Earnings Call: H2 2024

Jun 11, 2024

Good afternoon, ladies and gentlemen, and welcome to the KateBox Holdings Plc Final Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and we'll publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. And if you can give that your kind attention, I'm sure the company will be most grateful. I'd now like to hand over to the management team from Katebox Holdings, Suka Michael. Good afternoon. Good afternoon. Good afternoon. Thank you for everybody for joining us today. For those of you who don't know us, Cakebok is the U. K. Largest retailer of fresh cream celebration cakes. I'll give an overview and then hand over to Michael to present the financial performance of the business. After that, I'll give you a strategic and operational update. So on the first slide, we are pleased to present our full year 2024 results and the remarkable achievements our company has made during the year with strong growth across the business. The strategic initiatives we've implemented have yielded excellent results with increases in sales and profits. We have outperformed market expectations, achieved our store opening targets and investments made in brand refresh, IT Hub and customer database has all contributed to our growth and we continue to do so. These good results are also because of our commitment to cost discipline and our ability to maintain robust trading momentum despite challenging macroeconomic conditions. With that, let me hand you over to Michael to present the financial performance of the business. All right. Thank you very much, sir. So this slide just gives you a summary of all of our financial metric highlights during the year. What I'll do now is just go through each one individually on the next slides. So as we just look in terms of our franchise sales, so this is our sales from our stores to the end customer. That was up 9.1% in the year, going from SEK72,100,000 to SEK78,800,000. Our sales, which is our cake box group sales, that was up 8.7% from SEK 34,800,000 to SEK 37,800,000. And our adjusted EBITDA, this is after taking out the effect of exceptional items, was up 12% from SEK 6,700,000 to SEK 7,500,000 for the year. Our net cash, this is our cash and cash equivalent balances less our mortgages was up $1,200,000 in the year from $6,100,000 to $7,300,000 which was a 19.5% increase. If we then just look at our adjusted earnings per share. So adjusted earnings per share was up 4.2% from 10.6p to 11p and I'll take you through later on just why and how we move from an adjusted EBITDA of 12% increase year on year down to a 4.2% adjusted earnings per share or profit after tax. Our dividend to share has grown at 10.8% year on year. So from a full year dividend of 8.1% in the prior year to 0.9p per share this year. And our free cash flow conversion was 81.8% in the year. So if you then look a bit closer at our sales performance, so overall our franchise sales was up 9.1%. That was driven by 4.4% like for like for the furniture stores and our 20 new stores that opened up during the year. Our sales, which is $38,800,000 that was up 8.7%. Now that was up less than the 9.1%. Also due to the fact that the franchise packages and this is where we invoice for new store builds. That's slightly down year on year. Although we opened up exactly the same number of stores, 20 in 2023 and 20 in 2024. And that's just because we've allowed franchisees to go direct to the suppliers of the building or of the refrigeration that goes into stores to cut us out as the middle man. You can also see there a new line, the National Marketing Levy, which came into operation from just about the half year during the financial year and that was 600,000 that we collected from the franchisees, which was again spent on marketing activities. So this just give you an illustration of how our sales grew from the 72,000,000 dollars to the $78,800,000 in the year, which is $5,300,000 from existing stores, which is a combination of the like for like growth as well as the annualization of the stores that opened up in the prior year, dollars 1,800,000 from our new stores and a slight reduction in our sales Our like for like, the 4.4% of the slide just shows us how that's broken down due to the first half of the year versus the second half. We can see it was 6.3% in the first half where we were up against a negative 1.6% like for like in the previous year to a 2.6% positive in the second half, where we're up against a stronger positive from positive 3.4% in the previous year. One really good thing to note is that every single month during the year we had positive growth. Our online sales was 16.1 percent up year on year, driven by our investments in our online marketing as well as our investment in our marketing team. We can see we ended the year for the full year of $16,100,000 which was 21.8% of our total sales came from online versus 20.8% from the previous year. So we can see again an increase in that metric year on year. So if we look at our adjusted EBITDA, we started with our gross profit of 19,900,000 which was NOK 16,100,000 up. Just a note here and the 3rd bullet point on the slide shows that the increase in gross profit is down partly to the National Marketing Levy coming into force where the revenue is within our revenue lines, but the actual costs against that revenue are showing it overhead, which is the line below. So there's a little bit of that increase, which is down to the fact that the revenue is in the one line and then the actual expenditure is in the next line which is in the overhead line, which is why we've got an 18.7% increase in overhead line. But if you look underlying, you have to extract the actual marketing expenditure, which matches to the national marketing fund revenue that we collected. I'll just leave it at the bottom is $7,500,000 