Earnings Call: H2 2021

Jul 2, 2021

Good morning, and welcome to you all. We're here today to hear from the management of Cake Box, who announced their results to the end of March this week. We'll be joined by Pardip Dass, the CFO, and Sukh Chamdal, the CEO, who I shall hand over now and let him proceed. Over to you, Sukh. Hi, I'm Sukh Chamdal, CEO of The Cake Box. I founded The Cake Box in 2008 and co-founded the franchise model in 2009. I have 35 years experience of food manufacturing and retailing, and I've learned all that on the shop floor and hands-on. Pardip? Good morning, everybody. My name is Pardip Dass. I'm the Chief Financial Officer for Cake Box. Me and Sukh co-founded the Eggfree Cake Box franchise in 2009. I'm a qualified accountant. I've got more than 20 years experience within the food and beverage industry prior to Cake Box as an accountant. If you have the next slide, please. Our fresh cream, personalized egg-free cakes are currently sold from 157 stores as of 31st of March 2021. We have added nine more stores since in quarter one. This all started from a single shop in East London and is now served by our three warehouse bakery locations, headquartered in Enfield, North London, Coventry in the Midlands, and one in Bradford in the North. We have an ever-growing presence online, allowing for example, a one-hour click-and-collect service, and we also do a delivery service as well. Could we have the next slide, please? This page shows a cross-section of our products from our core product, the celebration cake, through to our grab-and-go selections of slices and cupcakes, to our tea time treats such as our loaf cake selection and a dozen choice of cheesecakes. Our business is not a seasonal business. With a population of 63 million, which if you divide by 365 days equals 180,000 birthdays a day, which is a baseline in addition to all the other celebrations such as anniversaries and religious celebrations. That shows how much capacity we have and potential we have, therefore increased sales. If we go to the next slide, please. This page shows you our attractive franchise proposition which our franchisees are. It gives you the potential to earn, on average, a very good EBITDA of GBP 87,000 per annum. We don't have a marketing service levy or a marketing fee. We allow the franchisee to have more than one location. They have a very easy ordering system in our B2B, and our website manages all the online ordering, which they receive in their shop. Once you've signed up with you, we give you a turnkey package, where we help you do all the building, social, finance, and give you the full training as well. If you could have the next page. This shows you our selection process. We get about 100 applications per month with a success rate of about 30%. That's because we're looking for quality and not quantity. The process is quite streamlined. There's an application form. If that meets our criteria, we give a full application form. If they meet that criteria, we have a face-to-face presentation in the head office every Wednesday. People who pass that selection process will then have a 1-to-1 with the senior team 1 week later. If they pass that selection, then we go out and find, in partnership with the franchisee, a site. Once that has been agreed and that goes to legal, the store building starts once we get the keys and the training of the franchisee as well. Once that is complete, we have a pre-open marketing blitz, and the store opens. Can we have the next page, please? That's right, I'll hand over to Pardip for this one. Thanks, Sukh. FY 2021, we've had a very strong year with turnover up to GBP 21.9 million, that's 17% year on year. Our gross profit percentage and our adjusted profit before tax were both up 25%, with gross profit now about 50% of turnover at GBP 10.9 million. Adjusted profit before tax, we've got it at GBP 4.7 million. That does allow for half a million GBP general provision for the GDPR breach, which we'll come onto later on. If we strip that out, we're at GBP 4.2 million. Cash at bank and net cash have both gone up about GBP 1.5 million. We've got GBP 5.1 million cash, and net cash is at GBP 3.6 million. Our adjusted earnings per share touching nearly GBP 0.10 per share at GBP 0.096, that's allowed us to pay a final dividend of GBP 0.037, making a full-year dividend GBP 0.055, which is slightly above two times earnings. We'd like to bring that in line next year. Here we have the operational highlights. We've continued to make good progress against our strategy on store rollout. We've opened 24 stores, again, hitting our 18 to 24 target to reach 150 stores by the period end. A real achievement given the backdrop of COVID restrictions during the period. This has continued into the new financial year, with 9 opened in Q1. Our investment to support the group's continued expansion as well. Our operations at Cake Box's new bakery and distribution center in Coventry commenced in April this year. That complements the existing facilities in Enfield and Bradford. We also continue to launch more products, for example, our custard. We're still working on our vegan cream cake, but we've nearly cracked that as well. We continue to innovate through the launch of our home delivery service to complement our delivery platforms such as Uber Eats and Just Eat. We've also trading 5 kiosk locations in a major