Cake Box Holdings Plc (CBOX) Earnings Call Transcript

Good. Well, it looks like most people are here, so we shall make a start. Good afternoon, everyone, and thank you for joining us today for the Cake Box interim presentation. The team have announced the results this morning, which I'm sure you saw from the RNS, and we have also published a note where you can find forecasts on our website. Otherwise, I will hand over now to Sukh Chamdal to take you through the presentation.

Great. Thank you very much, everybody. My name is Sukh Chamdal. I'm the Chief Executive Officer of the Egg free Cake Box. I opened the first Cake Box in 2008 as a concept store and we've co-founded the franchises in 2009 with Pardip Dass. I have a 35 years plus of experience in the food manufacturing and the food retail industry. I've learned the job on -- I've learned my role on the job. I've all done in practical and in being retail all my life. I have got experience in cake [ theme ] and vegetarian food for functions and event. We've done from small 50 to up to 20,000 people. And I'll hand you over to Pardip Dass.

Hello. Good afternoon, everybody. My name is Pardip Dass. I'm the Chief Finance Officer for the Egg free Cake Box. About 10 years ago, me and Sukh decided that we wanted to franchise the business, so we co-founded the Egg free Cake Box franchise. I've got more than 15 years experience within the food and beverage industry as an accountant. And I qualified as a chartered management accountant whilst also a commercial analyst at Starbucks Coffee Company.

