Cake Box Holdings PLC

LSE:CBOX

Earnings Call Transcript 2024-Q2

[Sukh Chamdal, executive]

Good morning. My name is Sukh Chamdal, CEO and Founder of the Cake Box. I will be taking you through the group's half year results today.

Today I'm joined by Michael Botha, our CFO. After Michael has concluded, I will then provide an update on our strategic and operational progress, recapping on what we covered at our recent Capital Markets event before finishing with a summary of current trading and our outlook for the full year.

So if we go to Slide 4, we're pleased with our strong performance in the first half of the year, generating strong growth across key financial metrics. This was underpinned by further improved trading momentum from H2 2023 into H1 2024 with increased like-for-like franchise store sales as well as ongoing focus on cost discipline, which enabled us to manage well [ documentary ] inflationary pressures.

What this added up to was growth in our revenues, gross margins and consequently profits, with strong cash generation enabling us to increase dividend payments to all our shareholders. At the same time, strategic initiatives we talked about at the full year in June and more recently at our CMD last month are delivering benefits to Cake Box. I'll talk more about this later.

So overall, we're happy with what we've achieved in the first half and look ahead with confidence despite the challenging economic backdrop in Cake Box franchise proposition, growth strategy and long term prospects.

I'll hand over to you, Michael, for the financials.

[Michael Botha, executive]

All right. Thank you, Sukh.

I want to start with a quick summary of the strong growth across our key performance metrics that Sukh just referenced that you can see on this slide. And I'll now run you through these in more detail.

For the first half of 2024, we have experienced double digit growth in franchise store sales of 10.7% and adjusted EBITDA of 10.4% compared to the previous year. Net cash has increased by 41.8% to GBP 5.9 million. The company's earnings per share and dividends per share have grown by 19.6% and 10.5%, respectively. Free cash flow has significantly improved due to a reduction in capital expenditure of GBP 900,000 year-on-year from 55.3% to 90.2%.

Our first half sales performance has resulted in a robust trading and improved margins. We can see our overall Cake Box sales which increased 6.8%, resulting in us with a 1.9% increase in our margin, which went from 47.7% to 49.6%. And this was as a result of increase in our margins due to stabilization of our input costs over the back end of the prior year, which has flown through into this year.

Now this is just a waterfall graph showing how our full sales has gone from GBP 34.8 million in the half year from last year to GBP 38.5 million for this half year. We can see our existing stores has added GBP 1.9 million in sales. New stores, which are stores that added -- which opened in the prior year, as well as the 9 new stores that opened in this half year, added GBP 2.2 million, and we had GBP 400,000 less sales from kiosk. But if we move on to look at our like-for-like sales performance, this has improved substantially from the first half in 2023, where we were negative 1.6%. In half 2 '23, we were positive 3.4%. And now for the first half of this current year, we were actually positive 6.2%. Now this is mostly driven by increase in pricing from our franchisees.

Now our online sales has grown dramatically as well in the first half by 15.1%, and this is driven by our investment in online marketing. On the graph on the right, you can see that we are now consistently well above the prior years in terms of our overall weekly sales generated online. And on the left, we can see that we generated GBP 7.7 million, which was 21.3% of our franchise store sales for the first half compared to GBP 7.2 for the second half of 2023, which was 20.6% of overall sales.

Group EBITDA grew by 10.4% as a result of gross profit growth of 11%, outstripping the planned growth in overheads of 8.8%. Our profit before tax increased as a result of the 11% increase in the gross profit, and this has flown through to our bottom line, where our profit after tax has increased 19.6% for the first half. Our effective tax rate being 25.7% as we've now taken into consideration the increase in the tax rate.

Our model remains to be very cash generative, and we can see that we've generated EBITDA above the prior year. And our free cash flow was GBP 2.4 million for the first half, which was 5.7% ahead of the prior year. The increase in EBITDA was offset by an increase in taxation that we paid in the first half.

Our net cash surplus has increased year-on-year as well, and this is after we have paid out GBP 2.2 million final dividend for the 2023 year during this first half. We can see we generated GBP 2.4 million of free cash flow, GBP 400,000 of CapEx in the first half, which is compared to GBP 1.3 million in the prior year, and dividends of GBP 2.2 million, which left us with a closing net cash of GBP 5.9 million.

If we look at our capital allocation policy, we can see that we have invested in our existing distribution centers, GBP 250,000 in the first half, our technology in driving our new Cake Box Hub, which we spoke about in the Capital Markets Day, where we invested in our new website, our ERP solution and ePOS was a further GBP 150,000. And then we've declared a dividend of 2.9p, which was 10.5% increase on the prior year. Our surplus cash, at the moment we have invested in a short term notice deposit with our corporate bankers.

