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 Pardit Das, the CFO and Sukh Chumsal, the CEO, who I shall hand over now and let him proceed. Over to you, Sukh. Hi. I'm Sukhram Chandan, CEO of The Cake Box. I founded the K Box in 2008 and co founded the Franchise Broad 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. Pardik? Good morning, everybody. My name is Pardik Das. I'm the Chief Finance Officer For Cake Box, Meehan Suk 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. We have the next slide, please. Our fresh cream personalized egg free cakes are currently sold from 157 stores as of 31st March 2021. We have added 9 more stores since in quarter 1. This all Started from a single shop in East London and is now served by our 3 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, for example, a 1 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 teatime treats such as our loaf Our cake selection and indulgent choice of cheesecakes. Our business is not a seasonal business. With a population of 63,000,000, which if we 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 Or it gives you the potential to earn on average A very good EBITDA of $87,087 per annum. We don't have a marketing Service levy or a marketing fee. We allow the franchisees to have more than one location. They have a very easy ordering system in our BGP, and our website manages all the online Our ordering, which they received in their shop. Once you've signed up with you, we give you a turnkey package, whereas We help you do all the build in, social, our finance and give you the full training as well. If we could have the next page and this shows you our Selection process, we get about 100 applications per month with a success rate of about 3%. That's because we're looking for quality and not quantity. The process is quite streamlined. There's an application form. And if that meets Our criteria is 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 a 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 All 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 go to the next page, please? And That's right. I'll hand over to Pardik for this one. Thanks, Sukh. So FY 2021, we had a very strong year with turnover up to GBP 21,900,000 that's 17% year on year. Our gross profit percentage and our adjusted profit before tax book both up 25% with gross profit now about 50 percent of turnover at GBP 10,900,000 Adjusted profit before tax, we've got it at GBP 4 €7,000,000 That does allow for €500,000 general provision for the GDPR breach, which we'll come on to later on. So if we strip that out, we're at €4,200,000 Cash at bank and net cash have both gone up about GBP 1,500,000 We've got GBP 5,100,000 cash and net cash of GBP 3,600,000 and our adjusted earnings per share Touching nearly 10p per share at 9.6p and that's allowed us to pay a final dividend of 3.7p Making a full year dividend of 5.5p, which is slightly above 2x earnings. So we'd like to bring that in line next year. And 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 restriction during the period. This has continued into the new financial year with 9 open in Q1. Or investment to support the group's continued expansion as well. So operations at KateBox'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 All more products, for example, our custard. And we're still working on our vegan cream cake, but we've nearly cracked that as well. And we continue to innovate through the launch of our home delivery service to complement There are delivery platforms such as Uber Eats and Just Eat. We've also Trialing 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 franchisees are the heart of our business. There's like for like sales have gone up by 14.7% through 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 89,000 in EBITDA. And we have a strong pipeline of potential new franchises and existing ones looking for additional stores. And I believe we have 52 in the pipeline at the moment. If we go on to the next slide, this shows Our distribution of our sites across the country, The successful expansion of our franchise store footprint has been and continues to be supported by the 3 distribution centers we now have, Equally geographically spaced to serve more divisions, egg free cake to more regions with more ease. And we have not rested on our lows. We are continuing to look for innovative ways to grow our footprint further in a sustainable way. As I mentioned before, The supermarket kiosks format are proven to success at 5 locations and 6 new locations in the planning phase. I've been going to the next, and I'll hand over to Parekh for the financial review. Thanks. Before we go into the detail of profit and loss and balance sheet, I just wanted to present this slide to you, which shows our 5 year picture And shows a strong track record we've got in terms of sales and profitability. Now 2 years have been impacted by COVID. We lost Sales in FY 2020 for about 2 weeks. And this year, we were closed for a 6 week period, But we still increased sales to £21,900,000 from £18,700,000 last year. Same with profit as well, despite the fact that we returned The furlough money is back to the government. We've got a year of record profitability and our profit after tax is at £3,400,000 We have a 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. So 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. So 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, but if you look at the underlying profit after tax, We're up 23%. Moving on to the balance sheet. As you know, all of our property It's Freehold. We like to buy Freehold and pay interest, lower rates of interest rather than extortionate rents, helps us achieve better bottom line. Our stock has gone up about 30% because we're holding it in 3 locations and people said, I mean, 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. And having 3 different locations And the stock that we need to hold has 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 £2,000,000 We said we're a low CapEx company. We don't spend on capital expenditure. Our franchisees does that for us. But with a combination of strong trading and low CapEx this year, we've increased our bottom line net cash by about 1,500,000. And don't forget, we have helped our franchisees this year substantially. We set up a support fund of £1,500,000 to plug the gap where the banks weren't lending the full amount to them. And 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. So moving on to the cash as well. I I've kind of mentioned everything on the previous slide on that, wrapped up with balance sheet, so we can pass that one. And just want to talk about a couple of things here. So