave on margin of 52%, 53% is where we are. Now, there’s a little bit of an element here with this — the new facility coming online that will have some — that is having some negative impact on the margin short-term, which is why we’re forecasting 52%, 53%. Once that facility is online, we see all sorts of reasons that we think the margins can go up fairly dramatically from there.
And I do want to emphasize that this expansion of the facility led by Tom McKenna is something that we have done before, and this is not — we’re not new to this. It’s not nearly as complicated as what we’ve done in the past. So we’re quite confident that we’ll be able to drive higher margins once this is done going forward.
The other thing is that, it will allow us to engage in the way we’re bringing in new equipment and some of the things we’re doing in much more personalization of our business, including meeting demand that we’ve had for years for a specific unit of use packaging that our customer base has been clamoring for. And the only reason we haven’t introduced it in the past really has been COVID being such that we couldn’t — we haven’t been able to get a hold of the new machinery that we wanted.
Max Rakhlenko
Got it. And then just one quick last one. But how should we think about your LTV to CACs going forward? Obviously, there is — 3Q is very strong, but it’s been pretty volatile just given your marketing campaign. So, I think you gave us a number previously. So just curious if that should still hold. And then furthermore, how should we think about the right marketing budget for the business going forward, say, next year and really just longer-term?
Paul Jacobson
I’ll take the first part of…
Michelle Crow
Yes, definitely. So in terms of our customer acquisition cost specifically, we’re really striving to be efficient for the whole year and from an LTV to CAC ratio perspective, our goal is three times or better. To your point about kind of the fluctuation quarter-to-quarter, that really is a function of the timing of the spend. But in 2023, based on our strategic approach, we’re going to be having more always-on marketing spend, which will kind of level out the spend and therefore, level out the customer acquisition cost impacting the LTV to CAC ratios, that would be kind of more stable as we move forward.
Paul Jacobson
And in terms of the overall marketing budget, so I’d like to emphasize a couple of things. First of all, risk control is what we’re after right now until we see the economy beginning to turn around. We’re anxious to take risk but do it intelligently.
As I mentioned a little bit earlier, and I tried to allude to this in my prepared remarks, we are taking, under Michelle’s leadership, a very, very hard look at what we think marketing should look like on a go-forward basis over the next few years. We are in the process of doing a deep dive and bringing more data science approach to the way we’re going to do things inside — in-house to keep it vertically integrated and utilize what we think is an underutilized asset, which has been our — the community we’ve built of influencers over the last several years and try to find new and differentiated ways to deploy that to marketing.
So we’re in the process of building the budget now, but that means that we’re also taking a look, as I mentioned, at almost — like what will we do if we were a start-up and how would we market ourselves given the assets we’ve already built up over the past half a dozen years or so. So we — I guess, it’s a long-winded way of saying that we expect to engage in marketing in a really intelligent risk and bold way, but expect us to step it up.
Max Rakhlenko
No, that’s very helpful. I appreciate all the color. Best regards and the happy holidays.
Paul Jacobson
Thank you. You too.
Bryan Conley
Thank you.
Operator
Thank you. [Operator Instructions] We have had no further questions. So I’d like to close the call here. Thank you all for joining. You may now disconnect your lines, and have a lovely day.
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