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Good afternoon, and welcome to Kits Eyecare Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. [Operator Instructions] This call is also being recorded and available later for replay. Your host today are Roger Hardy, Chief Executive Officer; Sabrina Liak, Chief Financial Officer; and Joseph Thompson, Chief Operating Officer. Before we begin, I am 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, will and other words similar meaning. This forward-looking information is based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors that we 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. We caution investors not to rely on the 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 securities regulators. During today's call, all figures are in Canadian dollars unless otherwise stated. And with that, I'd like to turn the call over to Mr. Roger Hardy, CEO. Please go ahead, sir.
Good afternoon, and welcome to the KITS 2021 Year-End Financial Conference Call. Thank you for joining us today. I'm Roger Hardy, the company's CEO, and joining me today are my 2 co-founders, Sabrina Liak, our CFO; and Joseph Thompson, our COO. Today, I'm pleased to share our fourth quarter and annual 2021 results, and discuss our vision for the company and its future. After my comments, we will review our financial results followed by a business update. When Sabrina, Joe and I founded Kits Eyecare back in 2018, we set up to build an eye care brand for the consumer of today, a customer that was technology savvy, time and value conscious, and one that we just couldn't see taking the time to ever visit much less wait for or pay the exorbitant prices associated with an in-person optical store experience. We believe that concept of eyecare was built for a customer of 50-60 or longer ago. We believe the future of eyecare was in our hands literally and on our phones. And so we set out to build an offering that would serve that mobile customer. We also believed health care, more specifically eyecare, was a category that was ripe for disintermediation, having been slow to adopt technology across many different verticals. We believe that value will be created at the intersection of health care and technology by those who could find technology solutions and scale them to address age-old health care challenges. As we looked out at the landscape of value creation, we are struck by the value created around us by companies like Amazon, Apple and Netflix with subscription businesses who derive predictable revenue from recurring customers, allowing those companies to make meaningful investments in service, manufacturing and differentiated offerings as opposed to just customer acquisition and retention. Accordingly, we made these pillars of our business plan. We also knew that companies that were able to vertically integrate and manufacture their own products were able to control the rails of production, and accordingly could shorten time to delivery and the value chain while retaining category value and margin. And so we set up to build an onshore manufacturing facility right here in Vancouver that would allow us to deliver premium products faster and more affordably than our competition. And finally, we knew that the company with the highest NPS in any category ultimately has the highest value. And so we engage with our community, allowing them to comment openly online and across many customer forums where we could hear the concerns and address issues all with an eye to improving our service. We are pleased today to report that we continue to have, by far, the highest number of reviews in the category posted online, which we see as validation of our focus on truly delivering a superior service and on track to achieve the highest NPS in the category. As a direct result of those early decisions, we can now celebrate having served more than 680,000 customers over the past 24 months and the creation of a meaningful eyecare platform ready to serve eyes everywhere. We derived over $82 million of revenue, which is up 15% year-over-year from $75 million in 2020 and community engagement levels are high with new customers hitting a new high in 2021 of 271,000. This pace of new customer acquisition remains above pre-pandemic levels and we made significant progress throughout the year in expanding our gross margins. Some highlights of 2021 include that orders delivered grew 23% year-on-year to over 640,000 in 2021. Overall revenue from repeat customers in 2021 was 71%, an increase from 2020 of levels of 65%. We delivered 163,000 pairs of eyeglasses to customers in 2021 compared to 38,000 eyeglasses in 2020, a growth rate of over 300%. And given our unique strategy of offering glasses to our existing vision care customers, we had a category-leading customer acquisition cost for the quarter of $28. Our active customers grew 36% to 680,000 customers, up from 500,000 customers in Q4 '20. This 2021 growth of our installed base of vision-corrected customers and revenue builds on record growth in 2020. In Q4 2021, the average order value for both contact lenses and glasses was up. However, the average revenue per customer trend reflects success in shifting towards greater eyeglasses sales, which have a lower first-time average order value. We continue to focus on decreasing promotional activity across all of our product offerings, and we expect that repeat glasses purchases