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

All right. I think we're good to go. Good morning. Thanks for joining us today on this Monday morning to listen in to the Q3 FY '24 results presentation for Mad Paws. My name is Justus. I'm the CEO and founder of the business, and we've also got Graham, our CFO, on the call who's going to run you through some of the financials later on the call. As always, we're going to have Q&A at the end of the session. So if you want to ask a question, please use the Q&A button on the bottom of your screen to ask any questions, and we'll answer them after the presentation. All right. And with that, we're going to get straight into it. For anybody new, we always start with our purpose. We exist to enable pets to live their life to the fullest, and we want to become the most trusted and convenient brand to rely on for all pet-related needs. What have we been up to over the last couple of years?, We've built -- either built internally or bought a couple of pet businesses in the Australian market. We run Mad Paws marketplace, which is the #1 pet services marketplace in Australia, now with well over 50,000 pet sitters on the site, but also quite mentionable Pet Chemist, the #1 online pet chemist in Australia where you get prescription medication, but also over-the-counter drugs, supplements and anything you need for your pet. And then we also run Waggly and SASH Beds our kind of retail subscription and accessory business in the market. We are in the process of consolidating those brands under the Mad Paws brand, and I'm going to talk about this a little bit later. And on why this is so important to us. But it gives -- there's a huge opportunity for us with our media partners, Seven West Media, and we're going to talk about that in a little while. A couple of words about the market. The pet market is obviously not just a very interesting market from an industry perspective, but also a very feel-good market. The relationship that we have to our pets has significantly changed over the last decade. Pets are now part of the family, and we've seen that reflected in the spendings, people spending a significant amount of money on their pets now. It's not so much about keeping the pets alive and feeding them something to stay alive. It is much more about making sure that they are healthy, they're happy and they're active for as long as possible so they can bring the joy to the family that they do for so many millions of families in Australia. Now we are a online retail and services business, but we really kind of tackle the whole industry, a little bit different than your traditional retailers. We come at it from a -- very much from a data-driven perspective. We started our journey as a marketplace, which inherently means you have to look after the data and you have to be good with data, and we're now using the same approach for all our retail businesses as well. We want to learn as much as we can about our customers, and we're very good in acquiring data about our customers, particularly the marketplace here is our crown jewel, where people sit down, give us up to 100 data points about their pets. So it goes way beyond name and breed. This is data about health issues they might have, behavioral issues they might have and all that helps us to profile those customers and their pets and make sure that we can put services and products in front of them that are very beneficial to them that they feel like Mad Paws is a trusted brand that kind of provides them with the right information at the right time. And that's something we're kind of pushing quite heavily for and which helps us significantly in cross-selling between the different brands that we're running at the moment. Now a couple of highlights. Graham is going to go into the detail of this in a second, but again, a very successful quarter for us with $6.6 million in operating revenue, up 13% year-on-year. And not just the top line grew, but I think we've been very efficient in how we grew that revenue record low marketing as a percentage of revenue for the quarter, which traditionally is probably the -- the Q3 tends to be the slowest quarter for us from a retail, but particularly from a marketplace perspective coming out of the huge summer break in Australia, that tends to be a little bit of a dip. But we've nevertheless achieved some great results, particularly on an EBITDA perspective, again, $700,000 better than the year before with a loss of $400,000. And also, if we look at the operating cash flow on a year-to-date perspective, it's a huge improvement to last year. It's over $3.1 million better than last year, with only a small loss of $200,000 for now. And all that while having $3.5 million in available funding still in our pockets. So we're well positioned to take advantage of the opportunity that's ahead of us. And I think one of the biggest opportunity ahead of us, most certainly is what we've announced last quarter, our Seven West Media investment and partnership, where we got $5.25 million, which consisted of $4 million in advertising across the Seven media channels, and we're going to take full advantage of that in the next financial year. We are planning to launch our campaign in Q1 FY '25 and this will reflect a huge increase in terms of the marketing spend for that quarter and that half year. Traditionally, again, Q1 and Q2, huge growth quarters for the business from a marketing, but also from a retail perspective. And I think with the consolidation of the brands that I mentioned before, we've got now Pet Chemist as essentially a carbon copy under the Mad