Cake Box Holdings Plc (CBOX) Earnings Call Transcript & Summary

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, who's the CEO, who I shall hand over now and let him proceed. Over to you, Sukh.

So hi, I'm Sukh Ram Chamdal, CEO of the Cake Box. I founded the Cake Box in 2008 and cofounded the franchise body 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 Finance Officer for Cake Box. Me and Sukh cofounded the Egg free 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 we 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 9 more stores since in quarter 1. All -- 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 for celebration cake through to our grab-and-go selections of slicings and cupcakes, to our tea time treats such as our loaf art cake selections and indulgent choice of cheesecakes. Our business is not a season -- operate our business, with a population of 63 million, 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 -- set of religious celebrations that shows how much capacity we have and potential we have, therefore, increased sales. Can we go to the next slide, please? This page shows you our attractive franchise proposition with our franchisees are at, or it gives you the potential to earn, on average, a very good EBITDA of GBP 87,000 -- GBP 87,000 per annum. We don't have a marketing service levy or a marketing fee. We allow the franchisees to have more than 1 location. They have a very easy ordering system in our B2B, and our website manages all the online ordering, which they receive in the shop. Once we've signed up with you, we give you a turnkey package whereas we help you do all the building of social or finance and give you the full training as well. If we can 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 with application form. And 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 one-to-one 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 legals, all the store building starts, so once we get the keys and the training of the franchisee as well. Once that is complete, we have a preopening marketing blitz, and the store opens. Can we go to the next page, please? And next slide, I'll hand over to Pardip for this one.

Thanks, Sukh. So FY '21, we had a very strong year. We've turned over up to GBP 21.9 million, that's 17% year-on-year. 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 put out GBP 4.7 million. That does allow for GBP 0.5 million general provision for the GDPR breach, which we'll come on to later on. So if you 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 of cash, and net cash is at GBP 3.6 million. 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 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, so operations at Cake Box's new bakery and distribution center in Coventry commenced in April this year. That complements the existing facility in Enfield and Bradford. We also continue to launch our 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 can continue to innovate through the launch of our home delivery service to complement the -- our 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. And on this page, we have the franchisee operational highlights. And as you can see, the franchisee are the heart of our business. Our -- the like-for-like sales have gone 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 earned in excess of GBP 89,000 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 to the next slide, this shows the -- our distribution of our sites across the country. The successful expansion of our franchise store footprint has been and continue to be supported by the 3 distribution centers we now have, equally geographically spaced to serve more delicious egg-free cake to more regions with more ease. And we are not resting on our laurels. We are continuing to look for innovative ways to grow our footprint further in a sustainable way. As I mentioned before, the supermarket kiosk format are proving the success at 5 locations and 6 new locations in the planning phase. If we can go to the next -- and 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 5-year picture and shows our -- 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 '20 for about 2 weeks. And this year, we were closed for a 6-week period, but we still increased sales to GBP 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 got a year of record profitability, and our profit after tax is up GBP 3.4 million. We have a progressive dividend policy that we have in place. You can see that here, since we floated in FY '18, we've had rising dividends as our earnings per share has increased year-on-year. If we 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 command a margin of 70% from that. So as we're adding 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. And at the moment, we are having a case where we're getting price deflation from our suppliers because we -- 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 is freehold. We'd like to buy freehold and pay interest, lower rates of interest rather than extortion of rents. It helps us achieve better bottom line. Our stock has gone up about 30%, because we hold it in 3 locations and people said to me, "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, 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. But with the combination of strong trading and low CapEx this year, we've increased our bottom line net cash by about GBP 1.5 million. And 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. 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 I move 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. And I just want to talk about a couple of things here. So 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 franchises that have just putting a deposit to us for a new area that they're looking at and some of franchisees or the others under 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 our 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, Deliveroo, and a phenomenal sales at the beginning for them. And 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. And 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. So 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 the cakes.

And if we look at -- and actually, as you've heard in the presentation, all this means that we can look ahead to the next 3 years with utmost confidence or both in our strategy and meeting our yearly franchise store target and in addition to the kiosk openings and exciting news about the further opportunity ahead for Cake Box 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 one of the worst of 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 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 they had since being employed?

We'd like to keep -- we like to support our franchisees in each in every way. And so what the brand managers do, they go in, they get a visit at least once in 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, Northwestern 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 franchisee is capable and passing all our criteria standards, then we're looking forward to expanding in all those areas.

And in terms of the regional spread of your depots at the moment, that would allow for that?

Absolutely. Our -- 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. And so as demand goes, say, we get 20 to 30 shops in Scotland, then we may consider opening another depot there nearby. But at the moment, they adequately are 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 period?

Absolutely. And what you find, as we all need a little nudge to go into the next part of our career paths, and so with the threat of redundancy, all with the redundancy payment and all the need to now rebalance your life-work balance, we find that we're getting much better quality of franchise applications, professionals who really want to move forward in life. And we welcome that with open arms and/or never waste the [ prices ]. And this just shows how resilient we are. And one would have thought that there'd be less application, but the applications have gone up.