will start to drive higher AOV, average order values, over time. The focus this quarter was definitely on glasses where the business experienced strong 150% growth year-on-year to more than 50,000 eyeglasses delivered. And as you've heard us say, there's significant growth potential in a larger, more fragmented eyeglasses category. The addressable market for glasses is approximately 5x the size of the contact lens market and today is serviced by a large, fragmented network of independent eyecare practitioners and where we can own the rails of production to produce higher-quality products that are our own at better prices. Looking at glasses growth on the year was a tremendous achievement by our team, growing our eyeglasses deliveries to 163,000, up 329% from 38,000 in 2020. Eyeglass purchased by repeat customers increased by over 300% year-on-year as we delivered 14,000 pairs of eyeglasses in the fourth quarter to returning customers. And again, perhaps more impressive is the large and category-leading retention numbers in our eyeglasses cohort as we provided more than 37,000 glasses to returning customers, demonstrating the strength of the vision-corrected community and the annuity we've begun to build. 2021 was a year of investment and strategic acceleration for KITS. We continued our capital investments in building a fully automated onshore optical lab at the capacity to produce thousands of single vision and digital progressive lenses per day. This investment came fully online in Q3 after a couple of years of hard work. Next we invested in attracting a strong community of loyal customers who would spread the word about our high-quality, comprehensive eyecare offering. Finally we invested in expanding the KITS brand predominantly in Q1 and Q2 with expanded top-of-funnel marketing efforts, which we saw deliver an increase in branded search of 625% and resonated with customers as a full 90% of our frames were from our own KITS brand of eyeglasses. These investments position us with a solid KITS platform, enabling substantial profitable growth in the years ahead. As we highlighted on our last call, the U.S. optical market is a $35 billion market with glasses making up about $28 billion of optical. We've made meaningful strides in our mission to gain share within this large market, much larger than contact lenses, and has higher gross margins and longer lifetime values. In addition, with our onshore digital progressive lab capabilities, we feel competitively advantaged to capture this higher average order value and margin segment within glasses. Today progressive glasses represent approximately 5% of our sales, making us under-indexed relative to the market, and this will also provide a growth vector for the company going forward. We're extremely proud of the traction our KITS offering is gaining within the industry and with our customers choosing our KITS brand of eyeglasses 90% of the time. We also achieved a milestone in repeat glasses purchases as 23% of eyeglasses delivered were to returning customers. The significant growth in our sales to repeat customers reflects our success in delivering quality eyeglasses at prices that inspire existing customers to return. In addition, gross margin expanded by 680 basis points to 30.1% in the fourth quarter of 2021 compared to 23.3% in the fourth quarter of 2020 as we shifted our promotional offers. We believe gross margin will continue to expand as eyeglasses become a bigger part of our mix moving forward. As we completed our first year as a publicly-traded company, we're proud of the progress and the outlook for 2022 and beyond. Our core community of highly recurring vision-corrected customers remain strong and growing despite macro headwinds. We believe that as our community and brand continue to be delighted customers, our revenue expand given our strategic and competitive positioning within the optical category. In Q1 2022, we launched our B2B platform fulfilled by KITS, providing access to our vertically integrated manufacturing lab and fulfillment center to select partners in health care, insurance and optical with plans to grow this high-margin B2B subscription platform substantially over the coming years. Our onshore optical lab, meaningful eyeglasses business and B2B foundation provides us with hard to replicate and enviable moat in the $35 billion optical industry. We now have a brand-new automated optical laboratory with the capacity to produce over 4,000 eyeglasses per day and have expanded manufacturing to complete all surfacing, enabling us to produce high-quality custom digital progressive and specialty glasses in-house. Our investment in an onshore vertically integrated glass manufacturing infrastructure enabled us to cut out the middleman, deliver predictably and quickly become one of the leading players in the market in North America in 2021. With all of our production, local and onshore, we can ship patient orders quickly and cost effectively. Our DTC fulfillment model allows us to produce and ship in-house in under 2 days. We strive to continue to improve on this metric as speed of delivery is critically important for our customers. There's tremendous value in having built out this complete vertically integrated eyecare solution, allowing us to ensure the highest quality of products reaches our patients in the least amount of time. I'll now turn the call over to Sabrina for the financial review. Sabrina?