for the year, which is 12% up year on year. If we then look at how we go from adjusted EBITDA down to our adjusted profit after tax. So we go from a 12% increase of adjusted EBITDA down to 4.2%. And we can see there the largest impact is the change in the corporation tax rate year on year, which went from 19% to 25%. Our underlying or our effective tax rate went from 22.2% to 25.6 percent and we're always slightly above the statutory tax rate as we have some expenses which are not tax deductible. If we just look at our free cash flow, so our reported EBITDA of $7,700,000 so that included our exceptional item which was a reversal of the provision we had made in the 2021 financial year due to a data breach. In the year, we had a correspondence from the ICO that they consider the case closed following the information that we have provided on how we've improved our security around our data capture and security around data and customer data in the business. So when you extract that, we'll go to from a reported EBITDA of $7,700,000 down to adjusted EBITDA of 7.5 percent. We've got a slight increase in working capital during the year and this is mainly down to stores that opened up in the second half of the year, opened up to the back end of the year. And that's the actual invoicing for those new stores, which again those funds would have been received from a franchisee in the new year, so it was April May. So therefore free cash flow ended at 6,300,000 which was in line with the prior year. So from our net cash position, we started the year with a $6,100,000 We generated $6,300,000 of free cash flow. We spent $1,300,000,000 CapEx, paid $3,440,000 as in dividends and $300,000 on our finance leases, which left us with closing net cash up $1,200,000 from the previous year at 7,300,000 dollars Then just select our capital allocation policy. So we expect $1,300,000 on CapEx, dollars 800,000 of that was on existing distribution centers, which is maintenance CapEx and $500,000 on our new IT infrastructure, which is our new website and our ERP solution, which is Microsoft Dynamics. Following just post year end, we've identified an opportunity to buy the land right next to our current Bradford Depot. We took that opportunity to purchase that land for 700,000 and we'll be look at developing a warehouse on that land which will help us with our expansion to the north of the country, Scotland and then over to Ireland as well. And then you can just see our dividend, full year dividend for the year is 9p per share, which is a 10.8% increase year on year. And no other opportunities have been identified to utilize our net cash. All right. I'll hand you back over to Sukh. Thank you. Thank you, Michael. Over the next few slides, let me give you a flavor of what we've achieved this year and what you should expect from us in the year ahead. This year, we opened 20 stores achieving the target we had set ourselves. As Michael also said, franchise sales increased by over 9% and online sales saw an increase of over 16%. And we managed to cost pressures in a highly inflationary environment. Turning to our key areas of focus, these are our key areas that contributed to our success. At the beginning of our financial year, we set out to empower our franchisees, expand our story state and or focus on growth in online sales. On a corporate level, we strengthened our leadership team and enhanced our ESG initiatives. I will take these in turn and go through the detail as progress in each and every one of these components. Empowering our franchisees and operation excellence, let me speak briefly about how we've empowered our franchisees. Firstly, we appointed a dedicated learning and development major to oversee our training programs. This move has allowed us to focus on enhancing the skills and knowledge of our franchisees. 1 of the key areas we addressed was the reinforcement of our franchise on boarding process. We structured a comprehensive training regime that includes a 4 day initial training session followed by a rigorous 10 day intensive program to reinforce and expand on the initial learnings. In addition, we rolled out a a specialized customer service training program for franchise staff to ensure exceptional service delivery across all our locations. To further improve in performance and standards, we introduced a new internal scorecard for our stores. This scorecard now attracts important metrics such as Trustpilot scores, food hygiene ratings and internal audit results. As a result of these initiatives, we were able to achieve an impressive Trust Credit Score of 4.4 out 5 by the end of the fiscal year 2024. This demonstrates our commitment to delivering outstanding service and maintaining high operational standards. On this next slide, Slide 20, furthermore, we will continue to invest in our IT hub to drive operational efficiency and improvements throughout our organization. We've hit our target and moving on to what we achieved in our FX to expand our stores phase, we hit our target of 20 new stores using a property consultant to map out all areas where we think we could expand into. We've identified 196 extra areas to achieve our target of opening 400 stores. In this next slide, we show you the brand evolution. The brand refresh initiative launched in H2 'twenty four has been a significant milestone of our company. The positive reception, encouraging results and the ongoing store refresh program demonstrate our commitment to evolving with the changing market landscape and meeting the needs of our customers. One of the significant achievements so far is that a total of 9 stores have been successfully opened with the newly concept. These stores represent the first phase of our brand refresh and has been instrumental in showcasing the direction we are heading in. The positive reception from