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

All right. Good morning, everyone. Thanks for joining us today, and welcome to the Q4 FY '23 results presentation for Mad Paws. My name is Justus. I'm the co-founder of the Mad Paws, and we also have Graham Mason on the call, as always, our CFO. We will run you through our results for Q4. Graham will give you some more details on the financial performance in the last quarter. And as always, we will also have time at the end for questions. So please use the Q&A function on the bottom of your screen. If you would like to ask any questions, and we will get to them at the end of the presentation. All right, let's get started. So a quick refresh about what we do here at Mad Paws, quite easy we exist to enable pets to live their lives to the fullest. And it's our goal to become the most trusted and convenient brand to rely on for all pet-related needs. We've really been on a journey of becoming a true destination for anything pet related. And with that, we are expanding our initial pet services marketplace into other pet offerings like food, health and pet products. We've already run Australia's dominant pet services marketplace, where we've built a community of over 40,000 trusted local pet sitters who provide 5-star services like pet sitting, walking, day care and grooming to pet owners in the communities around the country, and we use the marketplace to springboard a number of new verticals. And that's really what we focused on in the last couple of years using our base of customers with the marketplace, we now also run Australia's #1 online pet pharmacy, Pet Chemist as well as a subscription business in the treats and toy space called Waggly and Sash Beds, our premium dog beds and accessory business, which has really accelerated its growth in the last 3 months and is now a profitable part of the business with what we believe, some very interesting growth opportunities coming up in the next couple of months. The strategy is working for us. We've built a significant and very loyal customer base. We have now attracted over 1.3 million people coming to our website per month. We've got over 1.1 million subscribers on our databases that we can e-mail to. We take [ over ] 40,000 of our pet sitters that are real brand ambassadors for the Mad Paws brand. And all that turns out in us having over 70% customer repeat rate. So a very strong business from a repeat perspective. And our current focus is all about brand consolidation. I've talked about this a little bit before in the last couple of quarters. And really, our focus there is bring the brands closer together. We want to strong -- strengthen up the Mad Paws brands. And our focus is efficient growth, making sure that we can increase the share of wallet of our customers. Now also quick. The pet industry is obviously quite exciting industry. Most of you guys are aware of these trends that are on the screen here, significant growth in terms of the number of pet owners over 7.3 million households. And now out there with pets, we've got over 70% of our pet owners actually want to add more pets in their lives and added pets during the pandemic. And we've been talking about this a lot, but this really kind of coming through when we talk to our customers as well as the relationship between our pets has really changed. We've talked about humanization and premiumization already before the pandemic. But certainly, we've seen that accelerate throughout the pandemic. People are closer to their pets than they ever were and I think that also brings me to probably the most important point on this slide, which is we really believe that the pet industry is particularly recession resilient. Some of the retailers over the last couple of months have certainly felt a bit of a drag. We haven't seen that so far, and we think that we're very well positioned to kind of take the opportunity in terms of the number of pet owners out there and further grow our business over the next couple of months and quarters. Now all that has certainly resulted in pet owners spending a lot more on their pets, you can see that on the numbers over $3,000 spend on dogs now over $2,000 on cats. So we're talking about a huge industry now with a TAM of over $30 billion. So plenty of opportunity for us to grow our business. We're already playing in a lot of the different areas of the pet spend. You can see this on the bottom here. And our goal is certainly to drive more and more opportunities for the business and take part in more and more day-to-day activities that pet owners are looking for, making Mad Paws a real destination for pet owners to find anything they need for their pets. Now how do we do this? Mad Paws is certainly building a powerful network effect, and we've talked about this before. We started this with the Mad Paws marketplace, really focusing on the flywheel you see on the right-hand side there . More pet owners means we get more data means we can make better matches, make a better decision about what to put in front of the pet owner at what time, which then results in better retention. And that's really what we're focused on, particularly over the last couple of quarters. And that strategy is working. I talked last time already about our pet profile, or pet [indiscernible], where we're guiding people through a number of questions to give us more and more information about their pets, and that's been growing very nicely. Last time, I think we've been talking about 60,000 profiles in the last quarter. This quarter now, we're already at over 110,000 pet profiles, 70,000 of those ones have more than 50 data points. So you can see if this goes well beyond name and breed. We know anything about those pets down to medication and health issues, what brand of medication they might take as well as behavioral issues they might have. All that obviously helps us. We can use that data to drive cross-sell. And we've really seen that kind of working particularly well with cross-sell accelerating. We've seen 57% uplift on cross-sell customers in Q4 year-on-year. So the strategy is working. We're doubling and certainly down on that, finding more and more ways to interact with our customers and giving a real incentive to give us more information about their pets, so we can use that in our marketing communications. A couple of quick highlights. Graham is certainly going to take you through that in more detail, $6.5 million in operating revenue. So real bounce back from the last quarter, which seasonally were slightly lower. So we still saw 53% year-on-year increase. If you take out Dinner Bowl, which is the operation that we