Mad Paws Holdings Ltd

ASX:MPA

Earnings Call Transcript

[Justus Hammer, executive]

Good morning, and welcome to the Q4 FY '24 Quarterly Results Presentation for Mad Paws. As always, thanks so much for joining us today. We've got, as always, Graham Mason, our CFO, on the call; as well as myself, Justus Hammer, I'm the CEO and Co-Founder of Mad Paws.

As always in these presentations, we're going to run you through the results of the quarter. And Graham will give you a little bit more detail on the financial performance for the year. And as always, we will also have time at the end of the presentation for you to ask questions. Please use the Q&A function at the bottom of your screen, if you would like to ask a question, and we will get to all the questions at the end.

And with that, I think we can get started.

Just a quick reminder of kind of what we're all about. We exist to enable pets to live their lives to the fullest. And our vision is to become the leading provider of trusted pet products and services that enhance the health and well-being of all pets.

Now just let me give you a quick overview of Mad Paws in case you haven't heard our story before. We're on a mission to become the #1 destination for pet lovers in Australia, and we kind of have executed on that strategy over the last 3 years. We've significantly expanded our services and products over the last 3 years, and we're now running not only Mad Paws, which is Australia's #1 pet services marketplace, but also Pet Chemist, Australia's #1 online pet pharmacy, but also Waggly and SASH Vets as other retail offerings within the group.

Now over the last couple of years, we've been on a mission to kind of consolidate those brands and we're now finally kind of getting a lot closer to that dream. We've, over the last couple of weeks, launched the Mad Paws Pet Store, which is essentially a carbon copy of the Pet Chemist website, but it allows us now to promote really Mad Paws as a single brand with all the offerings, not just from a pet services perspective, so all your needs around looking after your pet, to finding a pet sitter, but also any kind of products you need to keep your pets healthy and happy.

So with that in mind, that was one of the key things that we needed to get done before this quarter because we've got our big media campaign starting in August this year, and I'm going to talk about that a little more in a second.

Now I don't have to tell you much, I think, about the market. It's a great industry to be in not just because it's a really feel-good industry, we're doing something really good for our customers, but also it's a growing industry. People are spending a lot more money on their pets now. The humanization and premiumization trend over the last couple of years has increased. And I think one of the key benefits of this industry at the moment, it is very recession-proof, and we feel kind of very positive about the outlook for that industry going forward.

Now a couple of words on kind of what makes us different compared to your traditional pet retailer. I mean, for one, we're online-only. But I think the biggest advantage that we have and the crown jewel in kind of our portfolio, certainly, is the marketplace. The marketplace allows us to aggregate a lot more data about our pet owners and their pets than your traditional retail business. As a marketplace, we've been data-obsessed from the very beginning. You can't build a marketplace, particularly a hyper-local services marketplace, without being obsessed about data. And we've kind of taken that knowledge now and kind of putting it into all the other business verticals that we're tackling along the way.

So for us, it's all about getting to know our customers and getting to know their pets more. Our pet owners are inclined to sit down and answer, some of them answer up to 100 questions, before they book a pet sitter with us. And that obviously gives us a whole lot of knowledge about those pets. So it goes way beyond kind of name and breed, but we know a lot of data around the pet behavior, any kind of medical conditions they might have. And all that helps us to fire up the flywheel that you see here, learning more about our customers, putting the right products and services in front of them at the right time. And that gives us a huge advantage over your kind of traditional retail business in the space.

Now a couple of highlights for the quarter, a quarter where we focused on finalizing the brand consolidation as well as a couple of other big tech builds in order to be ready for the launch of the media campaign in August, the other focus for the quarter really was to drive efficiencies. And even though we've seen lower growth than expected with 3% revenue growth for the year, there are a couple of reasons for that, that are, I think, worth pointing out.

Next to some soft market conditions that we've seen, holiday timing this year has impacted Q4 with Easter holiday starting earlier and winter holidays starting later this year, impacting our revenue recognition, which is showing in the marketplace, particularly, which if you look back the last 4 months, the growth of the marketplace has actually been 14% year-on-year.

The other impact is Waggly, and that is simply due to our decision to reduce the investment into Waggly to optimize for cash flow. If you take out Waggly, the group still grew by over 10% year-on-year.

Now what is very positive, I think, about this quarter is that all our efforts around driving efficiencies in the business have already been successful with an EBITDA improvement of over $500,000 versus last year and operating cash flow up $600,000 year-on-year. All that now puts us into a very good position, particularly with the new debt facility that we've just signed, and Graham will give you some more details around, but we've got $3.9 million pro forma cash balance available. And that's exactly what we wanted to see to make sure that we can take full advantage of the big media campaign that is planned to launch in August.

