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

Welcome to another Vox Markets webinar, and we're delighted to have Sukh Chamdal, CEO; and Pardip Dass, CFO of Cake Box, who will be presenting their half year results for the 6 months ended the 30th of September. At the end of the presentation, Sukh and Pardip will be available to answer any questions you may have. [Operator Instructions] Right now, I'll hand over to Sukh and Pardip.

Good afternoon, Justin. My name is Sukh Chamdal, I'm the Chief Executive Officer of Eggfree Cake Box. I co-founded the concept in 2008, and I co-founded the franchise business with Pardip Dass in 2009. I come from a background of 35 years of experience in the food industry, both retail and manufacturing. I have done high volume catering as well as manufacturing and supplying vegetarian food for functions and events. Pardip?

Hi, it's Pardip Dass. I'm the Chief Finance Officer for Cake Box. Co-founded the business with Sukh in 2009 when we decided that we wanted to franchise business. I'm a qualified accountant, and I am qualified whilst I was working for Starbucks Coffee Company. Got more than 20 years experience within the food and beverage industry as an accountant.

I'm proud to say that we now operate from key sites across the U.K., totaling over 50,000 square feet. We continue to grow our shopper state and have hit 174 stores. This allows us to offer our delicious eggfree product to more of a population to enjoy. We offer a variety of methods to order our products, which include a 1-hour click and collect. You can collect in person at shop or you can get the product delivered. On this slide, you can see a selection of our mouthwatering offerings from our birthday cakes, grab and go cake sizes and cupcakes. It also shows our other offerings such as our indulgent cheese cake selection, tea time treats such as loaf cakes. Here, this slide shows our franchisee proposition with an average of GBP 90,000 EBITDA, potential earnings, I believe we offer a very good proposition to our potential franchisees, who are also enticed by the social hours and our turnkey package. While the biggest attraction is, unlike the normal franchise offering, we do not charge a maintenance service fee or a marketing levy. We also run the website, the B2B one-stop ordering, and they have access to our brand. The slide shows our franchise application process, which is quite simple. Application is received from the franchisee. This -- then an application is sent out to them. Once we receive and they are approved, they will be inviting a presentation at Head Office. If they pass this presentation, we will call them back for a second interview one-to-one. This enables us to get to know them and they get to know us. If they are selected from this process, we go into site section with our senior team, and we help the franchisee locate [indiscernible] (00:03:30) in the area. Once a suitable [indiscernible] has been located, we will help them with the legal process. We have a presentation, which we sent to the landlord, and we have our own solicitors, who are now great specialists in what we require. Once the legals are done and we receive the key, we will start the store build, and in the meanwhile, the trainee -- the franchisee will start their training. Once the store has been built and the training has been completed -- with our preopening marketing presentation, and the store will open.

So just moving on to the financials for the half year. We had an excellent half year. Revenue has increased to GBP 16.5 million from GBP 8.6 million. That's up 92%. Gross profit is up GBP 7.6 million or 83%, and our EBITDA has more than doubled to GBP 4.1 million. Now this is against a backdrop of where we were closed for 6 weeks in the previous half year. So to make it easier to read these numbers and make it more comparable, we've done a 4-month comparison, which strips out the closure period. And even in those measures, you can see that revenue, gross profit and EBITDA has gone up by more than 50% on each of those measures. So really stellar half year. Earnings per share at half year at 7.5p. So that's more than doubled. Net assets of GBP 12.6 million. So our balance sheet has gone up by about 30%, and cash at bank is up GBP 5.6 million. Net cash and cash at bank, both going up about GBP 400,000. Now that doesn't seem a lot, but what happened last year was that we paid these final dividend as a special dividend after the half year period. So if you strip that out, we're actually comparing GBP 4.2 million net cash this year against GBP 2.5 million, so it's up substantially.

And if you go to the next slide, this shows our operational highlights. With our continuous growth, we have added another 35 stores to our portfolio with 20 new stores at the end of the period. We've gone into partnership as that bring our products to their customers with 7 new locations. Due to our forward planning, we have experienced very good restructuring to our supply chain with more than 3 months stock a month items. And to satisfy our customers who want less cream on our cakes, we successfully launched our naked cake range, which is also bang on trending at the moment. And if you go to the next slide, this is the franchisee operational highlights. Once again, I'm happy to report that the franchisee like-for-like has been along with the total turnover. Online growth has also been along with multiple store owners showing increasing ambition among our franchisees to own more than one store. And the average sales have also risen along with the average EBITDA to an excess of GBP 93,000. And if we go to next slide, this shows our distribution of stores, shopping center kiosks and ASDA kiosks across the country. It also highlights the gaps where we have potential to open more stores such as Scotland, Wales, the North East and the South West. They also show the distribution of our distribution centers, the blue Enfield in London. We have our Coventry and our Bradford distribution centers, serving all the shops along that corridor. And our next -- so it's the financial review, which I will hand over to Pardip.