Paws brand as a beta version live on the website. So we're testing that at the moment, and we're looking to launch that with a significant bend over the next short period of time. But that gives us the ability to really drive the Mad Paws as a brand through the marketing campaign that we've lined up. And we see huge -- significant upside, obviously not just from a brand awareness perspective but also from a growth perspective for the business. So a couple of words around the marketplace and what we've been up to. We've talked about this pretty much every time. But we're doing a lot on the data science and machine learning sides. This is an extension of a graph that you might have seen in the last update. But you see, again, in the last 3 months, we've seen a significant uptick in terms of the year-to-year conversion rate improvements that we've seen in the marketplace. And that is while we've actually done a lot of foundational work in the -- particularly in the last 2 months to be able to roll out kind of our new version of the search algorithm this quarter and the quarter after. And we see some huge potential there to further increase the conversion rates and the conversion rate improvements that we've already seen, but a heavy focus for us and with the data science team and the product team focusing on that, we see again significant upside, not just for business-as-usual, but then also obviously taking advantage of the growth that we anticipate from the marketing campaign. And all that is reflected, I think, in some of our key metrics that we're looking at from a day-to-day and months-to-months basis from acquisition cost, payback period. We're now at the point where in any marketing dollars we spend, our CAC is pretty much paid back within the first month. We've seen the highest lifetime value from our cohort perspectives that we've ever seen, and that's also reflected in our lifetime value to CAC ratio, which is now up to over 6x. So a very healthy value and gives us some good opportunity to drive growth even harder. From a e-commerce perspective, we're focused on very much the same things that we've talked about in the last quarter. A couple of things, I think, to highlight here is some of the operational efficiencies and the opportunities that we see there. We've already started on automating some of the processes in our warehouses and that will further, particularly over the next couple of months will give us some additional benefits for the e-commerce businesses. But then we've also launched our first home brand for Pet Chemist, which is a supplement that we're selling now, very successful launch, but we see a huge potential here to give those home brands more exposure and then obviously, expanding the range further over the next couple of quarters. But again, all that helps us to increase margin for the business and therefore, again, kind of drive growth. This is all part of the kind of refocus and we've driven with the Pet Chemist business around focusing a little bit more on prescription drugs. Again, it is something we're well known in the market for customers know us well for we can acquire prescription customers at a very good CAC and we can then focus on converting those customers once they are prescription customers into Auto Ship customers and over-the-counter customers to further drive growth. And with that, I'll hand it over to Graham.

Thanks, Justus, and good morning, everyone. I'm pleased to present the financial results and the key growth metrics for the Mad Paws Group through Q3 FY '24. And I'll firstly walk through the group performance and cash flow and then moving to our marketplace and e-commerce divisions. Firstly, looking at our group transactions and GMV for the quarter. Group transactions for the quarter were $108,000 flat versus the prior year. Headline transaction growth was affected by the closure of Dinner Bowl products since Q3 FY '23 and the Group's focus on profitability, which lowered our customer acquisition investment in Waggly due to the longer payback in this business. Excluding these items, Group transaction growth was an increase of 16% year-over-year. Growth came across both our marketplace and the focused e-commerce businesses versus the prior corresponding period. In our marketplace, our transactions increased 8% with Pet Chemists and SASH increasing by 13% and 9% (sic) [ 16% ], respectively. Group GMV was $16.1 million. This represents an increase of 11% or an additional $1.7 million in GMV from Q3 FY '23. Moving into our customer acquisition and marketing efficiency. The group acquired 27,800 new customers in the quarter. The prior period includes new customers acquired in our now closed Dinner Bowl product lines as well as new customers acquired through our Waggly business. As previously mentioned, through -- over the last few quarters, we have focused on customer acquisition activities in areas with a shorter payback period, which impacts the level of customer acquisition in Waggly. Excluding the impact of these items, new customers would have increased approximately 9% versus the prior corresponding period. As a Group, optimization of customer acquisition cost continues to improve as we focus on profitability and status foundation through the deployment of Seven West Media contract in the first half of FY '25. As a result, marketing as a percentage of revenue decreased 4 percentage points to 11% in the quarter. I will now move to Group operating revenue and operating EBITDA performance. [indiscernible] Group pro forma operating revenue increased 8% on the prior corresponding period or 13% excluding