Now a couple of points around operational highlights. With the marketplace in particular, I think the key thing to point out is that we've really finalized some of our bigger tech builds and the platform has now reached maturity, especially launching the Mad Paws Pet Store, which we needed for the marketing campaign to be ready. We're now in that position where the team can focus on innovating on the platform and really drive Mad Paws as a single brand through the media campaign in August.

Now the other thing to mention, on the e-commerce operational highlights. So this has really been a quarter where we spent a lot of time and effort in looking at the processes around how can we be more efficient in the warehouse as well as our customer service team. And the team has done an amazing job in terms of building new automations for the business but also putting new processes in place, so that we've seen now the highest efficiency for the warehouse as well as for the customer service team that we've ever seen for that business. And there's still a couple of things for us to do and improve on, but we've seen the first benefits of that coming through last quarter.

And then the other focus, and I think we've laid that out last quarter, what we wanted to focus on for the business is kind of refocusing on the strength of the business, which is really around prescription medication, and using that to acquire new customers but also to help drive improved margins. And you can see that on the right-hand side there in the graph, we've seen now a continuous improvement in terms of margins for that business and therefore, also a significant better performance from an EBITDA perspective for Pet Chemist, but also for overall business vertical.

And with that, I'll hand it over to Graham for some more details on the finance side.

[Graham Mason, executive]

Thanks, Justus, and good morning, everyone. I'm pleased to present the financial results of the Mad Paws Group for the Q4 FY '24. I will firstly walk you through the group performance and cash flow, then moving to our marketplace and e-commerce divisions.

Group pro forma operating revenue increased 3% on the prior corresponding period to $6.7 million in Q4 FY '24. Growth was 10%, excluding Waggly, due to the focusing on group profitability and lower marketing investment in that business.

Marketplace revenues were $1.8 million, plus 4% versus the prior corresponding period; and e-commerce was $4.9 million in revenue, plus 3% versus the pcp, or 13% excluding Waggly.

The quarter was a period of consolidation for Mad Paws as we completed the bigger tech builds and prepare for the media campaign launching in Q1 FY '25.

In addition, year-over-year growth rates were affected by the Easter holidays falling to Q3 into FY '24 and shifting store holidays as a result.

Group transaction volumes are down 4% versus the prior corresponding period, however, were up 6%, excluding Waggly.

New customer acquisition rates are consistent with the prior corresponding period, excluding Waggly, with marketing efficiency 1 percentage point favorable versus the prior corresponding period.

In Q4 FY '24, we saw a strong improvement in group operating EBITDA, which reached negative $0.3 million, an improvement of $0.5 million compared to the previous corresponding period.

Our segment operating EBITDA, the combination of e-commerce and marketplace segments, for Q4 FY '24 was positive at $0.5 million, up $0.4 million on the prior corresponding period.

Our e-commerce operating EBITDA reached breakeven to the first quarter, showing an improvement of $0.4 million on the prior corresponding period. In addition, our marketplace operating EBITDA stood at $0.5 million with an improvement in EBITDA margins of 2 percentage points to 30% versus Q4 FY '23.

As we recap the year that was FY '24, the group has made significant progress in the year in reducing operating EBITDA loss and moving towards cash flow breakeven as a result of our focus on our strategic pillars.

Unaudited group operating EBITDA improved by $3.6 million to negative $1.1 million, with the group's operating cash flow reducing by $3.5 million to negative $0.4 million for the full year.

Looking at our Q4 FY '24 cash flow drivers. Operating cash flow before sitter liability movement and restructuring costs was negative $0.3 million, reflecting the continued improvement in the group's operating performance.

During the quarter, the group incurred $0.2 million cash restructuring expense related to our marketing and operations overhaul in the e-commerce segment, driving this segment to its EBITDA breakeven and resulting in a $0.1 million offsetting operating expense savings during the quarter.

As previously noted, the marketplace benefits from a favorable working capital cycle, with customers paying for the service upfront and payment to the sitters made after the service has been provided.

The sitter liability movement was positive $0.2 million for the quarter, resulting in a $0.2 million negative operating cash flow for the period.

Operating cash outflows have reduced by $0.6 million versus the prior corresponding period.

For our financing and investing activities, Mad Paws completed a number of smaller enhancements in our marketplace and e-commerce vertical as the platform reached a greater level of maturity and usability, specifically, user experience enhancements across the app and desktop, our foundational work for the next generation of our search ranking algorithm.

In our e-commerce vertical, work was prioritized on digitalization measures across our warehouse and customer service functions, as Justus alluded to, to reduce handling time, which results in improved unit economics going forward and, to some extent, in the current quarter.

