Mad Paws Holdings Limited (MPA) Earnings Call Transcript & Summary

Good morning, everybody, and welcome. Thank you for joining us on the Mad Paws investor conference call. With me this morning are Justus Hammer, co-Founder and CEO; Graham Mason, CFO; and I'd also like to welcome Howard Humphreys, the CEO of Pet Chemist. The format of this morning's call will be that Justus, Graham and Howard will present on the strategic acquisition of Pet Chemist and also the preliminary unaudited results for the 6-month period to December 31. [Operator Instructions] Thank you again for joining us. And on that note, I'll hand over to Justus.

Thanks, Michael, and welcome, everyone. Thanks for taking the time. We're really excited to run you through our acquisition of Pet Chemist, and Howard has joined us, he is the founder of the business, and we'll give you some details about the business as well. We're also quickly going to run you through our preliminary results for the first half year of FY '22. And with that, I'll give it over to Graham to just quickly run us through the results.

Thanks, Justus. So I'm pleased to give you report on our H1 FY '22 highlights. These are preliminary unaudited results as Michael said, but it was a really pleasing half for Mad Paws considering the first quarter of that half was affected by extended lockdowns around the country. So with that backdrop we are really pleased with our results. Bookings and transactions were 88,000 in the half, plus 104% the first half of FY '21. Gross GMV of 9 million in the quarter, which was 81% to H1 FY '21. And operating revenue was $3.3 million, plus 231% to 1H FY '21 which is -- we're really, really pleased with. All that was driven by new customer acquisition. We saw 22,000 new customers added in the period, which is plus 60% in the first half of FY '21 also. And marketplace revenue of $1.3 million was 49% up versus the first half of FY '21. It was great to see that rebound in the second quarter of the period where travel on board as well reopened and really starting to see some rebounds and we had a record period for December from the marketplace. And finally, we still remain well capitalized. At the end of the quarter, we had $8.8 million in cash on hand to fund the FY '22 growth strategy, which we've kind of presented to you before. Moving on to the Mad Paws stand-alone first half profit and loss which again is preliminary and unaudited. Our operating revenue increased by 231% in the first half to $3.3 million. Marketplace revenue was up 49% to $1.3 million, and that was driven by improvements in marketplace bookings, which were up 25% as domestic borders reopen. But we're also seeing encouraging signs of the length of booking increasing as well as the books -- the rate per day increasing as demand comes back into the marketplace which is really, really encouraging to see that we've got both a volume driver as well as a kind of rate program coming through the business. We launched our subscription businesses in FY '21. It has started to make a considerable impact on revenue in the first half. They now comprise around 60% of revenue in the first half. Our subscription revenues grew to $1.5 million in the first half of FY '22, up from $1 million in FY '21. That's due to the pet food business Dinner Bowl increasing subscriber growth over that same period, as well as the full impact for Waggly acquisition that was acquired at the end of FY '21. E-commerce revenue delivered 500,000 -- $0.5 million in the period, which represents a nonsubscription toys and treats of Waggly as well as the recently acquired premium pet business Sash, which was acquired in November '21. From a gross margin perspective, the gross margin increased 96% to $1.8 million in the period, and this was due to the greater contribution of the new subscription and e-commerce that I of course mentioned above. The change in gross margin that you're seeing there is largely as a effect of the increase in the subscription of e-commerce revenues compared to the prior year. As I said before, the subscription of e-commerce revenues comprised around 60% of revenue in the first half of FY '22 versus around 10% in the prior period. From an operational EBITDA loss, the loss for the period was $4.2 million, an increase of $2.8 million from the first half of F& '21. The main drivers of that were an increase in employee expenses, which were $1.9 million higher, which is driven by partly the integration of the Waggly team, which wasn't there in the prior period. And also the buildout of the product tech marketing and senior management teams post the IPO in the third quarter FY 2021. And we're obviously looking to execute on the significant opportunity we see in the pet market. Marketing was up $900,000 in the period. We continue to invest in marketing given there are stronger sales we're seeing across all brands. The investment was increasing, driven by marketing costs from Waggly since the acquisition, which wasn't there in the prior period, as well as the pet food subscription vertical. Other operating expenses growth largely relates to kind of public company costs in the period. At that point, I will pause and hand back to Justus and Howard to talk us through the Pet Chemist acquisition.

