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

Thanks for joining us today. Today, we have Graham Mason, our CFO, on the call as well as myself, Justus Hammer, I'm the CEO and Co-Founder of Mad Paws. We will run you through our results for FY '23. Graham will give you some more details on the financial performance for the year. And as always, we will have time for questions at the end of the presentation. [Operator Instructions] All right. And with that, let's get right into it. So a quick refresher for those of you that are new to the Mad Paws story. We exist to enable pets to live their life to the fullest and is our goal to become the most trusted and convenient brand to rely on for all pet-related needs. Let me start with a quick overview of the Mad Paws business. In case you haven't heard this before, we are on a quest to become the destination for pet lovers in Australia. We have executed in line with that strategy, expanding our initial pet services marketplace into other pet offerings, food, health and pet products. We're now a business with 4 key verticals. We run Australia's dominant pet services marketplace, where we have built a community of over 40,000 trusted local pet sitter who provide 5-star services like pet sitting, walking, day care and grooming to pet owners in the communities around the country. We also run Australia's #1 online pet pharmacy, Pet Chemist, as well as our Subscription business in the treats and toys space, Waggly, and Sash, our premium dog beds and accessory business which we've seen some amazing growth over the last 12 months. And I think that we're most proud of -- what we're most proud of is really our very loyal customer base. We've attracted this year only 122,000 new customers who love our products because they're all coming back. Our repeat rate for the whole group is now over 70%, and it's certainly something we're very proud of. So why are we different to your traditional kind of pet retailer? And I think it really comes down to the Marketplace. So the Marketplace is the core business that we started at the very beginning of our journey. And the difference that we have to your traditional retailers is the kind of data that we get from our customers. So if you think about it, pets are now part of the family. So if you're looking for something to look after your pet make sure that you find somebody that is perfect for the job. So that's the chance where we as the Marketplace can ask our questions up to 100 -- ask our customers up to 100 questions to understand their pet and kind of really find the perfect fit for the sitters. And on the slides -- what you see on the slide here, the slide we're driving to acquire more customers, it means more data for us [indiscernible]. But nowadays, not only better measures for the Marketplace but more so for all the different verticals that we've built, and it gives us the ability to cross-sell into those different verticals at a much better rate than if you don't have those customers. And so if you compare that to your traditional retailer, don't try to buy a cheap bag of kibble, very unlikely that you're going to answer 50 or 100 questions about your pet. So this is the advantage that we have and what we're building on to further grow Mad Paws. And it is working, right? You can see this on the slide. We've seen significant growth over the last 3 years and now growing at over 194% CAGR in the last 3 years from a revenue perspective. And it also shows up in our results, right? Very happy with the last year results. I think a great year, particularly with the shift of focus that we had towards profitability. The group now with nearly $60 million in GMV over $24 million in operating revenue, which is up 145% year-on-year. And all that at an all-time low in terms of marketing as a percentage of revenue. So all that kind of shows that our strategy is working. Cross-sell is starting to work. We're becoming better and better in acquiring customers and cross-selling them between the different verticals that we have. Still acquiring over 122,000 customers, up 90% year-on-year, and we've halved our operating EBITDA loss from over $8 million the year before to only $4 million this year with a clear trajectory to get to EBITDA -- breakeven EBITDA positive in the short term. We said we're going to get to that in this quarter, and we still maintain that guidance. So a couple of points just on what we've been focusing on over the last year. I think the key thing I've already mentioned, we had a clear shift in focus from pure growth to growth and profitability. So we moved our profitability and target forward, trying to do everything we can to get the company to the profitability in the Waggly class. And we found that by focusing on profitable revenue growth, prudent cost management and disciplined capital management. In particular, here, we've made some decisions around Dinner Bowl, which was a business that had high growth but needed a lot of investment that would have dragged us down from an EBITDA perspective over the next couple of years. So we made a decision to cease 2 of the product lines that we had within Dinner Bowl to again get us closer to the EBITDA profitable -- EBITDA positive target. Now I think the key thing that we've seen for the business is, Mad Paws is a capital-light business, particularly Marketplace is extremely efficient now. Any dollar that we drop on the top line pretty much falls through to the bottom line. Our