I'll give you a small quick overview. If we can switch to Slide 3, please, [ Hannah ]. Right. Thank you for joining our presentation today. During the half year results period from April to September that we're reporting on today, we clearly faced unprecedented challenges from the pandemic, including the initial lockdown forced us to close our stores in 6 weeks. So I'm very pleased with the considerable resilience we've showed and a strong continued recovery since. I'd also like to thank all our franchisees and employees for their exceptional efforts during the unprecedented period. I said this as over a decade ago, and I've never been prouder of them more than I had been over the last 9 months. As I said, we opened the first store in 2008. We can see that in a single shop in East London. And I'm proud to say now that we operate in 3 operation centers, Enfield, Bradford and soon to be, Coventry. 139 franchise stores at end of 30 of September. We've opened 5 new stores since in even -- despite the lockdown. And what do we do? We've specialized in making delicious, high-quality, bespoke celebration cream cakes. All our cakes are free from egg-free products -- from egg products that enables us to have a much wider our market share. So we get -- we capture all the vegetarians. We capture anyone who's got dietary restrictions. And we capture everybody who loves a fresh cream cake. Or we're lacking in the vegan department, but we have these new products. And we will come into those later on. Or we provide personalization. We are the Amazon of the -- our cake industry. We give you your cake the way you want it. You want it now, we give it to you now. You can pop in the store. You've got a selection of ready-made cakes to go. You can order click-and-collect. You can order delivery. Or we have a strong growth profile, as we will be showing you along in the slide. If we pop out to Slide 4, you can see some of our products or the core product is the fruit gateaux over the gateaux lady. It's a fresh cream cake, sponge cake which we sell the most of. We complement that with cake slicing. We have complementary products like cheesecake, cupcake, and for larger functions, you can also have a party cake. Or we do a selection of loaf cakes so you can have that with your tea. And we've also launched the gluten/vegan-free loaf cake as well. Or we've got a slicing size on that GBP 2.50. We've got photo cake, and we do give you a lot of the collection for -- if you come in the shop, online or for delivery itself. We are -- if you go to the next slide, we are a franchise business. We do not own any stores ourselves. All the shops are clearly franchised. And we've got a record number of paid deposits from potential franchisees and reflecting what we can offer to them. We offer them the potential to open a marketing site. We've got 32 franchisees who've got more than 1 site. We don't have any marketing or service fee or a marketing levy. Very good hours, 11 to 7, and franchisees are welcomed to open earlier or later, but that's what we recommend. Or on average, you can expect to a [ 20-month ] payback, which is really good in our industry. We offer maternity package. We do every -- we call them once we get -- we help them negotiate the rental rates on the shops under terms and conditions. We help them with a business plan for learnings. And they can expect earnings of about GBP 87,000 EBITDA, which is a really good payback. Our brand is getting bigger and better and more recognized. As we all expand over the countries, we're getting more and more brand awareness. The franchisee, themselves, is a one-stop shop. They order online, and they will get all their goods delivered, and they only end up with one invoice. How convenient is that? If we go into the next one, I can give you a quick overview of this all franchise application process. We go for quality, not quantity. So that's why we have the 3 stages or format where they apply online. Once they receive that back, they will get a full franchise application sent. Once we have received that, we will filter out, and then we will invite the successful applications to a presentation with our senior team. Once they've had the presentation and we've talked to them, or they will be selected. If they're successful, then go forward to a second interview either with myself or my [ CB ] team. And once they're at that second interview and they then pass, they will pay deposit to show the goodwill. And I -- it seems like it's a deposit. We're an ethical company. We don't deduct anything out of those deposits if they pull out. We will then go to site selection. And once we've got the site selection, that goes to legal. And once we've got the keys in our hand, we start the shop build and also the training of the franchisee. We have a comprehensive training program, which will encompass the whole business model, right from how to make cake to how to do the accounts. Once the shop has been built and we have had all the training done, we will do a pre-opening marketing on social media. And within getting the keys, we aim to have the shop opened within 4 to 6 weeks. If we go to the next slide, I can give you the financial highlights. Our revenue down 2%, reflecting the period of closure during there's been a lockdown. However, gross profit was up, and EBITDA margin increased as well. Our net cash has increased along with the earnings per share. This has enabled our interim dividend to increase by 15% to 1.85p, and that's in addition to the reinstated dividend we had earlier in the year. We did, at the beginning, furloughed some staff. But once we reopened and we saw that the business was better than normal, we repaid all the furlough back to the government. If we go into the next slide, we can go to the operational highlights. Our store openings [indiscernible] and [indiscernible] unsurprisingly, impacted by lockdown in March to May. But we still managed to open 6 new franchise stores over the period, taking the total number to 139 by the end of September. Moreover, we have begun the second half strongly, with 5 new stores opening already and a strong pipeline that we can [indiscernible] and come on to talk about. Since the period end, we have also launched our own Cake Box delivery service. This complements the partnerships we have with the delivery platforms, such as Uber Eats, Just Eat and Deliveroo we launched -- which we launched in the first half of the year. These have been very well received, particularly by those outside of the delivery platforms' catchment service areas and means no distance is too far for Cake Box to provide customers with its tasty product. Products include our delicious new gluten-free and vegan loaf cakes, which have proved very well. If we go into page -- the next page, we've got franchisee operational highlights. Just like other metric, franchisee total turnover was impacted in the period by the forced foreclosures. However, we saw a strong recovery when we started to reopen the stores space, with like-for-like sales up over 20% -- sorry, 12%, underlining the continued growth in demand for our products and agility of our model. We saw online sales grow by more than 50%, driven by the initiatives we took in the first half to sign up with those newly partners to complement our popular click-and-collect offer. Importantly, we have also maintained and even strengthened our pipeline for new store openings, underpinned by a record number of new franchise deposits, which Pardip will come on and talk about in more detail shortly. As we go into the map along Page 6 -- or sorry, on Page 10, as you can see on the map, there are many areas in the U.K. that remains part of local Cake Box shops and many high streets in need of our total shop fronts and interiors. In particular, we see opportunities in Scotland, Wales, South West, North East and South East. We're still underrepresented in South London, but we are addressing this. Alongside our 139 stores at the period end, we also had 14 kiosks. This is a mobile format of our shops that open up further new potential locations for Cake Box products to be sold, including shopping centers, service stations, large service stations, train stations, et cetera. I'll hand over to Pardip for the financial review.