supermarket, and I'm pleased to report that we've also got another 6 allocated to ourselves as well. On this page, we have the franchisee operational highlights, and as you can see, the franchisee are the heart of our business. like-for-like sales are going up by 14.7% during the year, and we're really proud to say that we have 32 franchisees who are multiple site owners, ranging from 8 shops down to 2 shops. On average, the franchisee earns in excess of GBP 89K per annum in EBITDA, and we have a strong pipeline of potential new franchisees and existing ones looking for additional stores. I believe we have 52 in the pipeline at the moment. If we go on to the next slide. This shows the distribution of our sites across the country. The successful expansion of our franchise store footprint has been and continue to be supported by the three distribution centers we now have, equally geographically spaced to serve more delicious cakes to more regions with more ease. We have not rested on our laurels. We have continued to look for innovative ways to grow our footprint further in a sustainable way. As I mentioned before, the supermarket kiosk format are proven a success at five locations and six new locations in the planning phase. If we can go to the next slide, I'll hand over to Pardip for the financial review. Thanks. Before we go into the detailed profit and loss and balance sheet, I just wanted to present this slide to you, which shows our five-year picture and shows our strong track record we've got in terms of sales and profitability. Now two years have been impacted by COVID. We lost sales in FY 2020 for about two weeks. This year we were closed for a six-week period. We still increased sales to £21.9 million from GBP 18.7 million last year. Same with profit as well. Despite the fact that we returned the furlough monies back to the government, we've had a year of record profitability, and our profit after tax is at £3.4 million. With progressive dividend policy that we have in place, you can see that since we floated in FY 2018, we've had rising dividends as our earnings per share has increased year-on-year. If you go over to the page for the detailed profit and loss group income statement. I mentioned revenues were up despite the fact that we had traded for only 46 weeks in the year. Our gross profit margin is touching 50% nearly at 49.9%. That's because we manufacture sponge in-house, and we can command a margin of 70% on that. As we add in more and more shops, you will see that the gross profit margin improves. There's other ways that we can improve the gross profit margin as well. We can get better yields. At the moment, we are having a case where we're getting price deflation from our suppliers because of the volumes that we are buying. There's no need to increase our prices to our franchisees, and they can enjoy stable margins for their business as well. The bottom line is that we're up 7.6% profit after tax. If you look at the underlying profit after tax, we're up 23%. Moving on to the balance sheet. As you know, all our property is freehold. We like to buy freehold and pay interest, low rates of interest rather than extortionate rents. It helps us achieve better bottom line. Our stock has gone up about 30% because we hold it in three locations. People said to me, "Well, how come you've got so much stock?" The reason is that we buy from Far East. We've got very good quality packaging for our cakes. Having three different locations and the stock that we need to hold, there's extended lead times from buying from Far East, and therefore we do hold a lot of stock because we don't want stock outages. Cash has gone up, cash equivalents, by about GBP 2 million. We said we're a low CapEx company. We don't spend on capital expenditure. Our franchisees does that for us. With a combination of strong trading and low CapEx this year, we've increased our bottom line net cash by about GBP a million and a half. Don't forget, we have helped our franchisees this year substantially. We set up a support fund of GBP 1.5 million to plug the gap where the banks weren't lending the full amount to them. For us, that really makes sense because typically, we've lent it on the same commercial loans as the bank, and we have the net cash resources to do that. Moving on to the cash as well, I've kind of mentioned everything on the previous slide on that wrapped up with balance sheet, so we can pass that one. Just want to talk about a couple of things here. First of all, the store rollout, as Sukh mentioned, we have got a record number of deposits from our franchisees, and they're ranging from franchisees that have just put in a deposit to us for a new area that they're looking at, and some of the franchisees at the other end of the spectrum, where they're going to pick up their keys for their new site, and we're going to be happy to build that site for them within the next three to four weeks. On this slide, you can also see that distribution centers are strategically placed within England to serve most of our stores within 90 minutes, and that means that this year we're able to save more than 600,000 road miles. I want to put this slide in about home delivery and show how successful it's been this year. Because of lockdown, everybody wants their cake delivered, and a year ago, we did not have a delivery service. Originally, we partnered