closed Dinner Bowl product lines the $6.6 million in Q3 FY '24. The growth reflects strong performance in our marketplace vertical, where revenue increased 34% against prior corresponding period. Pro forma e-commerce revenues were $4.7 million, in line with the prior corresponding period and plus 6% excluding the closed Dinner Bowl operations. While Q3 typically sees a seasonal dip in revenue and profitability for the Mad Paws Group due to marketplace seasonality, we've made strong progress this year. Despite these seasonal challenges, we've narrowed our operating EBITDA loss by $0.7 million to a loss of $0.4 million. This improvement was showed by a positive segment operating EBITDA of $0.4 million, showcasing significant gains across both segments. This resilience and strategic focus underscores our ability to navigate seasonal variations effectively and drive towards sustainable growth. Looking at our Q3 '24 cash flow drivers. Operating cash flow before sitter liability movement was $0.0 million, reflecting the continued improvement in operating performance of the Group. The marketplace is a favorable working capital cycle with a customer paying for the service upfront and payment of the sitter made after the service has been provided. Q3 is seasonally a lower period for the group cash flow sitter payments related to summer vacation periods are paid to sitters throughout January. The sitter liability movement was $1.5 million negative in the quarter, resulting in a $1.5 million negative operating cash flow in the period. Year-to-date operating cash flow is slightly negative at $0.2 million compared to a negative $3.3 million in the prior corresponding period, representing a $3.1 million improvement, demonstrating the considerable progress the Mad Paws Group has made over the last 12 months. From a financing and investment perspective, Mad Paws continues to invest in key areas of the pet life cycle in the quarter, with $0.3 million invested in product initiatives in our marketplace and e-commerce verticals. Specifically, user experience enhancements across the app and desktop foundational work for the next generation of our search ranking algorithm and work for the launch of the Mad Paws store. During the quarter, Mad Paws received $0.5 million funding from its borrowing [indiscernible] facility with $0.1 million repaid in the facility in the quarter. At the end of the quarter, $0.25 million is undrawn and available to draw down. Further, facility capacity will be available to the group once the initial tranches are repaid in September 2024 and January 2025, subject to the approval of the lender. As noted previously, we completed a $5.25 million investment in Seven West Media during the quarter, $1.25 million of this investment was in cash, with $4 million in marketing contract. I will now turn to performance at a divisional level. The marketplace continued to perform strongly in the quarter. Marketplace revenue increased by 34% versus Q3 FY '23 to $1.9 million. As Justus highlighted, our continued investment in platform improvements across the sitter and handler experience and a greater use of data science for the key drivers of revenue performance in the quarter. Marketplace transaction growth was 8% -- was plus 8% versus the prior corresponding period, with average order values increasing through growth in both the number of time units per booking and prices per time unit increasing by 5% and 4%, respectively. Marketing as a percentage of revenue trends continue to improve to 21% versus 31% in Q3 FY '24. Our Marketplace segment performed strongly with an operating EBITDA of $0.6 million, representing 490% growth on Q3 FY '23 with EBITDA margins of 31.7%, a significant improvement of 24.5 percentage points. These robust EBITDA margins are driven by 3 factors: profitable revenue growth, enhanced marketing efficiency and advancements in technology and customer service. These strategic initiatives not only bolstered our operating EBITDA margins but also amplified our operating leverage. For our e-commerce division, e-commerce revenues were $4.7 million, an increase of 6% versus the prior corresponding period and excluding the closed Dinner Bowl operations. SASH beds increased 20% versus the prior corresponding period, driven by growth in its core product range as well as positive contribution from new products released over the last 12 months. SASH UK was relaunched utilizing a local 3PL partner at the end of the quarter and is expected to make a more meaningful impact to growth in Q4. Pet Chemist revenues increased 17% versus PCP, with a near customer growth of 10% and the benefit of range expansion in the period as well as focusing on our core medication value proposition. Our e-commerce segment saw a notable improvement in operating EBITDA rising by $0.2 million to negative $0.2 million compared to the prior corresponding period and $0.1 million higher from Q2 FY '24. This improvement was driven by sustained revenue growth in SASH and Pet Chemist, coupled with operational efficiencies and robust margin expansion in our Waggly toys & treats subscription business. Despite a challenging retail and statement by price-conscious consumers, our e-commerce team remains agile and proactive. We are currently reassessing our strategy and operations to strike the right balance, offering compelling value to our customers while staying laser focused on profitable revenue growth and achieving EBITDA positivity. That concludes the division performance review, and I will now hand back to Justus for the Group's strategic focus and outlook for the balance of FY '24.