During the quarter, the group repaid $0.2 million borrowing facilities. Furthermore, moving to the next slide, we'll outline our debt refinancing that was completed in July '24.

Post quarter end, the group refinanced its existing facility, replacing it with a $2 million facility with a 36-month term provided by Partner's for Growth. This refinancing enables the group to support the brand and customer acquisition campaign, realize the benefits of our cash cost savings plan executed in Q1 FY '25, and provide general working capital.

The new facility has numerous benefits, including a lower cost of funds and a 36-month term. Mad Paws is required to adhere to certain financial covenants during the facility's term, including maintaining minimum levels of profitability, gross margin and liquidity, as well as other covenants that are customary for facilities like this nature. As a result, we're including that facility from a pro forma basis. From a cash perspective, our pro forma cash would be $3.9 million at the end of June.

I will now turn to the performance at divisional level. Marketplace revenue increased by 4% versus Q4 FY '23 to $1.8 million, with transactions and number of time units booked flat year-over-year. Performance was impacted by the earlier timing of Easter holidays in Q3 FY '24 compared to Q4 FY '23. The timing of store holidays also varied, with early holidays in Victoria and Queensland and later holidays in New South Wales and South Australia.

While it's difficult to exactly normalize the shift in holiday timing, looking at revenue growth for the period from March '24 to June '24 provides a guide. For this period, revenue was 14% higher than the prior corresponding period. Despite these factors, trading was slightly softer than our expectation due to macroeconomic conditions, including the increased [ cost ].

Marketing as a percentage of revenue were consistent with Q4 as we commence some smaller investments in the top-of-funnel campaigns that build momentum for the launch of the media campaign.

Operating EBITDA was $0.5 million, representing a 10% growth on Q4 FY '23, with EBITDA margins of 30% improving 2 percentage points versus the prior corresponding period.

For our e-commerce division. E-commerce revenues of $4.9 million, up 3% on the prior corresponding period, 13% excluding Waggly. Pet Chemist revenues increased 16% versus the prior corresponding period, with new customer growth of 9% and the benefits of range expansion in the period as well as focusing on our core medication value proposition.

Waggly revenue was 41% lower versus the prior corresponding period due to the lower marketing investment in our subscription offering. However, in the period, we relaunched our direct-to-consumer Waggly e-commerce store. Now we have a full extent to the private label products in the quarter, allowing customers more flexibility in terms of how they purchase Waggly products.

Our e-commerce and subscription operating EBITDA reached breakeven for the first quarter, showing improvement of $0.4 million on the prior corresponding period.

Pet Chemist benefited from a comprehensive marketing and operation structure. Overall, we saw $0.1 million operating cost benefit in the quarter. In addition, Pet Chemist gross margins improved in the quarter due to the focus on our medication orders as well as shipping optimizations improving supplier relationships.

The Waggly segment showed significant year-over-year improvement in EBITDA driven by enhanced operational effectiveness, a higher proportion of private label products and reduced marketing investment.

That concludes the division performance review, and I will now hand back to Justus for the group's strategic focus and outlook and some major initiatives that will complete in Q1.

[Justus Hammer, executive]

Thanks, Graham. Yes, as mentioned before, and Graham has mentioned as well, I think we're well and truly now kind of reached the horizon 2 of our strategy, the build the brand phase. So we've finalized the big build around the single destination. So we've got Pet Chemist and Mad Paws now under the Mad Paws brand. So if you go to the Mad Paws homepage, you will see that you can go straight to the Mad Paws store and you'll find pretty much a carbon copy of the Pet Chemist website there, but all under the Mad Paws brand. And so that's obviously a huge step for us in the right direction, which is going to allow us to drive cross-sell even more and puts us into a position where we can really drive the media campaign, which I'm going to talk about in a second as well.

So with that in mind, I think the outlook for FY '25 is still the same as before. We've got a huge opportunity ahead of us now. This quarter was really about consolidating, getting the company ready for the big drive the media campaign that is coming with Seven West Media. And I think we've got a huge opportunity ahead of us now to really kind of close the gap between MPA and some of our peers and even global peers in terms of the valuation discrepancies.

Now I've mentioned before that our platform has reached kind of maturity. And I think that has really kind of allowed us to look at the team structure and the cost structure for the company and change that accordingly to kind of where we're at now in terms of that cycle. And doing that, we're now at a point where we delivered on the bigger tech project. We've now got a smaller team focusing really on innovating on the platform rather than having to build bigger infrastructure builds on the back end, or integrations within the company, and so that allowed us to executing on a reduction plan that resulted in $1.4 million in savings, that is OpEx and CapEx annualized. So I think that, combined with the new debt facility that Graham has just mentioned, really kind of put us into a position to take full advantage of the media campaign.

