to the 2023 Jefferies London Healthcare Conference. I'm Brian Tanquilut, I'm the U.S.-based healthcare services analyst here at Jefferies. With us today is EYE National Vision, the second-largest operator of optical clinics in the U.S., and joining us this morning are Reade Fahs and Melissa Rasmussen from the company. Reade, maybe, I'll pass it to you, if you don't mind just giving us a little bit of background on EYE, how the company started, where you are today, and where you're going. Good, good. Hello. Reade Fahs here. Nice to see you all. Thank you for your interest in our company. I've been leading National Vision for 21 years now and been in optical retailing for over 30 years, a part of which was running Vision Express here in the U.K., back in the late 1990s. National Vision, we've been public—oh, there, you can read all that to your heart's content. Okay, done? Done. Good. Okay, we are the second-largest optical chain in America, after Luxottica. We are a 35-year-old company. We do just over $2 billion in sales from just over 1,400 optical stores, with and we've been growing organically for a great many years now. We operate two primary brands, America's Best Contacts & Eyeglasses, which is a deep value-oriented place to get your eyes examined, your eyeglasses, and your contact lenses. What America's Best is to America is what Specsavers is to the U.K. We're the large value chain in the U.S. We're located in strip centers, generally next to a TJ Maxx, which is our equivalent of TK Maxx. Generally down the street from a dollar store, and our consumers are budget conscious and low-income Americans. We bundle all of our offers together with the eye exam, so if you buy two pairs of glasses with us, which start at $79, you get the eye exam thrown in for free. This is a great value, and our ad campaign says, "It's not just a great deal, it's America's Best." And like Specsavers, we have very, very funny, enjoyable ads that we've been running for a very long time with a consistent ad campaign. Our second brand, our smaller brand, but also our growth brand, is called Eyeglass World. It's a bigger optical superstore with a lab in every store, providing same-day service, still value priced, but more brands. So you save money on brands. You do pay for your eye exam, but the trade-off is, or the trade-up is that you get to get your glasses the same day. It's actually very much like what Vision Express was in the late nineties before I think it went a bit more upscale here. So we've been steadily growing in sales over the years with a nice upswing during the post-pandemic period, which was a really fun year, right after we reopened, and we'll talk about that a bit more. I do miss that year tremendously. Our consumer had more money than they ever had before. Our consumer, whenever they have found money, comes and buys their glasses from us, and that was great, and we'll talk about the post-pandemic era in a moment. Our heritage as a company is that we were founded to do vision centers inside Walmart, and so that was, we were founded in 1990 to do that. When I took over the business 21 years ago, 95% of the sales and profits were from Walmart, which I did not think was a great long-term piece, especially because Walmart at the time was not very happy with the relationship from my predecessors. We've managed to drive that down to less than 8% of our store sales come from Walmart, and that Walmart relationship recently ended, and we'll talk about what that means. It will officially end next year, but we've been preparing for this for a long time, making ourselves not dependent on that, and Walmart was not really a strategic part of our business anymore 'cause it wasn't growing like our America's Best and Eyeglass World businesses have been. We have four key strategies there. The first is about expanding our exam capacity. If you ask me, "Reade, what does one need to be successful in your business longer term?" I would say you need to retain doctors, attract doctors, and deploy them efficiently. We'll probably talk about that a bit more in a moment, but really that is the key to our success, and all those barometers are going in the right way, as we'll talk about in a moment. We are digitizing our stores in a variety of ways, and we'll be talking about the biggest way involving remote medicine. We are working hard on leveraging omni-channel capabilities that we have and think can be a key part of our future, even though most people by far still are buying eyeglasses and contacts in stores because you have to start with an eye exam, and we are leveraging white space opportunities. We've been growing 65-70 stores a year for a great many years, and we see tremendous white space opportunities, probably able to double the store count of our growth brands going forward. And we will be talking a bit more about some exciting AI technology and how that applies to eye exams and the ability to play an ever-greater role in our patients' overall healthcare, using a combination of retinal images of the back of the eye that we take as part of the eye exam, and using AI to assess all manner of healthcare information well beyond just getting people prescriptions for their glasses and contacts. And that is an overview of National Vision. Okay. That is a great overview. Thank you so much for that. There you go. Okay. Oh, thank you, and the owl there is our funny character in our ad campaigns that charm our customer base. ... All right, maybe I'll give you a little bit of a breather. I'll ask Melissa some questions here. One of the things that people liked about National Vision was the consistency of same-store performance over the years, right? So maybe if you can walk us through where that is today and how you're thinking about same-store growth going forward. Yes. Related to the consistency that was disrupted from the pandemic, we leverage our cost structure typically around mid-single digits, which is historically where we had been as a company. Now, as we went through the