XP Factory (LSE:XPF) — Interim Results

0:00 Good morning, and welcome to the XP FACTORY PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time just by using the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives in the meeting itself. However, the company can review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll.

0:29 I'd now like to hand you over to CEO, Rich Topham. Good morning, Giselle. Well, good morning, and thank you to everybody that's joined that's joined us this morning as we talk us talk everybody through the results to September 30. So that's our six month results to that period. Just by way of introduction for anybody that isn't familiar with us, I'm Richard. I'm the chief executive officer here at Escape Punts and Boom Baffle Bars, and Graham's joining me as well, our CFO. And, again, I'm sure that many of you on this call have got at least some familiar with XP FACTORY, the umbrella company that sits over Boom and Escape Park. But just in case you haven't, we operate in the experiential leisure sector. We're one of the preeminent businesses within that space, and we trade through our two brands.

1:16 Escape Hunt is now the largest global escape rooms operator. Escape escape rooms are heavily immersive themed environments where we bring teams together. They find clues. They solve puzzles, and ultimately, they look to escape. Boom is a much younger business for us. It is in the competitive socializing space, large format bars, very vibey, cocktails, high energy, anchored by a suite of games. That might include axe throwing. It might include augmented reality darts, golf, shuffleboards, beer pong, a a suite of games to play, but high energy businesses. And as I say, we're delighted to be here today to talk to our results till the September 30. So I suppose by way of overview, we're delighted really to be here yet again talking about another period of fairly significant growth.

2:05 So we've seen revenues up by a third, up to nearly 25,000,000 in that first half. And, again, we're delighted to have done that in a cash profitable way where group EBITDA of £1,500,000 has been delivered. It's probably worth diving into the revenue growth a little bit. And most excitingly for us, we've seen positive like for likes in both businesses set against a pretty tough market, if I'm honest. I'm sure many of you on this call will be familiar that actually the broader leisure sector over the equivalent period showed like for likes of 1.6% driven mainly by price in the operators that were aggregated. And in our specific subset, particularly for BOOM, that is the bar subset, actually, like for like growth was negative. It was negative 6.8.

2:54 So for us to have delivered three and a half percent on escape pump, four and a half percent on boom volume only, and actually within those numbers, we normalized for the rioting weeks, which quite materially impacted us. Actually, you're closer to sort of five and a half percent for each. It feels like that's a really strong position for us to have been able to deliver. Obviously, though, that in and of itself does not account for the 33% increase that we've had over the prior period. And, really, that is coming from new sites, as you would imagine. So in the period, particularly the drivers of that were bringing back three sites on from the franchise estate in Booms, so bringing back Allgate, Wandsworth, and Bournemouth. And, really, those are the key drivers behind that incremental growth on on that sales line.

3:41 As I mentioned earlier, we've done this in a cash generative way. We've delivered £1,500,000 of EBITDA. That's up from 1.1 in the cash factual period. And again, excitingly, we've continued to show those really strong cash generation metrics that we talked about last time we spoke. So delivering free cash of £2,100,000, I e, cash flow in excess of group EBITDA, really is born of this negative working capital cycle that we still continue to enjoy combined with rent free benefits that we have in quite a a number of our sites so far. So strong period here underpinned again as always by this customer satisfaction rating, which remains very, high at 98% for both businesses. So so as a highlight, I think that probably gives you a fairly decent overview of where we've been.

4:31 Getting into the businesses more specifically and starting with escape hunt first, what you'll see here in this business, again, is this continuing life like growth in the estate in a now very much more mature estate, which is, of course, a lovely thing to see. Excitingly, we're holding that 40% EBITDA margin that we've talked about previously. In fact, it's actually up ever slightly to 42 relative to that 40% that we had in the counterfactual. So very, very strong conversion to cash in this business has been continuing. Excitingly, we've opened a couple of new sites for Escape Hunt, Worcester and Glasgow, both of which have opened very, very well for us as a business. And indeed, we opened sites in a couple of days time, actually, in Cambridge for EscapePunk two. So very, very excited to see that site come come come good.

5:20 We're building we'll talk a little bit more to the pipeline that we're building further into the deck. But as you would imagine, the EscapePunk pipeline is ramping up as well. So lot lots to come after here. As for Boom, another decent period here, very strong growth from the sales lines we've talked about. We've talked already about the underpinning of like for like sales, which we consider to be a very strong indication of the quality of the returns that we're getting. We make a point in here just to say that Cardiff is is the one site for us that is in actually that is in sort of a meaningful negative like for like over the first half period. And the reason for that is that in the prior year, we benefited really very, very, very significantly from the rugby world cup. We benefited enormous enormously in that, and and so we saw the benefit last year as well. It's interesting that when the World Cup match or the Rugby matches haven't fallen for us on

6:18 Saturdays this year, that does actually have really quite a big swing on the mix. So showing here that we sort of taken that out, you'd be sort of closer to 10%, in in like for like terms. Within the business, we have continued to do as we've done before, and that is to bring back some more of our franchisees, I mean, to our own and operate estate. We bought back Allgate, Wandsworth and Bournemouth. And and indeed, post period, brought back another two as well, Southampton and Ipswich. We stand by everything that we've said previously, which is that franchising quite likely has a part to play in our journey as we go forward. But at the moment, we want to bring back some of the franchisees that we've had. We want to reset the the stage for much larger franchise deals that we might be able to achieve further down the line where a franchisee would be more likely to do 15 sites than the one that currently we have. So we've continued against that strategy, and indeed, we'll talk more strategy further in the deck.

7:17 EBITDA for the boon business is again up on its on its prior period, around 12% in the period. And it's worth reminding everybody that, of course, Boom particularly is a very seasonal business. We materially benefit through the q four trading, indeed, specifically the December month that we've just gone into. And that is the thing which, as it did last year, quite materially moves the dial for overall EBITDA delivered in year. So you'll remember seeing that last year where we moved from 11% in half one through to eighteen, nineteen throughout the end of the year. We would expect to see the very similar dynamics again in this year subject to Christmas trade being as we imagined it will be. Again, as with the, we're opening another side for BOOM this time in Cambridge also. So that's a combined unit that will have both Escape Hub and BOOM in it. Opens in two days' time. Very excited by that.