customers and community is a testament to the strength of our brand's evolution. We have received feedback indicating that the refreshed brand and store concept resonate well with our target audience, driving engagement and loyalty. The encouraging results are not just anecdotally. We have seen a notable improvement in key performance metrics such as foot traffic, sales and customer satisfaction rating since the launch of the new concept. These metrics validate the effectiveness of our brand refresh strategy. We're delighted to we are dedicated to delivering homemade happiness with every order. Our commitment to quality, personalization, customer satisfaction sets us apart and makes us a trusted choice for all special occasions. We take immense pride in the quality and individuality of our products. Each of our cakes is particularly finished by store in hand, ensuring that every creation is crafted to perfection for each customer's orders. In addition to our unique handcraft approach, we are providing a complementary personalization service for most of our clients. This allows our customers to add a special touch to their orders, making each cake truly one of a kind. Our focus on handmade craftsmanship and personalization ensures that every customer receives a cake that is not only delicious, but also tailored to their preferences. We strive to create a memorable experience that goes beyond just a simple dessert. Last year, investment in our online offer was a key area of focus. We launched a new website to improve the customer journey and e commerce capability. We also launched a national advertising fund in collaboration with our franchisees. This initiative allowed us to significantly invest in new customer acquisition online. As a result of our strategic investment, we achieved an impressive return on investment of 4 times. Furthermore, our value growth saw a substantial increase of 16.1%, driven primarily by capturing new customers. Our SEO efforts have yielded remarkable results since the launch of our new website. We are thrilled that we now rank number 1 in searches for birthday cakes and photo cakes online. To further boost our store awareness, we implemented a comprehensive strategy that involved radio advertising, Heart FM. Additionally, we utilized telephone kiosks to emphasize our online click and click proposition. We aim to continue building on this in the coming year. On the next slide, we can show you captured more of our customers online. Online sales of click and collect orders increased 16.1%, driven by more customers buying for the first time. And as I've stated previously, this is a result of investment in e commerce, marketing and capability. Our investment in marketing and CRSM systems has resulted in growth as a result of using customer data effectively. As you can see from the graph below, the month by month increase over the past 12 months. Let me talk a little bit about our new products that were well received by our customers. At the beginning of the year, we set ourselves the chance on we can make everyday occasions, especially by bringing new and exciting products to our customers while enhancing their overall experience. Our focus on innovation and customization has had a positive impact on our sales and brand image. By staying ahead of trends and offering unique products, we have garnered attention and loyalty from both existing and new customers set us apart from the competitors. We've introduced new premium product collections such as mango and speccanos to cater to evolving consumer preferences. We've expanded our seasonal launches for occasions like Valentine's Day, Mother's Day and Easter, ensuring that we are part of our customers' special moments and adding new ranges like brownies and buttercream cakes to diversify our offering and cater to varying tastes. We've implemented an online click and collect feature, allowing customers to order personalized cakes online and collect them within the hour, providing convenience and personalized service. These are just a few examples of the new products showing you what we're using in catering for the occasion. On the next slide, the successful Capital Markets Day in October 2023 highlighted the company's robust capabilities and commitment to growth. The Board changes in full year 2024 have further strengthened our leadership team and governance structures to position us for continued success in the future. In October 2023, our company had a highly successful Capital Markets Day led by senior managers, franchisees, showcasing the strength and depth of experience within our group. The CMD provided participants with the opportunity to visit our head quarters with significant investments made in our production facilities. During the fiscal year 2024, our Board underwent key changes to Center leadership and governance. Martin Blair assumed the role of Chair, bringing the wealth of experience and expertise to the institution. Sean Smith joined our Board on 1st February 2024 adding valuable insights and perspective, adding that he was appointed as the Senior Independent Director contributing his strategic counsel and independent oversight. Michael Fossef became our Chief Financial Officer on 11th April 2023 bringing his financial acumen and leadership to our executive team. By collaborating with our suppliers, franchisees, employees and utility providers and by upholding the highest standards of compliance and community engagement, Cakebox is not only striving to excel in businesses but also committed to making a positive impact on society and the environment. First of all, let me talk about our supply. It is impressive to know that 96% of our medium and high risk suppliers have undergone ethical audits within the last 2 years. This underscores our commitment to ensuring that our supply