Ready. All right. Well, thanks everybody for coming. Appreciate it. Welcome to the RBC Consumer E-Commerce Conference, and today I have the founder and president of Kits, Joe, with us, and so thanks for coming. Really appreciate it. Thanks for having us. Yeah, yeah. We thought it could make sense to go ahead and start with sort of like the foundation story. Sure. Why did you start the business? How'd you come up with the concept? Why did you think the timing was right to kinda get this thing going? I know that was about five years ago. Yeah. Yeah. That's right. Sure, yeah. It was about 5.5 years ago, so... A nd maybe just for some background, optical's a pretty big category. It's about $80 billion in North America between eyeglasses, contact lenses, and eye exams. Nearly eight out of 10 adults require one or the other to get through the day. But it's one of these categories that just really hasn't been disrupted yet. It hasn't had its Amazon moment, where automation and technology's come in to help. W e set out to launch Kits to make eye care easy, and we knew that wouldn't be by adding more stuff to the category, definitely not more stores. There's already about 45,000 optical shops across North America. It would be by breaking it down to what's most important for high quality, high value for the customer, and then passing that savings on to them. Y ou know, fast-forward just over five years, our latest quarter has us at about CAD 140 million revenue run rate. That's growing about 30% annually. G rowth about 5-10 times the rate of the industry. Gross profit growing a little bit faster than that, just over 30% over the trailing twelve. T hen, you know, possibly the most important for us is we have an active customer base of about 870,000. T he neat thing about this category, if you can execute well, is once you need vision correction, you need it for decades, often a lifetime. If you take great care of customers, they'll keep coming back. Every quarter, every year, over 60%, lately it's been around 65% of our revenue, comes from repeat customers, so it's a great annuity base. You know, how did we get from... That's, you know, one of the fastest growing optical companies ever to go from zero to about CAD 140 million revenue run rate in just over five years. How'd we do it? We have some experience in the category. Roger previously built an optical company. It was NASDAQ-traded from 2000 to 2014, Coastal Contacts. I previously came from Amazon, and so we said, "You know, what's really important in this category is, fortunately or unfortunately, to make a difference, you've gotta be really big." You can't be a 10, 20, even a $50 million revenue company and make a difference. You need to be $100 million. Really, you need to be $200 million in revenue to make a dent and to get leverage on the model. W e said, "What's the fastest way to go from 0 to $200 million, and still be generating cash from operations, still be positive Adjusted EBITDA?" Y ou know, we said, there's two approaches that we're gonna take, and then we're able to get some luck from a third element. The first real secret for us was to start with the smaller part of the category, which is contact lenses. Contact lenses is about a quarter the size of eyeglasses and has a lower gross margin percentage profile, but it's highly recurring, so a very profitable category of vision-corrected customers that tend to skew younger. S tart with contact lenses, build up this profit core of vision-corrected customers, and then use that profit to launch into eyeglasses. W hen you do, secret number two is start with the manufacturing. Start with the optical lab because all of the profit in this category is in the lens within the eyeglass, the upgrades, the blue light coatings, the thinner lenses, and so that's counterintuitive. Why would you invest millions into building a lab if you haven't figured out how to sell any eyeglasses in first place. Or you don't have any customers yet. Or, yeah, you don't have any customers. But the trick is, if you do it the other way, and you figure out how to sell 1,000, 10,000, 100,000 pairs of prescription glasses, well, now you've really built more of a marketing company or retail company, and you're giving the profit to someone else. B efore we sold our first pair of prescription glasses, we put CAD 2 million in the first version of our optical lab, and we've since scaled that up to have now one of the biggest, most automated optical labs across North America, with lots of scale left to grow into. T hose were our two secrets: start with contact lenses, build the profit core, and then use that to launch into glasses, starting with the lab. G rowth, you know, continued on, and fortunately, we had some luck, where we underestimated the speed that this category would move online. Where our business is all online, kits.com in the U.S., kits.ca in Canada. I t had been steadily creeping online, but really, the Millennial cohort has driven it forward with greater speed, and the Millennial cohort is now the biggest demographic in the U.S. in terms of people and spending power, just this last year taking over from Baby Boomers. D on't people need to have the glasses on their face to know whether they're gonna like it or it's gonna fit properly? What are you doing about that? You know, it's fit is really important, and so what we've learned is, you can actually get a very accurate online try-on from your phone or from using the camera on your phone or on your computer. T his last quarter, we had about 1.4 million virtual try-ons of glasses, where it becomes very