with Just Eat, Uber Eats, Deliveroo, phenomenal sales at the beginning for them. We realized that really, we serve more than GBP 10 million worth of customers on our website, so it's very important for us to set up our own home delivery service for our own website, which we did in October last year. You can see the results here that the uptake, especially in February and March, we've had a 150% increase month-on-month between January and February. It's a very successful rollout. We're doing about GBP 6 million on a run rate per year on home delivery. It's come down slightly in the last few months as stores and shopping centers have opened up, but our customers are still ordering online and coming in to pick up cakes. If we look at everything that you've heard in the presentation, all this means that we can look ahead to the next few years with the utmost confidence, both in our strategy, in our yearly franchise store target, and in addition to the kiosk openings, and the exciting news about the further opportunity ahead for Cake Box in kiosks in the shopping centers, plus in the major supermarket. This shows that our business is very resilient despite the crisis. If we were born in the recession in 2008, at the height of it, we've weathered one of the worst crisis in a generation, and we've come out with flying colors, and we continue this trend in the years to come. Thanks very much for your time. We welcome any Q&As. Thank you to you both. We've had a number of questions come in. Let's make a start. Sukh, what are the roles of the regional brand managers, and what impact have they had since being employed? We like to support our franchisees in each and every way, and so what the brand managers do, they go in, they get a visit at least once every six weeks, and they ensure all the standards are upheld, and they will work with the franchisee on any issues they have, anything, any support they need, and business development. They help with local marketing. They help with any ideas that the franchisee may have, but the majority of their work is to make sure that all our standards are upheld in all the stores. Okay, thank you. As we look at expanding out the franchisees' numbers, what's your strategy moving into Wales, for example, North West and Scotland, and have you secured any deposits from these areas? We are very much franchising led. When a franchisee comes to us and suggests an area, that is the area that we would go to. We do not specifically target any areas at this moment because we've got a very healthy pipeline, but we have got applications from Swansea, for example, and Edinburgh, and we will follow these up. If a franchisee is capable and passes all our criteria standards, then we're looking forward to expanding in all those areas. In terms of the regional spread of your depots at the moment, would it allow for that? Absolutely. By opening the regional depots, we have reduced our road miles by 90%. For example, delivering from Enfield to Bradford is 400 miles return journey. From our Bradford depot to our shop is 2 miles. As the mind goes, say we get 20-30 shops in Scotland, then we may consider opening another depot there nearby, but at the moment, they're adequately all served by our existing facilities. In terms of the numbers of franchisee applications, has the pandemic caused a surge in these numbers compared to previous periods? Oh, absolutely. What you find as we all need a little nudge to go to the next part of our career path. With the threat of redundancy or with the redundancy payment and all the need to now rebalance your life work balance, we found that we're getting much better quality of franchise application. Professionals who really want to move forward in life. We welcome that with open arms. Never waste a crisis. This just shows how resilient we are and one would have thought that there'd be less applications, but the applications go up. The mother of invention. In terms of, you spoke there, you covered off how you were Cake Box bank to the franchisees when the traditional high street lenders were making life a little bit tougher. Have you stopped that now or is that still ongoing? It's kind of coming to an end because we're dealing with an asset finance company, which used to be an arm of NatWest. They are going to fill in the gap of where we used to lend before, and they're going to lend, secured on the equipment that is going into the build. Okay. How many franchisee deposits are you holding today? We are holding 52 deposits, as I mentioned, and they're all at various stages. Some are just about to sign for their shop, complete their lease, and some have just put a deposit and are fresh going onto the marketplace and going up and down the high streets looking for premises. Okay. Perhaps move on a little bit now to kiosks. We've got a number of questions here on that subject. To start, what's the comparison in revenues for the kiosks versus the shops? It's very similar, actually. What we are finding is that because we've got a lot more footfall in the kiosk, we're hitting higher sales straight away. If you average out what we're doing in the kiosk compared to what an average shop does, they're not that dissimilar. Therefore, the margins that the franchisee is getting is very similar as well. The beauty of some of the kiosks in the supermarket locations is that the rent and