first of all, the store rollout, as Suf mentioned, we have got record number of deposits from our franchisees. And they're ranging from franchises that have just put in a deposit to us for a new area that they're looking at And some of the franchisees are 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 3 to 4 weeks. And 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. So originally, we partnered with Just Eat Uber Eats delivery, phenomenal sales at the beginning for them. We realized that really, we serve more than £10,000,000 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. And you can see the results here that The uptake, especially in February March, we've had 150% increase month on month between January February. So it's a very successful rollout. We're doing about £6,000,000 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 into a cup of cakes. And if we look at So everything that you've heard in the presentation, all this means that we can look ahead to the next few years with utmost Confidence, both in our strategy in meeting our yearly franchise store target and in addition to the kiosk openings And exciting news about the further opportunity to head for KateBox in kiosks, in the shopping centers, Plus in the major supermarket, this showed that our business is very resilient despite the crisis. So we were born in the recession in 2008 at the height of it. We've weathered 1 of the worst crisis In a generation, and we've come out with flying colors. And we continue or continue this trend in the years to come. Thank you very much for your time, and we will come in in Q and As. Thank you to you both. We've had a number of questions come in. Let's make a start. Souk, what are the roles of the regional brand managers? And what impact have they had since being employed. We like to keep we like to support our franchises in each and every way. And so what the brand managers do, they go in, they get a visit at least once every 6 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 or 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. And as we look at expanding out the franchisees numbers, what's your strategy moving into Wales, for example, North Western Scotland? And have you secured any deposits from these areas? We are very much franchisee led. So when a franchisee comes to us and suggests an area, that is the area that we will 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. And if the franchise is capable and passing all our criteria standards, then we're looking forward to expanding in all those And in terms of the regional spread of your depots at the moment, that would allow for that? Absolutely. By opening the video depot, we have reduced our road miles by 90%. For example, delivering From Enfield to Badford's 400 miles return journey from our Badford or depot to our shop at 2 miles. And so as the month goes, say we get 20 to 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. And in terms of the numbers of franchisee applications, has the pandemic caused a surge in these numbers compared to the previous periods? Oh, absolutely. And what you frame as we all need a little nudge to go to the next Part of our career paths. And so 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. And we welcome that with open arms and Never waste a crisis. And this just shows how resilient we are. And one would have thought that there'll be less applications, but the applications will go up. The mother of invention. In terms of you spoke there, you covered off how you were kickbox bank to the franchisees when the traditional high street lenders were making lives a little bit tougher. Have you stopped that now? Or is that still ongoing? It's coming to an end because we're dealing with an asset finance company, which is used to be an arm of NatWest. And so 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. And how many franchisee deposits are you holding today? We are holding 52 deposits, as I mentioned, and they're all in various stages. Some are just about to sign for their shop, complete their lease and some have Just put in the deposit and then fresh going onto the marketplace and going up and down the high streets and looking for a premises. Okay. Perhaps move on a little bit now to kiosks. We've got a number of questions here on that subject. So just 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 in the kiosk, we're hitting higher sales straightaway. But if you average out what we're doing in the kiosk Compared to what an average shop does, they're not that dissimilar. And so 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. So it's a bit of a win win for the customers because we're getting a lot more marketing as there's a lot more footfall in these high locations. Okay. Well, what are the details then for the kiosk arrangement with this national supermarket chain? Are the kiosks managed by a franchisee or they managed centrally? And who staffs these kiosks? Is it supermarket employees or cake box employees or as franchise employees. And are the margins comparable? Well, I think you probably just touched on that one, haven't you? The supermarkets kiosk is exactly same as the shopping center kiosk. They're an extension of an existing franchisee's store. They manufacture in the store and they deliver Once or twice a day to the kiosk and they refresh it. For the staff hour alone, the money goes through our tools And we have full control of the operation. Okay. And So have you signed an exclusivity agreement with the supermarket chain that you're currently working with? No. It's an open ended one, And so 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. And we will await for other supermarket operations to all contact us as well. Okay. And a question here from Keith. Which supermarket is it that you're trialing in? I'm afraid I'm not allowed to say at the moment. And Until we make a joint announcement, which shouldn't be too long now. You can always try trailing round all the supermarkets, can't you? And well, perhaps I don't know whether you can give any color on this. I'll certainly ask in terms of the Patients where these five trials are taking place, are they regionally spread? They are. We've got one in Swindon, Eastland in Bechton, Sutton Cottled in Birmingham. We have 1 in Washington, in Newcastle and 1 in Warsaw at the moment and with 6 further locations It's better geographically across the country as well. Okay. A 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 £40,000 that we make on a new franchise, and it varies only by about £5,000 either way Because of the build is relatively the same for each one. And that's why we've chosen to The lend to our franchisees because if