XP Factory (LSE:XPF) — Results for the year to 31 December 2023

0:01 Good afternoon, ladies and gentlemen. Welcome to the XP FACTORY PLC Results Investor Presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time. Just simply type in your questions in the Q and A box on the right hand side of your screen and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review your questions submitted today, and we'll publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'm sure the company will be most grateful for your participation. I'd now like to hand over to the management team from XP FACTORY, Graham Richard. Good afternoon. Good afternoon, Mark, and good afternoon, everybody else. Thanks so much for joining us this afternoon. It's our pleasure to be talking through our twelve month interim results to December 23. But I thought very briefly, a quick introduction on who we are. So so I'm Richard.

0:49 I'm the CEO here at XP FACTORY, and here's Graham Bird, who's the CFO. Good afternoon, everyone. And, obviously, we'll get into our results in a moment, but I'm aware that there might be some people listening today who are not quite as familiar with what we

1:03 do at XP FACTORY. So I thought it might be a helpful precursor just to give you a very brief overview of what our two brands are. So XP FACTORY is the is the sort of the umbrella company, if you like, that sits over our two brands, Escape Hunt and Boom Battle Bar. Escape Hunt is the market leading escape the room provider. We now have 45 units trading internationally. We have oh, we within which we have 23 that are owner operated. We have 22 which are franchised. And for anybody that isn't familiar, escape the rooms activities are these deeply themed, heavily immersive experiences. They're like theater sets, you like, that you visit with your group of friends, with your family, with your work colleagues. And once you're in our world, you're immersed in our world, you work together, you find clues, you solve puzzles, and ultimately, you look to escape the room.

1:56 Our other business, which is much newer, is Boom Battle Bars, and that sits in this really fast growing competitive socializing space. Essentially, these are wet led experiences. They're large format, typically 10 to 12,000 square feet. They're they are anchored by lots of different modular games that may include axe throwing. That may include augmented reality darts. It might be crazy golf. But but that that environment, that high energy, loud environment with cocktails, street food, game is a really, really fun place for us to play. And, of course, we're gonna talk a lot more about the details of them in just a moment. But we thought it might be helpful just to give you a very, very quick video teaser, one for each brand, just to give you a flavor for what it is that we do.

3:30 Well, so hopefully that gives you a little flavor for for what it is that we do at a site level. But what we're obviously here to do today is really talk about the numbers as we were delivered as we delivered to the twelve months to December last year. So I suppose the overarching narrative of the year really is one of growth. What you're seeing in these numbers is a business that has doubled in size for the second year in a row, the manifestation of which is revenues hitting almost £45,000,000, And most importantly, adjusted EBITDAs, that's pre IFRS 16 EBITDAs of 5,500,000. So, you know, that 5.5 is up from 2,600,000 in the prior year. The 45,000,000 of sales is up from 22 in the prior year. So really quite a significant period of growth for us as a business.

4:16 But I think the the the story that sort of underpins that is one of success in each brand on both in Escape Hunt and in Boom. You'll be aware, I'm sure, that Escape Hunt is the older of our two businesses. Escape Hunt's now six, seven years old in some cases, but it's still delivering like for like sales growth of 17% and Boom at 29%, albeit the much younger business. I think it's really important to understand within these like for like numbers that this is entirely volume driven. We have held price across both businesses. So this is volume driven like for like, you know, a very, very strong indication of, of customer response to our offerings. In terms of our customer satisfaction per se, we continue to be leading the charge against the whole of the competitive socializing set and indeed the broader leisure set. I'm at 98.

5:05 And so with these things combined, you know, a business which is throwing off good cash flow now, really strong customer satisfaction, these very strong like for like growth, we feel that there is, you know, really interesting future for both businesses. If we if we skip into a little bit more detail around Escape Hunt, as I mentioned, Escape Hunt is the older of the two brands, but nonetheless, it's still growing at really a very significant rate. 38% sales increase versus prior year saw us deliver £13,500,000 in owner operated revenue. And as I've already mentioned, the 17% like for like growth was really testament to the work the teams do to drive that customer participation. But I think on here, one of the stats that is most interesting to me is that within our earliest cohort of seven sites, these are the sites that we opened at the back end of 2017, early eighteen, still the like for like growth is 16%.