8:14 And indeed, as also with Escape Hub, we're continuing to build that pipeline as we're gonna look accelerate, but we'll talk to that in strategy in a moment. Right. I'm gonna hand over to you if I may just to talk through some of the cash generation finance. Yes. Thank you, Richard. I think many of you who listened to our year end presentation would have picked up the emphasis that we are sort of getting people to focus on is the cash generation business. It is a highly cash generative business model. As you can see, we tend to generate more cash than we report EBITDA largely because it is a negative working capital cycle that we have. People pay in advance for games, and we pay our suppliers in arrears. As we grow, we actually generate cash rather than consuming cash. And, of course, in the early years of leases, we tend to have rent free benefit, which gives us a big cash benefit.

9:06 So once again, we have generated positive working capital in it ahead of our our EBITDA. So $22,100,000 of free cash generated, that's before maintenance CapEx. So that's cash generated from operations after interest and tax. So effectively, giving you the capacity to go out and invest from that money. You can see on the right hand side, I've given a a sort of waterfall of where that comes from. So we have 1,500,000 of EBITDA. We've got some exceptional costs, which had some cash impact, and then the working capital benefit gets us up to the 2,100,000 after interest and tax.

9:48 We spent £300,000 on maintenance CapEx. Again, we're probably below what I would consider a mature run rate on maintenance CapEx. We've always talked about getting to about 3% of turnover, three there or thereabouts as a sort of longer term sustainable maintenance CapEx rate. So still slightly below that. So there's a cash benefit to that. If we take out the maintenance CapEx, it will give us an underlying cash profit. So the way we think about the business is the underlying the real sort of profitability of the business is what cash do you generate after you've paid your tax, after you've paid the interest, and after you've maintained your site, your estate. So after that, we had £1,800,000 of free cash flow as well as the maintenance CapEx.

10:34 Obviously, that's seasonally weighted, and we have a much bigger second half. So for the full year, we would expect a significant increase on that. If we assume that we have actually spent 3% of sales on maintenance CapEx, what I've called here, pro form a cash profits, so I. E, we spent £600,000 on maintenance CapEx, not 300 That would have given us, nevertheless, a £1,300,000 of cash profit. So just as a sort of illustration of how strongly cash generative and profitable the underlying business is, if we take the last twenty one months, so the fifteen months of our last financial year plus the six months and just annualize that, we generated £7,200,000 of cash profits on that basis.

11:22 So, again, just illustrating, and that's after a sort of full mature run rate of maintenance CapEx. And if you sort of work out what that means in terms of rating, you can see that a 12 p a share, which is where I I ran this yesterday, that would put us on effectively a 5.1 times cash PE ratio or the inverse is clearly a 20 which is under a 20% free cash flow after maintenance CapEx yield based on the 12 p share price. So very, very cash generative sort of position that the business is in. If we go to the next slide, so we generated this cash. How did we use it? We've spoken previously about the historic return on investment or return on capital employed for both BOOM and Escape Hunt being around 50%.

12:09 Historically, Escape Hunt about 48%. I think we showed enough full year, and BOOM was at 52, so around 50% for both for both brands. That gives us a very attractive investment opportunity. We've gone out obviously, we are growing the estate, leveraging. We're looking to leverage our fixed cost base, which can sustain a much, much bigger business as we'll see significant operational gearing coming through as we grow the business. So on the right hand side, again, we can see that the cash available for investments, we started the year with £3,900,000 of cash. Clearly, we didn't have a facility in place at that time, so a lot of that would have been held back as headroom As we came in towards the end of the period and we secured the Barclays facility, we're able to start dipping into that cash headroom as as our headroom is now sustained through the banking facility, which has been a fantastic and very significant development for the business.

13:00 So with 3,900,000 to start with, we generated 2,100,000 of of free cash flow. In addition, we had the benefit of £500,000 of landhold contributions that was essentially from Glasgow and Worcester escape hunts, which were in the period. So that gave us, you know, a a a total amount to spend of around 6,500,000, excluding any sort of headroom that we want to maintain. As I said, with the with the facility in place, now we can eat into that headroom by investing. So 300,000, I've already spoken about on maintenance CapEx, but we spent £1,300,000 of growth CapEx for the escapement. 1,000,000 of that was on brand new sites, so that was essentially Worcester and Glasgow. Glasgow, obviously, opening just after the period end. There will be some expenditure coming into the second half for Glasgow, and also there were some early investments into Cambridge and some games that we were buying for that in ahead. So a million pound on new games and £300,000 on expanding capacity within existing sites. That was largely the conversion of VR rooms into physical rooms as the returns that we get from those physical rooms we're finding is generally better than what we we got on the VR.

14:16 Within Boom, we spent £2,000,000 on on growing that that business, £1,000,000 into new new sites, including some of the former franchise sites that we took over Watford at the end of last year, which we did some changes. There was a bit of expenditure back into the financial year, so coming into this year, and one or two others. And then also, there's about a million pound, which has been into, again, some of those former franchise sites, but mostly also into our existing estate, where with the benefits of our data and our learnings, we are getting better at understanding what drives returns, and we've gone in and expanded games capacity in a number of sites and done some reconfigurations to optimize the performance of those sites. In terms of acquisitions, it was a £100,000 that was paid out on the acquisition of Bournemouth.

15:06 As we Richard mentioned, we've also taken over a couple of franchisee stays, Morgan and Wandsworth, where actually in those cases, we received the termination payment coming back to us largely because the franchisee had got himself into financial difficulty actually to do a completely different business and had fallen in arrears. And as a result, we were able to step into our franchise agreement and claim back the arrears and some additional compensation over a period of time. So that will be over a period of three years if we will get paid that. Obviously, the most important the big factor there was getting the bank facility with bar fees. So, hopefully, that gives you an idea of where we we deployed the cash and all of that growth CapEx should be to the benefit of both our top and our bottom line as we go forward.

