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

All right. I think we're good to go. Good morning, everyone, and welcome to the Q2 FY '25 quarterly results presentation for Mad Paws. As always, thank you very much for joining us today. As always, we've got Graham Mason, our CFO, on the call as well as myself, Justus Hammer, the CEO and Co-Founder of Mad Paws. As always, we'll go through the results for the quarter. Graham will give you a little bit more detail on the financial performance for the quarter. And as always, we'll have time for questions at the end of the presentation. [Operator Instructions] Let's get right into it. Quick reminder for anybody new on the call. We -- and don't know anything about the Mad Paws story, we exist to enable pets to live their life to the fullest. And it's our goal to become the leading provider of trusted pet products and services that enhance the health and well-being of all pets. Just a quick overview, where you can see kind of what the Mad Paws business is all about. We are on a mission to become the destination for pet lovers in Australia. And over the last couple of years, we've kind of really executed on that strategy. We've built 4 brands within the Mad Paws Group that we're now more and more consolidating under the Mad Paws brand. A couple of highlights here. We've done -- we've had our first EBITDA-positive quarter for the whole group, which is a big achievement, which also meant that we had our first half year that was EBITDA positive. And I think a great testament to the hard work the team has put in. The nice thing is we're doing all this while having a lot of fun in a great industry, now with over 60,000 brand ambassadors that are -- our pet sitters that support us on a daily basis, but also with our retail businesses, providing great products and services to our customers all around the country. Now I've talked quickly about the market. Nothing really too surprising here. It is a feel-good market, but it's also a market that's growing rapidly. We've seen huge growth in terms of the pet adoption, but also when we're talking about the premiumization and humanization of pets, pets are now not just in the living room, but also in most of our beds. And that also reflects in how we care for those pets, particularly making sure that they're healthy, that they can live as long as possible. And so that, obviously, means that people spend a lot more on their pets. And you see on the bottom, over $3,000 for dogs and over $2,000 for cats. And these numbers are even a bit older now because we haven't gotten the updated data yet. So we expect those numbers to be significantly higher by now. Now not just a great industry, but you can say how we're different to kind of anybody else in the pet industry. And I think this is where we've got one of the biggest advantages when it comes down to pet retail and how we interact with our customers. We've started off Mad Paws with a pet services marketplace, which means you have to be data obsessed, and you have to kind of really start that flywheel of making sure you learn more about your customers. You find better matches to the sitters and you feed that flywheel to make better connections and therefore, drive the business. And we've used that same methodology now to acquire as much data about our customers, in particular, about their pets. So we cannot just connect them with the best pet sitters out there, but we can also connect them and put the right products in front of them at the right time. Make sure that they are not just engage customers, but that we can help them to learn more about their pets, get smarter, become smarter pet parents and use the right products at the right time to make sure that pets are as healthy and happy as they can be. And that has really kind of worked for us over the last couple of years. We've been on a journey to become EBITDA positive, and we've now achieved that for the last quarter, a great result with over $20 million in GMV, a record for the group, 10% year-on-year growth, $7.7 million in operating revenue and over $300,000 in EBITDA for the group, which is an improvement of over $500,000 year-on-year, a result we're very proud of. And I think the team's kind of worked really hard to get to. Now on top of that, we also had a very positive result from an operating cash flow perspective, 81% better than last year, $1.7 million for the quarter, which meant that we had a cash balance at the end of the quarter of over $4 million. And I think Graham is going to go into a little bit more detail of that as well in a second. Now what have we been up to over the last couple of months? We've talked about this in the last update already. But this quarter, again, we've kind of really pushed our above-the-line campaign. And you can see here some snippets out of it. If you haven't seen the ads, please -- you can click on the link on the bottom of this page, or just go through our YouTube channel, the Mad Paws YouTube channel, and you can have a look at our ads. Kind of really something that helped us, I think, elevate the brand now and take us outside of what we normally do and what we're very good at, which is performance marketing but this has kind of really elevated the brand. Now, and we've also seen that in some of the brand tracking that we're doing that we are now by far the most preferred brand when it comes to pet services in Australia. And you can see that in the numbers as well. The above-the-line campaign has performed really, really well, where we've seen a little bit of a slowdown in terms of growth beforehand. Also, driven by probably some challenging consumer sentiment with the cost of living crisis. You can see that at the time that we started kind of the above-the-line campaign, again, we've seen a significant acceleration in terms of growth again. We're back to a 14% to 17% growth since we launched that above-the-line campaign. So something that we've been working on for a long time and has now really paid off. Now the good thing is we still have nearly $2 million in terms of that above-the-line campaign in our arsenal, and we are looking to spend that or deploy that over the next quarter, particularly with Easter coming up. Now what have we done particularly for the marketplace? We've -- the marketplace key or what we call peak season is always Q2 going into kind of the Christmas holidays and the long holiday season in Australia. And we've got a playbook for that. The team is kind of very experienced in kind of running that now. And that meant that on top of the performance marketing, all the e-mail marketing we're doing, the personalization we're driving, the SMS outreach we're doing, we've added now the television and digital efforts to kind of drive the brand awareness, and that's kind of really worked out well for us. And again, we're kind of trying to do the same thing for Easter coming up. And then from a product and tech perspective, this is a period where we're normally a little bit more careful in terms of new product releases, just making sure that we are not messing anything up, that's working perfectly fine in our peak growth periods. But one of the things that we're quite excited about that we launched last quarter is our new search infrastructure, and that had a significant impact already. We've seen over 50% reduction in terms of the average search time for users. So if you go on the site, you search for a -- sit on the site that is now 50% faster than it was before. And this is kind of really the basis, the groundwork for us that enables kind of real-time matchmaking for us going forward for kind of machine learning and AI algorithms. We're already using machine learning on our existing search algorithm, but the difference here is now that we can then really have live changes to search algorithms, to searches using all the deep data that we have for our customers. And so that's the next step forward and something that we're looking forward to do in the coming quarters. On the eCommerce side, again, I think we've continued to do what we've been doing really, really well, which is get more efficient in terms of how we run the companies. So we've done a lot of work from an automation process -- automation and optimization processes. So we are now at a point where most of our prescriptions that we get are uploaded and analyzed using AI, which has -- where we've seen significant reduction in terms of our admin time and the time that our team spends on making sure an order goes out to our customers. We've also worked on expanding our revenue streams and margins. So we drove particular media spend. So working with a couple of our customers, providing them with additional services and media campaigns throughout the group. We've also had inbox sampling as well as some very good kind of rebate campaigns, which made sure that we could drive top line revenue, while at the same time, maintaining margins and even improving margins quite significantly for the time. And again, an EBITDA breakeven quarter for the eCommerce group, which is over 100% improvement year-on-year for the segment. And I think with that, we'll hand it over to Grant.