Thank you Graham. Yes, a couple of words around our Group strategy. Nothing much has changed here. We're still on our way to become a household name in Australia in the pet market, and we're kind of in what we call between our Horizon 1 and Horizon 2 but we're getting very close to the Horizon 2 now which I've already mentioned, the single destination we've just launched our beta version there under the Mad Paws brand, which reflects essentially a carbon copy of the Pet Chemist side, but completely Mad Paws branded. And that's our first step towards that and a huge step towards making sure that the $4 million in media that we're going to spend is going to be spent wisely as well, pushing one brand and also making sure that our conversion rates remain high rather than driving people from one brand to another. The other one I've mentioned is around home brands. We see a huge opportunity here to increase our margins and provide our customers with products that are as good or even better at a better price. So we are certainly seeing opportunity here and driving that not just in the existing channels that we have now, but finding new channels for those products as well. And last but not least, we've already been working with some of the media partners out there, some of the old customers, some of the brands that worked with us already, but giving them access to the vast amount of customers and sitters that we have now has been proven quite exciting for them, and we see more growth to come here in the next couple of months and quarters. One thing to mention maybe on this one is, I mean, we're learning more and more about our customers, so we're getting better and better understanding kind of what they want and what they need and also when do they need it. But the other thing is really about the single platform again. And I think the huge opportunity we have here now as well as using the trust that we've built throughout the marketplace. People are trusting us with their fur babies to look after them, to kind of transfer that trust into other service and products. And we believe there's a huge opportunity to do that under a single brand rather than having to branch out and convert them into different brands in the ecosystem. So that kind of trust factor that we've been working on so hard for the marketplace, I think will really pay out once we launch that single destination to all our customers. And the outlook for FY '24. So not much has changed. Our strategy stays the same, as I've mentioned before. I think the heavy focus for the team has really been around that single destination. And I think the added motivation the team has gotten now by having the pressure of the media campaign going live, a huge national campaign going live has been putting a spring into the step of the whole team and have done some amazing work in kind of driving the -- those outcomes. And I think we're going to see the benefits of that going forward. All that as well as the cross-sell features that we've already released, we're working on a couple of things around the loyalty offering. We've had our first tests out now for all Mad Paws loyalty pass. All of these things are going to add up to help us to continue to drive sustainable growth. But in particular, supercharge the growth that we've seen now with the Seven West Media campaign where we are forecasting to spend probably half or even more than half of the $4 million in media that we have to spend in the next half year or in the first half year of FY '25. So quite excited to see the results of that. And ultimately, that will help us to drive further shareholder value. We've seen the transaction with Rover being concluded at the end of February. Rover was acquired for $2.3 billion. I think it was in the U.S. And some of those multiples is obviously quite attractive, and we think we can work towards that to drive shareholder value here for Mad Paws going forward. And with that, we'll open it up for questions.

So if you want to ask a question, just use the Q&A function or you can send it directly to me as well. I've got one question here from David. So even though the segment EBITDA is positive again, it seems that e-commerce segment is still loss-making when you see this turning around. Graham, maybe you want to take this one?

Sure. Well, I think we've seen this quarter we've improved the last in the last quarter by approximately $100,000. We've already identified and implementing a number of technology enhancements, we improved the operations in warehouse as well as customer service areas. We think that will drive significant improvement in the variables or cost margins we're getting out of that business. So I think as we go into this quarter, we should be getting very, very close to breakeven for that segment. And then we'll be sort of generating positive EBITDA margins from the start of FY '25.