15:53 So I think it's quite exciting now to be able to talk a little bit about the strategy that we have for the business as we go forwards. Everyone on the call, I'm sure, will have heard us talk previously around the runway opportunity that we've seen for the business and how excited we've been about that predicated in the box economics that we've seen for both the skate punt and for boob. So, you you know, with 50% return on capital, the obvious thing that you should be doing is more sites. But, of course, with the markets having been quite soft for a while now, we've certainly been reluctant to come back to the markets to take on any additional equity. And so that has seen us expanding, sure, but only out of the cash that we've been generating organically from the business. So this facility now really allows us to go far more aggressively at the opportunity that we've known existed and indeed that we've communicated.

16:45 So today, we want to share with you our plan to drive £90,000,000 of revenue at 15% EBITDA over the next four years. So that is a 50% increase in revenue and a doubling of pre IFRS 16 EBITDA in that in that period to '28. And so the way that we're gonna do that is actually quite straightforward. Clearly, the vast majority of that increase is gonna be through site expansion. Of course, we will still be picking up on ever looking to better the site economics. We can talk a little bit to initiative there, but, really, that's just the ongoing work that we've been doing through the businesses already. And most importantly, it's making strong leverage use of the head office that we've put in place. You know, we've talked before about the fact we have point by design invested in a head office capable of growing the business, capable of doing more. And what we needed was the fundings to be able to really grow into that and go after the non numbers that we know we can achieve.

17:47 So excitingly, with this Barclays facility of £10,000,000, whilst maintaining a modest net debt ratio circle one times, we believe that we can quite significantly create value within XP FACTORY. So as we talk to the site expansion, really, it's clearly obviously gonna come from both businesses. It's gonna come from escape pump, and it's gonna come from boom. But but that expansion plan is born off the learnings that we've had from trading the businesses now for a good sort of two years on the boom side and actually up to seven on escape pumps. And what we've seen in both these businesses are some differences. So for escape hunts, where we have typically built very similar types of sites across the country, that is to say, typically, the sites have been between three three thousand, 4,000 square feet.

18:37 They do typically have six escape rooms within them. They do typically follow the similar profile. Actually, the consistency of return across all of our escape hunt sites has been remarkable. And for some of you that have followed the business for a little while, you'll know that those early site, box economics that we set for ourselves, those target economics that saw us doing £500,000 of sales in a year at 30% EBITDA

19:02 have now been trounced by an average performance at Caesar site doing £650,000 of sales at 40% EBITDA. So the box economics are there for a skate pump. It's been fairly, consistent, and therefore, it's given us a lot of confidence about the runway that that that we can go after. And in fact, it's a runway now larger than we'd initially thought. We feel that there is probably a 100 sites worth of opportunity for escape from up from the 50 that we'd initially imagined, all all predicated in the data and the performance that we've had in existing state. So what that means for is that we'll be looking to target new site growth of around eight to 10 sites per annum. I say that in terms because it might be the case we actually build a bigger site somewhere and try to see what happens if you put in eight rooms, 10 rooms, maybe even 12 rooms if you fly at the right site. And that's very consistent with our having gone back over the last couple of years in and finding additional capacity to put into the existing sites where possible, where we've been able quite demonstrably to show latent demand.

20:06 But if you imagine eight to 10 USA escape hunt sites coming on average over that strategic period, that's probably gonna be in and around where we're where we're aiming. As for Boom, again, the data's been really, really interesting in Boom. And what's what where where Boom sits differently to escape hunts is that we have a much broader range of sites. We've got, on the one hand, these really large sites in Central London that are sort of fifteen, sixteen, 17,000 square feet, but all the way through to some much smaller sites in more regional towns, secondary towns that might only be 6,000 square feet. And I think really excitingly for that business model, you have in the middle sort of that that kind of average 10,000 square feet that return really, really well, and those are great they're great units for us. We're really excited.

20:53 They return the capital in 50%, as you know. But these sites over here, these high dense, big footfall, proud sites that we have, they return disproportionately highly. And so for us, the focus on boom is gonna be defined in the short term. By that, I mean, the strategic term to 28. Fewer boo sites, but more in that space there. So these super proud, super high footfall locations that really do return spectacularly well on their on on their investment, you know, sort of more £500,000 EBITDAs and beyond. That's where we think we can really move the dial quite aggressively in the short term. So we're we're remaining prioritized on The UK in terms of the size expansion. As I mentioned, the runway for both businesses is so significant relative to what we have that it feels that keeping a laser focus here is a smart thing to do. But have in mind eight to 10 escape pumps, three to four moves in a year on average, and that allows us to double size the business at least at a group EBITDA level as I've just mentioned.

21:57 In terms of that constant driving of unit economics, well, this is kind of almost day to day. We have it here in the strategy because it's obviously a really important part of delivering our numbers. But, actually, this is more tactical work for us. This is the stuff we do all the time. We're big into learning. We've got a lot of resource going into data, into analytics, and we use this on a recurring basis. Greg's talked to the work we've done on adding games capacity into Boom on redesigning a state fund, etcetera. This is all born of the learnings that we have. So we will continue to do that. We will continue to be driving these unit economics. We do think that there is an opportunity to better utilize technology in some areas, and we've kicked off some programs already in and around that. Some of you that have been familiar with the business for a little bit longer might remember us having talked about the platform we put in place for escape hunt. That's a good example.

22:51 It's allowed us to run those games far more consistently, far more profitably, if I'm honest. And and then that's been a a transformation for that business. That is one of the key drivers that has moved us to this position where we have 40% return sorry, a 50% return and a 40% EBITDA. So finding similar use cases for that technology, enhancing that technology, going further, implementing something a little bit closer in boom becomes a bit of a focus for us over the next period, and we've we've already kicked off some work there. And then as it relates to the head office, we we we think that good businesses in our sector run head offices that are sort of 10 to 12% of sales, and ours at the moment is obviously a lot higher than that. It's higher than that by design. We wanted to be recruiting ahead of the curve, investing ahead of the curve in order to then be able to go on these big expansive runs of, you know, expansion if you like. But nonetheless, we're now gonna be able to see the benefit of leveraging that, and and we'll see it come normalized back to that sort of 10 to 12% mark. In fact, already, we have been able to affect the plan that will see us annualizing million pounds of cost savings through that head office.