easy. You don't have to drive to five stores to try on, you know, 10 different frames and pick your favorite. We've got over 2,000. T he technology, and you can do it in a few minutes from your phone, and check with your friends and or family members, and pick the one that's right for you. R eally, the lift has been driven by this Millennial cohort, which is increasingly driving the category online. T hen what about pricing? I was a little surprised that the prices seem to be, you know, very reasonable. I’ve always thought glasses, you know, if you go to Pearle Vision, you go to one of these offline optometrist-type places, it’s like $400 or $500 generally. I think yours were less than $100. How did you come up with the pricing? How have you played around with that? How do you think about it? Yeah, the average price in the U.S. for a pair of prescription glasses last year was about $350, you're spot on. And what we found is if you take some of the cost out of the system that's not directly benefiting customers, you can get to a great price point. T he price of all Kits frames, including a prescription lens, is $28 across every one of our frames. T hen for digital progressives, which traditionally have been called bifocals, with two prescriptions in one lens, we charge $98 for those. We're able to do that by not having any stores, which typically save customers, you know, somewhere between $100-$200 per pair, just not having that infrastructure of stores, and by doing all the lab work ourselves and not outsourcing it to a third party. D id you try it at a higher price, and this is the price that basically people noticed that it's such a good deal that they're willing to give it a try? Is that... What, what, like, why not charge... It seems like such a big discount to the $400. Why not charge, you know, $150? We did a lot of experimentation, and some of it worked, some of it worked less well. Where we landed on. At one point, we had different prices for different frames that we offered, but we knew our cost of goods sold was the lowest of the industry. You know, the frames on average, $10, the raw material lens pucks, you know, $3 or $4, and a few dollars of labor, and consumables, and that's it. Y ou know, we did some focus groups with some Millennial consumers, and the one comment t hat we tested a few different price points. T he one—when we introduced $28, the one comment that came up from this consumer was, "Well, $20, well, that's about the price of an Uber ride these days." "I f I can get a pair of prescription glasses for the same cost that, you know, I'm taking an Uber, that's really interesting to me." T he power for us is that price point is disruptive enough to create some word-of-mouth and- Yeah - generate a lot of people talking about it. Did you... You know, if you get a new pair of glasses, you know, people are asking you, "What, you know, what changed? What'd you do differently? You get your hair cut?" "Oh, no, I got some new glasses. Let me tell you the story about it. Oh, yeah, and people get excited about it and refer it. What are some of the kind of guerrilla marketing tactics you've done? I think I saw one where you buy a pair, get a pair free, or buy a pair, get a pair for a charity or something. Or what are some of the ways you've been promoting this and kind of establish Kits's brand? Because Kits wasn't anything, right? You guys came up- That's right - with that brand, and so I don't think people associated Kits with eyewear, and that's what you've got to try and do over time. W hat are you doing? Yeah. Well, in the story of Kits, it started, we started the company on, in an area of Vancouver, Canada, called Kitsilano, Kits Beach for short, and so hence the name, Kits. You know, we've done a bunch of things, and two in particular have worked pretty well. When we were first starting out, we said, "We're gonna..." This is a few years ago, with our glasses business, "We're gonna, we're gonna try something where for a period of time, we give away a pair of glasses if you've never been a customer of Kits before." Because to acquire a customer on Facebook or Instagram, on average, it's costing $100-$150. W e could do that, and we have done that. But you are then giving away all the efficiency that you've worked hard to build, to you know, just to a third party. W e said, "Well, what if we could take part of that and just give it to the customer in the form of cost of goods sold? Could they be a marketing vehicle for us?" F irst pair free worked really well for us to get out of the gate. O f course, you know, there's skepticism. Nothing's free. I don't believe it. You know, hundreds of thousands of customers went to the site, tried it out, picked a frame, you know, placed their order, and for most of them, they probably thought, "Okay, we'll see what happens. Maybe in a month or two, something will show up on my doorstep." Well, the good news for us, because we manufacture onshore, it takes us about 30 minutes to make a pair of prescription glasses, and we can get it into the carrier network that night. T he next day, the customer opens their door, and they see a box from Kits on there, and they're calling us. They're saying, "No way. How did you guys do this? Yeah. Takes me two weeks to get a pair of glasses. I pay $400. You give them to me for free, and they got there the next day. What's the catch?" Y ou know, our customer service team just said, "Well, the catch is, tell everyone you know." T hat was a great vehicle to get us started. T hen lately, we've really found a lot of success with the influencer channel because