ceased in Q3, $4.7 million in e-commerce revenue, again, 68% up excluding Dinner Bowl. So still some very strong growth for the e-commerce businesses and $1.7 million in marketplace revenue up 24%. Biggest achievement certainly was that divisionally, we've EBITDA positive. So for all our verticals, we are already EBITDA positive. We're not just covering the cost of the corporate side of the business, and we're looking to do that this quarter. So just as a quick refresher, also, I've talked about this already last time, you can see now that we're kind of going back to kind of a more normal seasonal profile where the marketplace and particularly is some seasonal part of our business, where we see huge growth coming into Q2, which is always the biggest quarter for us simply because of the long holidays, people gone away. People going luckily gone away back to Europe now. Going away on longer holidays. So we see the strongest growth in those in Q1, Q2. And we certainly seen the same profile happen playing now at the moment. So we're gearing up to another record quarter coming up in Q2. Just a couple of operational highlights. What we've been focusing on, we've been banging on obviously, about getting to EBITDA positive, and we're well on track for that. Now we've changed a couple of things to do that, as you can imagine. So we were really focusing on making sure that we turn around every dollar, making sure the return on the dollar invested is as high as possible. And the marketplace yields itself well for that. We've got a positive return on our marketing spend that pretty much on the first month. And we've done a couple of things to, again, improve our user experience and in particularly things that help us to improve our conversion rate from first booking all the way down to -- sorry, for sending a booking request from a customer all the way to making the payment. And so making that experience easier, we've launched a couple of things like One Click sign on, you can see that on the website now as you go there, if you've got a Google account, it will pop up on the right-hand top, and you can lock in with a single click. We've had a major upgrade to our site performance so the site is significantly faster now, which [indiscernible] SEO perspective, and again, helps us driving profitability of the marketplace. We've also launched now a machine learning search algorithm. So not only do we have a search, a machine-learning search algorithm, which is a great thing to have, but we also now set it up in a way where the data team can deploy AB testing without any impact to the tech team. So it's completely independent. They can do this on a much higher frequency now. They can run their testing. And every time we run testing we find new things that work, which can help us from a conversion rate perspective, and then AI customer service support. So this is certainly not a buzzword for us just to throw it in there. We've started working with a company called [indiscernible], where we focus on servicing the right information to our customers when they have a problem or have a question when they need it. So that really helps us to divert customers from getting in contact -- the need of our customers to get in contact with our customer service team. So that way, we obviously reduced the load on the customer service team. We increased the satisfaction for our customers because they instantly find what they need. And we've already seen a change where we could reduce essentially our customer service team by one full-time employee at the same volumes that we had before. So kind of a very positive impact on the business. And I've already talked about the pet profiles. Big focus for us also going forward, where we want to drive more and more of those profiles because we see a very positive benefit in cross-sell. A couple of points on e-commerce. So Dinner Bowl is now fully closed. And all -- there's normal costs coming in. All exit costs are now kind of fully consumed. Our Waggly business, we've refocused a little bit in terms of marketing spend. We reduced our marketing spend slightly on Waggly simply because the payback period, as you can imagine, for subscription business like Waggly is significantly higher than for Pet Chemist, for example, on our market -- on the marketplace. So we redirected some of that spend so the Waggly business is growing slower, but very, very efficient from an EBITDA perspective. The other thing we've done there is increase the number of home brands that we have. So pretty much nearly all products that we send out now with Waggly home brands, which again helps us, a, it's a very high-quality product that we send out to a customer, but we also get it at a significantly better price, which helps us with margins. From a health perspective, Pet Chemist is #1, we certainly had some issues there with the size of the warehouse. The old warehouses just didn't give us the opportunity to add as many SKUs as we wanted. The guys were really struggling with adding any more products to the warehouse, which is why we've now got a new warehouse, which went operational on the 1st of July. And that now really allows us to go for a big push in terms of the SKUs. We want to add 1,000 new SKUs this quarter and we've worked well on our way. We've already added 400 SKUs up until now in this quarter. And so we see some significant upside accelerating across Pet Chemist again giving our customers more products they are looking for. And the other thing we're doing there is, again, on the customer service side, so we are trying again to do as much as we can on the automation and offshoring side, finding the right balance between having the team on site that can answer the more complicated questions but then supplementing the team with kind of our offshoring team where we've got a lot of experience from the marketplace to reduce cost and run it as efficiently as possible. And then last but not least, our home vertical with the Sash Beds, seen some amazing growth really. Team has done an amazing job over the last couple of months. It was mainly driven by new products and some marketing optimization that we've activated over the quarter. Again, huge opportunity for us to grow this. We think we can accelerate this business even further. So over the next couple of months, there's a couple of really interesting things happening and tests that we're running to see if we can accelerate that growth, obviously, by maintaining the high profitability that we already have for that vertical at the moment. And with that, I'm going to hand it over to Graham for some more details on the financial results.