Thanks, Graham. And yes, we're going to quickly run you through a quick summary of the transaction and then tell you a little bit more about Pet Chemist as a company, which we're really excited about to welcome them into the Mad Paws family. So just as a kind of highlight of how the transaction looks like, Mad Paws will be acquiring Pet Chemist, which is Australia's leading online supplier of pet health products for a total consideration of $25 million, which is stood up in an initial upfront consideration of $20 million and a potentially deferred consideration of $5 million, which is linked to performance hurdles in FY '23 and FY '24. The upfront consideration is $5.5 million in cash and 14.5 million shares. Those shares are issued at a price of $0.23, which represents about 16% premium to our 15-day revamp. Shares obviously escrowed for 12 months and after the 12 months every quarter 25% being released. So the guys are very well incentivized to come to the party and get Mad Paws onto the next level. And I guess that's what we're excited about. We've always been talking about the expansion of Mad Paws from the marketplace focus and adding additional revenue streams to it and really utilizing the kind of assets that we've built with the marketplace to accelerate other businesses and other verticals in the pet space. And that's what we've set out to do in FY '22, particularly after the IPO. And so in FY '22, we already added Mad Paws pet insurance, we added Dinner Bowl pet food subscription service, as well as finalize the acquisition of Waggly at the end of FY '21, which is in the toys and treats subscription space. And then beginning of this year, we've acquired Sash Vets which was really the start of our curated e-commerce piece. And now Pet Chemist is kind of right bang in the middle of the center of our strategy by expanding the health vertical. And we're very excited about the synergies that we see with Pet Chemists and how we can accelerate their growth even further. And talking about a step change, so it's certainly a step change for Mad Paws as a company in terms of size. If we're looking at the last 12 months as a pro forma group, you can see it's a significant uplift in terms of all the important metrics. We're essentially doubling the group's revenue to up to over nearly 12 million dollars, new customers at 79,000 for the period for the last 12 months and transactions over 252,000. So that obviously means that we're a much, much bigger group. If you look at the last half year numbers for the 2 groups combined, we're already looking at a GMV of $15 million and a revenue of $6.9 million for the group just for the 6 months. So a significant uplift and a real step change in terms of the size of the business. Perfect. So a little bit of detail about Pet Chemist and why we're so excited about them. I think the numbers on the top left is a good indication on why we're so attracted to the business on top of, obviously getting Howard as well as Howard's Co-Founder Mel on to the Board as well, and we're going to talk about this a little bit more. But with over 44,000 active customers in the last 12 months, so a huge opportunity for us to cross-sell between the existing customer base which means both ways we can cross-sell from Mad Paws into Pet Chemist, but also from Pet Chemist into our existing products and service offerings. They attract this growth with 65% GMV CAGR over the last couple of years and $130 average order value is what attracted us as well. And then I think one of the key things that we're always looking at in terms of acquisition is that they are similarly customer obsessed as we are, and I think that's very well reflected in the 4.9 star Google rating that they have and over 64% of the transaction is actually coming from returning customers. So even though they're seeing some really nice growth here, a bigger portion of their transactions are already driven by return customers. And then last but not least, that's something that's very beneficial for the whole Mad Paws Group is the low customer acquisition group that they have achieved at only $9 achieving a growth of 65% year-on-year is pretty amazing. It's lower than what the customer acquisition group -- the cost that we have in the group. So we see a huge opportunity here to accelerate that and also then cross-sell again into the existing customer base. And maybe Howard, maybe you can take the listeners through a little bit on what your business actually does and how the 2 parts of the business in terms of prescription versus over the counter product is working.

Yes, of course. Thanks. It's great to be part of the team. So yes, our business is quite simple. We are Pet Chemist, the chemist for pets. It's a business as Mel likes to call it the chemist warehouse of the veterinary industry. About half of our business is pet medication. So we act as a marketplace for people to source pet medication through our pharmacy. Now those medications are typically the sort of thing that treat long-term conditions like heart disease, skin problems. So that really is driving that repeat customer base that Justus is talking about. And that's what's been driving our revenue growth over the past few years. But we also sell a big range of complementary -- we call them complementary health care products and veterinary diets that really match in really well with those sort of pet medications that we also offer. And most of those are also to treat health conditions like anxiety, we've got calming products, probiotics, liver supplements, things like that. And that's where we come at it from a holistic health care perspective, which we think really fits in well with the ethos of Mad Paws and where we're looking to take this business together.