all the utilities are included within their package for rent. It's a bit of a win-win for the customers because we're getting a lot more marketing, and there's a lot more footfall in these high locations. Okay. Well, what are the details for the kiosk arrangement with this national supermarket chain? Are the kiosks managed by a franchisee or are they managed centrally? Who staffs these kiosks? Is it supermarket employees or Cake Box employees or franchise employees? Are the margins comparable? Well, I think you've probably just touched on that one, haven't you? The supermarket kiosk is exactly the same as the shopping center kiosk. They're an extension of an existing franchisee's store. They manufacture it in the store, and they deliver once or twice a day to the kiosk, and they refresh it. The staff are our own. The money goes to our tills, and we have full control of the operation. Okay. Have you signed an exclusivity agreement with the supermarket chain that you're currently working with? No. It's an open-ended one. We are free to explore with other supermarkets as well. This supermarket approached us, we didn't approach them. That's why we got such a good deal out of it. We will wait for other supermarket operations to contact us as well. Okay. A question from Keith, which supermarket is it that you're trialing in? I'm afraid I'm not allowed to say at the moment until we make a joint announcement, which shouldn't be too long now. You can always try trailing around all supermarkets, can't you? That's right. Well, perhaps I don't know whether you can give any color on this. I'll certainly ask. In terms of the locations where these 5 trials are taking place, are they regionally spread? They are. We've got one in Swindon, East London in Bethnal, Sutton Coldfield in Birmingham. We have one in Washington in Newcastle and one in Walsall at the moment. With six further locations spread out geographically across the country as well. Okay. Thank you. Little bit back to franchises again now then. How much of the annual profit comes from your initial fees, which are charged to the franchisees for the new sites? We have got a number. It's about GBP 40,000 that we make on a new franchise. It varies only by about GBP 5,000 either way because the build is relatively the same for each one. That's why we've chosen to lend to our franchisees because if we've got a very good potential franchisee, then what's the point turning them away when we're going to make £35,000, £45,000 from them? In terms of future expansion, what do you think the upper limit is in terms of the capacity for U.K. stores and what about overseas? We now count locations rather than stores. With our supermarket kiosks and further expansion of stores, we say we will revise our figures that we had at our IPO, or we're always thinking of other ways. We won't say no to overseas expansion. At the moment, we are busy expanding our profile here in the U.K. Watch this space. I think we need to touch on the GDPR breach. Can you provide any further comment on the fine and what happened, and can you provide some comfort that the card systems are now secure and that you won't see this happening again? Yeah. We were unfortunately victims of a malware attack which occurred on our website payment system. One of the first things we did was we worked with our website security company and our specialist security company and our website developers to make sure that our website was secure. We have informed all our customers. We wrote to all our customers. We've informed the ICO as well, and we've also taken advice from a GDPR lawyer as to what the liability could be. They came up with a range of about GBP 14,000-GBP 240,000 for a potential fine from ICO, which we, coupled with legal fees, have provided for in this year's accounts. We will appeal it. It's our first offense. We've been running our website for 10, 12 years and never come across this again. I can say that our website is secure, and we've got confirmation of that, and largely our customers are happy. There's no impact on the online orders. We're still getting a number of online orders. I want to reassure that our website is stable and secure. Good. Okay. Thank you. I think you touched on it earlier, Sukh, your ability to control raw material costs. Conversely, is there a scope to increase prices? What have you done in terms of experimenting with pricing and volume at a store level? I'll probably answer that. Yeah, we like to give our franchisees a stable business and stable margins. Prices go up and down all the time, but that's what we're here for, to ride out the price increases and decreases. As I say, at the moment, we are having a little bit of a price deflation, and therefore, there's no reason for us to put up prices to our franchisees and no reason to reduce them either because we do cover for them when prices go up. I think that's the beauty of it as well. Our customers, our franchisees can enjoy a stable business. Okay. Thank you. Would you consider buyback shares at the current time? We are not considering buyback shares at all at the moment. I think we want to create more liquidity in the market rather than the opposite. Yeah. Okay. I think some of these questions we've answered in terms of supermarket trial stores operating under the same terms as franchise. I think we've done that. How many stores do you