24:02 And where that saving is coming from is not us just taking away functions that are gonna become important further down the line. It's us recognizing where we are in our life cycle. So to give you a really good example, when we set Boom up in 2022, we had that crazy period of growth where we opened 25 sites. Alongside opening that number of sites, we also had to build a brand from first principles. We had to recruit a thousand people. We had to work out how to train the booties in the absence of any preexisting sites. And so you have to have resource in place to do that. But over time, that resource can fall away because you're now into your operating motor, and these things happen more organically. You know, when we wanted to make a real inroad and a kick of corporate sales and really drive that part of the business, we had to put a lot more people behind it in order to really shift it and kick it and get it going. Well, now it's found its own momentum, so we've been able to cut back a little bit in that area and so on and so

24:57 forth. So it's about being right sized where you are in your life cycle whilst remaining invested enough to be able to grow aggressively. But we do feel that we've now made significant inroads into that and continue to do so. So I suppose, really, these next kind of slides are just touching a little bit more on some of the things that I've just talked to you so I won't dwell on too much. But it is to say for a skate park that actually we're in this remarkably unique position we feel with this business where we're absolutely the market leader, but actually have a very small overall share of The UK in terms of the number of sites we have relative to the market, and that's because it's such a fragmented market that still has a lot of independence within it. So with all that as given, that opportunity, as we've said, exists for us. It is significant. I've talked to unit economics already.

25:43 I won't talk about that again. I've talked to this consistency before, so I won't talk about all that again. But just to reiterate that, actually, the takeaway for skate punk is we think the opportunity is bigger than we previously said, and it's exciting to be going after it more aggressively now. And, again, really, boom, touching on a lot of those points that I've already made, but continuing to learn, continuing to understand the data, continually moving around the kind of formats and the sites to best maximize has been very much the marker of our last couple of years. And and seeing now this real overperformance and over delivery for certain types of sites makes it quite a straightforward choice for us to focus on those in these premium locations that have these large catchment areas where we know we can do very, very well.

26:30 So so this will be, as I say, the marker for boob as we go forwards. So if we were to bring all of this together, I've given you the highlights. I've talked about the the the £90,000,000 of sales, like, you know, the adding of 15% sales over the period. I've talked to the 15% EBITDA, so 13,000,000 against there. But in but in terms of the specifics, you can see for escape funds, what we're looking to do is drive a £30,000,000 business. We would see by the end of the period having a stake that is somewhere between fifty and sixty sites. As I say, the makeup of that will depend on the size of site that we open, but in and around that sort of number, and and that'll be a very highly profitable business at that level. On the Boone side as well, you're seeing also, you know, a significant advancement. Getting up to that £60,000,000 at that 20% EBITDA, again, highly profitable business at that point. We see that being around 40 sites, something in that ballpark.

27:27 Again, you could open three Oxford Streets, you wouldn't need to be anywhere near that number of sites in order to to to get to that level of turnover. But on average, we think, you know, sort of three or four premium sites per annum really does move the dial for the business. We we're continuing to receive benefit from our franchise network. Whilst this is not today something that we're actively looking to grow, we do expect to see that contribution maintained. And all importantly, we're leveraging against that head office cost, as

27:57 I've said. So on one page, that is the direction of travel for XP FACTORY. We think it's exciting. We think it should be significantly value accretive, and and and we'll we'll talk, obviously, in future updates as to how we're getting along. I think just to add to that, the one really important factor in terms of funding the growth, what we can see, given the cash generation capacity within the business and the facility, we can do this whilst maintaining our sort of old fashioned debt and EBITDA ratios of of around one times. And in fact, towards the end of the period, we would expect to see that number coming down as we invest that front, get the benefit of the sites that are coming on board, which generate more EBITDA and cash. And, actually, that gives you quite a quick path to go from modestly modest net debt back to sort of neutral and net net cash sort of towards the end of that period.

28:55 So I think, you know, this is a really exciting strategy without having to bid the farms, if it were. Exactly that. I I won't labor too too heavily on on this slide here other than to say that, of course, our site selection is not just a random collection of dots thrown at a map. It is data led. So by taking the data, by understanding what we know already about the existing sites we have and by overlaying data such as work capacities, populations, wealth indexes, competitor adjacencies, etcetera, etcetera, etcetera, we're able to

29:29 build up these models that kinda highlight you in on key areas that would be good for us to to to to play it. And, obviously, a a subset of this list is obviously, you know, fairly advanced in in terms of conversations, head to terms, etcetera, through pipelines. So everything from some really exciting sites in London through to conversations in Bristol. We we're we're building that pipeline aggressively at the moment. And as I say, you'll see us update further on that in future in future meetings.

29:57 But one of the things that one of the things that well, almost certainly, in fact, I can see on some of the questions that are being submitted as we speak are are coming up in and around some impact that we will have on the business through some government changes in the national wage, etcetera, national insurance. And so I thought I might pass over to Graham just to talk a little bit about that and what the impact on us might be. It's obviously a big big issue both in the press and in the investment community. People are asking questions, and as Richard said, a number of your questions coming through. So, hopefully, we can we can answer that with this slide. Obviously, within the budget, the two big impacts on us outside of business rates, which I'll come back to, are firstly, the employer national insurance changes. Actually, the biggest impact there for us is the reduction in the

30:48 threshold at which that national insurance gets paid. We have a lot of variable hours staff. Many of those were either at or only just above the threshold at which you started to pay national insurance in terms of their annual pay, and they now fall into that into that into that bracket. And then, of course, you've got the 1% increase as well. And then, of course, we've also got increases to the minimum living wage,

31:15 which comes across our industry and a lot of retailers and people who employ casual staff as as we do. So having been through this, the impact, I've sort of divided it down into the three areas of our business, and it's Stateline, William, and and head office. Head office is relatively easy to deal with. No one really impacted by minimum wage. Most one of the head office staff are well above minimum wage level anyway. And if you take the gross cost of our employment, which obviously includes our pension contributions, various other benefits, existing employers, national insurance, the 1% increase plus the increase plus the additional payment on the lower threshold means it's approximately 1% of our total existing labor cost for head office, which runs at about 6,000,000. So you can see what the what what what the impact there is, and that's relatively easy to absorb within our existing forecast and our expectations for for labor increase going forward.