Perfect, yes. Thanks, Howard. Why -- just a couple of words on why we think this is such an excellent strategic fit for us. I've already talked about our strategy and how it fits into that. We're always looking at it at the health care vertical. It's a really attractive one just from a size perspective, $4.3 billion in terms of size. So there's a growth -- a lot of growth to be had in particular, as you think about it from an online penetration point of view only 14% currently being transacted online, and we believe that shift from off-line to online is going to drive that, and we're going to see a lot of growth in the market. There's also some structural changes possible over there in the future. At the moment, we're still talking about physical prescriptions that are being sent to the business. If that changes to digital subscriptions, obviously, we'll see that as an additional acceleration for the business. We are benefiting from the same tailwinds that we've been talking about and we've experienced over the last couple of months and quarters. Increased pet ownership, humanization and premiumization. People are really looking to look after the pets now as good as possible, and the next step of that just from making sure that they've got good sitters looking after their pets, making sure that they feed the pets well, obviously medication and supplements, making sure that the pets are as healthy as possible, for as long as possible. We see a huge opportunity here to accelerate Pet Chemist's growth by adding a little bit of the smarts that we've built from a technology perspective, but also from a marketing expertise. And that's why we see where we can further accelerate the growth of the business has already experienced over the last couple of years. And then we've already talked about cross-selling opportunities. This is really where we see the biggest low-hanging fruits for us as well. And for us is always kind of 2 parts of the strategy. One is the marketing integration, making sure that we integrate with Pet Chemist into our dollar structure, making sure we've got a single view of the customer and making cross-selling as easy as possible from a marketing perspective. But then obviously, going back to the technology, we're also looking at improving the technology we have, particularly from a subscription perspective and making the user experience as seamless as possible. Yes, and we've heard already from Howard, I've mentioned the team before. This is always the first thing that we look at when we're buying a company that has a good fit between the teams as well. And I think Howard is not only going to be excellent in driving Pet Chemist growth, but also going to be extremely well for the wider Mad Paws team in terms of their knowledge with Howard running the vet clinics for multiple years and Melissa being a pharmacist with multiple years of experience and very close to the pet market -- yes, pet market is going to help us extremely on all parts of all verticals within the Mad Paws business. So it's something we're really looking forward to. So a bit of an outlook of kind of what we expect from the acquisition. We've already talked about the growth that we've seen over the last couple of years, but I think the earn-out numbers will give you a good idea in terms of where we see Pet Chemist growing towards. Now keeping in mind that these targets are fairly much taken into consideration that we've taken away the Pet Chemist being limited by the resources that they have because they have really built that business on a shoestring budget up until now. It doesn't really take into consideration some of the cross-selling and other benefits that we're seeing by bringing into the fold of the wider Mad Paws business. But with that, we see $22.8 million to achieve the full earnout for FY '23 and $32.7 million in terms of the earn out target for FY '24. And just to make clear, these are revenue numbers and not GMV numbers. So it gives you a good indication on where we see this business going to. Yes, we've always talked about these tailwinds, and we just want to reiterate kind of the same tailwinds that are true for the Mad Paws business, obviously are also true for Pet Chemist. 69% of households now own a pet, and there's not just more pet owners out there. People are also spending significantly more in the pet -- with people spending there almost $3,200 on their dogs and over $2,000 on their cats. So that kind of double whammy we see as the biggest driver for our business. And then from a marketplace perspective, obviously, people going back to travel now is where we've seen very positive signs at the beginning of the year already for the marketplace growing stronger. And this gives you a good indication on where Pet Chemist is playing it. What are the verticals where the Pet Chemist market opportunity lies, obviously, in the food, toys and accessory business, but also in the health care business, both of whom are significant parts of the spend for any pet owner out there. And if we look at the numbers now, the total TAM for dogs and cats now sitting at over $30 billion. So, not just a very fast-growing industry, but also already a significant industry in terms of size. We've talked about some of the growth trends already and why we're excited about Pet Chemist coming into the Mad Paws fold. Maybe, Howard, do you want to talk a little bit about kind of what you've seen in terms of the customer and the change towards kind of more premium products and the humanization of pets and how do you see that playing out over the next couple of months and quarters?

Yes, of course. And we know that pets are part of the family, 2/3 of owners see pets as part of the family, and I think almost half of those admit to letting their pet sleep on the bed as well when it comes to dogs and cats. And it just shows how when we love our pets so much more now and they really are part of the family, one of the key growth factors in that has been spending more and more money on pet health care. Whether that's medicine, vet treatments or supplements, the sort of things that we sell, people are spending more and more money looking after their pet's health because they are really part of the family. And that's where we see this explosion in spending on the premium end of the market, which is where we like to sit. So we'd like to sit on the premium and the pet food, on the premium end of supplements and on that end. And that's where we see the growth is going to continue and especially has been driven by COVID. All the numbers that are up there in terms of pet health care are all up to 2020. So it doesn't take into account the explosion in pet spend due to COVID and are spending more and more time working from home and just becoming more closely connected. And that's where we sit. So and that's how we fit in so well with Mad Paws. We're closing that group -- closing that loop in terms of becoming part of caring for the pet as a whole as opposed to just on the Mad Paws side or just on the Pet Chemist side, which really does fulfill our goal of becoming a one-stop shop for pet health care and pet care overall, so yes.