Thanks, Justus, and good morning, everyone. I'm Graham Mason, the Group CFO, and I will providing an overview of our group financial performance for Q2 FY '25. We are very pleased to report a significant milestone for the group this quarter, achieving both cash EBITDA and operating cash flow positive. This is a key achievement for Mad Paws, demonstrating the resilience of our business model and the strong foundations we have built across the segments. Specifically, group operating revenues reached $7.7 million, up 2% on the prior corresponding period and 12% when excluding Sash and Waggly. Our Marketplace segment continues to be a major driver of growth, delivering $3.8 million in operating revenue, a solid 16% increase on pcp. This reflects the increasing demand for pet services and the continued success of our marketplace platform. On the eCommerce front, we reported $4.9 million in revenue, which represents a 4% decline on pcp. But when excluding the impact of Sash and Waggly, eCommerce revenues grew by 10%, showcasing the ongoing strength of our core pet products offering. In terms of profitability, we saw group cash EBITDA of $0.3 million, marking a 328% improvement on pcp. The strong performance reflects our continued focus on driving profitable revenue growth and improving margins. For the first time, we are also reporting a positive operating cash flow of $1.7 million, an 81% improvement compared to the prior corresponding period. This performance underscores the effective execution of our operational strategies and cost control measures across the group. Now let's take a closer look at our cash flow for the quarter. Operating cash flow before the sitter liability movement was positive $0.3 million, reflecting the continued improvement in the group's operating performance. When we include the movement in sitter liability, the group's operating cash flow reached $1.7 million, representing an 81% improvement on pcp. This improvement in cash flow is a direct result of our strong revenue growth, particularly in the Marketplace and eCommerce segments as well as our disciplined focus on cost management and operational efficiencies. Turning to our financing and investing activities. In Q1 FY '25, we rationalized our product and technology employment costs as the platforms have now reached a level of maturity. This allowed us to shift focus on -- from large-scale platform builds into more innovative upgrades across the platform. As a result, CapEx cash flows have continued to trend lower, coming in at just $0.1 million, a 59% reduction compared to the prior corresponding period. Additionally, during the quarter, the group made $0.2 million in debt repayments and $0.1 million in lease payments, resulting in a closing cash of $4 million. Now let's take a closer look at the performance of our key divisions for Q2 FY '25, starting with the Marketplace. The Marketplace segment has shown strong growth with operating revenue of $2.8 million, which is up 16% on PCG. This growth is a direct result of our strategic initiatives, including the launch of the second phase of the above-the-line campaign. Notably, we experienced a positive inflection in growth, particularly in the number of new customers and bookings. Our new customer growth improved to 6% versus pcp, marking a strong acceleration from Q1 FY '25, where new customer growth was down 2%. This reflects the effectiveness of our marketing customer acquisition strategies, especially as we've been driving increased awareness for our above-the-line campaign. Overall booking growth for the quarter increased by 8% versus pcp, significantly improving from 2% in Q1 FY '25. This improvement in booking growth enhances the quality of our overall revenue growth as it is primarily driven by volume rather than pricing or take rate adjustments, showing that demand for our services is strong and increasingly organic. Additionally, we continue to see positive trends in average price, which was up 5% versus pcp, reflecting both higher service demand and our ability to assist our partners to optimize their pricing effectively. Our cash EBITDA for the Marketplace stood at $1.4 million, a 37% increase on pcp and maintaining a healthy 49% EBITDA margin. This is an excellent result, reflecting the scalability and efficiency of our Marketplace model even amidst the challenging market conditions. Notably, our cash EBITDA margin of 49% has been positively impacted by a reduction in employment costs as a percentage of revenue, which decreased 8 percentage points to 30% of revenue. This reduction follows the product and technology rationalization we implemented in Q1, where we streamlined resources and focus efforts on innovating on the current platform. In terms of marketing spend, we maintained marketing as a percentage of revenue at 22% despite a 16% increase in the total performance marketing expenditure being required to support the above-the-line campaign. This highlights our commitment to supporting the above of the above-the-line campaign effectively while ensuring we maintain marketing efficiency and consistency in our ongoing activities. Turning to our eCommerce segment. We reported $4.9 million in revenue, which represents a 4% decline on pcp. Though it's important to note that this is a 10% increase, excluding Sash and Waggly. Despite the challenges faced by certain product lines, particularly Sash, we continue to see strong momentum in key areas with a significant focus on our Pet Chemist business. Pet Chemist has been a strong performer, achieving 8% growth compared to the prior corresponding period. This growth was driven by continued emphasis on our core medication and health product lines, which remain a vital part of the business. Additionally, Pet Chemist has benefited from ceasing of Marketplace channels after Q2 FY '24, which previously represented 6% of orders. Excluding these channels, Pet Chemist orders grew by 7% compared to the prior corresponding period. A key focus for Pet Chemist business has been improving gross margins driven by several strategic initiatives. These include a stronger emphasis on medication as a core offering, optimizing our supplier mix, leveraging direct contracts to reduce input costs and placing a greater focus on securing supplier rebates and incentives. These efforts have resulted in a 3.6 percentage point improvement in gross margin, enabling us to improve profitability. In addition, the cessation of the Marketplace channels such as Amazon and eBay mentioned before, improved the AOV and product mix also improving our [ gross ] margins. In addition to the strategic improvements around gross margin, we have also implemented a leaner management structure as part of our ongoing focus on process optimization. This, coupled with AI and technology-led warehouse and order management initiatives, has contributed to a 20% reduction in staff costs versus pcp. eCommerce media revenues, which were launched in Q1 FY '24 have increased by an impressive 96% compared to pcp, reaching $0.2 million. This represents a high-growth, high-margin opportunity for the group, leveraging both our Marketplace and eCommerce assets. By capitalizing on our platform's customer base and engagement, we have successfully developed a new revenue stream with significant potential for further growth and opportunity for our partners. Our eCommerce EBITDA was breakeven for the quarter, marking an improvement of $0.3 million compared to the prior quarter. This reflects the success of our operational initiatives and the continued scaling of Pet Chemist, even in a competitive environment. I will now hand back to Justus for an update on our strategy and outlook.