And maybe a couple of words to kind of finish the presentation on this. The media campaign is obviously in partnership with Seven West Media. We're going to spend $4 million of marketing contra over the next 9 to 10 months. We're looking at about $2.5 million in spend for this first half year. And we're going to reach over 2 million people with that campaign. We've got our first 5,000 spots booked.

But not only do we run the media campaign in terms of TV and the other assets from Seven West Media, but we will supplement this campaign by a significant effort in terms of performance marketing. We know that the best results we're going to get is kind of really benefiting from the increased awareness that we're going to drive through the above-the-line campaign. We're then kind of harvesting that by having the performance campaign in the back end of that. We've got a huge social campaign planned around that as well, including a big competition as well. So we think that making sure that the company, from a financial perspective, is in a position where we can really drive that was essential for us. And so I think the combination of the restructuring as well as the debt facility puts us in the perfect spot to take the full advantage of the opportunity ahead of us.

And with that, I think we have finished the presentation and go to questions.

[Justus Hammer, executive]

Let me just go through to the questions. So there's one question that popped up here. You referred to softer trading conditions in the quarter, can you elaborate on what you are seeing?

Sure. I mean maybe I'll start, and Graham, maybe you can add a couple of things to this. So it's not easy to kind of give you an exact read particularly for the marketplace and how this is playing out at the moment because we've got those timing differences of the holidays, and Graham alluded to that already. Winter holidays, obviously, started later this year versus last year, and that's different per state as well. So it's kind of hard to get an exact read of that. But consumers are obviously still traveling based on a few data points that we have.

And maybe, Graham, maybe you want to talk a little bit about that in detail.

[Graham Mason, executive]

Yes, sure. So yes, certainly, I think if you look at sort of the travel market across sort of the big international airlines, say, Qantas, for instance, as well as some sort of ABS daily, you can kind of see that certainly people are still traveling internationally. Although it's starting, I think, in the most recent quarter to drop off from the sort of Q3 FY '24 levels and it's getting closer to sort of 2019 levels, which was always going to normalize back to those levels. So I think that's a trend that we were expecting.

Also from our traffic in terms of the people that come to the site, we are seeing a lot of search volumes across our key terms. However, sort of despite this, the platform investments that we made over the last 24 months have meant that we're sort of outperforming in those categories compared to the market and still growing in those channels.

But I think what I'd just point to is that, when we look where we were in the cycle, awareness is the key, awareness in the Mad Paws platform is the key thing we sort of need to solve for, which is the driver of us sort of going into the Seven West Media campaign and getting that investment in the door because that really gives us sort of the firepower to increase the overall awareness and drive, I suppose, beyond our existing channel set and enhance the existing marketing channel set as well. And to a degree, this quarter as well, we didn't chase too much demand because we wanted to keep the firepower coming up for the big great campaign that we've got coming up starting in August.

[Justus Hammer, executive]

And we've got a second question here as well. Can you provide some more background on the debt refinancing and need for this facility? Graham, maybe you can take that one.

[Graham Mason, executive]

Yes. Sure. I think as we mentioned in our remarks, the overall purpose of that facility is to support the brand and customer acquisition campaign as we realize the benefits of sort of cash cost savings plan that we sort of initiated in Q1 2025.

I suppose, in addition to that, we do recognize there's a degree of uncertainty in the market. The macro factor is still fluctuating a lot. The interest rate outlook more recently is changing as there's a fair amount going on sort of globally and across geophysical factors. So with this in mind, we wanted a bit more flexible financing solution. That, combined with those sort of $1.4 million in proactive tech savings, would enable us to manage through those potential sort of headwinds in any scenario that could play out while we remain excited about the opportunity of that Seven West media campaign and wanting to be able to support that. So that is sort of the main drivers of why we thought it was important to refinance that facility to something more flexible.

[Justus Hammer, executive]

Makes sense. I think that's it. There's no questions in the chat.

All right. So with that, first of all, I'd like to say thank you for joining us today. Obviously, I think as Graham has mentioned again, and I've mentioned many times in this presentation, we're quite excited about the opportunity and the opportunity ahead of us for the next quarter. We're going into our strongest growth quarters traditionally for the company. I think we are probably in the best position ever to take full advantage of that.

And so with that, I hope you join us on that journey. And I'm sure we'll be talking again soon. Thanks a lot, and have a great day.

[Graham Mason, executive]

Thanks, everyone.