Thanks, Justus. Good morning, everyone. I will be presenting the performance across our key growth metrics for the fourth quarter of FY '23. You will see through our Q4 FY '23 results. Mad Paws continues to progress towards its EBITDA breakeven target and ended Q4 with the momentum for continued growth and profitability in FY '24. Firstly, looking at our group transactions in GMV for the quarter. Group transactions for the quarter were $112,000, an increase of 26% on Q4 FY '22. Growth came across marketplace and e-commerce verticals versus the prior corresponding period. Ecommerce increased 41% versus PCP, driven by Pet Chemist and Waggly subscription as significant growth in Sash Beds of 149%. Product expansion in Sash Beds as well as strong new customer growth in Sash and Waggly were the main drivers of the e-commerce transaction growth, coupled with Pet Chemist transactions increasing by 52% versus the prior corresponding period. Marketplace transactions increased 7% versus PCP, partially affected by the earlier timing of the Easter holidays in 2023 versus 2022 as well as lapping the pent-up international travel demand of April 22. We've seen acceleration in marketplace bookings trends in June 23, which are continuing into July 23. Group GMV was $15.1 million. This represents an increase of 27% or an additional $3.2 million GMV from Q4 FY '22, reflecting our continued transaction growth as well as increasing order values and take rate enhancements increasing our share of the pet owners wallet. Moving to our customer acquisition and marketing efficiency. For our group customer acquisition metrics, we continue to see strong levels of new customer acquisition in the quarter. Total new customers acquired was 29,000, up 12% versus Q4 FY '22. The levels of customer acquisition are pleasing as we are focused on profitable customer acquisition metrics with shorter payback periods. Additionally, we have largely maintained customer acquisition levels despite the closure of our Dinner Bowl operations. As you can see on the graph on the right, marketing as a percentage of revenue increased 4 percentage points versus the prior corresponding period and consistent with Q3 at 15% of group operating revenue. If we move to our group operating revenue and EBITDA performance. [indiscernible] group operating revenue was $6.5 million. This represents 41% growth versus Q4 FY '22 and 53% growth excluding Dinner Bowl operation with product lines. Revenue growth versus the prior corresponding period is a result of the volume drivers previously highlighted, higher average order values driven by a combination of market conditions, new products and pricing strategies. This quarter, Mad Paws continues to make strong progress towards the goal of operating on an EBITDA positive basis. For the first time, the quarterly operating EBITDA from our divisions combined was positive before corporate costs, a significant milestone in the group's journey. Overall group operating EBITDA negative $0.8 million. Margins improved by 6 percentage points on a quarter-on-quarter basis and 26 percentage points versus the prior corresponding period. The improvement in our operating EBITDA margins is led by our marketplace segment. While the group operating EBITDA for the quarter was negative $0.8 million, we implemented a number of initiatives during that quarter that only partially impact the quarter. These marketing optimizations and cost base initiatives expected to provide $0.3 million benefit to EBITDA in Q1. In addition, our new media offering is expected to deliver $0.1 million of high margin revenue in Q1. Overlaying our revenue growth momentum in our Marketplace and Ecommerce divisions, we remained on track with our stated EBITDA goals. Now moving on to our performance at a segment level. The Marketplace continued to perform strongly in the quarter. As Justus outlined earlier, our Marketplace is transitioning to -- back to a pre-COVID growth profile with growth peaks allowing to travel and holiday periods. Marketplace revenue increased by 24% versus Q4 FY '23 to $1.7 million. Our continued investment in improved website functionality, customer and customer experience has resulted in high booking values and take rate accretion versus the prior corresponding period. The Marketplace achieved operating EBITDA of $0.5 million for Q4 FY '23, and operating EBITDA and margins were a record high of 28%, and this is on track for our margin target for this first -- consistent with our previous messaging. Moving to our Subscription and Ecommerce vertical, Ecommerce revenues were $4.7 million, an increase of 48% versus the prior corresponding period, and 68% excluding the closed Dinner Bowl operations. We saw very strong levels of growth in Sash Beds and Waggly versus the prior corresponding period, increasing up 155% and 46% respectively, driven by the insourcing of social media marketing management and the expansion of influencer collaboration. Pet Chemist revenues increased 63% versus pcp in spite of constrained warehouse capacity impacting the [ group's revenue ] in the quarter. Ecommerce EBITDA margins was flat quarter-on-quarter and negative $0.4 million. Operating EBITDA margin is stable at negative 9%. We saw [indiscernible] across Waggly and Sash while Pet Chemist focus constrained by warehouse and space, which is no longer the case with the move to a much larger distribution facility on the 1st of July 2023. With the momentum we have seen in the current quarter in Sash and Waggly and Pet Chemist moving to a new distribution facility significantly increasing our SKUs, we are on track with continued