And maybe as a final remark, we're very excited, particularly because we feel there's a really great overlap between customer base, between Pet Chemist and Mad Paws, just from a type of customer. Obviously, our customers are very focused on making sure that the pets are looked after spending money on making sure that they find the best sitter. They are spending money on premium dog foods, as well as premium toys. So they're there to look after the pets as good as possible. And obviously Pet Chemist with the medication and supplement side of things, is kind of the next step and should be very well received by our customer base. And maybe the last point to talk about as well is, obviously, from a data perspective, I think this is where we are very excited about bringing Pet Chemist in as well. Our business drives and thrives on the data side of things. We always said we're looking at having a single view of our customer and accelerating that kind of circle of acquiring customers, learning more about them and then driving them through the network of products and services that we have, and that fits very well with Pet Chemist as well. They've got a whole a lot of data about their customers, simply a lot of things we can do by looking at the data and learning about the customers, what medications they're having, what breed a particular person has. And that, again, gives us a lot of ammunition to be as targeted as possible with driving cross-sells across the group. And with that, I think Michael we'll open it up to Q&A.

Thank you, Justus, Graham and Howard. Yes, let's open the lines for questions. [Operator Instructions] We've got a question in chat, which is, hi Michael, how do I ask questions through audio? It's -- we have to do it through the Q&A or chat function. Yes, let's do the chat function. Sorry about that, James. [Operator Instructions] Well, while we're waiting for James to type his question, why don't I ask a question to Howard. Howard, I'm interested in how you and the team built this business. What were the sort of key operational milestones that you delivered in getting Pet Chemist to where it is today?

Yes, so I guess one of the key operation milestones we achieved recently, I think -- we started off in a small shop Mel and I working together. And over the years, we've expanded our footprint. And as we've done that, we've managed to expand our range as well, which has been a key driver of growth. So just over a year ago now, 2 years ago now, we've moved into a warehouse, which has allowed us to really expand our footprint and expand our product range. And that sort of has allowed us to offer more services to the customer as well. Our growth has been driven largely through online marketing paid search, that sort of thing. And as Justus said, we run on a shoestring budget. So it has been to a certain extent, very much constrained by that ability to work on the business instead of in the business. So I think that's one key milestone that has been our expansion of our footprint as well, development more of a search-friendly website as well was a key milestone for us. But -- and launching a subscription service, which was a very recent development for us that we look to further grow with Mad Paws' assistance. So hopefully that answers your question.

Thanks, Howard. Let's stay with you as questions come through. First question from John Vergis. Howard, can you run through prescription versus OTC business? Do you hold inventory in the OTC? And do you see any gross profit margin opportunities from the current 365 -- 355 private label mix, et cetera, over the medium term?

Yes, good question. So we do hold OTC inventory. So we are a retailer of those OTC products and we're a marketplace for the medication. So we work alongside a pharmacy for the medication side. On the OTC side, we do hold the product, but we have really good terms with our wholesalers, and we have really good relationships with them. So we're not having to hold a huge amount of stock. We can have a really good range of products but then also bring in the stock as we need it to replenish the shelves. So we can hold a relatively small amount of stock. And because we have same day and next day delivery, we can manage to not hold such a huge amount of stock that we can stock a really big product range from quite a small footprint. And that's one of the things that's allowed us to grow and being relatively capital light on that basis as well, and that will continue going forward as well. So we'll be able to offer more and more products but not have a huge expansion in the amount of stock that we need to hold. Your other question in terms of margin growth, margin expansion. We're getting into the stage now where we are a lot more significant in terms of our purchases. So we're working directly with manufacturers and wholesalers to improve those margins. So they'll offer us stock rebates, specials, things like that because we are of a more significant scale now. And that's helping us in times like Black Friday, things like that, where we do, do promotions. And that's happening more and more. So we're getting to the point where we're a key account for a lot of these manufacturers. So that's leading to margin improvements and margin expansions there. In terms of private label, it's not something we've considered for the immediate term or the short term. Our intention at the moment is still to focus on our core business and building awareness. But that is something that we'd like to scope out going forward as a potential because I know that some other larger retailers do offer private label products, and they can lead to a significant margin improvement. So that's something that we'll scope out with the Mad Paws team over the short term as well.

