Kits Eyecare Ltd.

Good morning and welcome to the KITS iCare first quarter 2024 financial results conference call. This call is being recorded and available later today for replay. Your hosts today are Roger Hardy, Chief Executive Officer, Joseph Thompson, Chief Operating Officer, and Z. Chu, Chief Financial Officer. Before we begin, I'm required to provide the following statement respecting forward-looking information, which is made on behalf of KITS and all of its representatives on this call. Certain statements made on this call will contain forward-looking information. These forward-looking statements generally can be identified by The use of words such as intend, believe, could, expect, estimate, forecast, may, would, and other words of similar meaning. This forward-looking information is based on management's opinions, estimates, and assumptions in light of their experience and perception of historical trends, current conditions, and expected future developments, as well as factors that they currently believe are appropriate and reasonable in the circumstances. Actual results could differ materially from a conclusion, forecast, expectation, belief or projection in the forward-looking information. Certain material factors and assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Management cautions investors not to rely on forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in KITS filings with Canadian Provincial Security Regulators. During today's call, all figures are Canadian dollars unless otherwise stated. And with that, I'd like to turn the call over to Mr. Roger Hardy. Please go ahead.

Thanks, Operator. Good morning, everyone, and thank you for joining us. I'd like to start out today by thanking the entire KITS team for delivering a record quarter for shareholders, stakeholders, and customers. As we have grown, our company culture continues to become more focused on execution. It's been great to watch this team evolve and flourish this quarter, as well as see the achievements of our work. There's nothing as exciting to me as watching our KITS business compound its growth as we did again this quarter. We have a large, loyal community of existing customers who return to KITS time and time again because we consistently deliver high-quality products. In addition to this healthy annuity, we continue to organically expand our network each quarter in meaningful ways, and it's having a compounding effect on our scale and the markets we serve. This has made even more exciting because KITS exists in a large legacy $80 billion category where incumbents deliver marginal service levels and still remain largely undisrupted. There's incredible opportunity to grow KITS in the coming quarters and years. When we architected KITS, we built it specifically with this opportunity in mind. As our team continues to innovate and our technology continues to improve, we recognize the opportunity in front of us to take meaningful share from incumbents as well as grow the overall market. During our last call, I provided expectations for Q1 of 22% to 26% year-over-year revenue growth and hitting positive adjusted EBITDA. I'm pleased to report that we delivered revenue growth at the top end of the range, meeting management's expectations with Q1 quarterly revenues of nearly $35 million, which equates to 26% organic growth and an annual run rate just shy of $140 million. This record quarterly growth was driven by two factors. First, the compounding of our annuity-like returning customers who continue to return at a record rate across both our contact lens business and our eyeglass business. And secondly, the efficiency with which we are acquiring new customers in this category. We had tremendous organic growth this quarter with our U.S. business growing 20% and our Canadian business growing over 40%. We also saw great growth across both our key segments where our stable annuity contact lens business grew 25% and our eyeglasses business grew 36%. We are pleased with the record $30 million contact lens quarter, but even more impressive to me is the traction we are seeing in our eyeglasses segment, which was our fastest growing segment in the quarter. In perhaps a watershed moment, the most impressive statistic in our business's quarter is that more than 1 million people tried on eyeglasses using our virtual try-on tool, which I consider a leading indicator with regards to future purchase intent. We believe this makes us one of the largest optical stores in the world and by far one of the most heavily foot trafficked in optical globally, a stat that would be hard for anyone in the category to ignore. We're starting to see interesting network effects of influencers and advocates sharing broadly their experiences with kids on TikTok and other social media platforms. One such poster who was unpaid by kids generated more than 250,000 likes for her referral to kids. We have no doubt that we have created an economic engine that offers a better solution in this category than anything else in the market and that we have built this engine and business to scale. We also remain confident that this will be very difficult for others to replicate or even compete with given their legacy infrastructure and cost base. There is no doubt in my mind that this glasses offering will continue to compound and exceed $100 million healthy business within the next three to five years as more and more customers turn to the benefits of buying the kits. In Canada, we are seeing huge demand for our business, where we are the fastest growing profitable eye care provider in the country. Our value proposition is cutting through the substantial noise as we acquire new customers with confidence and at will, as others have been suffering with weak revenues or growing losses. And we've achieved this growth all with reduced marketing expense as a percent of sales. This quarter, we experienced declining competition across many areas of our business, where we saw competitors withdraw from situations where the cost structure simply could not rival some with our lower cost direct distribution model. We also saw improving organic growth in our glasses and contact lens segments. What makes us all the more impressive is that this record growth was achieved with a declining spend in marketing as a percent of sales. We believe this gives us a strong indication that our value proposition is resonating with consumers and that the power of our brand is generating increasing momentum, which we saw across many metrics in the business this quarter, as Joe and Zee will discuss. It's always important when expanding a fast-growing business like ours to maintain tight fiscal discipline, and I'm pleased to report that's exactly what the team did throughout the quarter. While we made some intentional moves to generate more new customer growth that slightly impacted gross margins, we controlled our operating expenses nicely and improved the overall long-term profitability profile of the business. Accordingly, the marketing team delivered solid execution with declining spend, as marketing expense as a percent of sales declined in the quarter from 14.5% to 13% of revenues. We were also successful in improving leverage and decreasing fulfillment expenses of percent of sales, declined to 11.9% of revenues from 12.5% of revenues in 2023. Our two-year active customer count grew to over 870,000. This growth is a testament to the effectiveness of our offering and our relentless focus on meeting the needs of our diverse customer base. In addition, we generated over 64% of our revenue from our loyal core customer. This continued support not only reflects their strong affinity for our brand, but also ensures a steady stream of revenue contributing to our financial resilience. We also added 74,000 new customers during the first quarter. This influx of new customers has significantly contributed to our record-breaking top-line results, setting a promising trajectory for the rest of the fiscal year. Our strategy yielded remarkable results, and the response from both new and returning customers has been overwhelmingly positive. Glass's revenue increased by 36% year-over-year, reaching $4.6 million, as we delivered a total of 75,000 units of glasses, 33,000 of which were delivered to new customers. Remaining steadfast in our mission to streamline eye care and provide high-quality, accessible solutions, we continue to witness a resounding positive response from new and returning customers. As we move further into 2024, our expectations are that growth will continue at a compounding rate. Accordingly, we expect to see revenues of approximately $36 to $38 million and targeting 3% to 5% adjusted EBITDA margins for Q2 2024. Overall, we have built a company that's nearly impossible to replicate with many strategic advantages over traditional brick and mortar providers, including the quality, price, and delivery speed of our products, our best-in-class experience, our onshore manufacturing lab, and our compounding annuity-like base of returning customers. We've created this industry-leading platform with our own cash flow and minimal debt, that is set up to serve an annual revenue run rate of at least $250 million without any additional CapEx investments. Today, we are routinely serving thousands of patients and generating more than a half a million dollars a day of sales and delivering from our state-of-the-art facility without missing a beat. It's my wholehearted belief that we'll soon be delivering over a million dollars a day from this facility, also not missing a beat. We're incredibly well positioned to deliver outsized value over the long run to our customers, employees, and shareholders. On behalf of the entire KITS team, we look forward to updating shareholders on our progress as we strive to achieve our long-term growth targets for the business. With that, I'd like to turn the call over to Joe to dive more detail on the operational performance. Joe?