chain adheres to the highest ethical standards. We are also committed to reducing plastic. An example of this is changing the packaging of our frosting from plastic buckets to bag in the box, reducing the plastic by 95%. Moving on to our franchisees, an outstanding 96.7% of them have achieved a food hygiene rating of 4 or above for the year 2024. This remarkable achievement demonstrates our collective dedication to providing safe and hygienic products to all our customers. Our employees are the pillars of our success and their satisfaction is paramount to us. A remarkable 93% of our colleagues will gladly recommend Cakebox as a great workplace. This statistic speaks volumes about our corporate culture and work environment. In our efforts towards sustainability, we are proud to share that 72% of our electricity we utilize is sourced from renewable energy. This initiative reflects our commitment to reducing our carbon footprint and promoting a greener future. I'm pleased to say that our NFU depot has achieved an impressive AA rating from the British Retailer Consortium in terms of compliance and health and safety standards. This accomplishment underscores our unwavering dedication to maintain the highest operational standings. Lastly, our franchisees are actively involved in supporting local community in various impact borne ways from sponsoring youth football, cricket teams and to providing hot kitchens during the winter months in areas like Newham to feed the homeless. Our franchises are deeply engaging giving back to the communities they serve. Here's a summarization of our achievements. Our company has demonstrated a strong performance in recent period, delivering impressive sales and profit growth. We have significant progress within our strategic initiatives, laying a solid foundation for future growth and success. Our financial position has strengthened significantly with an increase in net cash and balance sheet strength. This improvement not only reflects our commitment to financial stability, but also provides us with a resilience to navigate challenges and see the opportunity. I'm pleased that we exceeded market expectations, surpassing performance targets and setting new benchmarks for excellence. Turning to the outlook. Trading environment for 2025 is expected to be challenging due to uncertain economic conditions. Interest rates are still high. We will continue to focus on growing our store estate with some 20 plus new stores to be opened this year. Our marketing initiatives, online growth, customer loyalty programs are all expected to help us on an upward trajectory. That concludes our presentation. And we're ready for Q and A. That's great. Thank you very much indeed to both for your presentation, ladies and gentlemen. Please do continue to submit your questions along with a copy of the slides and the published Q and A can be accessed via your Investor Meat Company dashboard. Thank you everybody to your engagement this afternoon and for those Okay. So we'll take the first one here. So in terms of share buybacks, at the moment, we're effectively keeping our pipe powder dry. We're looking at it if there are any other opportunities to enhance shareholder wealth in the markets. But buybacks would definitely be something that we'd be considering going forward. Our long term growth plans, yes, they do include looking at how we take the brand to other countries and we continue looking at that. However, we haven't built that into any of our modeling at the moment. How long does Magnus think about dividends versus share repurchases? Has any consideration been given to share repurchases given the current low share value compared to intrinsic value? So I think that's pretty much the same as question 1 in terms of share buybacks. The answer is yes, we are giving consideration to that And we'll have something else from you in the near future regarding any sort of buyback program. Is there an aspirational target for the rate at which new stores are opened? And what steps have been taken to accelerate openings beyond the current rate of 20 to 25 1st year? So at the moment, we've got a target of 20 to 24. We are working with an external consultancy, property consultancy business, where we have together highlighted 194 locations, target locations for us. Out of those, we are now looking and going further down to understand exactly where in those locations we need to be. So bottom line of the question is yes. There are plans to scale faster, but that will come probably following this year. The benefit of an asset light model is scaling without the need of high capital investments. How the CapEx stock expansion rates seem stagnant? Is there a plan to scale faster in the future? So I think it's a little bit similar to the previous question. I think, yes, we are working on our store expansion program And we've identified where we want to expand to. And it's a case now of finding the sites, finding and matching that to a franchisee. What we have done now is being more proactive than we have been in the past. We are actually going out and finding the site first, then mention it to a franchisee. So that should help in terms of the rollout program. What doesn't the release of exceptional €24,000,000 provision made in 2021 for the date of which increased adjusted EBITDA this year. Is the result in the result it pays to reduce it? It does. So the reported EBITDA is $7,700,000 which includes this reversal of the provision, which is therefore an income in the SEK 7,700,000. We then have to we take that SEK 0.24 million out, which then reduces the reported EBITDA down to adjusted EBITDA of €7,500,000 Do you believe you exceeded market expectation? Why has the share price fallen back and gone down a little 5p today? I would like to throw that question back to the market. I