Thanks, Sukh. If we turn to Page 8, go through the detailed financials. So Page 8 is the income statement. As we mentioned earlier, revenues were only down by 2% despite our store closed for more than 6 weeks in the first lockdown period. Gross margin improved by more than 300 basis points as a result of lower shop openings, where the contribution is 25%; and we had higher sponge sales, where the contribution is 70%. Our administrative costs went up year-on-year, as we increased cost in payroll due to the planned growth we had envisaged before the COVID lockdown. And all in all, profit after tax dipped slightly as a result of the lost revenues in that 6-week period that we spoke about. If we turn over to the next page with the balance sheet, you'll see that fixed assets increased in value as a result of the upward valuation of Enfield warehouse and distribution center. We reported this at the full year as well, where our valuation went from GBP 2.5 million to GBP 4 million for the freehold property that we have in Enfield. And this, coupled with the lack of dividend that we paid for the full year, meant that we increased our balance highly by more than 35% to GBP 9.7 million. Move over to the page for the cash flow. In the 20 weeks that we did trade, cash from operating activities was nearly as good as the prior half year. As a result of the strong trading or in the first lockdown period, we decided to return the money that were given to us by the government for furlough paid. And in return, we need to pay a special dividend to our shareholders. Net cash increased by GBP 2.3 million in this period, but roughly half of this was due to the nonpayment of the dividend. And I'm pleased to say that we paid a special dividend, which was equal to the dividend that we took away for the full year, and this was paid immediately after the half year period. If we move on to Page 12. So I talked to you about store rollout. So we're holding a record number of deposits from potential franchisees as the secured areas and territories from both existing and new franchisees. And I think having 47 deposits at half year shows that our brand and proposition remains highly attractive from both the existing franchisees and a greater proportion of new franchisees that are coming through. And we're getting those franchisees coming through because they feel a little bit of insecurity in the jobs that they're holding. And so they see Cake Box as a brand of proposition going forward, a stable business with a good backup from the franchisor. And with that in mind, we're very confident that we'll be -- easily be able to hit our store targets in the future. Page 13 is really about online sales and how our online presence has grown rapidly during the COVID period. We partnered with third-party delivery platforms, such as Just Eat, Uber Eats and Deliveroo just before the lockdown. And that gave us access to a new customer that would not only have come to Cake Box. And most recently, we introduced delivery from our own website in the first week of October. And that lets us tap into existing customers who want their cakes delivered. And online now represents 25% of our total sales, whereas before the lockdown period, before COVID, this was trading at 15%. And what does that mean? What's the benefit for that? We've seen the benefit in our like-for-like sales performance, which has been positive through our estate. I'll hand you back to Sukh.

We've been -- or for the current trading outlook, we've touched on our strong current trading already, but I want to finish by running through a few key takeaways on that and the outlook. Most importantly, all our stores remain open, with only the few shopping center kiosks closed down due to the second lockdown. But we have maintained a positive sales growth in the second half. This has been supported by a continued acceleration in our online sales, up circa 56.5% year-on-year in the 6 weeks since period end versus last year. And this has been by the launch of the Cake Box home delivery service to complement our existing partner offer from the various platforms. Opening 5 new stores with encouraging initial trading is [indiscernible] by a new [ stay-in ] shop, which has record sales week sales record. Looking ahead, we have a strong pipeline of new franchisees and franchise stores [ that are finished with ], and they are, therefore, confident of meeting full year opening [ commodity ] of new stores and delivery of the growth strategy. And so we'll hand back to [ Hannah ].

Thank you very much. [Operator Instructions] But we have had a few through on e-mail prior to this. So let's make a start with these. Does management think that the brand will be going through an upgrade anytime soon?

Brand is constantly under review. And the change is taking place in the next -- in this next cycle. So every 5 years, the franchisees all renew their contracts. And so at that time, that's when the upgrades start going in of the -- it's actually [ urgent ] therefore, and we do find that the customers really recognize the colors, or rather than going to more subtle colors like green, we would like to be light, bright and sticker [ like I saw some ] and we shall -- we are achieving. And so -- but we do change the sign, the front, et cetera, as the cycle goes around.

Good. Well, it's certainly -- it can't be missed on the high streets at the moment. And perhaps a little bit here on sort of repeat customer to get a better view of the profile of them. Do you know how many times the average customer would buy a cake in a year?

Again, we have data that say that the customer will buy a birthday cake for themselves, will buy a birthday cake for their children or their partner or an anniversary cake. So depending on the size of the family, the size of how many people that they have, that's determined so many times by a celebration cake. But that doesn't determine how many times they also pop-in for a slice or a cheesecake or a selection of cupcakes, or they send out cupcakes or birthday cake to loved ones.

Okay. Thank you, Sukh. And perhaps then a couple now on new product development. And we think, first of all, about -- obviously, your egg-free cream cakes. Are you seeing -- or is there an opportunity perhaps to move away from the cream-based cakes and do things like brownies? Is there a greater range of products planned, particularly for home delivery to take on Kaspas and other dessert options on those apps?

