Mad Paws Holdings Ltd

ASX:MPA

Earnings Call Transcript

[Justus Hammer, executive]

All right. I think we can get started. Welcome to the Q1 FY '24 Quarterly Results Presentation for Mad Paws. Thanks very much for joining us today. Today, we have Graham Mason, our CFO, on the call as well as myself, Justus Hammer, the CEO and Co-Founder of Mad Paws. We will run you through, as always, our results for the quarter. Graham will give you some more detail on the financial performance for the quarter as well as at the end, we always have time for questions. So please use the Q&A function on the bottom of your screen. If you would like to ask a question, and we will get to them at the end of the presentation. All right. Let's get right into it, a quick refresh for those ones that are new to the story. Mad Paws, 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. Just a quick overview of the Mad Paws business, just in case you haven't seen the different parts of the business. We are on a mission to become the destination for pet lovers in Australia. We have executed in line with that strategy over the last 3 years expanding our initial pet services marketplace into other pet offerings like food, health and pet products. We are 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 pet sitters. They are local with 5-star reviews, providing services like pet sitting, dog walking, daycare and grooming to pet owners in the communities around the country.We also run Australia's number 1 online pet pharmacy with Pet Chemists as well as our subscription business and it treats in toy space, Waggly and SASH beds, our premium dog beta necessary business. From the beginning, we've been obsessed with providing a great customer experience, and this has been resulted in a very loyal customer base. We love our products and services, and that shows now because they're coming back to us on a very regular basis, our repeat rate for the whole business is at over 70% for the whole group. So what makes our industry so interesting, it's not just a few good industry. We really kind of love working and our customers, as I said, love our products and services, but it's also a fast-growing industry. And that gives us plenty of opportunity to expand. You would have heard about the macro trends of pet humanization and premiumization, and these trends really have significantly accelerated over the last couple of years. Pets are now an extension of our own family. We treat them like family members, and it certainly shows not just in the relationship that we have in our heads, but also on how much we spend on our pets. In Australia, we're now spending over $3,000 on average on our dogs and over $2,000 on our cat. So what makes us different, though, from your kind of traditional retail business you might ask. And it really comes down to the unique ability of our marketplace to acquire customer data in a way that a traditional retail business will always struggle with. The marketplace really gives us the ability to ask our customers a series of questions and think about it that way. If you look for someone to look after your pet, you want to make sure that you find somebody that is the perfect match. So you might want to make sure that they know about the breed that they have looked after pets like years before. But you also want to make sure that they know everything about your pets. Are there any behavioral issues? Are there anything they need to know about medication or the food they take. And all these things, we can run customers through and we've taken really good at that to acquire that dialogue from customers, and that gives us a huge leg up compared to the traditional retailers in this space. And that really shows in that kind of life cycle flywheel that we've built. We traditionally -- we started doing that in the marketplace where there's all about better matches, more other more transactions. We get better matches for sitters and owners. Now we're kind of translating that into our retail businesses as well, which means we use that data to put the right products and services in front of our customers at the right time. And it shows in the results. So a couple of highlights for the quarter. We're very proud of the results that we've seen this quarter. Obviously, the first quarter where we had our first EBITDA positive month in September. But overall, a great result for the quarter as well. Again, a huge improvement to our EBITDA loss, which was improved by $600,000 from quarter-to-quarter. And while doing that, we still maintained a very high level of growth, 34% up in terms of operating revenue year-on-year at $7.2 million. And we've achieved that while getting much more efficient in terms of our marketing spend as a percentage of revenue, it's dropped to 11%, which improved from 16% in the prior corresponding program period. So we are still maintaining the same growth that we've seen before, but now at much more efficient