pandemic, we, of course, had a 2021 year, which was a fabulous year, and have come back down from there. We are implementing remote technology, and we're really focused on recruiting and retaining our doctors, and with all three of those items, we'll be expanding our exam capacity so that we can get back to mid-single digits from an operating margin perspective, as well as from a comp growth perspective. Our America's Best stores actually were comping at 5.7% last quarter. So America's Best is the brand that we had implemented the strategic initiatives of remote recruiting and retention first, because that was our largest brand, and as you can see, that that was working well, and now we'll deploy that to our Eyeglass World brand so that that one can get back to mid-single digits as well. So maybe I'll use that as a segue. Reade, as I think about the digitization and the rollout of the virtual eye exams. Yeah. W hich you showed me, when I came to visit you in Atlanta, maybe if we can share that with the audience, what exactly are you doing, and why is it that important to the business? Right. Thank you for that. So as I said, the key thing we've got to do well is make sure that we have eye exams available for when our customers want to have them. Like with most healthcare professions, sort of doctors in a variety of fields cut back the number of days they wanted to work in a post-pandemic world. This is happening in everything from dermatologists to veterinarians to nurses in America. I I wouldn't be surprised if it's happening here, too. The burnout factor and rethinking of life factors that went on, this was the new reality of sort of 2022 for us was coming to terms with that. And what we found was, guess what? Optometrists would like to work from home, just like you like working from home, but until recently, they haven't been able to. What we have now, when we refer to remote, what we refer to is the patient is in our store, surrounded by expensive exam equipment that does diagnostics on their eyes and their eye health, and the doctor is sitting in their home office, den, whatever, and receiving this data, then coming in live on screen synchronously with the patient, saying, "Hello, I'm Dr. Smith, you know, here, here I am." And then doing the final eye exam with them to the point that, you know, the big joke about eye exams is, which you like better, number one or number two? When they're putting new lenses in. The doctor at home is pressing the button and changing the lenses on, in front of the patient in the exam room. So it's, it's synchronous, it's fast, it's instantaneous. For us, our key mantras are, retain, recruit, deploy, and deploying doctors most efficiently is gonna be a key source of our future success. A doctor sitting at home can appear in whatever store we'd like them to appear. Wherever a walk-in or an appointment might be, they can, they can appear there, and it. The easiest thing to do in terms of recruitment of optometrists is recruiting a doctor to work from their home. So that's an easy recruitment and a more efficient deployment of their resources. We have this now in over half of our America's Best stores. Two-thirds of our states are remote enabled, and this is now starting to generate a significant part of our eye exams. Patients are good with it. Guess what? None of us really like to have a doctor breathing six inches from our face anymore, so having them that remote feels really good, and we see this as a key part of our future success. So maybe just to that point, right, I think Melissa said that, America's Best had 5.7% same store this quarter. Yeah. Is that the proof point that the strategy is working, and how far do you think can we take this? Yeah, I think that there are a few aspects of that 5.7%. One is I'm seeing this as a green shoot to the purchase cycle. There's the... Those of us in optical retailing would say that the purchase cycle disruption that occurred because of the year after COVID is unprecedented. Frankly, the only thing I can reference back to, and I was not here for this, was when the NHS here in the U.K. in the late 1980s decided to stop paying for eyeglasses. So guess what? I think it was on July 1, I think it was 1988, 1989, everyone got their eyeglasses for free going up to July 1, and guess what? No one got them on July 2nd. A very smart core consumer base here, they all went and got the free glasses while the NHS was still paying for them, but that's the only other disruption that feels at all like a reference point to what happened in the year after that. Generally, the purchase cycle for eyeglasses is about two years. Your eyes go bad at about that rate. And so I'm not ready to say the purchase cycle is normalizing. I'm a little cautious on that, but it was a green shoot towards normalization. That's point one, and point two is we've been talking about in our sort of our Q2 call about how recruitment is going well and retention is going well, that the second-best recruitment year ever, and that retention is having its second year in a row of improvement. There is a little lag on those things. There's generally from the time a doctor sort of signs a contract with us, they don't show up for 60 days. When you recruit a student, they can't show up until the summer. So I would say it's primarily improvements in capacity from retaining, recruiting, and remote, and secondarily, it's maybe we're seeing some green shoots on the purchase cycle returning. Maybe I'll pass it to Melissa. I know in the past we've talked about margins picking up as same-store picks up, right? So how are you thinking about where margins could get to once we get to 2024, 2025, when the rollout is done? Yes, what we talked about at the beginning of the year when we released our original guidance for 2023, once we get through the heavy implementation cycle of our remote medicine rollout, which is expected in late 2024, we expect to benefit from about a 100 basis point improvement on margins, and that's going to come from both expanded