Thanks, Roger. As we grow our revenue, we expect to continue to benefit from scale and remain disciplined on pricing. Last quarter, we talked about our strategic focus on building out our glasses business through leveraging our annuity-led base of contact lens customers, increasing gross margin as we move upwards on the customer value chain. We believe we are on track for executing on this plan. Our expansion from a stable contract lens business into the more profitable glasses segment is actively underway. This year is pivotal for our business as we continue to drive margin expansion to support long-term profitability and sustainable growth. On a currency adjusted basis, revenue was up 15.1% in 2021 and up 2.4% in 4Q versus the same period in the prior year. This year, we're investing in our highest LTV customers and in building out our glasses business. As a result, revenue in the near term was impacted by this strategic shift. However, engagement remains high, and our retention levels and KITS community of active customers have increased over this 2-year period. Active customers reached 680,000, an increase of 36% year-on-year, and retention is a healthy 71% in 2021. In 2021, orders delivered were 640,000, up 23% versus 2020 and up 155% versus 2019. The increase in orders delivered is a result of our strong growth in glasses in our Autoship subscription program. Glasses delivered grew by over 300% year-over-year to 163,000 pairs of glasses. We expect this momentum to continue as our in-house manufacturing enables us to produce complex custom glasses orders at extraordinary value and prices. Similar to last quarter, the difference between our revenue growth and customer order growth reflects the introductory offers we have provided on both subscriptions and glasses. Going forward, we continue to expect this delta will decrease and reverse as our customers return and expand our higher-priced offerings. Turning to gross margin. We made solid progress this quarter as we adjusted our promotional offers and successfully attracted higher-value customers. As we gain momentum for our product offerings and increased brand awareness, we expect to be less reliant on promotional activity going forward. Preliminary progress is strong as gross margin expanded 420 basis points from 25.9% to 30.1% compared to 3Q 2021. Driving this large magnitude of gross margin improvement in a challenging supply chain environment throughout this COVID-related and weather-related operational disruption reflects our team's commitment in planning and focus. We met our NAS target from last quarter of achieving a 30% margin in the fourth quarter of 2021, and we maintain our belief that near-term margins will continue to expand as eyeglasses become a bigger part of our sales mix. Our goal is to generate long-term margins above 35% to 40% as our glasses business and returning Autoship customers become a larger portion of total revenue. Adjusted EBITDA margins remained relatively steady in this quarter versus last quarter. 2021 was an investment year for KITS, and we invested in brand building activities to launch our glasses business and to build out our state-of-the-art onshore optical facility. In 2022, we passed this investment phase and plan to reach EBITDA breakeven in the near term. Having built ahead of anticipated glasses growth, there is significant operating leverage embedded in our business. We generated an adjusted EBITDA margin of minus 6% this quarter, which is flat year-over-year, and we are projecting a return to EBITDA breakeven by midyear, and our guidance for 2022 remains unchanged at between $115 million to $125 million of revenue. We finished the quarter with a strong balance sheet, reflecting $20.5 million in cash and do not expect any material investments over the next 12 to 18 months as we have built a significant runway for growth. I'll now pass it to Joe to discuss our operational highlights.