Our sales are 95% cream -- fresh cream celebration cakes. So we have other peripheral cakes, which are like the cheesecakes. We have the -- we are -- we've got the slices, the brownies. We've got the -- most cakes. But we see that the sales are primarily in the sponge place cream cakes. So we will have, in the kiosks that we're doing, we anticipate greater sales in these periphery products rather than the core products. But our core products are the best selling and the most selling that we would have. And we're not into a dessert market is a very small, equivalent to a slice sales that we have, a very low basket. Our average basket was GBP 31, reduced slightly now to GBP 26 because of the smaller groups that we have, that which the government are allowing. But I would anticipate that going back up once lockdown and we're back to normal. So the periphery cakes are fine product, but that's what they will be, periphery and not the core product.

Okay. And perhaps then, well, that leads us neatly on to the discussion around new products and vegan options. And when will the truly plant-based option become available? Egg-free is a good start, but do you see that coming within the next 12 months?

We are on version 7 of -- we are version 7 of the vegan sponge, and we're on version 6 of the plant-based cream. We've got it now to a level which is quite resembling what we have to offer. So we're really happy to say within the next few months, we will be launching a true fresh cream in [ vegetarian ] commerce our vegan cake, so that our market who cannot enjoy a cake at the moment would be able to do so quite soon. We've launched the gluten/vegan loaf cakes, and we've just perfected a vegan loaf cake as well, which we'll be launching in the next few months. So I'm happy to say that we look at all of the market, and we'd like to capture all the market.

Okay. And perhaps -- well, final one for now on that subject because it seems all the people are interested in. Do you feel perhaps that the press and customers recognize you as a veggie meat-free? I mean, there's obviously lots of press and recognition around brands like Oatly and Beyond Meat. Do you think that Cake Box gets the same recognition within that sort of specialist food segment?

In the early years, we were recognized as a niche producer of cakes for -- catering for the egg-free vegetarian market. But now as we expanded across the country and everything or we're becoming more mainstream, so they still emphasize the fee from. So -- or they're more interested in that we give the product which everybody can enjoy, so including the dietary restrictions and including non-dietary restrictions.

Okay. Perhaps one now for you, Pardip. Store EBITDA went down from GBP 94,000 in the last year. But same-store sales went up. What was the driver?

Well, store sales, average store sales have been going down as we open more and more stores and our estate becomes a bit more immature. But what we have found is in a quarter now, this is the first quarter where we've had average weaker sales going up. At full year, it was GBP 6,300. It's now GBP 6,450. And for the first time in a quarter, the EBITDA for the franchisees has gone up from GBP 82,000 to GBP 87,000. But when we had less than 100 stores, you can imagine, if we're adding another 20 of stores in there, the percentage of the immature estate has got higher. And as we get growing and getting bigger, there are additional 20 stores that are having less of an impact.

Okay. Then looking at the distribution of stores around the U.K., what determines which areas you're looking to have representation in? Is it the interest of a franchisee?

We are primarily led by franchisees. So where franchisees fly from, that is where we will go first. And/or if we find that is some areas particularly underrepresented like Scotland, we would do advertising there to attract more franchisees. But we go with the flow. Like we said, we have 47 deposits already taken, and they're all franchisee-led. So the franchisee who know their local area, knows the potential for our products there, we will primarily go with them.

Okay. Back to the vegan opportunity again. What do you think the opportunity is in terms of additional market size from the introduction of a vegan product?

Again, personally, I believe that the vegan market will be complemented by the flexitarian market. So people who want to give up meat or dairy for -- or 2 days a week, we can offer that product to them. But we haven't really catered for the vegan market. So it'd be very interesting to see how the sales are when we launch an equivalent of a fresh clean cake offering that we do offer at the moment. The most difficult thing was to getting the taste of the cream. All the creams on the market were 26% sugar. And our fresh cream cakes contains no sugar in the cream at all. So we've managed to frame one which is 4%. In the data, once we've launched it, the data will speak for itself. Once we know the data and how much sales we've got, we can report that to you next time on the full year report, full year results.

I think that was fine. That's helpful. Thank you. Which of your competitors do you value most?

We have no direct like-for-like competitor. But we're honored why people are copying us, which are locally based. They've got 1 or 2 shops, and they still don't have the confidence to make it a pure cake shop. They will have so many other products in there like pastries and [indiscernible] juice, et cetera. Or -- so it's only local competition, and you're going to get that in any share of business that you're in. But we've got one person who's got that 12 shops in the Midlands. But otherwise, we don't really have a like-for-like competitor.