cost base for that business is pretty much fixed. We can double our volume in the Marketplace without adding much more cost to it. So very attractive for us, still growing at a way attractive rate. And one of the key drivers for us to achieve profitability very shortly. So one of the other key things we found for the whole group was a brand overhaul. We're talking about a single destination. This is where we want to get to. We want to have a single destination where customers can go, get everything they need from a product and services perspective. And for that, we needed to look at the Mad Paws brand. So it was not just an update from making the brand more modern, but it also included a complete overhaul of our homepage, for example. You can see an example here on the slide, and the results were very positive. We've seen a 20% increase in conversion on the homepage itself, and it also gives us now the ability to cross-sell into our different verticals because it's not just pet services marketplace focused but it really kind of showcases all the different products that we have and that our customers need. Now I'll go into a couple of highlights from a segment perspective, and Graham will run you through that from a financial perspective in a lot more detail. But the Marketplace is still performing very well. We've had over 167,000 bookings, which is up 31% as well as customers, 46,000 new customers joining us, also up 30% year-on-year with now over $30 million of GMV going through the business. And all that, at the same time, we still increased our take rates to 25.4%. So this shows, a, we're kind of market leader, we can still increase the take rate without losing anything on the top line. And it -- this is probably something that we are not focused on in the future. I think we're very well positioned in terms of the take rate. And this take rate might still go up because we've got some historical sitters that are still 15% that are falling out, the new sitters coming under 20%. But overall, $6.5 million in revenue, so over 70% -- 74% up year-on-year. So this is a result of, one, additional customers. But, b, we've seen also price increases coming through on the Marketplace as well as an increase in terms of the time units booked. So think about it. People are going on holidays now, going overseas again. So the booking periods that we've seen have increased and all that resulted in the 74% uplift in revenue. And I think the key thing to look at is 20% EBITDA margin for the vertical already for the whole year, up from minus 18% the year before. We've closed the year in Q4 with the Marketplace at 28%, and we certainly see that kind of positive trajectory for EBITDA perspective for the vertical to continue. A couple of operational highlights. So what have we been focused on? I've already talked about data. So we've worked hard on what we call Links Data, which is our comprehensive Pet Profile Database. So this is something that we've started at the beginning of the year. We already had 160,000 pet profiles in that database now. And it gives us a huge opportunity, a, to improve the matchmaking, which I've mentioned at the beginning; but b, it obviously is a very valuable asset for us to have to commercialize that further down the track. It is also the basis for our machine learning search algorithm, which we've launched a couple of months ago, where we're seeing significant uptick in terms of conversion rates. So we're getting better and better. We don't need the tech team now to actually release any new versions of our search algorithm and it's something where we still see significant upside for the business. I've talked about the rebrand and the other thing we've worked on very hard is the performance of the site. So speed is obviously important to my perspective to make it as seamless as possible. But also from an SEO perspective, SEO -- organic traffic to the Marketplace homepage is our #1 driver for new customers for the Marketplace. So making sure that we are on top of that has a positive impact for our organic traffic as well. Marketplace liquidity is something that we're working on all the time. We want to make the life for our customers and our sitters easier. We've had a lot of focus on making this easier for our sitters to use our product, use our back end. And obviously, that drives the quality of sitters that we're working with, always focusing on finding the sitters that we want to grow with the business that don't take a business off platform and we've been very successful with that driving more and more sitters and driving more and more quality sitters to our platform. And last but not least, we had a couple of very successful operational initiatives. In particular, we've launched an AI product from Brainfish to reduce our customer service contact. This has been very successful in converting customers from getting in contact with us via e-mail or phone to actually driving them to the vast amount of content that we have already answering them -- them answering the questions themselves, reducing the number of customer service reps that we need to drive the business. And it's all successful that we're currently looking at not even increasing the number of customer service reps that we have while increasing the volume to the Marketplace. So it's a very successful and helps us a lot again to drive the profitability of the Marketplace. And the last thing to mention is probably peak period pricing. So this