levels. And we see this momentum kind of going forward into the next quarter as well. I think this graph really shows the trajectory that the business has been on over the last couple of years. And it shows a clear trend towards growing profitability, especially going now into the strongest quarter, which traditionally is the Christmas quarter. And this was a result really of executing on the strategy that we laid out over the last couple of years, and we'll run you through a couple of the operational highlights for the quarter. So on the marketplace, 2 things that we're focusing on. One is driving marketplace liquidity as a marketplace, you have to do that. And the other side is operational initiatives in order to run as efficient as possible. On the liquidity side, we've done a lot of things to make sure that our business runs smoother. The experience is better for our owners as well as for our sitters. And we still see a huge potential there going forward. But the things that we've done in this quarter, in particular, was making sure that our sitters now have the ability to charge different rates for different times. You can imagine there's a very different demand, for example, in the Christmas time and prices go up in that time. So really optimizing the earning potential for sitters was the goal here, and we see that as a huge potential now going into Christmas. But we also gave them now the ability to charge for different services that they're offering. So within a holiday service, for example, now, they can add additional charges for particular services that they offer. So again, it gives them the ability to really customize the service for our owners and at the end, optimize their kind of earning potentials. We've also done a lot of work, again, on the search algorithm, such algorithm is kind of the key technology part of our business will make sure that we're finding great sitters, but it also obviously make sure that we are working with the right sitters that are staying on platform, keeping transactions on platform. We've done a lot of work now in identifying different behaviors, for example, from a location based with a location-based data identifying areas where we've got less sitters where we need different behaviors from the search algorithm, for example, then in areas where we've got high density of sitters. And last but not least, on the operational initiatives, we've done a lot of work on reducing costs. So on the technology side, for example, we reduced technology cost as a percentage of revenue by 20% but also on the operational side, for example, now using AI to solve our customer issues as quickly as possible, so they don't have to contact our customer service, which again reduces the load and lower the cost base for the business, again, makes us even more scalable than before and gives us the ability to grow the marketplace on a pretty much fixed cost base now. The other thing we're always working on is continuous development of content on SEO. SEO is the biggest driver for the marketplace, driving organic traffic. So free traffic to the marketplace is key to make it work. And so we're continuously investing into the content and SEO infrastructure to stay the number 1, which we are in terms of pet services in Australia. A couple of words on the e-commerce operational highlights. Essentially kind of the 3 things that we focused on. One was margin expansion, what we've done here. Waggly is now 100% in-house brand. So we're completely in-house now in design and sourcing of those toys, which again increased the margin and the profitability of the boxes that we're sending out. We've grown our range significantly. So for Pet Chemists, we've grown the range now we over 900 SKUs just in this financial year, which again drives the growth for Pet Chemist and is now is a result of the new warehouse, which we opened up beginning of the quarter. And last but not least, improved customer acquisition costs. And this is really a result of us getting more efficient in terms of customer acquisitions in the channels that we're using and the marketing mix that we have. But it's also a result now of the cross-sell really kind of picking up and we're seeing numbers going in the right direction. We've relaunched the Pet Chemist website, which we believe is a key milestone for the business because that now gives us really the ability and the foundation to consolidate the different brands that we have, so SASH Bed and Waggly under the Pad Paws banner. And you will see quite a lot of new launches coming over the next quarter or 2, where we're working to consolidate those brands and drive Mad Paws as kind of the main brand and really kind of drive home the ecosystem that we're building in a single destination where customers can buy products and services from Mad Paws. And with that, I'm going to hand it over to Graham, who's going to run you through the financial performance for the quarter.