32:20 However, at the site level, the impact is much more significant. The employer national insurance, when you take those two aspects of it together, may have mean an increase to the labor cost of about three and a half percent compared to our existing cost. And our existing cost across two sites is around about 15,000,000. So you can see what the impact there is. And then the increase in the minimum minimum wage, I think what I would Richard, I think, has already mentioned, we pay a premium to minimum wage across across the group. So we don't have to increase everyone by the full increase that's that is being put forward. But we obviously we have options. So there's a question of how much premium we maintain, If if any, if we go to the sort of minimum, the impact is around two and a half percent in escape plans and one and a bit percent in boom.

33:20 If we maintain the full premium that we have, the impact is more like 5% on either of those. So that's the sort of range. And if you have the two together, it means an impact of around minimum 5% and probably up to a maximum of around nine, nine and a half percent across those two businesses. We had already factored into all of our forecasts in our planning around about a 5% increase. So at the bottom end of the range, that's already within what we had forecast and what's what's out there. So the increase, depending on how much we do, could be up to sort of 4%. So, again, putting that in context, 4% on 15,000,000 is about £600,000. Now against a a turnover of 60,000,000, that equates to 1% of our turnover. So

34:07 were we to claw back, a, first go for the full increase and b, look to claw it all back through price. We're talking about a 1% price increase. So I think it will probably got some room to claw that back. Would we should we want to look for for price? However, there are a number of other mitigation considerations, which we are already looking at. Layer efficiency initiatives, we have been really kicked off some of these, which we haven't planned within our our forecast, but I think we'll start to take impact. You know, things like

34:38 utilizing our proprietary technology and escape funds better allocate labor. We can actually manage games remotely with a little bit of work, which just means that we can manage optimize labor and utilization a bit better, which will help us. Things like in BOOM, which, again, we've already sort of started to look at things like self check-in, saying things like booking booking up whilst you're in the site, having screens that people book rather than having to go back to a desk to to book again. All of these things were things which we would be doing anyway, but, actually, we would accelerate and probably

35:09 give more emphasis to now and enable us to mitigate some of that increase that comes through. We can do things like managing rotors and so on. So I think whilst, clearly, these budget impacts are are quite significant, they are a, we had expected something to come through, and that was planned for. And the excess, I think we can manage without too too significant impact on the business.

35:37 I'm just gonna pick up quickly. I think the next slide is just I'm not gonna dwell on these because we've actually covered most of the points already. I think if there are any points I would pick up on the p and l, there's details here for you for really you to to go through. So please submit any questions if if I don't cover anything that you want to cover. I think the one thing I would pull out on the financial performance slide is particularly with the gross margins across the group being maintained

36:04 compared to the same period last year, I'll just remind you that all of our variable labor cost goes into our gross margin and as part of our cost of sale, and we absorbed a 9.80% increase in the minimum wage last year. And that has already factored into that. And yet with even with that increase, we were able to maintain our gross margins. So, again, just testament to the operating leverage, the improved scale, and the improved efficiencies that we are seeing as the business grows. And I'll remind you that Boom clearly is a very young business,

36:35 and I think there is a lot more efficiency which we can drive through just from our learnings and our data in Boom. So and speaking back to our previous slide, I would hope that a fair amount of additional labor costs can be absorbed through further efficiency just from the learnings that we've had. As we move on to cash flow, I've covered all the points on cash flow in those two slides earlier on, so I won't dwell on this any further, so please submit any questions if you do. On the balance sheet, I've mentioned the completion of the £10,000,000 working capital revolving

37:07 credit facility with Barclays. That's core to backing out our new strategy of growth and how we can get there largely just by providing the headroom, to be honest. As I said, we don't expect to go into significant levels of debt, but we will see some debt levels as we as we roll out with this new strategy. We've spoken previously about some technicalities on IFRS 16 accounting, which I won't bore you with, but just to remind you that don't be surprised if you see the right of use assets and the lease liabilities deviating

37:38 in terms of amounts. Actually, usually, that's as a result of a good thing, which means we're getting large landlord contributions, which under IFRS 16 are offset against the right of use asset. So it resulted in a discrepancy between those two numbers and also because of rent free periods, which means you're not paying upfront. And actually, what that means is that the lease liability goes up to start with, whereas the item used asset comes down. So if you do see that gap, don't be surprised. It's usually as a result of an economically advantageous thing to us and not the reverse. And the final thing to mention on the balance sheet is we did announce in the results that we will do a balance sheet reorganization. Again, this is really just a technical point. As we stand today, we're unable to do a share buyback, and we're unable to pay dividends as we don't have distributable reserves given the historic losses of the group.