Thank you, Howard. Another one for you, you're very popular this morning, and I might ask Graham to supplement your response too. From James, first question relates to operating leverage at Pet Chemist. I notice that most of the gross profit gains have been reinvested through OpEx. At what stage do you expect operating leverage to become apparent?

That's a good question. I might just briefly answer that. So I guess any business, when you're in the growth stage, you want to invest as much as possible to take advantage of the opportunity with this growth. And I think Mad Paws subscribes for that as much as I do personally in my personal opinion. In terms of forecast, I'll probably leave that to Graham to sort of touch on a little bit.

Sure, thanks, Howard. I'm just saying when we look at the kind of our targets, FY '23 and FY '24. We're seeing that as Howard said, that we are investing a lot of that back in to grow that business from a top line perspective. So we're expecting somewhere low single digits kind of EBITDA. Over those progressing over FY '23 and FY '24 period, and then really kind of exiting that FY kind of 2025 period higher sort of double-digit kind of low double-digit EBITDA growth after that. Saying that, that is all reflective of kind of current business as it currently stands. That's not taking into account any kind of cost synergies or benefits of scale is coming back into this group and us all getting better purchasing power across freight costs. service fees. And as Howard said around actually now we're getting a lot more scale around how we're dealing with suppliers, that would be all the upside in terms of those numbers that are suggested for those periods.

Thank you, Graham. A couple of questions here asking about competition. Howard, in terms of competition, could you please provide some insight on who Pet Chemist competes with and how Mad Paws intends to strengthen its position. So perhaps, Justus, you may want to add to Howard's comments, too.

So, good question. So in terms of the medication side, primarily -- our main competitors are primarily pharmacist owner operated. We base our claim of being a leading provider on web traffic estimates and our overall market position there. So -- we -- I guess we intend to strengthen our position by taking the initiative to really grow and sort of develop that first-mover advantage that we think we have on that basis. So by partnering with Mad Paws, it really does have a -- present a step change for our subsector of health care and pet medication and allows us to really accelerate that first-mover advantage that we see. Justus, is that a fair sort of explanation for you as well?

Yes, I think we're obviously trying to differentiate ourselves as well from the market. We're not going down the road with something kind of a traditional retail business or anything like that. The marketplace is still center of our strategy, but it's been about kind of driving the different experience that you have as a pet owner and guiding you in the right direction, right? So I think that's what's going to happen over the next couple of months and quarters. We're doing a lot of work at the moment and kind of how do we actually bring the brands that are within kind of the Mad Paws universe now, how do we bring them closer together to be more efficient from a marketing efficiency perspective. But then also from a user perspective to make sure that people know what they can find with us, I've been always talking about trust. I think trust in this market is particularly important. We've been doing a lot of work and learn a lot about how to gain trust as a marketplace. It's one of the biggest currencies you can have. I think that is something that we're going to lean on really heavily using the trust that we're building with customers to then guide them into the different offerings that we have within the Mad Paws brand. And that's going to differentiate us from the competition, and also strengthens the competitive position we have against other players in the market.

Thanks, Justus. We have a question from John here that may well apply to Pet Chemist, but I think will also address it including Mad Paws at a broader level, too. Can you discuss the COVID benefits of lockdown in the first half of '22, and the shipping delays you may have experienced? Are shipping issues moderating? Howard, why don't you take it first from a Pet Chemist perspective, and then Justus, you may want to add to that.

Okay, so in terms of COVID, we do see an occasional bump whenever lockdowns are announced but that tends to moderate as well. So in that respect, we would be complementary in terms of offsetting to some of Mad Paws' business that may struggle during COVID times or lockdown times. But generally, in terms of delivery, we did see some delays, especially when there were restrictions in the workforce around that, but we have an ability to upgrade people from for example, standard post to express post to mitigate some of that risk as well. And we are seeing a lot of those delivery issues that we were experiencing earlier in the year and later in last year. They've definitely eased off significantly recently. We saw some impact from the floods and getting product out to WA, which meant we did send some parcels express post to them as well to fly them over as opposed to them being trucked over or similar on a train. So we do what we can in terms of delivery flexibility to improve the outcomes because it is a really important factor to get medication and health care products to customers as quickly as possible. But take the point that there were some delivery impacts. We did mitigate a lot of them, but they are significantly eased now as we get to the other side of this COVID bump.