Thanks, Ryan. Yes, just a quick wrap-up around kind of where we're going from here. We've talked about this before. We're kind of at the moment, what we call our Horizon 2. We've got a single destination for our brand now. We've kind of pushed the Mad Paws brand from a brand perspective through the above-the-line media campaigns. And we're kind of really at a stage now where we are doing more and more data-driven cross-sell, where we still see a huge opportunity to grow. The other thing Graham just mentioned around media partnerships, certainly an opportunity, some further growth for the group and some very profitable growth for the group as well. Now that's all resulted in us having a very strong customer base now and really that gives us that opportunity to take full advantage of that huge customer base that we have now. And it's not just an e-mail database that we have, but we've got pet profiles over 400 -- well, close to 450,000 pet profiles now actually that are extremely deep that we can use to put the right products and services in front of our customers and which helps us to get better and better in driving the flywheel that I mentioned at the beginning. Now what's outstanding for FY '25? I think we're going to keep doing what we're doing, which is drive sustainable growth. How do we do that? I've mentioned already the Seven West Media campaign. There's still nearly $2 million in media spend left, and we're looking to deploy that over -- mainly over this quarter and next quarter. So we see some, again, accelerated growth coming our way here. Historically, the Easter period has been particularly good growth for us when the Easter holidays and the long Easter weekend are falling together on the same dates, and that's -- this year, the case. So again, historically, this has been always an indicator that we see some significant growth in that period. And then we do what we're doing best, which is work on efficiencies in the business, use technology to get better and better in terms of how we can service our customers and how we can do that on a very low cost base. At the same time, cross-selling, driving the share of wallet for our customers, where we still see some significant improvements coming our way in the future. And with that, we hope we can drive further shareholder value for all our shareholders out there. We know that there's a significant gap between NPA and some of our global peers, and we're looking and working hard to bridge that over the coming quarters and quarter and quarters. So with that, I think we'll finish the presentation. Thank you very much, and we can hand it over to questions.