exam capacity due to the technology, as well as expense savings, where we won't need to have these training teams and travel teams going around implementing this technology. In addition, once we get to that point, we do expect that we'll have mid-single-digit comp growth at our stores as well. So between the two, we expect in 2025 that margins would improve. Also, or I'll go into Walmart here in a moment. Let's do that. All right. So Walmart rolls off in early 2024. Number one, and like you said, Reade, it's probably not unexpected, right? Or. We were not expecting it. We thought they would renew the contract, but we have been preparing for it- Preparing for it. F or about 20 years. Yeah. Right. So how are you thinking about the impact of that? Both, obviously, I think you've disclosed the revenue impact, but does that change the scale dynamic where you are a scale player, and you get purchasing discounts because of how much you buy? Does that change anything? We are, we're still growing 65-70 stores a year. We are still going to be either the second or third largest optical chain in America, even after this is over. So it does not change the scale dynamics at all. Melissa, on the margin, yeah. Yeah, and so, and also to add to that on the scale, when Reade said that Walmart was 95% of our revenue when the relationship started, it's, you know, less than 7% now. So as far as scale goes, it is a very small portion of our business today. The margin on the Walmart business is actually quite a bit lower than the margin on our growth brands. So as we exit these contracts, we do expect that we'll have some margin improvement based on these two brands no longer being part of our business. Maybe I'll set a follow-up on the Walmart stuff, right? So I've had some investors ask: Does Walmart become a competitor here, right? Or does that, are you worried about the competitive dynamics? Walmart has operated 2,800 vision centers for 35 years, so there is no change there. They just didn't want a competitor operating 8% of their stores. It was not a strategic part for us. It was a nice part of our legacy, and I've really appreciated all the time. I'm glad, I'm glad this was supposed to happen over a decade ago. I'm glad for the time we've had. They've been a great partner all this time, and now we're all- we're both moving on. Yeah, that's good. Melissa, I'll shift over to you. Reade mentioned that, you know, you see a future where you could double the store base over time. How should we be thinking about the ROIC profile of your business? Yeah. So our new stores, as we expand our new stores, the initial investment for each new store that we open is between $400,000 and $600,000 per store. The store typically pays back in the range of three-five years, and we expect the stores to typically be profitable within their second year of operations. So within 18-24 months, they're typically turning a profit, and we would expect that that would continue as we roll out our store base, and we'll continue to grow it between 65 and 75 stores per year as we have. Gotcha. Reade, you talked about the three focus areas, right? Recruit, retain, deploy. We haven't talked about the demand side of things. I mean, you called out the green shoots. So how are you thinking about or maybe what are you seeing in terms of the demand side, as we think about the U.S. consumer and also, like the trade downs and things that we are seeing in the market? Very, very good. So where we have the capacity we want for stores, we're delivering in our historical mid-single-digit range, and to be clear, for the 18 years prior to COVID, we had 72 consecutive quarters of positive comparable store sales, averaging 5%, averaging 7% for the four years prior to COVID. So very consistent and predictable growth along the way. Our consumer, starting in about April of last year, was more cash-strapped than they have ever been, and our purchase cycle, as I said, was disrupted. People say, "Well, what if we slip into a recession?" Our consumer's been in a recession for over a year now. This is. This is not gonna change their reality a whole lot, but what we are seeing is we're seeing trade down from wealthier folks who are now feeling strapped and saying, so the crowd for wealthier for us is over $100,000 in household income, and they are finding us in ever greater numbers. We're also finding the managed care consumer is finding us. That's the insured consumer, is finding us in ever greater numbers. Right now, we are one-third insured consumers, two-thirds uninsured, which is a flip-flop of most of the industry. Most of the industry is closer to two-thirds insured and one-third uninsured, but of course, if it's your money, you seek out real value, and you find, and you find us. But our insured business is growing ever more as insured consumers are finding that their money goes a lot further. Their insurance money is going a lot further with us. So we are seeing trade down. We expect that to continue, and if the economy does get worse for richer consumers, we expect that to drive even further. Gotcha. You talked about AI briefly in your introduction. Maybe walk us through what exactly you're doing in AI. Yeah, yeah. This is really exciting. So, the, an eye exam, most people think, "Oh, yeah, an eye exam, that's where I get the prescription to know what the curvature of the lens should be," right? But actually, it can detect 270 different disease states, some of them vision disease states, and some of them general disease states. Our doctors are generally often the first person to tell someone they have diabetes or hypertension. Our consumer base and uninsured consumer base aren't going to doctors very frequently, so they're coming to our doctor, and our interaction with our optometrist, who has four years of graduate education, is probably the only medical interaction they're gonna have with a medical professional, that year. So, our doctors are already providing a far broader set of healthcare diagnoses than one would expect