this is just something that everyone needs. Everyone needs glasses, you know, whether even you know some customers using blue light. F or you know for an influencer you know they can market it to their network and it's super intriguing. It's not a $400,000 purchase, as you said. It's something that can be done very quickly. T he last quarter, you know, influencers were the biggest growth channel for us and also came at the lowest cost per acquisition. I think there's a lot of growth ahead of us in that channel. Are you using one of these, you know, like, influencer management programs? We had a company at our tech conference that was doing that. I'm forgetting the name, but, is it, like, an influencer marketing where you find the right influencers, make sure they are the right for your brand, and then they get a part of the action? Well, we should probably get that name from you. Yeah. We've been doing it ourselves. Okay. We tend to like to tinker a little bit ourselves and build up the model, make sure it's there, as opposed to outsourcing it. But now that we've got some scale behind it, I think that's probably the next step. Awesome. Can you talk about the competitive environment? I know, you know, versus the offline players, you're clearly way cheaper, but what about, like, Warby Parker and some of these other online mixed hybrid players? Well, the category, this $80 billion category, 50% of the revenue in that category is still highly fragmented. It still trades through independent optical retailers. That's not even the chains, the Luxotticas, or the Pearle Vision. That's just the independent onesie-twosie independent optical retailers. T hat is the segment that's most rapidly moving online. The online competitor... and then there's chains, and then there's a few online competitors, and, you know, there's a couple that do a really good job, you know, on glasses. A couple direct like-minded companies to us, that go direct to consumer. To be honest... They're about your size or smaller? Some a little bigger. Some a little bigger on the glasses side, and only a few on the contact lens side. The movement that we've seen from brick-and-mortar to online has been pretty significant. Pre-pandemic, eyeglasses were about, you know, 6 or 7% of the revenue was online, and this last year, it's about 16%-17% of the revenue, and on contact lenses, even more significant. It used to be around 18% online pre-pandemic, and the latest number from the Vision Council this year has about 42%. I t's just, this category is rocketing online. I n other categories, once we see that trend start, it never goes backwards. You have to generally start with an optometrist, right, to get a prescription to figure out what you need? That's right. But then, like you say, once you're ordering contacts online or you're getting the frames from them, then you can just keep doing it. That's right. Yeah. H ow do you partner with some of these optometrists? Is it competitive or can you find ways to partner? Yeah, and we have a number of optometrists in our Kits network, and we'll continue to build more. You know, I think what we hear from a lot of optometrists is that they somehow, over the last 100 years, the model has moved to, you know, you go to school to and do all this education to learn how to take care of customers' eyes, and then you realize, really, the only way to make it in this industry is to open a ground-floor retail store and employ a bunch of people selling glasses. I think, you know, this movement online is gonna help us centralize or help the industry really centralize around having customers take great care of their eyes, go for an eye exam every year, every two years, and then have the optometrists be reimbursed adequately for that, and then have the customers have lots of choice out there on what kind of glasses, digital progressives or contact lenses are right for them. Okay. I know you guys made a lot of progress on the profitability front. You, I think, are profitable now for one or two quarters, and can you talk about how you did that and how's the profitability gonna scale over time? Sure. Y ou know, before we IPO-ed the business on the TSX in January 2021, and before that, we had been a profitable business. In the year immediately after the IPO, we put some of the proceeds of the IPO to work, building out our lab, which will now scale us to about CAD 500 million in revenue, in our view, and building out the brand, as you suggested, Kits. W e dipped negative for about four or five quarters there. T hen, starting in 2022, the lab was built, our collection of Kits' glasses was done, technology was built. We had some investment in the brand. Things started to take off, and so six straight quarters now of +20%-25% revenue growth, and six consecutive quarters of positive adjusted EBITDA. We're generating cash from operations, and this is a great industry, if you execute well for customers because they keep coming back. Awesome, awesome. T hen, how about capital structure? D o you have much debt? Do you think you'll need debt in the future for future eye labs? H ow do you grow this without having to use too much capital? Sure. Yeah, that's been a really important focus for us. It's number one, to keep it simple, and number two, to be great stewards of capital, on behalf of shareholders as we grow. Y ou know, our structure is very simple. We have about 31 million shares outstanding, all common shares. High insider ownership, and we're all incentivized to grow this thing, alongside external shareholders. We have a healthy cash position of about CAD 18 million