improvement in operating EBITDA in our Ecommerce division next quarter. Now a view of our cash flow for the quarter. Operating cash outflow before sitter liability movement was $1.1 million, reflecting the top -- reflecting the EBITDA profile as well as an additional adverse movement due to the prior quarter inventory payments to support Sash growth and annual prepayment [indiscernible] has been $0.4 million. As previously highlighted, our Marketplace business is a favorable working capital cycle with a customer paying to a service upfront and payment to the customer happening after the service has taken place. As can be seen from the table below sitter liability movement was stable at $0.4 million for the quarter with a favorable cash liability of $0.7 million for the last 4 quarters. This resulted in an operating cash outflow of $0.8 million for the quarter. Mad Paws continues to invest in key areas of a pet's life cycle in the quarter as we're seeing good returns with $0.4 million invested in product initiatives in our Marketplace vertical, specifically the launch of new search functionality, website's speed enhancements and machine-learning search algorithms. Based on the current trading expectations, the group's focus is on profitable revenue growth from prudent cost management, we expect to see a considerable improvement throughout FY '24 in operating EBITDA starting in Q1 FY '24. This coupled with the favorable working capital dynamics of the Marketplace, we see to be capitalized to expand our position in the Australian pet market. I will now hand back to Justus for the group's strategic focus and outlook for the balance of FY '24.

Thanks, Graham. Yes, not much to add. Just a quick kind of recap of kind of what we're focusing on. Really not much has changed for us. As you can see, we're focusing on the same things. We're trying to work on the same things because things that we're doing are working. We're certainly doubling down in the pet services marketplace where we've seen huge improvements in terms of the metrics for the marketplace. We've already doubled our CAC to lifetime value over the last kind of 2 years, and we still see some good growth opportunities here, particularly focusing on efficient growth from a top line perspective, so driving more traffic to the marketplace. That is mainly for us, content and SEO, driving efficient growth for the marketplace. But then in particularly, one -- in particular, once we have customers on the website. we want to make sure that we convert them as well as possible. And I think that's particularly where the team has focused on for the last couple of months. We've seen some really good results, a, from the search results, but then also from some of the product improvements that we've made to make it easier for our customers to get from a booking request to a paid booking. And this is where we see a huge opportunity for us to grow even without the top line significantly growing. And this is certainly part of the [ OKR's ] for the team now for the next 2 to 3 quarters. Cross-selling. We've talked about this a lot. I think the biggest opportunity for us now that we've kind of laid the foundation. We've got the data about our customers. We want to drive more and more data of -- for our customers. So we give them incentives to give us more data on their pets and themselves so we can get smarter and smarter and kind of what campaigns we can run to them, what products to put in front of them. But the biggest opportunity there is certainly loyalty, and we're looking at certain -- a couple of different options that we have to drive loyalty further, give people more opportunity - more incentives to stay within the pet -- within the Mad Paw's ecosystem and buy as many products as they can within the Mad Paws ecosystem. And then from an upselling and margins perspective, margins particularly from a Pet Chemist perspective, one of our key focuses, a couple of things we're doing there, one is range extension. Again, the warehouse was the biggest thing that was holding us back here. Home brand, the other one we've already done this very successfully with Waggly. We're now doing the same thing for Pet Chemist, which gives us a huge opportunity in terms of driving margins for the Pet Chemist business. And then add to box, we're sending out already close to 30,000 packets a month. So there's a huge opportunity for us to make it easier for customers to add products from the different verticals that we are already -- that we already have, make it very cost effective for the customer because it comes at no additional delivery costs and make it very positive for the Med Paws business because any product we add to a box, you can imagine pretty much adds to the bottom line for that customer in that order. And then from an efficiency perspective, the new warehouse certainly is a huge opportunity for us not just to add products, but also to put more efficient processes in place. So we're already working on optimizing the pick-and-pack setup for the business. And again, all that will help us to drive efficiencies. And I've already mentioned the customer service setup for Pet Chemist, we see a big opportunity there to get even more efficient and run that business on an even lower cost base than we do already. And with all that, I think that's the end of the presentation. But obviously, we want to open up now the lines for any questions you might have. Please use the Q&A function on the bottom of your screen, and we'll answer as many questions as we can. You can also use the chat if you like, that's easy. We will give another second.