38:28 So by converting shared premium into distributable reserves, that would give us that capability. There's no commitment at this stage, but, clearly, you know, there is an opportunity when the return on equity is very attractive as it has been, share price is very low. You know, there is then a choice for the board to make as to where the best returns would come from. So at least having that capability gives us within our, yeah, our gift to give. Richard, do you want to talk about post period? Yeah. Absolutely right. So I I think a lot of this we've touched on, but just, obviously, the the the RCF we've touched on a few times. Post period, Escapemont Glasgow opened, which is going really well for us. It's very close to the boom

39:11 site that we already had, same center, great landlord. It's opened extremely well. We're very, very pleased. Excitingly, already, I've mentioned we're opening for both businesses, a site in Cambridge this week. So we'll be up there tomorrow evening for the prelaunch ahead of opening fully on Thursday, so exciting times for for that. We've taken back a couple more of our Boom franchise sites. We've taken back South Hampton. We've taken back Ipswich. Those, bring us now to around 25 overall 26 owned and operated sites for Boom with, five franchises just to give anybody a flavor for that. But, again, we've already talked about that previously. Greg's talked about the plan to mitigate so much of The UK budget's work. Now, obviously, time will tell the extent to which we you know, what levers we pull out in exactly what order, but we'll be able to update. But we sit here relatively confident that we have plans be able to mitigate for most of those dynamics in a way that perhaps some other businesses might not. The cost savings that we've talked about have already been implemented. So this is through head office. You'll see this play out for the remainder of this year. You'll see it play out into next year, Driving that head office cost down to a run rate of 10 to 12% is absolutely the thing that we have in crosshairs. We will deliver that. Graham has talked about this balance sheet redistribution and restructuring. That's exciting.

40:35 It seems to us very obvious that if the relationship between the return on equity and the return on capital that we're seeing is as divergent as it is right now, having at least the facility to buy back shares must be sensible. So reorganizing the balance sheet in order to do that is a key thing for us. And indeed, most excitingly, we have now announced to you what it is that we will be doing as a business strategically, 50% of revenue, double up group EBITDA, and we'll update as we go forward. So just by way of summary, I guess the key points I would like you to go away with are, firstly, to recognize that, again, this has been a period of quite significant growth, cash generative growth, and, underpinned by those strong volume driven like for like growth, metrics in both businesses.

41:25 We feel very, very pleased now to be able to go after this runway opportunity that we've talked to. We are all all about that for strategy. But in the very, very, very here and now, I would bring everybody's mindset back to to hospitality at Christmas. This month that we're now in is the big month for our year. We generate, as you know, a significant proportion of our trading and investable cash flow in December. Actually, we've come into this period really well. We're we're we're very, very, very pleased with the way our corporate bookings have landed, you know, significantly up on prior periods. But nonetheless, we've got to execute against that. That will be the thing that determines how much investable cash we have going forward from organic generation, and we'll be excited to update at the back end of January on how that's gone. So so thoughts with us. It's gonna be a very, very busy time, an exciting time for the guys in sites.

42:21 If any of you are able to pop in and offer them a little bit of support, I know they'd love that. They're always very, keen when we have investors going in and and talking to them, but they're gonna be crazy busy. Hopefully, that's a very positive thing, and we'll look forward to coming back and updating, you know, with the trading statement back end of January. But for for here and now, that concludes the main part of the presentation. I can see that quite a lot of questions have come in, so perhaps now is a good time to move to those. Perfect, Rich. Graham, thank you very much for the presentation. Ladies and gentlemen, please do continue to submit your questions. You can do that just by using the Q and A tab that's situated on the top right hand corner of your screen. But just while the company take a few moments to review the questions that have been submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard.

43:08 As you mentioned, we have received a number of questions throughout today's presentation. And, Richard, if I could just hand back to you to read out those questions where appropriate to do so, I'll pick up from you at the end. Yeah. Sure. So looking at the themes, I think a fair few of them have already been answered. But the top one at the moment, as general analysis, you performed very well in terms of delivering strong growth in revenue and cash generation. What is it then that we're missing, and why is the market not appreciating the story? I guess our take on that is at least twofold. I think that we have not previously done a good enough job potentially of communicating just how cash generative the business is, and we are specifically trying to do better at that. Hopefully, you will see that from this presentation where we really quite explicitly lay out those cash generation dynamics. Because for us, that cash generation is the marker of a healthy business. Yes. Of course, it is really important to get to positive operating profits and so on and so forth. But, actually, under the international accounting standards relative to UK GAAP, there are a lot of things that go against you as a young, fast growing, small company, whereas that underlying cash generation, we think, is a really, really powerful market for success. So we don't feel that we've done a good enough job communicating that. Hopefully, we're doing better now. I'm sure you'll feedback.

44:25 So so certainly that's been on us. I think also we have probably failed to communicate coherently enough exactly what our growth strategy is for the business, And that's why now in explicit terms, we're coming out and saying, this is what we're gonna hit. That's how we're gonna do it. Hopefully, that becomes much more obvious, and, hopefully, that is exciting for the market. I think, however, there are clearly some market dynamics that are outside our control. The markets generally, as we know, are very soft. I think we have had a lot of our investors with significant redemptions in their funds, which creates a bunch of false sellers. There's not a lot we can do about that. And, obviously, there has been an awful lot of very, very negative consumer sentiment for a long time now a little bit of a downward hospitality per se. Albeit, we continue to perform ahead of the market, ahead of our contractual set, so hopefully that might continue.

45:16 And so what is said is the XP FACTORY effective on the new business rates relief, which was reduced from 75 to 40%? Yeah. You can answer that, Paul. Yeah. So on the business rates, it was the other, obviously, piece that came out of the budget. The short answer is very little impact. Even with the 75% reduction as a large company, you are only entitled to a maximum of a 110,000 exemption. That remains in place. It will be at 40%, so the underlying impact on us as a group will be zero. Obviously, the bigger consideration is what happens to business rates going forward, and I believe that there should be well, we are very hopeful that changes to business rates will be positive for physical physically located businesses, retail, hospitality, etcetera, when those changes are made. So I hope that answered the question.

46:05 Competitive socializing concepts are on the rise. Do you see your landlord grants at risk as competition heats up? Landlords may realize the grants are not needed anymore as there are more bidders for spaces. Certainly true to say that's a possibility. We haven't seen it yet. But, actually, I think it becomes a lot less important now in our journey with the benefit of organic cash flow generation and a facility in place. Because what landlords are not doing is moving away from incentive overall. So even if there is a shift away from capital into rent free periods, that's kind of okay now because whilst, you know, earlier in our story, we needed to make use of the capital contribution in order to grow as much, and rent free was less important to us because we needed capital upfront.