as of last quarter. Small debt position of about CAD 6 million with the Business Development Bank of Canada, the BDC, which we're steadily paying off. But the magic for us is to ensure that our organic growth continues without burdening working capital too significantly. T hat typically is, you know, marketing costs going up as growth companies scale, inventory levels going up, CapEx burdening the balance sheet. T ou know, we've been fortunate in the last year, you know, 32% revenue growth in calendar year 2023, and we saw marketing costs flat to down a little bit. R eally driven by the word-of-mouth we were talking about, and the recurring nature of the business. W e saw inventory turns go up because we have the full data picture of what customers are ordering, what they're browsing, we can plan our inventory accordingly and make sure that we're growing organically, but not burdening cash. W e expect that to continue. I mean, we generated... While growing over 30% last year, we generated about CAD 2.5 million cash from operations. W e think, you know, and the final point, I guess, is on the optical lab. We have built this big optical lab that can make 4,000, over 4,000 pairs of prescription glasses in a single day, and, you know, we're still only about 30%-35% of the capacity of that facility. W e think there's... It's exciting for us that, you know, we think we could get at least a double on revenue where we are now without requiring any significant CapEx. Wow, that's great! I saw the stock made a pretty good move last week. Yeah, I think it was up 20% one day, and I was looking into some of those stories, and it looks like you've created a relationship with Telus in Canada- That's right -for reimbursement. H ow does that work exactly? Yeah. Well, Telus in Canada is one of the biggest insurance networks, Telus Health, covering about 70% of Canadians. W e've done a... Isn't it a telecom company, Telus? Yeah, they do a bit of everything. Wow! Yeah. Okay. It's one of these big companies. They have the cellphone service, internet, and insurance, apparently. Okay. W e've created a partnership with them at the technology level, where just through an API connection, a customer in Canada can come in to kits.ca, plug in their insurer and their number, and immediately see how much coverage they have right on our website. T hen importantly, take that amount off of their in the cart checkout, so they have no out-of-pocket. P art of the frustration that we've seen with some of the surveys we've done is customers don't know. They know on average about 55% of customers have some kind of optical coverage, and that's typically about CAD 300-CAD 400 which renews either every year or every two years, depending on the plan. But when customers are making an optical purchase, they don't really have a line of sight on, "Is this covered? Is this lens covered, is the frame covered, and if it is covered, when am I gonna get reimbursed on it?" I t's a bit of a leap of faith for these customers. Y ou know, we're super happy that we're able to take both those things off of their plates now. They can see with full transparency, you know, you've got CAD 400 to spend, it expires at the end of December, and take that right off of your cart checkout. Pay, you know, out-of-pocket. Can you go ahead and raise the prices for all those customers? Bring it up a bit. I think, you know, I think— Government's got to pay a little more, generally. You know, the economics of the insurance customer tend to be a little bit more favorable. Yeah E specially if you have full clarity in the checkout. "Oh, my gosh, I didn't realize last year I let $200 go. I just left it unspent. Yeah. I think customers are, you know, a little... But I think we're, you know, we're happy to provide the leading value 'cause that's ultimately what's gonna allow the word-of-mouth. Okay, I'm gonna open it up for questions. If anybody has a question, think about it, and I'll keep going, but we'd love to have audience participation. All right. W hat's next for the company? You're doing contacts, you've got the eyewear. Are there other tangential areas that you can fold into the Kits brand? Are there other things that you can do with your membership base? There's lots of stuff that is keeping us occupied. We've set no formal guidance, but we've set an internal target in the next two years or less to be over CAD 200 million in revenue. Wow! T o have EBITDA, you know, at around 10%-15%. T hat's kind of a short-term internal target. T hen, you know, our five-year target is to build a CAD 500 million revenue, Kits business. T hat will come through continued glasses growth. You know, we see the opportunity for our eyeglasses business over the next three to four years to grow to CAD 100 million, if we execute well. T here's lots of technology opportunities on the side of that, in terms of some of the vision tools that will propel this move of the customer base online. You know, we're also intrigued with other adjacent categories. There's some interesting technology in hearing aids and how hearing aid technology could interact with the eyeglass frame and be a little bit less cumbersome for customers than, you know, an in-ear device. Particularly for a lot of folks in North America that have a mild to moderate hearing impairment. W e think that, you know, those are really interesting categories. There's a few others that we're looking at, but certainly right in front of us, we're not gonna run out of market share that's coming online. O ur full focus in the short term is continuing to grow organically in the 