Thanks, Sabrina. Our new and expanded onshore optical lab and distribution center had a busy quarter. We manufactured and delivered over 50,000 pairs of eyeglasses to patients in Q4. Thanks to this facility and our investments in previous quarters, we can now manufacture and ship over 95% of single vision orders in under one day. This gives us a competitive advantage as we know that orders produced and shipped from our own lab have faster turnaround times, lower return rates, higher margins and higher NPS scores. Our new in-house surfacing and lens coating facility also saw considerable growth in Q4, with high-margin digital progressives representing approximately 5% of all glasses production, boosting our overall gross margin percentage. Digital progressives make up nearly half of the dollars in the eyeglasses market, owing to their high retail costs. Progressives typically sell in traditional optical retailers for $800 or more. By vertically integrating this process, we're happy to offer high-quality digital progressive to customers for only $98. We expanded our inventory on hand of frames and lens products earlier this year, which has allowed us to avoid costly airfreight or inconvenient out of stocks for customers. Our data focused inventory team continues to optimize our mix of inventory on hand, reducing inventory level quarter-on-quarter by nearly $2 million. Our lab also gives us control and flexibility of our inventory levels, which insulate us from supply chain and price increase challenges impacting many others. With automation and scale come savings. As our eyeglasses frames increased, our labor cost per frame reduced considerably quarter-over-quarter, a good indicator of how incremental scale will benefit us moving forward. As Roger mentioned, our onshore optical lab, meaningful eyeglasses business and B2B foundation provided us with a hard to replicate enviable moat in a $35 billion optical industry. This concludes our prepared remarks. Operator, please open up the line for questions. Thanks.
[Operator Instructions] And your first question will be from George Doumet at Scotiabank.
I didn't have a chance to see in all the literature, but I just wanted to confirm, Sabrina, that you mentioned that we're going to stick with our guidance for $115 million to $125 million of revenues for this year and returning to positive EBITDA in early 2022?
And correct, our guidance remains unchanged for 2022. We think with our investment phase behind us, we're poised to benefit from significant operating leverage going forward. And all of our efforts are focused on growing top line, as indicated in our previous guidance of $115 million to $125 million in 2022. We are targeting a return to EBITDA adjusted EBITDA breakeven midyear.
Okay. That's a 45% growth off of the revenues that were reported in 2021. You've been kind of experiencing some flat growth like over the last couple of quarters' year-over-year that's a big number. So I'm just wondering if you guys are able to maybe help us reconcile that or give us some buckets in terms of what's going to be driving that really strong growth over the next 12 months?
Yes sure, George it's Roger here. So if we think first about the contact lens bucket, as we come out of the pandemic, some of what we've factored into our guidance is that there will be a return to a more normalized run rate in the contact lens business, and we see ourselves outpacing that market. So I guess not surprisingly, over the last year, as people have been told not to put their hands anywhere near their face over and over again. People were putting less contact lenses in and on. And so our expectation is -- as we come out of the pandemic, we're going to see a more normalized high single-digit category growth, and we expect to grow significantly beyond the category in our contact lens business. So that's point 1. Number 2, in the past 12 months, you've seen us taking contact lens customers and putting them into eyeglasses. And so that average order value has been anywhere from 1/3 to half of what a traditional contact lens customer would spend with us. And so in a sense, we've cannibalized a large part of our ordering database by putting them into eye glasses with the belief that ultimately, we're going to build a branded business in our own brand of KITS frames, which we believe ultimately is more valuable than being in third-party brands. And so again, we're going to take -- we've taken for the past 1.5 years, a high average order value of north of $150 and put them into anywhere from $30 to $50. We're going to -- we have been slowing that process down. So we feel like we've got a nice base of customers in eyeglasses. And so we feel good about that. And that's where that 163,000 pairs of glasses delivered comes from. And I think we've really validated not just the fact that we can convert people to a first pair of glasses, but you'll also see in that slide deck, the number of glasses customers who returned. And so on the year, somewhere around -- if you look at 2020 and look forward into 2021, you had higher than 90% of the glasses that we sold. We derive that many glasses to return customers in 2021. So if we carry that forward in 2021 as we go into '22, we should see a very high number of returning glasses customers at higher average order values and increased gross margins, and we'll be doing less of that cannibalization I talked about in the first part. And number 3 is that we have, as we've kind of pointed out in this fulfilled by KITS, discussion. We've signed up and the Sun Life partnership was announced previously so Sun Life being one of the largest healthcare providers across the country. We will be announcing another one as the year progresses here and a couple of more we hope. So we think that by partnering with some of these insurance providers, we give them better care, better patient service and better visibility into their vision care business and a better overall experience. So those are kind of the -- a few other vectors and happy to go into more detail with you off-line on those and review your model with you if you've got time, George.