Thanks, Sukh. So look, [indiscernible] a more detailed set of numbers here. As mentioned, revenue has gone up 92% year-on-year and 50% on a more 4-month basis. Our gross profit has come down slightly by 200 basis points. Now we expect that because we had a lot more store openings. We opened 20 stores in the first half, and the margin on new store openings is a lot lower than our day-to-day activity, which is providing sponge and cake ingredients, which are higher percentage. So we do expect that to come down when we open more stores. And we've also got an increase in administrative expenses as we employ more and more senior managers and investing for the future growth of the business. Moving on to the balance sheet. We've got a strong balance sheet. All our properties freehold and our net asset value has gone up in line with our profitability and a lot of the other key measures are fairly static from year-end. On the cash flow, we've got an impact of cash from operating activities of GBP 3.7 million worth of cash from operating activities. And you can see that from a full year last year, we risen substantially from the full year of GBP 4.2 million. So just half year, we managed to generate GBP 3.7 million. So overall, cash is -- hasn't gone up substantially from year-end position, and that's because of the special dividend that I mentioned, which we've paid obviously in July this year. So that's fallen in the half year period. Just looking at a couple of strategic initiatives. As Sukh mentioned that we are very satisfied and happy with our relationship with ASDA, we trialed 7 kiosks in 2021. And since our half year, we were able to open 4 further kiosks within ASDA. So you can see that that's quite a rapid growth and a rollout program, and we're intending to open a lot more kiosks within ASDA through the course of FY '22. The good news is that some of the fit-out cost is being covered by ASDA. So the franchisee is receiving a contribution towards that, and it's fairly low cost to fit-out and set up a kiosk within ASDA. And all the sales go through our franchisee tills as opposed to ASDA tills. So we're able to generate revenue a lot more quicker for our franchisees. We've got a record number of deposits from our franchisees for territories that have been secured. We actually got 62 different deposits for areas. Now these was at various stages. Some have just put in the deposit. Some of our franchisees are looking for shops, and some of the franchisees about to build their first or their multiple shops. So we've got a record number of deposits and that should see us opening more and more shops in the coming months. I'll hand you back to Sukh.

We are investing for the future by strengthening our senior management. We have appointed an IT Director along with several other appointees. We're happy to say that we will appoint today [indiscernible], which include food technician, asset manager, production manager, and we are improving all our IT infrastructure. And we've also appointed BDO as an internal audit process, so that makes the full year audit going a lot easier. With the demand -- with our whole planning and our supply chain, we've also hired additional warehouse base in MPO, where we can store the bulk products, which we get from the Far East, such as boards and boxes, further strengthening our supply chain mechanisms. And if you look at the current outlook, that outlook is very good with us confident of meeting our full year goals with up to 32 new store openings for the full year. We [indiscernible] to buy 3 new stores over in the last 5 weeks since half year end. And as I mentioned, our supply chain is very robust, and we are very confident of meeting our full year expectations. Thank you very much for sharing this presentation, and we're ready for any Q&A.

Excellent guys. Well done for the presentation. You know what you should be sitting down now with a cup of tea and a cake maybe. There's no time for that because we've got lots of questions from investors here. So let's get through them. Sukh, Pardip joined us here for the questions. And first one up is, you've had amazing online success in a relatively short space of time. Can you please expand on the strategy for online? And what is driving these numbers?

We provide our customers various route to buy our product, in-store, online, click-and-collect, delivery. By allowing the customers all these choices, we built brand loyalty and the convenience to get a cake when and whatever time they want to get it. We consider ourselves the Amazons of the cake industry. We provide you cake when you want it, at your convenience. You don't have to preplan. Just walk into one of our shops and pick up a cake and get it personalized. Go online while you're at work, click-and-collect on your way home. So we make it so easy for the customer, and that's why we've got a steady business. 68 million people in this country, 365 days in the year, that equals 180,000 birthdays every day, and we haven't even scratched at the surface. So allowing all this access to cake, we will drive all these numbers.