5:58 And that's made all the more interesting by the fact that these sites are still trading the very original games which were built all that time ago. There's been no game reinvestment into these units. So really, really pointing to a business which is enduring, a concept which is enduring, and I think that's a positive place to be. For for for the second year in a row, we've delivered a site level EBITDA sitting ahead of that 40% mark. So 42% delivered in the year, quite materially higher than our aspirations were when we set out to create this business six years ago. We imagined that good would see us get to 30%. So being set at 42, again, is real testament to the team. And, of course, that, unsurprisingly, perhaps, strong level of EBITDA, which is a really good proxy for cash flow generation, results in a very, very high level of return on capital as well. So we're seeing 46% return on capital employed in escape hunt.

6:53 You know, we talked already about these TripAdvisor scores and Google Google review scores being really important to us. We've maintained this absolute number one position in this space. 99% average review It it is obviously a a place that we, you know, we can be proud to own. We opened a new site last year for a skate company. Opened a great new unit in Woking, which is now kind of building up and moving along its maturity curve. But what also we did was create some additional capacity if you like. So where we were a little bit constrained for space, we found space to put four incremental games rooms into a number of sites really to sort of bolster and cater for that latent demand that we were seeing. So, overarchingly, a very good performance for Escape Hunt and one one that we're proud of.

7:40 If we move now into sort of an overview of the boom business, what you'll see here again is another story of growth. You'll see 200% sales increase, some bring us to almost £29,000,000 in the owner operated estate, 200 percent over the prior year. And, again, as I mentioned, within this, we've got 29% like for like sales growth, which is obviously very, powerful given the way that flows all the way through to to cash generation. But we opened a few more sites. So we opened three sites during the year, Canterbury, Dubai, and South Bend. But more more more importantly, almost, we we completed on five franchise buybacks within the year as well. We we do this opportunistically where the sites become available typically on very favorable terms for us.

8:27 And so it's exciting to be able to see those sites, you know, kind of grow grow with us as the business. It's really important, of course, to see sales growth, but it's almost more important to see the conversion flowing all the way through the p and l. So when we look at, Boom for the twelve months, seeing 18% EBITDA delivered over that period is really strong. That was a quite significant increase from h one. So, in half one, we delivered 11%. In half two, we delivered 23% blending to 18. And we've set for ourselves this aspirational target of getting to 20 to 25% for a more mature business. I I hope you can see that we're very much on that trajectory at the moment. Again, it's a very well reviewed business, particularly reviewed for well reviewed for bar business. We sit quite significantly ahead of our peers, in that space.

9:16 And and as I say, whilst we continue to learn more and more about the best ways to operate, boom, whilst we continue to invest in our existing sites to further increase our efficiency to create better capacities, I hope that you'll see this performance continue to, to continue to grow. I just thought this might be an interesting graphical representation of our journey. For anybody that's a little bit newer to the story, what you're seeing here is a very, very, very aggressive rate of growth across both sales and EBITDA over the last four or five years. You know, you'll see just just as we were going into that COVID period, we we closed the year at £5,000,000 of sales in round numbers. So as I've gone through COVID highlighted in purple on the screen then ramp up tenfolds, the 45,000,000, I think, testament to the growth that's kind of manifested itself during that period. And, of course, the same is true for EBITDA. You know, we went into that COVID period loss making business, and we've kind of grown through that, grown through sort of EBITDA neutral through 2.6 last year into five and a half this year. And, obviously, we expect that trajectory to grow.

10:26 And in terms of that revenue growth, we thought it might also be interesting just to bridge for you where the drivers of that growth are coming from. So so you'll see you'll see the sort of the third bar in is showing our '22 close at £22,600,000. The next two bars there, which sums to 4,500,000, are the like for like growth. So that's the benefit of that 29% on Boom and that 17% on Escape Hunt going good in pound numbers. You'll see next circa £13,500,000 from both Boom and Escape Hunt new sites. So that's the significant benefit that we're seeing from the new sites which we've been opening. Obviously, materially larger for Boom given that we opened so many sites through 2022. And and and it's also the full year effect and the maturing effect of those sites that were opened towards the back end of the year.

11:17 You'll see then the franchise sites which we've acquired during the year we just talked about as well. So those are generating almost £5,000,000 in the year for additional revenues to us as a business while we bring those sites back into our ownership. And I think it's worth pointing out as well that what what you're seeing there is a negative naught £900,000 on the franchise fees from Boom. Actually, this is possibly a tad misleading. The underlying rate of growth in the franchise sites boom is positive. There's underlying cost of like for like. What that naught 900,000 represents is a change to the way that we now report. So previously, the business that we acquired had had a mechanism whereby you would basically sell to franchisee sites, and then you'd obviously have an offset further down the p and l. So the the bulk of that movement represents the per the sort of sale of the site, the benefit and revenues to us. So that's not really a true reflection of the underlying growth in the franchise estate, which is actually actually positive. But nonetheless, we hope that this is a positive or at least an easy representation of our growth over the last year.