from an eye doctor. All of our America's Best stores have a retinal camera, which takes a picture of the back of your eye, the retina. The retina is a treasure trove of information, of healthcare information. It can detect diabetes, the presence of, and the progression of hypertension. We believe cardiovascular issues. I mentioned the investment we have made. We just invested in a company called Toku, which is in the process of getting FDA approval for their AI scan of the retinal image we take to determine the presence of and extent of cardiovascular issue. We see that AI and our retinal scan is a combo package that can play a far greater role in the healthcare of our consumers, and we are hopeful that at some point we can be working with insurance companies on ways that we can both improve health outcomes for our patient base and maybe get save the insurance company money, some of which we hope they might share with us. But the presence of the retinal camera and the AI is a big combo package that we think can play an ever greater role in broader healthcare, which is why we're at a healthcare conference. Generally, we go to consumer and retail conferences. This is our second-ever healthcare conference, but in the process of building the second-largest optical chain in America, selling glasses and contact lenses, we built the largest chain, the largest network of employed optometrists in America, who are all connected together on a common data platform, and we think that that large network of employed doctors with things like retinal cameras and AI and common data platforms can play a broader role in U.S. healthcare over time, which is why you'll see us at more and more healthcare conferences. Reade, maybe just to that point, so as you think about layering healthcare as an opportunity for EYE, does AI have to happen, or does FDA approval have to happen, or is there a way for you to tap into the healthcare opportunity without Toku? There are ways to do that. The FDA has approved AI scanning for diabetes and I believe for hypertension, and two weeks ago, Toku got something called a breakthrough designation, which is a from the FDA. In essence, the FDA is saying, "We like this. We're gonna fast track and make it easier for you." So I'm not too worried that this is gonna happen. Toku's technology, AI, is being used in the New Zealand healthcare system now. It's just we haven't got the FDA approval yet. Well, looking forward to seeing you at more healthcare conferences. Yeah. Melissa, maybe we've got a little bit of time here. One question that I would ask: as we think about the balance sheet and capital deployment, how are you thinking about, you know, obviously investing in the stores, but how should we be thinking about cash generation, balance sheet focus, and then maybe debt paydown, if that's an opportunity? Yes, we are fortunate that we have a very solid balance sheet and a strong cash position, and so we look at our capital allocation in such a manner that we want to continue to invest in the growth of the business, as well as return value to our shareholders. We recently repaid $100 million of our convertible notes that were maturing in May 2025, and the reason we went ahead and repaid them now is because they were trading below par. So we were able to take out $100 million of debt without paying $100 million, and so that was, so an opportunistic move for us, and we'll continue to look for ways to, opportunistically pay down the debt that we have, return value to our shareholders, and of course, continue to invest within the growth of our business. All right, Reade, I'll shoot it back to you. We have two minutes here. I figured we'll throw you some closing remarks and what investors need to be thinking about as we think about National Vision. Oh, Brian, thank you for that. That's a very nice thing. All right, so we are the low-cost provider of a medical necessity. Low-cost provider of medical necessity should always do well. Your eyes are all gonna get worse with age. I'm sorry to tell you that, but it's true. And so you will need to address that. This is why, for 18 years prior to COVID, we had consecutive positive comp growth of 5%, every, averaging across, those 18 years. Consistent, predictable, because people's eyes were going bad, and they and many people need to save money on this and can't afford a lot, and we were the place where they sought out. We were disrupted by COVID. For sure, we were disrupted by COVID, first on the upside, and then the purchase cycle disruption that we've been catching up to, but history would say that the purchase cycle should normalize over time because the biology of the eye has not changed at all because of COVID. Our biggest challenge is having the eye exams available for our patient base when they want to get them. Where we have the capacity we want, we are delivering at the historical comp base that makes this business work really well. We are improving in our recruitment of doctors. Second record year in a row of recruitment. Our retention is growing for the second year in a row, and we found a way through technology to deploy our doctors in an ever better way that will help us with recruitment and will help us make the doctors appear where we need them most efficiently over time. We're starting to see green shoots in the third quarter when all these things start to come together, and we are optimistic about the future, about being able to get back to the historical consistency we had pre-COVID, while concurrently playing an ever greater role in the healthcare of our patient base in ways that we hope to be able to monetize over time. I think that's it. That was great. Thank you so much. Aside from that, it's great to have you here. Oh, and next time we get together, I'll talk about all the good we do in the world. We're trying to solve the global vision crisis because 15% of the world's population has bad eyes and doesn't have glasses yet, and we're gonna help 1.5 million of them this year, and we're just.