you've got a very good franchise, potential franchisee, then what's the point of turning them away when we're Going to make £35,000 to £45,000 on them. And then in terms of future expansion, what do you think the upper limit is in terms of the capacity for UK stores? And what about overseas? We now count locations rather than stores. So With our kiosks, our supermarket kiosks and further expansion of stores, all we say that we will revise our figures that we had Our IPO or we're always thinking of other ways. So we won't say no to overseas expansion. But at the moment, we are busy expecting our profile here in the UK. But what's his face? I think we need to touch on the GDPR breach. I mean, can you Provide any further comments 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. Yes. We're unfortunately, we're 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 the GDPR lawyer as to what the liability could be. And they come up with a range of about 14 1,000 to 240,000 for a potential fine from ICO, which we, coupled with legal fees, have provided for info in this year's accounts. So but we will appeal it. It's our first offense. We've been running our website 10, 12 years and never come across this again. But I can say that our website is secure and we've got confirmation of that. And largely, our customers are happy, and there's no impact on the online orders. We're still getting roughly a number of online orders. But I want to reassure that our website is stable and secure. Good. Okay. Thank you. Now I think you touched on it earlier, Sukh, your ability to control raw material costs. So conversely, Is there a scope to increase prices? And what have you done in terms of experimenting with pricing and volume at a store level? Paul, you answer that? Yes. 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. But as I said, at the moment, we are having a little bit of a price deflation. And therefore, there's no reason for us to put our prices to our franchisees and no reason to reduce them either because We do cover for them when prices go up. So 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. Yes, 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 has been the strength, we can say, is it? Well, we hope to have a lot. And but again, it depends on how what the market conditions are And if we've gone international, again, we've got a lot of caps in the country. We haven't we haven't exploited Scotland yet. We haven't exploited Wales yet The Northeast, the Southwest. And so we haven't got into every high street yet. Well, we always look at grades and they've got a lot. So never say never. Well, since I've got you in your blue sky thinking mode, Sig, the other question I've got here is if you received a takeover offer of £6 per share, would you accept? I'll let Palu answer that. We'll see it first and see. Look, KateBox is all we know and that's all we do at the moment. So I think we'd have to defend an offer at any level. Okay. Back down to reality with a bump, can you tell us like for like sales in the current financial year sales growth? Yes. 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 1st 2 weeks of May. And then we had a progressive opening of shops in May. So we are not reporting any like for likes for those 2 months. I'm happy to say that June and Black Flux are in double digit figures. So 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 a percentage of the As demand requires it, that's when we consider it. But we only run one shift at all 3 bakeries. So if we need to, we can increase the shifts as well. So at At the moment, there will be no there's no need for another bakery. But 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 customers being informed and when did you discover the breach? So we discovered the breach in the summer of 2020, but we had a lot Parties that we needed to consult before we could make an announcement. So we've taken a lot of advice from 3rd party, Especially social, GDP, Aloyar. Okay. And I think, Suki, again, you touched on this in regards to your 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, cream cakes. Anything else you can expand on to tell us how you can take advantage of the trend? Great. It's what we need to concentrate Is the actual core product. With the our 90 5 percent of our sales is the core product. And so we put a lot of our energy into having trending cakes, for example, caramel of the cakes. Red Velvet. Red Velvet is a really big trend at the moment, and we've seen sales really, really do really well with our new Red Velvet offerings such as such. We're already offering Square. Now we started off we're going to start offering Round as well. And Or as trends emerge, we are well placed to take everyone fully off them. Okay. Thank you. Who do you consider to be the biggest competitor of Cake Box? We are so fortunate that we don't have a like for like national competitor. You're always going to get the owner occupier, One shop, 2 shop operators. And we've got 1 operator in the East Midlands who's got about 10 or 12 Sites, we've got 1 or 2 in Wellingborough, but 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 is the market saturated? I think you're very much answering that the market is not saturated. Absolutely correct. Yes. And I think we're probably nearing the end because I think, Pardit, you've touched on your current average weekly sales rate Per store and like for like is tricky? Yes. I mean, I can talk about FY 2021 that the average weekly sales did increase £6,900 per store from a previous £6,300 and that's why the earnings for the franchisee has increased to 89,000 From £82,000 per year. And again, I know you're driven by franchisee interest. Have you seen any from Northern Ireland? Normally, we have seen interest, but the logistics to get over there at the moment is not possible. But 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 We can sell them online. 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. And everything we do buy from them was well planned and will all execute so that we have enough stocks just in case there are delays. And they are delayed because of the lorry drivers shortage, etcetera. But Brexit hasn't seen no impact Because all our customers are homegrown. Everybody who's having their birthday is here. Absolutely. Well, I think that's we're about there, gentlemen. Can you confirm Mr. Slide deck up on your website? It will be, yes. It will be. That's great. So if people and we shall also make this recording available. So if people would like to share it or watch it again, and 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. Great. Thank you very much for your time, everybody. Thank you. Thank you.