[Graham Mason, executive]

Thanks, Justus, and good morning, everyone. I'm pleased to present the financial results and key growth metrics for the Mad Paws Group for Q1 FY '24. You will see through our Q1 FY '24 results, Mad Paws has made significant progress towards its EBITDA breakeven target, achieving its first month of positive EBITDA on September ‘23. I will firstly walk you through the group performance and cash flow and then moving to our marketplace and e-commerce divisions. Firstly, looking at our group transactions in GMV for the quarter. Group transactions for the quarter were $120,000, an increase of 18% on Q1 FY '23 and a record high for the group. Growth came across both our marketplace and e-commerce verticals versus the prior corresponding period. E-commerce increased 22% versus PCP or 30% excluding the closed interval product lines. Pet chemist increased by 39%, while betting down its operations into the larger warehouse space. And SASH increased 130% year-over-year driven by the scaling of existing marketing campaign, higher customer pet rate and new product launches. Waggly transactions were largely flat versus the prior corresponding period as we allocate marketing to businesses with shorter payback periods. Marketplace transactions increased 12% versus the prior corresponding period. We've seen an increase in transactional growth quarter-on-quarter, which is the result of the owner and sitters enhancements introduced across the fourth quarter as well as in Q1. In addition, it is worth noting that prior year included a one-off location driver from an additional public holiday that drove additional booking volumes in the prior period. Group GMV was $16.8 million, and this represents an increase of 26% or an additional $3.5 million in GMV from Q1 FY '23, reflecting our continued transaction growth as well as increasing order values and take rate enhancements, increasing our share of pet owner as well. Now moving to our customer acquisition and marketing efficiency. The group acquired 31,800 new customers in the period, marginally ahead of the prior corresponding period. The prior period includes new customers acquired and are now closed in a bull product lines as well as new customers acquired for our Waggly business. As previously mentioned, over the last few quarters, we have focused our customer acquisition activities in areas with a shorter payback period, which impact the level of customer acquisition in Waggly. Excluding the impact of these items, new customers would have increased approximately 20% versus the prior corresponding period. As a group, we have been focused on maximizing our new customer acquisition while driving down our customer acquisition economics. As a result of this focus, we saw a 4 percentage point decrease in marketing as a percentage of revenue to 11% in Q1 FY '24. Now looking at our operating revenue, operating EBITDA performance. Group operating revenue was $7.2 million. This represents 34% growth versus Q1 FY '23 and 43% growth excluding the discontinued dinner bowls product lines. The revenue growth versus the prior corresponding period as a result of the volume drivers that faced about previously, higher average order values driven by a combination of market conditions, new products and pricing strategies. This quarter, outfalls continued to make strong progress towards the goal of operating on an EBITDA positive basis with a key achievement of its first month of positive group operating EBITDA for September 2023. This positive result is the combination of increased demand on Arco services and several operational initiatives underpin on last financial year focused on margin improvements, marketing efficiencies and optimizing the cost base. Overall, group operating EBITDA was negative $0.2 million, a $1.2 million improvement year-over-year. EBITDA margins of minus 2%, an improvement of 25 percentage points versus the prior corresponding period and an 11 percentage point improvement quarter-on-quarter. The improvement in operating EBITDA margins was driven by both divisions with marketplace and e-commerce divisions improving their respective segment EBITDA by $0.3 million on a quarter-on-quarter basis. Now looking at our Q1 FY '24 cash flow. Operating cash inflow before to liability movement was $0.1 million, reflecting the improved operating performance of the group on a quarter-on-quarter basis. As previously highlighted, our marketplace business is a favorable working capital cycle for a customer paying from a service upfront and payments has affected happening after the service is taking place. The sitter liability movement was GBP 0.2 million positive in the quarter, resulting in a $0.3 million in positive operating cash flow in the period. Mad Paws continues to invest in key areas of the pet life cycle in the quarter with 0.4 million invested in product initiatives in our marketplace and e-commerce divisions. Specifically, the launch of new SCA discoverability improvements, updated pricing capabilities to sitters and the integration of new payment going way that lower the merchant fees and adds additional payment options to the platform. In addition, we completed the Pet Chemist website rebuild at the end of the quarter, providing a faster and improved shopping experience for our customers with enhanced auto-ship and add to book functionality. During the quarter, Mad Paws secured a $1 million working capital facility with a specialist cash way lenders to safeguard against any potential intra-month fluctuations in cash as we enter the busiest period of the year and to allow for continued marketing and technology growth investments over this period to affect the completion of the publicity, $250,000 was drawn down during the quarter. Moving to our performance at a segment level. The marketplace continues to perform very strongly in the quarter. Marketplace revenue increased by 32% versus Q1 FY '23 to $2 million. Our continued investment in improved sitters’ improvement has allowed us to increase our take rate without impacting customer demand at this stage. We have made a number of optimizations with our marketplace in the quarter, and we've made consistent levels of customer acquisition acquired more efficiently with marketplace marketing as a percentage of revenue decreasing to 18% from 21% in the prior corresponding quarter. In addition, a portion of our development effort has optimized our hosting customer messaging costs. With the latter, we can reduce message length, message frequency and with the launch of our updated at the delivery mechanism of our owner and customer messaging. During the quarter, we saw technology costs as a percentage of revenue decreased by 2 percentage points to 10% of revenue. This resulted in the marketplace achieving operating EBITDA of $0.8 million for Q1 FY '24. Operating EBITDA margins were a record high of 39%, further demonstrating the high operating leverage we can command from this segment. And finally, looking at our e-commerce performance. Pro forma equine revenues were $5.2 million, an increase of 34% versus the prior corresponding period and 47%, excluding the closed interval operations. SASH saw stronger levels of growth increasing 163% versus the prior cross growing period, driven by strong growth in its core product range as well as positive contribution from new product relations. Pet Chemist revenues increased 43% versus the prior corresponding period, with range expansion benefits progressively increasing across the quarter as we utilized the largest staff in the new warehouse. E-commerce operating EBITDA improved $0.7 million to negative $0.1 million versus the prior corresponding period and improved $0.3 million compared to Q4 FY '23. This was the result of the strong revenue growth in SASH during the quarter with the new products launched at the end of Q4 FY '23 and during the current quarter, accelerating growth above the core product range. Operating efficiencies and strong margin growth grow by Waggly toys and treats subscription business to profitability in the quarter. And finally, the expansion of pet care is into its large warehouse space in the quarter, resulting in revenue growth and higher gross margins as range expansion start to improve our returns. I will now hand back to Justus the group's strategic focus and outlook for the balance of FY '24.