46:50 Well, now we have capital. Actually, taking something in rent free is no bad thing particularly. So I don't think it really changes our return on capital dynamics per se, certainly not from a cash on cash perspective. It's rare to achieve ROCEs in the 40 plus percent range. How confident are you that you can keep those high ROCE numbers? Are there any indicators signaling a decline in coming years? Obviously, ROCE is a two sort of number ratio. Clearly, you've got a a numerator and a denominator. The numerator, I. E, site performance is probably the most important thing. So, you you know, I guess escape hunt has shown that over a very long period performance has just got better rather than worse. And, indeed, as we've talked about escape hunt in the past, we've shown that the more recent sites actually generate high return on capital than the older ones because they perform better. They're in better locations on average, and and they get to maturity quicker, and they cost us less to build because we moved into modular. So there's nothing yet on the skate hunt to suggest that that should slow down.

48:00 On on BOOM, because we are specifically targeting the sort of those high dense, high footfall, very, you know, big, longer to mature sites that have done so very, very well for us, I imagine that we maintain very similar return on capital there. Obviously, it's a younger business. We don't have quite the same level of data, but there's nothing yet to suggest to us that we should that we should come off materially. I might make the point that whilst our return on capital is incredibly high, we are our threshold for the decision making is materially lower. I mean, it just happens to be that we're overachieving our own thresholds. I think just to add to that on on Boone in particular, where we've had significant land book contributions. Now with the benefit of the facility, we have Richard mentioned earlier, we we can negotiate with landlords where you can flip between a landlord contribution, for example, or a lower rent or a rent free period, for example.

48:57 Now the net present value of going from the rent free period may actually be better than taking the upfront, but actually on a return on capital metric probably means your return on capital metric looks slightly lower. But actually, the net cash benefits and their net present value Cash on cash. Go, the cash on cash. So you may I think that is that's just a a function of the way that we decide to go ahead to to go ahead where we have this facility. So I don't see any sort of underlying threat to the to the return on capital, but there is that sort of technicality in terms of mix of how you set up the leases, which could or may or may not, but expect the cash on cash returns to to be broadly similar to what we have today. Some of your competitors are bad for private equity firms, Lane seven, Roxy, etcetera. Do you think being a publicly listed company gives you an advantage over those competitors considering the depressing the depressing share price?

49:51 I think you have to talk about this philosophically because, obviously, I think where we are as a market, there is it's very hard to see the positives of having such a depressing share price today. I think philosophically, it should be a good thing. If if you get back to a world where your return on capital somewhat better mirrors your return on equity, then, actually, there should be a lot of advantages being listed. You know, we see some consolidation opportunity further down the line. You want to be in a world in theory where you can capitalize on that public market should facilitate it. It certainly helped us initially because the PLC moniker allowed us to get sites where we would otherwise be far too small. And so that was a hugely powerful part of our beginnings in the journey. Obviously, it's fairly depressing place to be today.

50:38 God willing, that turns around in some capacity. But, yes, it's certainly been an advantage in the past. It's horrible today, but philosophically, we think it's a a good place to be. We've talked about that. Roky points consolidation, actually, we've just talked about. Let's come up then. There's a couple of questions around central resource. I think we've talked about that a lot. The question specifically is yeah. What yeah. Whether or not we are investing ahead, and whilst it's depressing on term profits, is it right for me to go going forwards? Yes. The answer to that is yes. We we we've touched on this.

51:23 We've specifically invested in a high caliber, but more expensive head office in order to be able to go faster. Now we're doing that. We will leverage it, and we'll reverse backwards into that 10 to 12% position that we've talked to. Your advice strategy suggests that you significantly change your growth ambitions by spending with the state punt in a way that you initially want to expand with Boom. Can you elaborate on mention loans for Boom? Why is it a significant change in strategy? Do you think there's less competition? Do you see a drop of customers or rising costs in Boom? I think we've touched on this at quite some length, but just to reiterate, the sole difference is that we think we can get disproportionately high returns by doing particular type of boom sites, which is whereas the skate pump is a far more consistent delivery largely, as I said before, because the skate pump is almost always built the same size, the same space where the boom can differ.

52:20 So we're just going after the most profitable of the boom sites. What else have we got? Considering the recent takeover of lounges and upcoming consolidation experiential leisure, do you fear XPF is a takeover target? I can't answer that. I'd be very, very surprised if we weren't in somebody's crosshairs just because the performance the the business has grown exponentially over a period of time. All of the operating ratios are very, very good. It would be surprising to me if no one is looking at it, but but you you'll I can't really say anymore than that. You mentioned 15% EBITDA target in four years.

53:06 Can you clarify you mean adjusted EBITDA or EBITDA? I guess if that question is well, let's talk about pre IFRS nine and post IFRS 16. So what we talk about is on a pre IFRS 16 basis, I e, fully accounting for the lease payments that Punnett run through. So that old school EBITDA, if you like, and that is the basis upon which we are describing it. It it will it will come through as being adjusted because we would still strip preopening expenses. If we didn't strip the preopening expenses for the new sites that we would be opening, you would see a very much more negative picture as you can imagine because, you know, you're almost disadvantaged for opening a lot of sites in the short term. That's not a true reflection of the business that you're creating, so it will be adjusted for free IFRS 16.

53:54 Do you want do you wanna add to that? Yeah. No. I mean, there's a couple of other noncash items which we which we take out there. But, again, trying to get it to EBITDA as a sort of proxy for cash, that's essentially what it is. So what's the cash return? In sites of significant rollouts, do you plan to buy back most franchise sites, or do you plan to roll out new no. Our growth is entirely from newly opened sites, not from buying back franchisees, and that is Certainly not an escape hunt. It's a very different franchise businesses, a, international, and, b, quite different to what we have in The UK. So I don't think that that wouldn't be a strategic step we would take. Yeah. There's quite a few questions in and around expectations for cash flow going forwards.