[Operator Instructions] Yes, there's 2 questions here from Ron. The first one is, "Can you expand on the strategic review to maximize value? Can you provide timing?" So no. Unfortunately, we can't provide any timing. We're still in the process, and we're working with Highbury Partners as we've announced in October. So currently, there's nothing new to report. But we're obviously sticking with our obligations in terms of the continuous disclosure obligations. So if anything happens or anything updates on that front, we'll keep everyone up to date. And there's a second question here also from Ron that is around the seasonality between the first half year and the second half year. So seasonality is mainly on the Marketplace. I mean our retail business has also seen a little bit of seasonality in Q2. Obviously, Black Friday and so forth is something that drives that. But for some of our businesses , it's quite different. Sash breads, for example, is much stronger in the winter months actually because some of our products lean themselves more towards the colder periods. But for the main -- the biggest part of the business, the Marketplace, the seasonality is essentially all around holiday seasons. So traditionally, we've always seen the biggest growth spurt from a new customer perspective and growth from a GMV perspective in that Q2 quarter. We see a little bit of a slowdown at the beginning of Q3, but then we see an acceleration again into Easter and the winter holidays. And so I think I mentioned it before already, but this year, it's quite a beneficial timing for us from a holiday perspective because Easter holiday and the Easter long weekend fall on the same dates. And historically, that always meant that we see some very significant growth in that period. And at the same time, we're obviously deploying the additional $2 million or nearly $2 million that we still have left with Seven West Media in that time frame as well. So we're quite comfortable that we continue to see a growth that we've seen before. And so far, we've had a very good start into Q3 as well. There's one more question here around, "If there's any more detail on the Sash beds business, and if you can provide a little bit more color." Graham, you may want to answer that one?

Sure. So I think we alluded to in our quarterly update that Sash certainly underperformed against our internal expectations. It is -- competition has got a lot tougher in its car bed offering. We've sort of continually looked to ways we can challenge that sort of new colors and different things coming out of that product. But we're still finding conversion rate is particularly volatile across different weeks and that's affected the overall sort of CAC and the profitability of that business and also the revenue growth. So what we have done in more recent times is sort of start from scratch on that business, look at the cost structure to minimize the effect of sort of impact that can have from an EBITDA perspective, and we start to implement sort of those revised strategies from this quarter. But it should be in terms of the impact it had on sort of EBITDA, should be minimal going into sort of Q3. And then we'll see how the business performs against that sort of competitive landscape.

Perfect. let's check if there's any other questions? I don't think there are. So with that, again, thank you so much for joining us today. As always, I hope you can tell we're quite excited about our results, but I think so even more so about the opportunities ahead of us. We're building really from our first EBITDA profitable quarter here, and we're seeing great momentum into Q3. And we're expecting very positive Easter trade, as I mentioned. And so I think the future is quite promising. Thank you so much for your support, and I wish you a very nice rest of the day, and I hope you join us on our exciting mission to serve pet parents better. Thank you so much.

Thanks, everyone.