[Justus Hammer, executive]

Thanks, Graham. Yes, just a couple of words before we go to the Q&A as well. Just on the group strategy. We've been talking about this for a while. We're building Australia’s number 1 destination for pet parents, but we're still at the beginning of the journey, right? So if we think about the different horizons that we've got for the business, we're kind of moving towards Horizon 2 now, where we're getting closer and closer to really building that single destination for customers where they can buy all our services and products from a single destination. Moving towards the data-driven cross-sell, which, again, I've mentioned, we've already seen some great increase over the last year. It's working better and better, but we're now kind of moving towards really kind of productizing that cross-sell rather than having to move our customers between the different brands, we're going to get to the point where they're just going to buy it from a single destination that is Mad Paws and that's something we're very excited about. Obviously, home brand strategy is something that we've been working already particularly for Waggly and SASH beds very successfully, bragging now with 100% home brands. But we see that opportunity also for Pet Chemist, huge opportunity for us to increase margin for that business to really kind of dig into the knowledge that we have our customers and the knowledge about the products that they're already buying to use that to drive the kind of home brands, which again going to give us a huge opportunity in terms of the margins for that business. And again, we've got a huge set of data that we can use to get that right. And the other one is media partnerships, again, kind of using the data that we've built now to drive further opportunities for the business and new revenue streams for the business. This is just to show again that we are operating at a significant scale now. We've got a database now of over 1.1 million people who've got over 1.3 million people coming to our website on a monthly basis. The 40,000 pet sitters are a huge opportunity for us. We're working now to trying to understand how we can use them better and better in terms of the cross-sell, how do we make them. They're already ambassadors for pet services business, but how do we integrate them more and more in becoming ambassadors for our products as well. So this is something where you're going to see some more activities over the next quarters. And then an outlook on what we're working on, we're quite excited. We certainly, like I said at the beginning of our journey, but we see some huge growth opportunities for us going forward. We're heavily focused on sustainable growth, building on the positive momentum that we had now, first positive EBITDA month in September going into the biggest quarter that we always have in terms of growth for the year, in the Q2 quarter before Christmas. So this is something we're very excited about, but we also see a very focused on making sure that we stay as efficient as we have been over the last couple of months and quarters. Again, that will show in the customer acquisition costs and the efficiency on how we drive that. I've mentioned SEO before as well as kind of how we focus on getting the marketing mix right, which has shown in the huge improvement that we've seen in terms of the marketing spend as a percentage of revenue. And efficiencies and cross-sell is obviously something that we're always working on. You've seen the huge decrease of 20% in terms of tech cost as a percentage of revenue. This is something that we continuously working on. We've got an extremely scalable platform where the cost base is pretty much fixed for us now. We've released the new Pet Chemist website, which is the foundation of consolidating Waggly and SASH beds under the Mad Paws brand as well. So a lot of the hard work has been done, and we're really kind of focused on growing the business from here on out to get to our final target, which is cash flow breakeven, but it's very much within our reach now. And with that, I would like to open it up for questions. So if you have any questions, please use the Q&A function on the bottom of the screen. And Graham and I will answer any questions coming up.

[Justus Hammer, executive]

I've got one question coming through here. So this is about the EBITDA progression. So the question is following the achievement of Mad Paws first month of positive operating EBITDA. When can we expect to see this on a quarterly basis? Graham, do you want to take this one?

[Graham Mason, executive]

Yes, sure. So we do not provide forecast at this stage. However, I think you can see from the chart we put in the presentation, we've certainly continued to see continued improvements in progression in our EBITDA. We are entering the sort of the biggest period in the marketplace in Q2. So we expect that progression to continue to the marketplace as well as the e-commerce business as well. There will be some quarterly fluctuations due to natural seasonality we've kind of progressed over the next 9 to 12 months, we do see sort of continued progression. I suppose our big sort of target is that we're looking to be the first half or cash flow positive year would be to FY '25, and that's really in our wheelhouse in our target range at this stage.