Yes, I appreciate it. One more for me before I pass the line, on the gross margins, a really strong improvement in the quarter, 30%. I'm just wondering with -- what we're seeing in terms of the inflationary headwinds, resins, all that stuff. Is that -- do you think that number is sustainable as we go through the next couple of quarters?
Yes, George, I think our view is that it's going to continue to move up to mid-30s and even as high as 40% by year-end as Sabrina touched on, as a higher percent of orders become glasses customers and returning glasses customers specifically. So that's kind of how we think about it. We've also, I think, been pragmatic in, as we mentioned, building out an onshore manufacturing capability, which we think insulates us a little bit from some of the import and export challenges, and we've made sure to have enough inventory on hand to take great care of our customers move -- going out over the next couple of quarters. So when we look at our inventory, we've probably built in anticipation of some growth but also built in some insulation and a buffer to make sure that we have no interruption of any kind. So we're feeling really great about sort of inventory levels about restock speed times and the suppliers that we've chosen have been quite strong globally.
Next question will be from Luke Hannan at Canaccord.
Yes, maybe I'll follow-up on that last sort of point there on inflation. I think George had touched on potential asking whether there's potential any issues with specific materials. Is there anything that you're seeing right now as far as sourcing raw materials where you're experiencing maybe greater than normal levels of sort of pain and being able to source those or what that dynamic sort of look like right now in terms of lead times?
Luke, this is Joe. And I think as you saw in our gross margin numbers in Q4, some of the scale benefits that we've achieved over the last year and over the last 2 years really are outweighing any cost increases that we're seeing. So we have not -- to your specific question on resins or raw materials. We've not seen an increase in many of our orders on the glasses side have dated back 6 months or even beyond as we have been preparing for this growth. So as Roger mentioned, we have been insulated from some of those more recent impacts by planning quarters in advance. Maybe the last thing I would say is the numbers that are jumping out to us on the 2021 results, 15% revenue increase, but a 23% increase in orders and then a 36% increase on active customers. And so as our orders have continued to go up 23% year-on-year off of a very strong base of growth in 2020 as well. We are seeing a lot of interest from vendor partners to do even more in the industry as one of the faster-growing businesses in optical. So those are all points that give us confidence that we remain insulated from some of the activities that you see in other companies in the industry or even beyond.
That's good color. And my second question, just again on the topic of inflation, but thinking about it from consumer lens, clearly, with what we're seeing right now across our coverage universe? The consumer is, we'll say, incrementally a little bit weaker in terms of the discretionary dollars in their wallets or will be at least for the next few quarters. So I'm just curious, is that sort of built into the guidance as well? And are you seeing any change in customer purchase behavior thus far in 2022?
Luke, it's Joe again. I think you're touching on something that's really important to our business model, which is providing value, and we're seeing more customers do exactly as you suggest, which is look for value. And the timing was perfect with the launch of our digital progressive surfacing line nearly half of the dollars in eyeglasses, which is, as Roger mentioned, the largest part of the $35 billion optical market in North America are spent on progressives. And the price point customers are paying right now is $800 to $1,000 in market. And so we're happy to offer customers a free form digital progressive lens in a KITS frame for $98. And so we've seen quite a bit of growth in Q4 of our digital progressives business growing to 5% of our production and then further growth on top of that as we've gotten into Q1. So I think your point is right on. I think customers are looking for more value.
And probably one last piece on that Luke is, to remember the vision is really nondiscretionary. So for a customer that consumption is kind of planned in on contact lenses when you use Dailies and you run out of Dailies, you need new contact lenses. And if your prescription changes and you can't see from your glasses, it's really nondiscretionary. So vision care has sort of a built-in annuity in that sense. So we think of that as being also an important factor that the consumer is still going to need to see, and they're going to be looking for better value and more convenience this year. And fortunately, we think we've built out in anticipation of that.