think it would be that the market has had built in the fact that we had exceeded market expectations. And the whole market is down today as well. So if you look at all the other shares, there's all they're all in minus territory today. How effective has the targeted marketing initiatives and brand refresh been attracting new customers and retaining existing ones? What metrics do you use to measure the success of these marketing efforts? If I give you a one page view on this, website business are up 37.6%, volume sales are up 13%, value sales are up at 16.1%, conversion rates are up 12%, average order value is 37.94p versus offline of 22.39 percent, return on the advertising spend is 4.1 percent, online customer retention is 60%, database has grown by 68% and SMS off sign ups have achieved has gone up to 181,000. You want to scroll up, which area do you think has more store expansion potential beside London region based on external consultants' recommendations? It's quite across the U. K. It's not just the London region as you've stated. It's from the Southwest right through to Scotland, excuse me, where we're actually at the moment engaging with 2 separate franchisees, 1 to go to Glasgow and 1 to go to Edinburgh and then to build out the rest Scotland. So it's across the U. K. I think we missed one question. How is the company is positioned relative to other emerging competitors that says Just Cakes, Cakes, Cakes Street and alike? Or we've got many look alikes come on and they go, but we've got no like for like CapEx in the country. We've got 2 25 stores now. We've got 27 kiosks. We continue to expand roughly 2 stores a month. And these smaller ones, they haven't expanded in the last 2 years. They haven't added any more locations? So do the 20 new stores open including pop ups? No, they don't. Those are pure brick and mortar stores. And that's the 2 25 stores that we speak about. Again, those are pure bricks and mortar stores. Do you track like for like volume sales, not pound sales? I reckon the like for like volume would have gone down slightly in 2024. The majority, the 4.4% like for like was price. Where we had slightly, which is below 1% positive increase in volume for 2024. Employing rate is on Glassdoor. Can you just scroll up, please? Can you scroll up? I saw them. Or is this the last question? If you just move your mouse on the right hand side, you should see that scroll bar coming in. Would cakebombs consider selling it into stores or partly more with cafe type brands or supermarkets. We have not considered that at the moment, but there's a possibility because getting our BRC rating AA rating, we are now well positioned to if we want to put a product into supermarkets, such as our brownies or our boffier or cupcakes, it is possible. And if an opportunity does come up, we would consider it. How is the rollout of new store branding going to be managed over time? Is there a timeline? Every franchisee or within their 5 after their 5 years of agreement, they have to do a refresh. And so we held off doing quite a few refreshing as we launched the new concept. So we will be refreshing as quick as possible and as quick as time as we can. Would it not be beneficial for suppliers to deliver stock straight to Bradford and Condominium Depots while in drivers coming 1000 lines, they'll be going up and down to Enfield. Or supplies do send straight up to Bradford. They do deliver to Coventry as well. And the only time that we have to deliver to the Coventry and Bradford site is the cheesecake and the cupcakes we make in Enfield. So we did make another one on stores, which I think we answered. Is the vegan food worth expanding? How is the current vegan products doing? We have a vegan range come out. It's doing very well. But vegans, unfortunately, they talk a lot, but they don't buy a lot. And as and when demand increases, we'll increase the range. Will Kate Fox consider WhatsApp's business over SMS? Or we constantly look at new avenues. And so if an opportunity arises, and we will consider it. I think in short, in the last one in terms of difficulties, are there any difficulties faced with new store locations in Scotland further north from the group? And no, they're not. They will be we had 1 or 2 stores up north and which was being supplied from our Bradford depot. Also, what product types can mitigate low sales in hotter periods? Example, summer hot autumns. What we tend to find is that if the temperature exceeds 30 degrees for 3 days, customers tend to go to a beach and buy locally. And so what we do, we are reminding the customer that we're available everywhere. So if you are going to the beach, for example, Southend in the south of England, that we have a store there. So please preorder and collect there. And it's just about reminding the I think that is it. Any other questions? That's great. I think you've been very comprehensive in your responses, so thank you once again to everybody for your engagement this afternoon. If any further questions do make themselves available, obviously, we will pass those on to you post today's meeting. I know investor feedback will be particularly important to you both, and I'll shortly redirect the investors on today's call to give you their thoughts and expectations. Before doing so, sir, I wonder if I may just come back to you for a couple of closing comments. Yes. Thank you very much for everybody, and we hope to engage again soon. Yes. Thank you very much for your time. That's great. Thank you very much indeed. Ladies and gentlemen, if I could please ask you not to close today's session. We'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This won't take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Cake Box Holdings Plc, I'd like to thank you for attending today's presentation. I wish you all a very good afternoon.