is something we've laid the foundations now. Think about it as Uber's search pricing, right? So everyone has tried to get a Uber late at night on a New Year's day. Very hard and very expensive. Similarly, it works for our sitters. If there's a peak period around Christmas, for example, sitters can charge significantly more with later foundations now and we're going to roll it out to give our sitters more and more mobilities to change their pricing throughout peak times in order to maximize the earning capability. A couple of highlights on the e-Commerce side. So very happy with the growth. We've had over 260,000 total orders for the year, up 155%, $18 million of revenue, which is up over 188% for the year. Again, a key focus for us has been customer repeat rate. We've done a lot of work on Pet Chemist business, for example, to really utilize the huge amount of customers they already have, but making sure that we drive them back and get better in getting them to repeat with the business, and that's been very successful. We've already added over 600 SKUs in the last year. But just to give you an idea, we're accelerating that now and we're targeting over more than that number only in Q1 of this year. So again, that's a huge driver for growth for the e-Commerce business. And we see a huge opportunity to accelerate that further. I've already mentioned the SKU increase. So what does that need to actually make that happen? You need a new warehouse because particularly in the Pet Chemist business, we're literally stepping on each other's toes. So we've now got a new warehouse operational from 1st of July in Tweed Heads, significantly more space and allows us to really grow that business to where it should be. So this is something that we've been working on throughout the end of last year. But now in July, the warehouse is operational, and we see the advantages of that coming through. It's not only about increasing SKUs, we've had a major focus now on increasing our own branch. We've been very successful with that -- with Sash brands and Waggly over the last year. We've launched 3 new products for Sash Beds. Very successfully sold out most of those products in a much shorter time than we expected. But also with Waggly, nearly all the products now that you find in the Waggly box are in-house design and sourced, which again allows us to keep the quality high, but reduce the cost and again, increase margin for the business, and we see a huge opportunity going forward to do the same for Pet Chemist and drive the home brand strategy for Pet Chemist as well. Customer acquisition costs. I've already mentioned at the beginning at an all-time low. We're getting better in cross-selling customers between the different verticals and utilizing the data that we have, and we still think there's more for us to do, particularly on the cross-sell side of the business. And before I give it -- hand it over to Graham for some more financial details, the number one thing we always look at is our customer satisfaction. And I think a huge credit to the team by -- even though we had this huge focus on profitability, our customer satisfaction has not, in any way, been harmed. We're still looking at 4.7 stars for the Marketplace with over 2,600 reviews. So this is obviously one of the things that we keep on looking, making sure that we give our customers what they need. And as you can see with the reviews here, we're doing really well on that. And with that, I'll hand it over to Graham for some detail on the finance side.

Thanks, Justus, and good morning, everyone. For our group and e-Commerce segment financial performance, we have presented our results on a reported basis, but have also presented FY '23 excluding the effects of the closed interval product lines in the group's strategic review. The group continued to strongly following COVID lockdowns in FY '21 and FY '22, delivering record revenues, acquiring record levels of new customers, coupled with high customer repeat rates, enabling more and more pets and their [ parents ] to live their best life. The group executed across its 3 key pillars: profitable revenue growth, prudent cost management and disciplined capital management. FY '23 group operating revenue was $24.6 million, a 145% increase versus FY '22. Revenue, excluding the closed Dinner Bowl lines is $23.7 million, 136% improvement year-over-year. Transactions were a key driver of group revenue growth, increasing 87% to 435,000 in FY '23, with the remainder due to increasing average order values following the Pet Chemist acquisition as well as growth across all segments in the year. Total gross margin increased by $5.9 million to $10.9 million, a 117% improvement versus FY '22. The group's gross margin percentage was 44%, down from 50%, due to the e-Commerce segment increasing to 74% of group revenue, up from 63% in FY '22. At a segment level, the group achieved improved margins in FY '23, with the Marketplace division gross margin increasing to 94%, an increase of 1 percentage point and the e-Commerce division gross margin increasing by 12% to 27%, excluding closed Dinner Bowl product lines from 24% in FY '22. Segment operating EBITDA was $1.2 million loss, a 68% improvement compared to FY '22. Excluding the closed Dinner Bowl lines, segment EBITDA was a loss of $0.6 million. As outlined in our Q4 FY '23 update, our segment EBITDA was positive in Q4 and contributed to the corporate costs in the period. Central and corporate costs