[Operator Instructions] And your next question will be from Matt Koranda of ROTH Capital.
Just wanted to cover trends that you're seeing in glasses, AOVs. I appreciate -- the color that you gave. But just with the higher mix of digital progressives that you called out and the lower mix of discounting the more repeats -- maybe could you speak to average order values in glasses specifically and where they trended in the fourth quarter relative to the third? And then just expectations as we head into '22 on that front, I think it would be logical to assume they increase, but maybe just help kind of gate our expectations, if you could, on that front?
Yes, sure, so in the fourth quarter, AOV on glass is that roughly 20% relative to the third quarter. And then for 2022, we expect that AOV that will be another 20%.
Okay very clear. And then just curious if we could zoom out and think about the outlook for 2022, the $120 million at the midpoint. Maybe if you could just speak, Sabrina, to the cadence of revenue through the year and anything we should be kind of factoring in, in terms of seasonality and growth acceleration because it is a pretty big uptick in growth that you guys are guiding to? And then just maybe rough if you could help us on the split between glasses versus contacts and sort of expectations there that would be very helpful?
Sure, that was a lot. So let me try to dissect that a little bit. So first, on the seasonality, we expect a steady ramp from the fourth quarter upwards throughout the year, and that to be a function of the cadence of repeat purchases in those contact lenses and glasses as you look at kind of the typical repeat behavior is could we repurchase between 1 and 2 years. And so we'll see that kind of flow in and progress as that -- in a matching way to how we acquire new customers over the last 24 months. And of course, we expect glasses to accelerate relative to contact lens as a portion of that. And so I guess that was the second piece of your question, which is what is the glasses versus contact line mix. And I don't think we've broken out that yet. And so I think we're not breaking that out yet at this point.
Yes, I mean I think we've kind of tried to talk about category growth at high single-digits and us outpacing the category fairly significantly. And then we've given you good visibility into that glasses number, how the glass has number ramped over the last couple of quarters and year-over-year. And so our expectation is that, that glass is number stacks again this year and including we were able to acquire a similar number or ideally more customers going forward. So it's -- I think those are some of the key pieces. And then as I talked about the Sun Life partnership, one of the largest providers in Canada as well as others will give us a healthy bump is our view.
Okay, very helpful. If I can follow up on the healthcare front, just curious if you guys want to kind of shape expectations as to sort of the amount that may contribute to revenue this year, especially given that you guys talked or alluded to maybe having another relationship that you'll announce later this year? So just trying to factor in sort of how much to expect from that channel because it's a totally different sort of channel, I would expect versus sort of the consumer-oriented general where you might be leaning into marketing spend to drive growth. And so maybe it would be helpful because it could maybe just kind of parse out what you expect from the healthcare channel?
Matt, this is Joe. So on fulfillment by KITS, we aren't breaking that out that number out at this stage. It is a fairly new business, although growing rapidly. What I can say, though, is the early metrics are very encouraging, not just on unit growth, but also favorable on average order value and gross margin. And so we think that there'll be growth in a couple of areas of the growth in new partners to the platform. There will be growth in units within those partners on a considerable ramp. And then on top of both of those 2, those new customers adding new orders will come in at a higher AOV and gross margin. So we look forward to updating on yourself and the market as we onboard more of these partners. What has been -- what maybe the last thing I'd say is -- the reason that we are optimistic about these partnerships is because of the great service we've been able to provide. Thanks to onshore manufacturing of particular interest with partners that have reached out to us, is our ability to manufacture anything from single vision to digital progressive glasses and get them in customers' hands, patients' hands in 1 to 2 days versus 1 to 2 weeks. And so we think that will be the final element of continuing our high track record of repeat purchases as we add new partners and new customers in to fulfillment by KITS.
And at this time, Mr. Hardy, there are no further questions. Please proceed.
Great well, thanks everyone, for joining us today. We look forward to updating you on the Q1 results shortly. And I hope everyone has a great day and super week, and we look forward to talking soon. Thank you.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.