Thank you very much. I'll hand you back to Sukh for the strategic and operational update.

[Sukh Chamdal, executive]

Thank you Michael.

Moving on to our strategic and operational update. The Cake Box business model has again shown its strength in the last 6 months. On Slide 19, we have our operational highlights. And as Michael has just outlined, we've achieved good growth in sales, supported by further new shop openings and our investments in serving more customers via online channels. And once again, we have succeeded in again managing the cost pressures in this inflationary environment.

On Slide 20, I highlight the franchisee operational highlights. This momentum can also be seen at our results at a franchise level, and I'm particularly pleased to report that we now have 46 franchisees operating more than 1 Cake Box store. These ambitious entrepreneurs are the lifeblood of our business, and it is their success in growing their franchise store networks that underpins our own success. I know there are many who want to continue to expand and give us -- and gives us added confidence in our future growth.

So if we move on to Slide 21, we've talked about our strategy in some depth at our recent capital markets event, but I wanted to reiterate much of what was said. There were 5 key areas we prioritized at the start of the year to drive growth, and I'm pleased to report that we've made progress against each of them.

First, as we have focused on empowering our franchisees and delivering operational excellence, we continue to deliver efficiencies that translate into a rising of gross margin to 49.6% and an 18% increase in profit before tax. Secondly, our success in further expanding of our store estate to reach our target of 400 stores in the U.K. over the medium term was evident in new shop openings in new locations such as Liverpool, Cambridge and Didsbury. And we're looking at more ways than ever before to support franchisee growth, namely through our third key focus areas on data and digital. Our aim to place data at the center of our strategy has progressed considerably this half year to support our multi-channel growth, which I'll talk more about in a moment.

In terms of our enhanced leadership team, Michael has made a fantastic start to life at the Cake Box as the Cake Box CFO, and the Board was delighted in October to announce the appointment of Martin Blair as nonexecutive chairman. As we have previously announced, we are also actively recruiting another new NED to chair our audit committee.

And last but no means least, supporting the communities in which we operate, that remains a core to the Cake Box, and we'll continue to support local initiatives at this time of macroeconomic and geopolitical uncertainty.

If we move on to Slide 22, turning to one of these core areas of strategic focus, marketing. Bolstered by our marketing capabilities is critical to our success and so has been a key focus for us to look in the next phase of our growth. We've made good progress strengthening our marketing function, and we've invested more than ever in our digital and e-commerce capabilities. Alongside this, we have launched both national radio and outdoor advertising campaigns to build our brand nationally to help support awareness of our offer as more Cake Box stores continue to pop up in new locations.

If we go on to Slide 23, we recently conducted a brand awareness assessment which showed that we are in a reasonable place, but there's plenty of us to go for to help us make up that ground. We've created a GBP 2 million co-funded annual marketing fund with our franchisees, a large proportion of which has been allocated for digital and social media marketing. We're also rolling out an exciting new Cake Box brand identity which we'll give you a sneak preview of in a second.

On Slide 24, we have a big opportunity to lure more customers by taking a multi-channel approach as we've summarized on this slide, which many of you may be familiar with. Our new website, for example, which went live in June, improves customer experience and allows us to get better capture data, which allows us to gain more customers, retain them for longer and increase their lifetime value. And if they want to pop in, this is the updated shopfront they'll be seeing very soon as our new brand identity is rolled out across the U.K.

Slide 26, returning to the theme of data and what it delivers. We are already seeing early results. The numbers and illustration on this slide showing the growth since we launched our new CRM system speaks for itself and will continue to help us improve our engagement with our customers and ultimately drive increased sales.

And we move on to Slide 27. And under the bonnet of our business system, we have recognized that we need best-in-class technology to support our digital push. Our head of IT, Dale Lee, who we hired had in the last 18 months, has years of experience building systems for some of the biggest technology companies in the world, and so we are delighted to have his and his team's expertise to ensure that we have what we need in place.

So in conclusion, we are pleased with our strong performance in the first half. The business delivered continued growth across key financial metrics while simultaneously making good progress across a number of key strategic growth initiatives. All the while, the benefits of our model remain as a highly cash generative business with a strong balance sheet.

Since the start of the second half, we've seen trading momentum continue with total franchise sales growth up 5.1% in October 2023 and are therefore on track to meet market expectations for the full year. Looking further ahead, we remain confident in continuing to grow the business and deliver against our strategic objectives.

Thank you for your time listening to us today.