There's one question coming through from anonymous. The question is perhaps, I want to talk about the M&A in the space and how you see the industry dynamics at the moment? Yes, absolutely. So kind of quite an interesting space, quite a lot has kind of been happening in this space, as you would have seen with Woolworths and a couple of other deals in this space. Now -- we've always said from an M&A perspective, we're quite interested in seeing how we can expand the offering that we have and how we can kind of broaden the ecosystem that we've already built. So we're certainly -- continuously being interested in the M&A space, but only for the right opportunities. There's certainly nothing lined up at the moment that we say is the right thing. The market obviously is quite interesting at the moment from a valuations perspective so that there could be some opportunities out there in the short term where we feel we could do something. But again, we'll be very focused on making sure that any M&A opportunities that we look at would have to be an accretive business for us from an EBITDA perspective and something that really fits into what we're already offering. So nothing lined up. Again, I think there is certainly consolidation out there. There's a couple of bigger players in this space that are quite interested in coming into the space and also building, I guess, a destination for pet owners. And so from that perspective, I think we're quite well positioned playing in this space. I think the biggest opportunity for us and the biggest moat that we have to kind of traditional retail players in the space, it's again the data. I've talked about the data already before. That's the crown jewel, I guess, from the Marketplace. So it's not just a very profitable business that we can -- that really helps us now to get to profitability for the whole business. But it also helps us from a data perspective. Pet owners are much more inclined to give us 50, 60, 90 points of data about their pets because they want to make sure that we find the perfect pet sitter for them. It's very unlikely that a traditional retailer would get a similar amount of data about their pets. And so in general, I think that's why the Marketplace generated -- represents a huge opportunity for us going forward. There's another question from Michael. Do you see the current run rate of new customer acquisitions remaining? Or is there a room for this to accelerate again? Yes. Great question, Michael. Thanks for that. So there's absolutely an opportunity to accelerate this again. And we assume that there will be some natural acceleration coming over the next couple of quarters because we're coming into what we call our golden quarter, which is Q2 for the Marketplace, but also for all the retail businesses. So I think there's going to be a natural acceleration of that in Q1 and Q2 this year. But then also, we've been very careful in kind of how we invest for the different businesses to make sure that we get to our EBITDA target as early as possible. So if we have a little bit more dollars to spend, we could certainly accelerate some of our growth again, but we want to make sure that we do that efficiently at the moment. And so to do that, we're obviously optimizing the channels that we already have, but we are also focusing now on finding a couple of new channels, working with partners, utilizing the huge database that we have already to work with some potential partners and, for example, share databases to make sure we can drive customers as efficiently as possible. So I hope that answers the question. But most certainly, we see some acceleration coming there naturally just because of the seasonality of the business. Any more questions? All right team there's no more questions. So I just want to say big thank you for everyone joining us today. We're very excited. We're going obviously into the most exciting parts of the business from a seasonality perspective. We see some significant kind of growth coming our way. The team is in very good spirits at the moment actually. I think we've been -- we're probably in the best position ever from a team perspective and focus perspective. Team is laser focused on making sure that we get to the profitability target that we set ourselves. And that's kind of what we get up on every morning to get that done. So I hope you're going to join us. The next update is most likely going to be in August. Certainly, we're going to have the annual report coming out then as well. So I'm looking forward to talking to you again then. Any other questions, please feel free to reach out to myself, Graham or John from Hawkesbury. And we'll -- we can either set up the call or answer those questions as soon as possible. So talk again soon. Thanks a lot for joining and have a nice rest of the day.