[Justus Hammer, executive]

Perfect. Got another question here from Caleb. Some color on the working capital facility. Is it used to fund inventory buildup increase in SKU? How would it be used going forward? And what is the interest? And maybe I'll give a little bit of color on the top end and Graham can take it from there. So the main reason behind the facility was really to make sure that we can keep our foot on the pedal, kind of maintain the growth that we've seen for the business now without having to be too careful around managing cash flows, particularly kind of intra-month cash flows as well. So that was kind of the idea behind it to make sure that we can kind of maintain the growth and the momentum that we're seeing for the business now going forward. And that was a quick way for us to kind of get that done and not being distracted for the business and kind of focus on the growth. And maybe, Graham, you can give a little bit of color on the details of the facility.

[Graham Mason, executive]

Sure can. So we've outlined in the fee sort of key terms on this. There is a loan fee of 14.5% of the loan principle drawn. That's an interest charge in the minute. There's a commitment fee of 1% of the available a little bit being GBP 1 million, and it's got a 12-month. Key terms of that. I think the term being 12 months just sort of indicated there, it's not a long-term sort of funding approach, but really just to make sure that as we go through this period, we can keep investing and keep growing in line with the trajectory we're seeing.

[Justus Hammer, executive]

Thank you. Another question here around what are the key drivers behind the considerable improvement in EBITDA margin this quarter? Do you want to take that one, Graham?

[Graham Mason, executive]

Sure. So I think specifically around the marketplace, the marketplace has seen quite a decent increase in EBITDA margins about 11 percentage points in this quarter. As we said at the start of the presentation, the sort of initial product investments that we've continually made throughout the last 6 to 12 months, I mean that we would be able to increase our take rate, which has meant that, when you have a sort of high operating leverage that is driving incremental EBITDA margins. In addition, a portion of our technology investments in the quarter did focus on the overall cost to serve the platform as well as making sure it's still a most robust platform we can have. And that focused on how we are hosting that platform and how that works, as well as our messaging with owners and sitters to sort of drive conversion and booking volume with a lot of work around reducing the input cost of those messages, test volume and length as well as when we roll out rolling out our new app, which is fairly soon, actually change the delivery mechanism for those messages as well. So that resulted in a pretty decent reduction in our technology costs as a percentage of revenue for the marketplace. And also, in the corner to the marketplace, we were more efficient from a marketing perspective where we saw the decrease in marketing as a percentage of revenue. From an e-commerce perspective, it's largely revenue growth from SKU expansion of new products as well as slightly improving gross margins across Waggly from the use of private label and the product expansion into so more higher gross margin products. And we've got more of that to come specifically in the Pet Chemist business across this quarter going into Q3 also.

[Justus Hammer, executive]

Yes. I think, maybe good to mention here again kind of the marketplace and how kind of how scalable it really is. We've obviously got a team working in the marketplace from a product and tech perspective because we still see some huge opportunity for us to improve on what we have. But the nice thing about the marketplace is that, that cost base is very much fixed. We can pretty much double the volume of the marketplace. And the only thing we need is some of our great customer support people in the Philippines to kind of work through that additional volume. But nothing else would change in terms of the cost base for the marketplace. So kind of going back to what Graham has said, it's extremely scalable from here. And any additional dollar that comes through on the marketplace pretty much falls through the bottom line. And that's why we're kind of expecting that EBITDA line to continuously improve for the marketplace as well. So with that, I'll close it here. First of all, thanks very much for joining us today, and being kind of part of the journey. As you can tell, we're very excited about the results. I think it was a huge milestone for the business to have our first EBITDA positive months in September. Obviously, also in a quarter that's not a seasonal high for us. So that achievement for us even more so something that the team is extremely proud of. But really building from that first EBITDA profitable months, we've seen great momentum going into Q2. Traditionally, that's our strongest quarter in terms of growth for all parts of the business, and we're seeing cross-sell kind of really picking up, which is shown in the strong improvement of the marketing cost as a percentage of revenue. But quite aware that we still have a lot of opportunity ahead of us, particularly on the cross-sell perspective, if you think that only 10% of our customers at the moment have purchased from multiple verticals. So this is the piece that we're most excited about and where you see -- going to see a lot of movement over the next couple of quarters. So exciting journey that we've been on for the last couple of years. Again, thanks a lot for the support, and I wish you a nice rest of the day. And hopefully, you're going to join us on our mission to serve pet parents better. Thanks very much.