54:40 I think Graham has sort of touched on the cash dynamics as an analyst know how to talk to that. Yeah. I mean, I think just to answer that question, what do you expect? What we've always said in terms of our cash flow metrics is, you know, if we've got 13,000,000 of EBITDA, typically, the analyst's model is around 2% of revenue growth as a positive working capital benefit. So as long as revenue is still growing, you would expect to see some positive working capital coming through, so on top of that 13,000,000. And then the way I look at it again is if you take 3% of turnover as a sort of pro form a maintenance CapEx that would give you and then take off tax and interest that would give you what I would call a sort of pro form a tax profit true profit in terms of contribution. So you can do the maths on that.

55:35 Yeah. Could you talk through your capital allocation strategy? What would be the timing on potential share buybacks or dividends? The capital allocation, I suppose, is fairly straightforward. We're lucky to be in a place where we have similar levels of return on capital for both businesses. Therefore, we can be a tad indifferent depending on when the sites when when the sites either for scope or for boom land. So capital gets allocated into new sites. It also gets allocated if we think we can return quickly into the existing estate. Graham's already talked to that through game expansion, expansionary CapEx, etcetera. Clearly, we also allocate capital towards technology improvements and system, etcetera. We've talked already to a couple of examples of that in the presentation about what how we might go on to drive further efficiencies and operating level through investment in technology.

56:26 In terms of the timing on potential share buybacks or dividends, we, at the moment, are most key to have the facility in place such that we can do it where we when we think it's when we think it's most important. We're not gonna put a timing on that. We just wanna know that we can do it should it be the right thing to do. Can you please give some color on what the lease levels of the current estate would look like on a normalized basis if you were to exclude all rent free periods, temporary discounts, etcetera? The Well, add back that we actually do disclose in rent includes the rent free periods because, of course, under even under UK GAAP, you're accounting for the rental over the entire period of the lease irrespective of the of the cash the cash benefit.

57:21 So what you see being added back, which in there is actually a a slide towards the back of the presentation, slide 29, which shows a sort of pro form a reconciliation between UK GAAP and and IFRS. In the period, we added back £1,900,000 of rent. That's that is grossing up the rate free period. So it's averaging up those over the period of time. So at a run rate, obviously, for a full year, that would be in round numbers about 4,000,000. There's obviously Caneham, which will be coming on, and the new sites will be coming on, which gradually grow that number. So, hopefully, that answers the question. Second part of that question was, can you give some color on the profitability distribution on-site level across The States?

58:08 The answer to that is yes. So on escape hunts, we've talked about this before. Escape hunt is quite consistent. Obviously, there are some sites which are spectacularly highly profitable and some which are a a little bit more marginal. But broadly speaking, escape hunt is fairly consistent. And you know, as we've talked a lot about the the average EBITDA last year being circa £240,000 in that business. For the boom, we we've talked about this actually even today. The distribution is not as flat, largely born of the fact that, you know, a 17,000 square foot site in Central London cannot be equivalent to a 6,000 square foot site in, let's say, Norwich. You know, those two things don't compute. One clearly has far higher profitability than the other.

58:57 So in terms of the shape and the distribution, I would say for Boom, you've probably got all all our 25 old owned sites, you've probably got five or six superstar high performers. You've got probably 15 or 16 really good, fine performing, you know, strong sort of foot soldier types if you like. And and then we we've got a couple of sites at the end, which are average at best and slightly dilutive at worst. We have mentioned in the announcement there were two former franchise sites which we've taken over and stepped in. Largely, there is we inherited these sites as we when we bought them in, and the way that the lease is structured is that there is a residual lease exposure.

59:43 So it's better to step in earlier rather than wait until later. And those two sites in particular have been diluted by either lost money in the first half, and we're working hard have been working hard on that and confident we can turn them around. So there is a a distribution, but, you know, overall, you can see what the results are through the the blended numbers. Yeah. I I suppose the key one, yeah, I go back to that sort of 50% return on capital we talked about. That's obviously all all all relevant sites included in that number. There's a question here. Are there any thoughts behind targeting the younger audience or the horror theme? I presume this is an escape hunt question. Specifically, there's a huge shift towards horror themed escape rooms in China. Yeah. Yeah. We have. Yes. So we we talk about sort of almost like family horror, if you like. What we're not in the market for doing is going all out on an absolutely shocking, terrifying horror. We're kind of, you know, kind of cozy horror, if you like. So we've just launched a Dracula theme here in the estate.

1:00:44 I absolutely get that there is a market for very, very scary escape groups, but that's not our target. So we are very much a family orientated business in escape hunt. We think it's on a cozy horror, if that's the phrase, is is a really nice place to play. Drakka, I think, plays into that quite nicely. And whilst it is true to say that there are a lot of independents popping up that are truly terrifying experiences, that's not the market that we look to go after. Time. I I think we are running out. So for what it's worth, I think we've gone through most of the questions. But if there is anything else, I'm conscious of everybody's time that that we've missed, then we'll we'll come back on we'll we'll come back and respond by email. Perfect. Thank you very I should say. So thank you very much for answering those questions from investors. Of course, the company can review all the questions submitted today. As mentioned, we will publish a response to that on the investor meet company platform.

1:01:36 Just before redirecting investors to provide you their feedback, which I is particularly important to you both, Richard, could I just ask you for a few closing comments? Well, firstly, thanks to everybody that's put the time in to come and listen to us today. I'll just reiterate what I said previously. I'd like you to go away remembering that it's another period of high growth cash generative performance, which is really strong from the underlying business. I think really excitingly, we're delighted to be announcing the completion of that £10,000,000 facility. And most excitingly, we're delighted to be able to announce this target to add 50% of revenue and double EBITDA. So if you have three things to take away, those would be then for me. So most importantly, thanks to everybody for listening. Richard Graham, thank you once again for updating investors today. Could I please ask investors not to close this session? As you know, we automatically redirected to provide your feedback in order the management team can better understand your views and expectations.

1:02:29 This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management in for XP FACTORY PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.