Thanks, Roger. Our growth continues to take shape, and as it does, we remain focused on operational cost discipline, while adding to our active vision corrected customer base and consistently improving service levels. Operational cost discipline was a highlight in Q1 as we saw 220 basis points of cost improvement versus Q1 2023 across marketing, fulfillment, and G&A. Leading the way was marketing expense, which was reduced by 150 basis points year-on-year to 13% of revenue in Q1. For us, maintaining marketing spend in the 12% to 14% of revenue range while continuing to grow new customers will ensure that growth is coming from word of mouth and strong customer experience, insulating us from our reliance on expensive paid channels. A particular highlight in the quarter was our influencer channel, which was our fastest growing marketing channel in Q1, while registering the lowest cost of acquisition, a powerful combo. The team believes it's still day one for kits in this channel and anticipates that in Q2, influencers could become our biggest marketing channel overall. Fulfillment also saw leverage as greater scale in our lab brought savings in manufacturing and shipping. In Q1, we also made meaningful progress adding customers in premium categories within Optical, including digital progressive customers as well as those looking for premium lens upgrades. In contact lenses, this includes daily modality contact lenses. These customers have a higher optical spend per year and come back more frequently. We've also found that premium category customers appreciate the significant savings and convenience Kits offers and historically retain at a higher rate. In Q1, this led to a growth in average order value in both eyeglasses and contact lenses of 16%. Growth in revenue per customer per year, up 18% in Q1. led by eyeglasses, and growth in progressives and premium lens upgrades with revenue up 55% year-on-year. Importantly, adding these premium cohort optical customers did not burden marketing spend, which decreased the percentage of revenue year-on-year. Finally, we continued to improve service levels to patients each and every quarter. This starts with a high-quality selection of the latest styles. In Q1, we added 384 new unique Kits frame styles, including our Titanium, Rimless, Liftoff, and Habitall collections, to end the quarter at over 2,100 total styles and 305,000 frames in stock. Importantly, our operations team did not miss a beat with higher order volumes, and the majority of single vision Prescription glasses were manufactured and shipped the same day the order was received. Our same-day service in Vancouver expanded. The team added Saturday delivery to key metro areas in Canada, and our next-day and two-day delivery experience continues to roll out throughout North America. Expect more of the same from the kids' team in 2024. We're built for scale, and we're just getting started. I'll now turn the call over to our newly appointed CFO, V. Chu, for an overview of our first quarter financial results.