decreased by $0.8 million, an 18% reduction year-over-year. The focus on prudent cost management optimized the corporate head count and overhead structure in the period. The group made significant strides towards positive group operating EBITDA, led by profitable revenue growth across all segments and focusing on the key strengths of the business. Looking ahead, we believe there is a clear pathway to achieving positive group operating EBITDA. FY '23 group operated EBITDA loss was $4.7 million or $4.1 million, excluding the closed Dinner Bowl product lines, an improvement of $3.3 million from FY '22. Nonoperating items increased $600 million in FY '23. This was a result of the lower R&D tax rebate to reduce COVID-related government support and an additional $1 million of amortization expenses related to the Pet Chemist purchase consideration that were offset by lower share-based payments and a $0.5 million reduction due to expected earn-out payments related to acquisitions completed in previous years. In addition, the group had impairment costs of $0.5 million relating to the closure of Dinner Bowl product lines. Moving to our FY '23 revenue growth breakdown. FY '23 revenue growth, as previously mentioned, was 145% and 136% excluding Dinner Bowl closed lines. Key drivers of the growth were the Pet Chemist acquisition impact, excluding organic growth post integration of $5.5 million, Marketplace growth of $2.8 million and organic growth within our e-Commerce segment of $6.8 million. Due to the closure of Dinner Bowl unprofitable product lines partway through the year, this provided a 0.5% negative impact compared to FY '22. Excluding the impact of the acquisitions of FY '23, pro forma revenue growth was 59% for the group. Now looking at our cost base drivers. Across FY '23, we delivered a number of initiatives to increase growth margin at a segment level as well as improved our operating leverage. Gross margins for e-Commerce improved by 12% due to direct and better sourcing relationships with our suppliers and delivery partner optimization. For the Marketplace, gross margins were 94%, a 3% improvement. Marketing as a percentage of revenue had seen a significant improvement over the last 3 years. And for FY '23, it was 18% of revenue, down from 33% in FY '22. While the Pet Chemist acquisition at the end of FY '22 was a key driver, there are a number of initiatives that Mad Paws Group has implemented, including continued investment in website and Product strategic initiatives, improving conversion rates resulting in lower customer acquisition costs. In-housing and channel marketing expertise and lower cost of subscription offers we provide to our Waggly customers. We have been able to continue to gain operating leverage from our corporate cost base with corporate costs as a percentage of revenue decreased to 15% from 43% in FY '22. This has been achieved through the simplification of reporting lines and the rationalization of SaaS and technology spend in the period. The trends we are seeing across these drivers point to a greater proportion of revenue falling to EBITDA as the business grows. Now looking at the group's cash flow. Operating cash flow improved 38% to negative $3.9 million, driven by improvements in operating EBITDA, the favorable working capital environment to the Marketplace and active working capital management as the e-Commerce segment scales. The prior year operating cash flow also included $0.4 million of COVID government support. In addition, the FY '23 operating cash flows include a $0.6 million impact from the Dinner Bowl closed product lines. For our investing activities, the group continued to invest in our core Marketplace and Pet Chemist platforms across the period, with overall intangible CapEx of $1.5 million. This includes approximately $0.2 million in CapEx related to Dinner Bowl technology investments that were subsequently written off. Following the group's successful capital raise in early 2023, Mad Paws operations are funded through to breakeven in FY '24 with $3.1 million in cash at the end of June 2023. I will now give more of a detail breakdown of our segment performance. The Marketplace segment delivered 74% operating revenue growth of $6.5 million. The Marketplace division experienced continued rebound in travel, which drove booking growth, especially in the first half of FY '23. The second half of FY '23 sort of demand normalizing with the group's product investment and marketing optimization, increasing repeat in overall new customer bookings. These drivers resulted in a 31% increase in bookings versus FY '22, with average time unit per booking trending back towards pre-COVID levels, up 13%, and the average price per time unit increasing 12%. Overall, this led to a 64% increase in the Marketplace for gross merchant value for FY '23. The Marketplace take rate increased 3% in FY '23 to 25.4% as the group passed on increased fees and continue to invest in sitter and owner features that improved user experience. The Marketplace division has strong operating leverage as revenue grows, with the cost base increasing at a much lower rate. As a result, as you can see in the table, the Marketplace division's gross margin increased 75% to $3.5 million, with segment operating expenses increasing 15%. The Marketplace division operating EBITDA was $1.3 million, an improvement of $2 million or 300% compared to FY '22. The FY '23 EBITDA margin for the Marketplace is 20%. Throughout the