The mother of invention. And in terms of -- you spoke there, you covered off how you were Cake Box bank to the franchisees when the traditional size street lenders were making lives 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 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 are all in various stages. Someone just about to sign for their shop, complete their lease, and some have just put in a deposit and are fresh playing into the marketplace and going up and down the high streets and looking for premises.

Okay. Perhaps move on a little bit now to kiosks. We've got a number of questions here on that subject. So 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 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 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 to the kiosk arrangement with this national supermarket chain? Are the kiosks managed by a franchisee? Or are they managed centrally? And who staffs these kiosks? Is it supermarket employees or Cake Box employees or, I suppose, franchise employees? And are the margins comparable? Well, I think you've probably just touched on that one, haven't you?

The supermarkets, our 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. So the staff are our own. The money goes through our tills, 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've got such a good deal out of it, and we will await for other supermarket operations to contact us as well.

Okay. And question 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 trialing around all the supermarkets currently. And 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 1 in Swindon, East London, Beckton, certain culture in Birmingham. We have 1 in Washington in Newcastle and 1 in Walsall at the moment and with 6 further locations spread out geographically across the country as well.

Okay. Thank you. 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 GBP 40,000 that we make on a new franchise, and it varies only about -- by about GBP 5,000 either way because of the build is relatively the same for each one. And that's why we've chosen to lend to our franchisees because if you've got a very good franchise -- potential franchisee, then what's the point turning them away when we're going to make GBP 35,000, GBP 45,000 from them.

And then 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. So with our kiosk -- supermarket kiosks and further expansion of stores, all we say that we will revise our figures that we had at 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 expanding our profile here in the U.K. but watch this space.

I think we need to touch on the GDPR breach. I mean, 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?

Yes. We're 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 secured. 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. And they came out with a range of about GBP 14,000 to GBP 240,000 for a potential fine from ICO, which we, coupled with legal fees, have provided for in full in this year's accounts. So -- but look, 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. But what I can say is that our website is secure, and we've got confirmation of that. And largely, our customers are happy. And there's been no impact on the online orders. We're still getting record number of online orders. But I want to reassure that our website is stable and secure.

Good. Okay. Thank you. And 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?

I'll let Pardip answer that.

Yes. We'd 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. And 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?

Yes. Over how long [indiscernible] we can say, isn't it? Well, we hope to have a lot. And -- but again, it depends on what the market conditions are and if we've gone international. But 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. And so we haven't got into every high street yet, or we will look at [ grades ] and they've got a lot. So never say never.

Well, since I've got you in your blue sky thinking made, so the other question I've got here is if you received a takeover offer of GBP 6 per share, would you accept?

Well, I'll let Pardip answer that.

We'll see it first and see -- look, Cake Box is all we know and that's what we do at the moment, so I think we'd have to defend an offer at any level.

Okay. Back down to reality with the bump. Can you tell us like-for-like sales in the current financial year from 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 the first 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. But I'm happy to say that June like-for-likes are in double-digit figures, so trading is strong. That's all our concern 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?

Right. As demand requires, then that's when we would consider it. But we only run 1 shift at all 3 bakeries. So if we need, we can increase the shifts as well. So at the moment, there won't be -- there's no need for another bakery. But we may need a storage facility in the near future but not another bakery.

Okay. And 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?

So 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. So we've taken a lot of advice from third-party, especially our GDPR lawyer.

Okay. And I think, Sukh, again, you touched on this in regards to your trying and tweaking your vegan cake. It 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?

Great. It's what we need to concentrate on is the actual core product. Or with the -- our -- 95% of our sales is the core product. And so we put a lot of our energy into having trending cakes, for example, caramel birthday 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 offering, such as that we're only offering square. Now we're going to start offering round as well. And as trends emerge, we are well placed to take advantage fully often.

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. We're always going to get the owner-occupier 1-shop, 2-shop operators. And we've got 1 operator in the East Midland to [ swap back to 12 ] sites, and 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 Pardip, you've touched on your current average weekly sales rate per store and the like-for-likes tricky.

Yes. I mean, the -- I can talk about FY '21, the average weekly sales did increase to GBP 6,900 per store from a previous GBP 6,300. And that's why the earnings for the franchisee has increased to GBP 89,000 from GBP 82,000 per year.

And 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 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 there. We can serve Northern Ireland.

Okay. And 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 if we do buy from them, it was well planned and well executed so that we have enough stocks just in case there are delays. And they are delayed because of the low drivers, shortage, et cetera. But on Brexit, it hasn't seen no impact because all our customers are homegrown, everybody who's having their birthdays here.

Absolutely. Well, I think that's -- we're about there, gentlemen. Can you confirm is this 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 very much, everybody, who's here. Cheers. Bye.

Thank you. Goodbye.

Thank you. Bye-bye.