12:24 I think it's good when you look at the cohorts for escape hunt to see, you know, again, I reference again this enduring business, the enduring nature of this business. So what what you're seeing here on this slide is the cohort analysis that we've done showing the average EBITDA per room by cohort. That is to say how well are the rooms performing that we built in 2018, 2019, 2021, and so on and so forth. And what you'll see in all cases is each cohort continues to grow. And, obviously, that's manifesting itself in the like for like growth. But really, really interesting to see that all of these cohorts, even these original ones from way back when are still growing. And and if you get even more granular than that and we take the original five games, the very first five games that we created back in 2017, even these year on year continue to grow.

13:17 So whilst, yes, we've got a, you know, a much larger library of new games today and whilst those new games do very, very well, this original cohort also continued to grow. So I think it's really, really important to see just how far much further forwards escape rooms are becoming in the consumer psyche and why this is a business that is here to stay. The result and effect of this is a very, very high return on capital. So what you're seeing here is an average weighted return on capital for escape on a 46%. That's represented by the dotted line in the middle. And, you know, what whilst it's actually very positive to see all sites making a strong return, If you were to flip this chart almost revert almost reverse this chart, not quite linearly, but what you would almost see is an increasing rate of return for every newer incidents of escape part that we build. That is to say that the newer the site, the higher the return on capital in broad in broad terms.

14:15 And I think the reason for that is twofold. One is that now we are so much more a, you know, sort of a cornerstone, if you like, for shopping centers. You know, it is a good thing to have a skate hunt in a shopping center. We trade well. We're well reviewed.

14:31 Landlords typically like us. The the results of that is we get better sites. So the sites we achieve today are materially better than the sites we achieved five years ago, six years ago. And that means that, typically, they hit the ground running a little bit faster. They mature a little bit quicker. And in absolute terms, they supersede the target economics which we'd initially set for them. And that combined with an underlying capital cost, which is actually diminished. It costs us less to build a site today than it cost us six years ago due to the work that we've done in that intervening period. Combined with the fact that now we might get a little bit of landlord contribution for escape hunt, which is not something we ever saw back in the day, you're seeing this increasing rate of return on capital, which is obviously a very nice position for us to, to to enjoy. In terms of the boom data, again, very strong return on capital on average. You're seeing 48% there for for that that return on capital. And, again, you know, with with with a huge exception on the right hand side sorry, on the left hand side and and lower forming site on the far right. What you're seeing is a pretty consistent cluster in and around that number in the middle, which is, of course, what you want to see as an operator.

15:43 So, you know, it leaves us with two businesses with, I would suggest, market leading return on capital. I think it's very, very uncommon to be seeing rates of 46, 48. It feels like a very good position for us to be. And as I say again, it really cements that foundation for growth that we can, that we can hopefully enjoy going forwards. So I'm gonna pass you over to Graham now who's gonna get into a little bit more detail about some of the key aspects of the financial statements. Yeah. Thank you, Richard. I think a lot of the detail that's in here has been touched on to some degree in what Rich has already said. But just sort of going through the p and l, again, just emphasizing that, you know, nearly doubling of revenue to 44,800,000 with Escape Hunt growing very strongly both organically and through the full year effective sites that opened in 2022 and, of course, working opening in the current year, giving it 38 overall increase as we saw there. Boom up 200% and, you know, strong margins coming through. I think at a gross margin level, we saw an improvement in BOOM from 52% last year up to 58%.

16:49 Born really of efficiencies, there's certainly as we've mentioned earlier, there's no price that's been pushed through on BOOM. In fact, we had an increase in some of our costs, particularly on drinks and so on, which we didn't pass through. We absorbed that. But the additional gross margin that has come through has been born of more efficiency and and use of labor and and also some mixed benefits across the piece there. So nice to see that that that margin has improved and has been reasonably stable around that level. Certainly, site level EBITDA margins, Richard has spoken to, so I won't I won't go back onto that. One point to pick up on central costs, where we we do sort of lump it all together, where we have a central cost base, which came in at just a on a £8,000,000.

