Kits Eyecare Ltd.

Good morning, ladies and gentlemen, and welcome to the KITS second quarter 2024 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press the star zero for the operator. This call is being recorded on Wednesday, August 7, 2024. I would now like to turn the conference over to Roger Hardy, Chairman and CEO. Please go ahead, sir.

Thanks, Operator. Good morning, everyone, and thank you for joining us. I hope everyone's been enjoying their summer, spending time with friends and family, and appreciating our good fortunes. Here at KITS, we have a lot to be thankful for this summer. I'd like to start out by thanking the entire KITS team for delivering another record quarter for our shareholders, stakeholders, and customers. It's been an exciting nearly three years as a public company, working hard to make eye care easy and accessible. During that short time, our business has nearly doubled from an $80 million run rate to almost $160 million run rate this coming quarter. We've built a large, loyal community of almost 1 million existing customers who return to KITS time and time again. We have one of the highest retention rates in the category because we consistently deliver high-quality products at breakneck speeds. In addition to this healthy annuity, we continue to organically expand our customer base each quarter, and customers continue to expand the amount and frequency with which they order from us. which is having a compounding network effect on our scale and market reach. KITS operates in a large legacy $80 billion North American category, where incumbents deliver marginal service levels and remain largely undisrupted, so that is starting to change, especially in Canada with our recent progress and success. When we architected KITS, we built it specifically with the opportunity to transform this category for the benefit of consumers. As our team continues to innovate and our technology improves, we see a clear opportunity to transform the lives of our KITS community, taking meaningful share from incumbents and growing the overall market, but most importantly, helping make VisionCare affordable and accessible for our many, many customers. During our last call, I provided expectations for Q2 revenues of $36 million to $38 million and targeted 3% to 5% adjusted EBITDA margins for Q2 2024. pleased to report that we delivered revenue growth at the top end of the range with Q2 quarterly revenues of nearly $38 million, equating to 26% year-over-year organic growth and an annual rate and run rate of $151 million. We also achieved our adjusted EBITDA goals, exceeding 3% along with net income of 0.2 million and earnings per share, one cent. Additionally, we achieved positive cashflow and 1.1 million in the quarter, while continuing to pay down 0.8 million of debt principal, leaving us with very favorable low debt outstanding balance of approximately $6 million. Several key network effects helped drive their record quarterly results. First, the growth and the compounding of our annuity-like customers who continue to come back at record rates across both our contact lens and eyeglass businesses. These customers enable us to invest in category-leading product and manufacturing capabilities. Second, the efficiency and compounding network effects of our economies of scale. As we've begun to see quarter after quarter, customers aren't just returning, they're buying more and our cost per customer user are declining. And each time they do, they drive efficiency throughout our business in terms of marketing efficiency, fulfillment efficiency, and general and admin cost efficiency. This compounds in our ability to have more and more inventory than competitors do on hand, meaning we fulfill faster than others. And once again, we generate a compounding benefit in this self-fulfilling flywheel. And finally, as we benefit from these growing economies of scales, we generated an improved ability to innovate and invest in technology and partnerships, like the one we invested in developing and integrating with more than 39 healthcare providers throughout the Canadian market, which helped drive our Canadian business. Speaking of which, our Canadian business grew an impressive 47% year over year, and we saw meaningful growth across our key segments. Our stable annuity-like contact lens business grew 24%, and our eyeglasses business grew an eye-watering 42%. We're pleased with the achievement of a record near $33 million contact lens quarter, but even more impressive is attraction in our eyeglasses segment, our fastest growing segment in the quarter, increasing 8% sequentially, and as mentioned, 42% year over year, as network effects began to accelerate, reaching $5 million. We believe we're just starting to see the compounding effects of our returning glasses customers as well as the improvement in average order size as customers increasingly select upgrades and specialty lenses. Overall, this was a watershed quarter for Kits as we continue to outpace the industry growth rates with declining marketing spend as a percent of revenue driven by word of mouth and customer satisfaction. Our product marketing and customer service and fulfillment teams are all executing at the highest levels leading the category. We have no doubt that we've created the fastest growing optical store in the world, an economic engine offering a better solution than anything else in the market. This engine is also built to scale with modern technology, no legacy infrastructure, CapEx deployed, and a highly recurring model where we control product production and fulfillment. We've built true sustainable advantage into our model and look forward to the network effects continuing to accelerate our growth in the quarters to come. This quarter, we once again experienced declining competition and growing momentum in both geographies. and both major segments of our business. Competitors have withdrawn from situations where the cost structures couldn't rival our lower cost directive model. Having read about the challenges of maintaining legacy US pharmacy businesses recently, I couldn't help but think of the similarities to the legacy optical model, where an outdated model of an eye care practitioner who profits from what they prescribe is required to sustain expensive retail overheads with fast declining football numbers, and a customer who's no longer kept in the dark as to available options. The customer of today is starting their search for optical products online and isn't looking for expensive, opaque, and grading. They want what KITS offers, easy, transparent, and affordable. We are happy to not be in these same store environments which are experiencing secular decline, and his only growth will come from investing millions in opening stores where performance is destined to decline. At KITS, our investments drive network effects. They go directly into product, technology, and fulfillment, as opposed to expensive, labor-heavy, high-street retail locations. This differentiation is being felt in the hands of consumers as they experience our product and service firsthand. These differences are increasingly driving separation from the competition and a growing annuity of returning customers. This quarter, we saw improved organic growth in both glasses and contact lens segments and made even more impressive by the declining marketing spend as a percent of sales. This indicates improved retention and word of mouth, a strong sign that our value proposition is resonating with consumers and our brand is gaining momentum, which we saw across many metrics in the business this quarter, as Joe and Zee will further discuss. It's also important when expanding fast-growing business like ours to maintain tight fiscal discipline. I'm pleased to report that's exactly what the team did throughout the quarter. While we made intentional moves to generate more new customer growth, we controlled operating expenses and improved long-term profitability. There's still lots more we can do and will do here to remain efficient as our business scales, but this quarter we saw us continue our disciplined approach to execution. Quarterly, the marketing team delivered solid results, with marketing expense as a percent of sales declining year over year from 13.7% revenue to 13.4%. Our fulfillment team also successfully reduced fulfillment expenses as a percent of sales, decreasing from 12.6% in the second quarter of 2023 to 11.2% this quarter. Our two-year active customer count grew to over 875,000 customers, representing an 8% year-over-year increase. And we felt one of the largest network effects in customer confidence as year-over-year, the average order value increased by over 21% to $182. 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 64% of our revenue from our loyal core customer, reflecting their strong affinity for our brand and ensuring a steady revenue stream. We achieved a record 13.8 million from 72,000 new customers during the second quarter, a 21% increase year-over-year. This influx of new customers contributed significantly to our record-breaking top-line results, setting a promising trajectory for the fiscal year. made all the more impressive considering the decline in marketing expense as a percent of sales, as I've highlighted previously a few times, and as I may just mention again. One strategy of building an iCare platform that makes, sorry, our strategy of building an iCare platform that makes iCare easy and accessible for the customer of today yielded remarkable results with overwhelmingly positive responses from new and returning customers. I'm pleased to say I read every single customer comment and survey and can see the uptick in our service response

Thank you, and ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the star followed by the number two. One moment, please, for your first question. And your first question comes from the line of Luke Hannon with Canaccord Genuity. Please go ahead.