year, the group continues to optimize technology support and people costs with the Marketplace division EBITDA margin approaching 28% at the end of FY '23. Now looking at the e-Commerce performance. E-Commerce revenue increased 188% to $18.1 million. The successful integration of Pet Chemist acquired in Q4 FY '22, coupled with organic growth within Pet Chemist, Waggly and Sash were the main drivers of this revenue growth. During the year, the group focused on efficient marketing investment, which drove an increase in e-Commerce in customers by 163% versus FY '22 and new customer growth across all brands. In addition, range expansion in Pet Chemist and Sash businesses assisted to drive new repeat purchases from customers, also increasing the overall share of the customer's wallet. Gross margins in the e-Commerce division increased to $4.7 million in FY '23, with gross margins improving to 26% or 27% excluding the closed Dinner Bowl product lines. The execution of the products label strategy were successful, improving Waggly box margins and the group ended the year with over 80% of Waggly subscription boxes filled with home branded toys. In the Sash business, the group continued to optimize the supplier mix, sourcing superior quality items at favorable prices. This was further assisted with in-bound freight costs return to more levels in FY '23. The group is planning further margin gains as the private label range across Pet Chemist expanded. The group also increased marketing costs by $0.2 million to $2.2 million versus FY '22, primarily across paid media channels. This targeted more efficient customer acquisition through site conversion initiatives and campaign performance. Furthermore, the group significantly reduced the cost of offers by testing rapid offers with local suppliers and switching to directly sourced offers once new offers performed well. In FY '23, employment costs increased $2 million in FY '23 due to the full year impact of the Pet Chemist head count and additional roles to support significant growth expected from this business. In FY '23, the e-Commerce operating EBITDA loss was $2.6 million. But during the year, a strategic review of Dinner Bowl operations resulted in the closure of raw and lightly cooked product lines. Excluding the performance of these lines, e-Commerce operating EBITDA improved 41% in FY '23 to a $1.9 million loss. That concludes my comments on the segment results. I'll now hand back to Justus to discuss the strategy and outlook for FY '24

Awesome. Thanks, Graham. I've already mentioned earlier the focus on our pet data strategy, and this is really the foundation for our long-term strategy. The Marketplace, as I mentioned before, gives us the ability to acquire customers to acquire data from our customers that a traditional retail businesses would struggle to get, and we're really building on that opportunity. And you can see on the right-hand side, we're kind of at the beginning of that journey, right? Where our first -- we call the first horizon for us was the foundations part, right? So this is all about achieving Marketplace leadership with the clear #1 now in Australia, but also the differentiation of revenues. Integrating some of the businesses that we have acquired now showing that we can integrate those businesses, and we can cross-sell and reaccelerate the growth of those businesses with the Marketplace as a core. So that has -- that also meant that we needed to build the right foundations from a technology perspective. And so the focus of that has been over the last 12 months really building the rails -- for that building the data rails that we needed, and we now have a single view of our customer and we can build on that to accelerate into kind of our Horizon 2 and 3. And that is much more now around the single destination working towards building that destination that customers can get to and find anything they need from a product and service perspective for that pet. It also means accelerating dollar-driven cross-sell, where with some great advances with 55% up in terms of cross-sell year-on-year, but we still see a huge opportunity here to make the experience more seamless for our customers and make it more obvious that Mad Paws stands for the different verticals that we have. And then there's the other options like home brand strategy that I mentioned, Pet Chemist is very close to launching their first home brand products, but also media partnerships working with some of the brands that we work with now and giving them access to the vast amount of customers and the data that we have now. And then thinking that further through, there's obviously more opportunity for us in terms of internationalization, data commercialization, but also adding more touch points with our customers. There are still areas where we've got some blind spots and we want to play in, and that's an opportunity where we can either build product or acquire businesses to further drive that strategy. So this slide really just to show you quickly that we are at the beginning of the journey, but we're certainly not at small scale anymore, right? We've got 1.1 million customers now subscribed to our database. We've got over 40,000 sitters that are real ambassadors for the Mad Paws brand. And we've got a huge opportunity here to work more with them to involve them more into cross-selling into some of our different verticals. And we've got over 1.3 million people coming to our websites. So we're not