17:38 Obviously, that's up on the last year, largely as a reflection of costs which we brought into the business as we scaled in 2022, which we've got the full year effect of in the current year. And, also, there's some inflationary impact, but we now have pretty much the team that we would need to support a very much more substantial business. It obviously will scale to some extent as we grow, but it should be at a very much slower rate going forward outside of inflationary pressure outside of inflationary pressures. Moving on to the cash flow statement, I think this is really the the feature of of the performance which I'd like to focus on. Just demonstrating very strong cash generation at an operating level for the business. On a pre on post IFRS 16 basis, operating cash generated or cash generated from operating activities of 9,500,000.

18:32 Obviously, that's on a post IFRS 16 basis. If we take the rent out and go back to good old UK gap, that would go down to 9 7,200,000. So the seven which which is the 2,300,000 of rent payments, which under IFRS 16 come out as lease and interest lease lease payments and interest. So 7,200,000 of underlying cash generation, which compares to the 5,500,000 of pre IFRS 16 EBITDA we talk talk about. So very much very much, you know, stronger cash generation compared to EBITDA. Reason for that really is threefold. There is a there is a one off benefit in the year. At the end of twenty twenty two, there was about you know, having just built a number of franchise sites, there were a number of franchisees who were just a bit late on on paying their royalties and so on. So we were about a million pound of debtors, which we've collected really in January and February last year, which which is a I would call a sort of one off benefit.

19:30 That process is now very much on in hand and and franchisees are paying by direct debit. So we get paid weekly on for franchise royalties, which is which is good. So about a million of that 7.2 is probably one off. But the balance really reflects the attractive working capital cycle that we have in the business. Obviously, in the in the early days of sites where we have rent free periods, there's a significant cash benefit. We are accounting for rent, but you're not paying it, so that gives us a positive benefit. We're coming to the end of some of those rent free periods, but there's still some more to go. And as we open new sites, we will continue to see some of those. I'll come back to that in a second just to talk about the impact as we go forward. But the the final piece, obviously, on that positive working capital piece is, by nature, we are a negative working capital business. We don't hold high stock levels. There's a few drinks and things in bars, but, generally, that's, you know, only a few days worth of sales.

20:26 And our customers generally pay us in advance for games and obviously pay on-site when they're in sight in in boom, whereas we pay our suppliers in arrears and, of course, we pay our employees in arrears. So at the end of the month. So, typically, we have a a negative working capital benefit. So as we grow, we actually have an inflow of cash rather than outflow of cash into working capital. So that should continue as the business grows. Just coming back to the rent free period, obviously, there's a significant cash benefit upfront, which ultimately does unwind over the period of the lease. But just to give you a flavor that actually impact annually is quite modest compared to the benefit that you get upfront when it reverses. So if you imagine you imagine a fifteen year lease where we've got a £100,000 of rent free a rent payment per annum, and let's say you've got three years of rent free, you're getting a £100,000 cash benefits in years one, two, and three, during which time you've accrued a £300,000 accrual on the actually, I should go on the next slide.

21:26 Yeah. £300,000 accrual on the balance sheet, which then unwinds over a twelve year period, which is the rest of the lease. So, actually, the impact on the cash going forward is only sort of $20.25 k a year compared to the £100,000 that you have upfront. So just on that. The main feature, of course, of both balance sheet and cash flow is then the CapEx investment that we've done. We put £6,900,000 invested in fixed assets. That was split 1,400,000 from it's a Escape Hunt and 5.3 into Boom.

22:04 Within Escape Hunt, 900,000 was spent on new sites. Of that, 500,000 or just less than 500,000 was working. And, actually, we've already we've already invested about 400,000 into new games, which are in stock and ready to go into new sites in Glasgow, Cambridge, and or other sites as we go forward. So we're not getting the benefit of that yet, but it's ready to go, which means when we when we get access to those sites, we can move very quickly. We put about £300,000 of expansionary CapEx into escape hunt, which is Richard mentioned going back and adding rooms where we could. So there were a couple of rooms added in Manchester, one in V, one in Oxford. So that that provided and it provided some additional capacity.