25% range. Continue to do so, Adjusted EBITDA positive, and generate cash from operations, and then pass as much savings and high quality onto the customers who can. Okay. Erwin. Oh, wait, you've got a mic. Look at that. Oh. Oh, yeah. You hear me? Hello? Yeah. All right. How many, how many pair of glasses do people actually buy? Like, you know, I wear glasses all day, and I've done it for, you know, 30+ years, but I might buy a pair of glasses every five years or so. Like, when you say repeat customers, like, people buy... For $28, you can afford, you know, a few Uber rides less. But do people buy, you know, five pair a year, two, once every six months? Yeah, it's a fun trend in the industry now, where on average, in North America, customer buys another pair of prescription glasses on average, every 18-24 months. T hat's not because magically, people's prescription changes exactly every two years, just like, you know, your iPhone needs to be replaced. It's driven by the insurance industry. T ou have $400 in coverage that renews every two years. Magically, the optical industry has priced glasses at exactly $400, so you can buy one pair every two years. W hat we're seeing now with the $28 price point or $98 for digital progressives is, customer will come in, try us out, maybe a couple small upgrades, pay $50-$60. But now, you know, the three months later, the glasses are still perfect, the quality's holding, the hinges are as good as they were on day one. Now these customers feel like: Well, I've always wanted a pair of sun prescription glasses, or I've always wanted that red pair that I couldn't buy if I could only buy one pair every two years. T he behavior that we're seeing, we're still only a couple of years into the eyeglass journey, but the behavior that we're seeing is, on average, you know, greater than 50% of eyeglass customers are coming back for a second pair in under 12 months, and many of them are coming back in under six months. T hat's quite a big departure from the industry trend. On average, the Millennial consumer and Gen Z behind them are very comfortable buying two or three pairs of glasses per year and then, you know, changing their look every year. Is that a bigger growth engine? Sorry. Is that, is that a bigger growth engine than actually moving people from brick-and-mortar to online? It might be. It might be. The movement online is pretty significant, so in an $80 billion category, even just 1% of the category moving online in a year is very significant. There's just because, you know, and, and we saw this when I was at Amazon, if you have a brick-and-mortar infrastructure, it turns out it's just really hard to build an online infrastructure standalone to compete with these online-only competitors. It's just very difficult. You have a whole organizational structure over here. That, and now that you're acquiring, all this capital, all these folks, and it's just a small percentage of the business growing up, growing up. A s a result, it, there's not a... I almost wish there was more competitors in the online-only part of optical because it would further this movement. Build awareness, yeah. It's there's nobody who's, you know, customers say again and again, "I do not wanna get in my car, drive to a store, pay $400, wait two weeks, get back in my car, drive back to the store and buy that from a limited selection. I'd rather have it in a day or two. I'd rather pay $30 instead of $300." W e know the market is, as they become aware of this, the behavior that we're seeing is they are moving online. W e, we do think that's probably gonna be a big growth area. But our focus, to your point, is 60%+ of our revenue every year, or above, needs to come from recurring customers, and that's a good read of how well we're delivering for those first-time customers. We had one last question right here. Thank you for being here. J ust a follow-up, is the reverse of that. W e have seen some brands like Amazon start online, be successful, and then go brick-and-mortar for, like, showroom-type cases and city centers. I s that something you've considered in very select, high populace, high consumption areas? Yeah, I think it's a really important question, and I think it's and I appreciate the way that you have framed it because I think there's a difference between some select showrooms, maybe two or three, as many as five across North America, versus hundreds of brick-and-mortar stores. I think showrooms, you know, if you do the math to show that it is a big awareness booster, you can have a couple showrooms per country and have that be fairly successful. We have one showroom only in Vancouver. It's on Kits Beach. We sell coffee in there as well, and sell food. Come, have a coffee, pick out some glasses. It's a great concept for us. But, you know, the danger is to become too addicted to this quick injection of revenue that comes at a high burden. One, for investors, your you know, each store can cost, you know, we've heard in the industry, $2 million of capital, and now you gotta maintain it, and the labor that goes into that, and someone's got to pay for that. T ypically, it's the customer who's spending. Our findings are that on average, a customer who shops in a brick-and-mortar is burdened with an extra $100-$200 per pair, versus a customer who's buying in an online-only concept. You know, our view is that shareholders will benefit from a better return on invested capital over time with a leaner structure. But I think there is an opportunity for a couple showrooms. Thank you. Awesome. All right, I think we're out of time. Thanks, everybody.