a small scale anymore. And on the right-hand side, you see some of the data pieces that we're getting. The data is obviously much more detailed. We don't just know that a pet has a health problem. But with the pet -- with the Links Data base, we now also know what kind of behavioral issues they have, what kind of medication they might take down to the brand of the medication that they take. And you can imagine that this is very valuable, a, from a cross-seller perspective, but also from potentially commercializing that data with partners. And I've talked already a lot about the growth of pet ownership in -- if you've seen any of the presentations before. And I think the opportunity we see here -- but the one point to highlight on this slide is probably how recession-proof our industry is. So a lot of retailers have seen some contraction over the last couple of months. We are kind of very well positioned in times like today, and we feel very comfortable that we will continue our growth trajectory we've seen over the last couple of years simply due to the fact that pets are now part of the family. And traditionally, people don't start saving on the family. They start saving on other bits and pieces. But all that, we think we're in a very good position to continue the growth that we've seen over the last couple of months and years. And just to round it up, we've kind of touched on some of the key strategies already that we're working on scaling the Marketplace is obvious any dollar that falls on top into the Marketplace falls down to the bottom line now. We still see some huge opportunities here in terms of increasing and improving our sitter experience and customer experience. And there's a lot of -- a lot in the pipeline in terms of our product road map that we're going to churn out over the next couple of months. E-Commerce platform is a huge piece for us. So we're close to releasing the kind of updated platform for Pet Chemist, which is also going to be the basis for us to roll in some of the other e-Commerce and Subscription businesses we have. For us to end up essentially with 2 tech stacks, the Marketplace and our e-Commerce Subscription business, all managed from a single back end, which again is going to allow us to do a lot more of the things that we want to do in terms of cross-sell, upsell, add to box, and it's going to make that a lot easier once we get there. All that obviously is geared towards cross-sell expansion. I've already talked about the data bridge pet profiles. But last but not least, the focus that we have now in increasing the products and the SKUs that we have for Pet Chemist is a huge opportunity with the new warehouse finding it -- able to kind of accelerate that growth and our private label product as well with Pet Chemist being well on the way to release that over the next couple of months. So that's a very [indiscernible] and a lot of things kind of falling in place over the next couple of months. Obviously, going to the biggest quarter for us always Q2 traditionally for the Marketplace has always been what we call the golden quarter. But very similarly for e-Commerce and Subscription businesses as well, we expect a lot of growth going into Christmas. And with that, we've already exited June, like Graham has mentioned, with a record operating EBITDA of only a $100,000 loss and this momentum that we've seen over the last couple of months has certainly continued into trading into FY '24. And with that, we're expecting a growth trajectory across both pet services marketplace as well as the Subscription and e-Commerce business to continue. And we are reaffirming our FY '24 guidance of being EBITDA positive. And that is the end of our presentation. Thanks for sticking with us for a little bit of a longer presentation, but I'd invite you now to use the Q&A function on the bottom of your screen and ask us any questions.

So we've got one question already from [ Boon ]. The question is, with the data collected by Mad Paws, can you explain a bit more on the AI strategy beyond reducing customer contacts? Yes, absolutely. So the AI strategy is actually -- it's a business that we work with and they kind of allowed us now to surface the content that we have around, particularly the Marketplace. We've just kind of launched this for Pet Chemist as well. But to surface the right content to the customers when they have a question. So think about it, you're a Marketplace customer, you want to cancel an order and you don't know exactly how to do that. Most of the time, yes, we had an FAQ article about this somewhere, but it was hard to find. Now with kind of the AI enabled, they can ask us any question, kind of open-ended question, and the engine -- the AI engine essentially finds the right content and then write it back to the customer to answer their question in the most convenient way. So this is not just about surfacing the content but it's also surfacing the content at the right time, in the right context. And we've seen a significant reduction in terms of bookings to context for the Marketplace, which again allowed us to keep our customer service reps at the same volume, while the volume of the Marketplace has obviously grown significantly. So a very successful strategy for us. Any more questions, just please put them into the Q&A function. So here's another question that came through. This is about how is Pet Chemist's first full year contribution been? Maybe Graham, maybe you want to take this?