22:50 And the underlying maintenance CapEx was around about a £250,000, and that's in addition to the repairs and maintenance bill of about a £250,000 as well, which we spend on that. So the underlying maintenance CapEx for escape hunt, relatively low. Obviously, as if we get to the point where we start to rotate games, there'll be a modest increase, but underlying business is is really maintained through the repairs and maintenance. For BOOM, 5,300,000 invested, 3,400,000 of that was on new sites. Actually, about 700 of that relates to sites finished in 2022 where we had final bills and things to pay in 2023. So the new sites were bang in line with our expectations of about £900,000 of sites, so 2,700,000 on three new sites to buy Canterbury and Southend and 700,000 which went to finish off the final bills of Oxford Street, Leeds, and Birmingham, principally the sites that were finished towards the end of twenty twenty two.

23:47 We put a million pound back into sites to expand capacity. So some good examples there. We went back into the 02 where, anecdotally, you know, we found that actually our performance wasn't necessarily stronger on nights where you had big events going on, and one wondered why. And, actually, what's the the issue was was because we had games downstairs. I think a lot of people walking past felt thought that you had to book to go in, and we were missing on passing trades. So we went and reconfigured the site. We've turned the downstairs section in 02 into a cocktail bar, and that's cost us about a £250,000. And we're seeing a an uplift on sales of about £15,000 a week. So that investment should pay back in less than six months. So a fantastic way of deploying capital. So having done that, similarly, we went back into sites like Oxford Street. We added some bar capacity.

24:40 Lakeside, we've done the same thing. And each one of those investments, we're seeing very, very attractive returns. Many times, months under six months, those those investments are paying back. So we will continue to do that. And then there was about 600,000 pounds of maintenance CapEx, which is added to also around about the same amount, which is over £550,000 of repairs and maintenance, which goes through the p and l for our boom sites. So those sites are being maintained. I think that's probably the sort of main features on the cash flow statement. If I move on to the balance sheet, we again, the main feature, the movements on the balance sheet, you'll see the biggest movements are obviously all related to the CapEx and the the acquisitions of the franchise sites.

25:28 And and then, of course, the sort of corollary down low down. We have got some debt instruments on the balance sheet. There's no sort of major sort of debt in a in a conventional sense, but the 4,500,000 that we are talking about is made up as I've set out there. First of all, on the vendor loans, we were able to buy back these franchise sites on very attractive terms. We have quite strict criteria where we will pay a multiple of the incremental profit that we expect to earn from these sites based on their performance. Obviously, we would expect to improve that once under our ownership. And, typically, we're buying these franchise sites by and paying for them out of the cash flow from the business that we're acquiring. So we don't pay much upfront. Indeed, on the cash flow, you will see that the outflow from acquisitions is only £60,000 for all five acquisitions because, typically, we will simply leave a loan with the vendor, and we'll pay them back monthly from the cash flow from the business that we've actually acquired from them. And that sits as a vendor loan on the balance sheet paid back over eighteen months, twenty four months, or indeed thirty months, I think, is the longest we've got.

26:34 And the interest rates on that are either zero or at at maximum 5%. So they it's an attractive way of funding these things. So that's 1,500,000 of the 4,500,000. The finance is largely sort of high purchase type arrangements on equipment that's in the boom venues where we we fund it or finance it over either a twenty four or thirty six month period. So, obviously, the accounting standards require you to gross that up and show it as a finance lease on the balance sheet.

27:03 So that's what that is. And then the final piece, bank and other borrowings, there is a million pounds of loan notes, which we had from a an individual, which we utilized, a, just to sort of help our expansion. And as we were going through paying the final deferred considerations on Cardiff and indeed the original Boom acquisition, it was just a useful way of ensuring that we didn't absorb the capital in doing that. We were able to continue to invest in new sites. So that's a million of the 1.3, and the balance is actually just insurance funding where we spread the cost of insurance over a year. So matched with the cash flow and the and the p and l recognition there. So that's the balance sheet, and we'll come back to a couple of questions, I think, which have been asked on the balance sheet separately while we we get back to the question. So I think that probably covers it, Richard, if you want. It does. So we we thought it might just be interesting just to give you a little flavor for how we've been trading post period.