Good one, you sold me. Stop mentioning cakes so much. I am almost celebrating there. Okay. The next question, franchisee turnover has seen a rapid rise. Is that purely due to more franchisees? Or has there been an increase in sales by franchisees, too? Are there any particular areas that exceed others?

Well, our ever increasing prices on the high street, in shopping centers, ASDA and online, our brand awareness is increasing, which in turn fuel the sales from the stores. I would like to expand on the ASDA bit, where we are now going with kiosks into ASDA, which is a bolt-on for the franchisee, the manufacturing, the store, delivered through the ASDA and sell. And we are now in exposure much bigger database of customers or who would never have heard of us and now who walk pass our beautiful displays in store, and they have a cake -- a slice of cake, and they graduate to a birthday cake, which they order from in stores.

Yes, yes, huge exposure. Talking about the rapid rising franchisees here. They say, is there a saturation point of franchisees? Can growth be sustained there?

We have huge gaps in our coverage across the country. We've only got one in Wales, one in Scotland, the South West and North East or East Anglia. We are far from saturation yet.

Okay. All right. And you state, you've had no supply chain issues. How are you succeeding here where larger players are failing?

We buy our packaging from the Far East. So we normally have about 9 months of stock, and the minimum we carry 3 months of stock. So worrying about the storm is no problem, and we don't operate a just-in-time system. So any delays can be absorbed quite easily.

Yes. Yes. And future geographical targets. Someone is asking here, are you looking further afield?

Yes, it's on my wish list, and I would like it to be everywhere. And if we do go abroad, my first target will probably be in North America.

Okay. Someone wants to know more about ASDA. How the partnership works? [indiscernible] seems huge there.

So we went for space from ASDA or they fit it out for us. We provide the equipment. The franchisee serves at the -- the franchisee staff serves at the kiosk. The money goes through our tills. And so we've got full control of our product, our displays unlike some other operators who are in Sainsbury's. We just plump the goods in next 2 Sainsbury's goods and that's it. We take full care, so we got full control of the full supply chain there.

Yes. Yes. And you're saying before you went on that ASDA have 650 stores nationwide. I didn't know that there's that many. That's amazing. Exposure there is huge, isn't it? Next question here. I understand -- maybe to Pardip. I understand that you need to strengthen your team as you grow, but can you explain your rationale of the senior hires? And what you see them bringing to the company?

Yes, Justin, we've got 200 locations now. So with that, we're setting up a structure of area managers, and we need to strengthen our middle management team. Later on, we will be appointing a Chief Operating Officer that will head up the area managers and make sure that our strategy is cascaded down all the way down to the franchisee level. We're also strengthening our marketing department. As you know, we're quite light on marketing because we did just the brand awareness at the moment. But if we get a specialist in who can look at tracking customers, who can set up an app, we can give them reminders and notifications. And lastly, about a couple of months ago, we appointed an IT Director. So we're looking at our systems, our IT systems, making sure that they're robust, but they all talk to each other and that's one of the things that the IT Director will be doing. So all these posts will be paying for themselves eventually and bringing in a lot more quality to the business.

Yes, absolutely. You are paying a dividend and have net cash. What are your future investment plans?

Well, we're fortunate because we are cash generative being a franchise business. And whilst we do need a buffer of cash as there is a small acquisition that comes through. We look for properties freehold. We like to buy freehold and keep the cost of running that property as low as possible. But if we don't purchase any building or what we can do is, we can return some of the finances, specially dividend to our shareholders, and we won't rule out share buybacks.

Yes. Yes. Next question is, are you looking at future M&A?

We're not actively looking at future M&A because just in the past one year, we've added more than 35 high street locations, more than 15 kiosk locations. So that's been a 50 new sites and locations in just a space of 12 months. That in itself to me is a mini acquisition.

Yes. Yes. Yes. One personal question for me. When you create a new cake there, guys, do you both try it? Or do you think I've had too much cake in the last week. Or did you -- or you got to try it?

In last week, I've tried 15 different variations in one day, 15, I have to try 7 different ones. That is my job. I call that quality control. I would like -- I personally test every product before it goes out.

I tell you what, guys, I can think of an excellent marketing idea for you. Just advertise for cake taster. You would be overrun. That would hit the national press and everything. I think this is an idea is there. All right.

You can apply for that, Justin.

Yes, let me part time there. It would be too heavy. Guys, thank you very much for that. That's all the questions about here, and hopefully, we'll catch up in the not-too-distant future. Thanks very much.

Thank you.

Thank you.