think you'll have in 10 years? Well, how long's a piece of string we can say, isn't it? Well, we hope to have a lot. Again, it depends on what the market conditions are and if we've gone international. Again, we've got a lot of gaps in the country. We haven't exploited Scotland yet. We haven't exploited Wales yet, or the Northeast, the Southwest. We haven't got into every high street yet, or we always look at Greggs, and they've got a lot, so never say never. Well, since I've got you in your blue sky thinking mode, Sukh, the other question I've got here is if you received a takeover offer of GBP 6 per share, would you accept? Oh, I'll let Holly answer that. We'll receive it first and see. Look, Cake Box is all we know, and that's all we do at the moment. I think we'd have to defend an offer at any level. Back down to reality with a bump. Can you tell us like-for-like sales in the current financial year sales growth? Yeah, it's very difficult to answer that one actually, because if you look at it a year ago, we weren't trading in April and certainly the first 2 weeks of May. We had a progressive opening of shops in May. We are not reporting any like-for-likes for those 2 months. I'm happy to say that June like-for-likes are in double-digit figures. Trading is strong. That's all I can say at the moment really in terms of current trading. Okay. Well, perhaps. What have we got here? Do you have further bakeries planned in the near future after Coventry? I suppose you touched on that in terms of volume of stores in Scotland, didn't you? As demand requires it, that's when we would consider it. We only run 1 shift at all 3 bakeries. If we need be, we can increase the shifts as well. At the moment, there's no need for another bakery. We may need a storage facility in the near future, but not another bakery. Okay. One here on the chat. Why was there a year-long gap between time of breach to customers being informed, and when did you discover the breach? We discovered the breach in the summer of 2020, but we had a lot of parties that we needed to consult before we could make an announcement. We took a lot of advice from third party, especially our GDPR lawyer. Okay. I think, Sukh, again, you touched on this in regards to you trying and tweaking your vegan cake, should be ready soon. Obviously, that's one thing in the pipeline. I assume that can be rolled out across different platforms, cupcakes and cream cakes. Anything else you can expand on to tell us how you can take advantage of the trend? Greggs. What we need to concentrate on is the actual core product. With 90% of our sales is the core product, and so we put a lot of our energy into having trending cakes, for example, caramel or birthday cakes. red velvet. red velvet is a really big trend at the moment, and we've seen sales really do well with our new red velvet offerings, such as that. We've only offering square, now we're going to start offering round as well. As trends emerge, we are really well-placed to take everyone fully often. Okay. Thank you. Who do you consider to be the biggest competitor of Cake Box? We are fortunate that we don't have a like-for-like national competitor. You're always going to get the owner-occupier, 1-shop, 2-shop operators. We've got 1 operator in the East Midlands who's got about 12 sites, and we've got 1 or 2 in Wellingborough. We haven't got a like-for-like competitor. No one with the same national reach. Correct. Well, I expect then, I think, do you expect to keep growing at this pace or has the market saturated? I think you're very much answering that the market is not saturated. Absolutely correct. Yeah. I think we're probably near the end because I think, Pardip, you've touched on your current average weekly sales rate per store and that like-for-likes are tricky. Yeah. I mean, I can talk about FY21, that the average weekly sales did increase to £6,900 per store from a previous £6,300. That's why the earnings for the franchisee has increased to £89,000 from £82,000 per year. Again, I know you're driven by franchisee interest. Have you seen any from Northern Ireland? Northern Ireland, we have seen interest, but the logistics to get it over there at the moment, it's not possible. As we see more and more interest coming through, then we, for example, if we get a lot more in Scotland, we can always open a depot there, we can serve Northern Ireland. Okay. Have you seen any impact from Brexit on the business? Again, we have not seen any impact on Brexit because we don't buy a huge amount from Europe. Anything we do buy from them was well planned and well executed so that we have enough stocks just in case there are delays. There are delays because of the lorry drivers shortage, et cetera. On Brexit hasn't seen no impact because all our customers are homegrown. Everybody who's having a birthday is here. Absolutely. Well, I think that we're about there, gentlemen. Can you confirm is the slide deck up on your website? It will be. Yes. It does look. That's great. We shall also make this recording available, so if people would like to share it or watch it again, they can certainly do that shortly. Otherwise, I think it's time to say thank you to you both for your time, and we look forward to hearing from you in another 6 months' time. Greggs. Thank you very much for your time. Thank you so much for having us here. Cheers. Thank you. Bye.