27:56 And so in calendar q one this year, like for likes have remained remarkably resilient, actually. So, you know, we're circa 10% of the business overall. And I think it's important to mention that we're we're tracking actually, particularly for BOOM, a very, very, very strong period of growth in in the in the KETTERFACTORY year in in in 2023. And the reason for that is that if we go back as far as 2022 and Christmas specifically in 2022, some of you may recall that there were so many train strikes and tube strikes, etcetera, that really the Christmas trading in '22 was pretty badly disrupted. And so many of those Christmas parties, corporate ones especially, got shoved back into January '23. So that's the period that we're now

28:43 sort of comparing to. So the fact we're showing strong like for like growth even against such a strong pent factor, I think, is another reason to be fairly confident that, you you know, hopefully, good things can fall ahead for for the business. What you'll continue to see us doing at the moment post period is really focusing in, as Graham said, on those sort of high level side level investments that that Graham's talked about. You know, particularly for Boom, we opened such a lot of sites so quickly back in back in 2022 that we didn't get everything right. We we we made some mistakes. We've had a lot of learning since that. And, you you know, we're we're not too proud to to put our hands up and say, actually, we got that wrong. That's not the best flow for customers. We got this wrong. That that incidence of that game is not as effective as this one would be. Let's change it out. You know, we're not too proud to sit back and say that our operation has got continuing improvements. You know, there is still too much capacity at some of the bars. How do we release that? How do

29:40 we get more drinks into more hands more quickly? So you'll continue to see us really focusing in on on these sorts of investments to really drive utilization within the existing estate as well, obviously, as, you know, continuing to grow. So in terms of, I suppose, sort of summarizing the key aspects of the presentation, points I'd love you to take away would be that, you know, if the markers of a strong site based business are great customer response, good like for likes, and really healthy conversion to EBITDA, which we'll use as a proxy for cash, then I hope you can take away that we're ticking those boxes on on both businesses. Know, in Escape Home, we've got a business which continues to exceed our expectations, and Boom is absolutely following the maturity curve that we'd hoped for it. So we have a lot of reasons to believe that it will get to that 25% EBITDA that we're targeting at a level. You know, as I said, we will continue to focus pretty unrelentingly on on the customer experience, where we can improve it, how we can make it more

30:41 efficient, how we can create more special moments across both businesses, but particularly for Boom, which is younger. But most personally, we remain very, very excited that there is a real opportunity to make hay in an underpenetrated market here in The UK, particularly. We've talked about this aspiration of getting to 50 sites for a skate park, a 100 sites for Boom. Clearly, the market, in our opinion, very much exists in order to fulfill that. So, hopefully, you'll see an exciting year ahead. But now that's probably it for the presentation. Obviously, there are some questions which we'd love to touch on as well. Well. That's great. Richard Graham, thank you once again for updating investors. Ladies and gentlemen, please do continue to submit your questions just using that Q and A tab on the right hand corner of your screen, but just while Graham and just take a few moments to review the questions you submitted already. I'd just like to remind you that we're recording this presentation along with a copy of the slides and the published Q and A can be accessed via your investment company dashboard.

31:37 Richard Graham, you've received a number of questions ahead of today's event, and you also received a number of questions throughout your presentation. So

31:42 firstly, thank you to everybody for your engagement. If I may just hand back to you guys. If I could ask you to read out the questions, and I'll pick up from you at the end. Yeah. Sure. So so hope hopefully, we're picking up certainly on on the the main themes, if you like. There are a few questions which are a little bit similar, so we'll try and combine if that's okay. So, one of the questions, if I'm gonna take two actually in the same place. So we had a question that came through, firstly. How does the company ensure balanced and accurate information is presented during interviews, especially those potentially funded by the company? And then as and then I think in a related question, we had one that says, in updates to the market, can the company start providing commentary on actual profit, not EBITDA or operating profit, both of which are just garbage? So I'd like to pick up both of those things, I suppose, in the round.

32:30 When we do investor interviews like this one, we are, of course, honing in on the things that we as a management team think are the most pertinent as they relate to creating value into the longer term. And the way we think about the business is very much about box economics first. And by that, I mean site profitability and its constituent parts.

32:54 And so for us, health in a business is viewed very much along those lines that I just said. A healthy business has got strong like for like sales, which are volume driven. That's really important. As a a really healthy business has got really good conversions of cash, which is why we do use EBITDA as a proxy because it's the best proxy for cash that we have. The fact that our cash flow actually is generated at a higher level than our EBITDA should only serve to be a benefit. But nonetheless, EBITDA is a very, powerful thing. And and, of course, the way you're reviewed by customers is essential because this is the thing that allows you to play into the future. So when we talk to investors, we talk about these things because we think they are the fundamental building blocks for a high value business going forwards.

33:39 And and so, you know, yes, absolutely. We're delighted to talk about, you know, PBT, etcetera, and we can do that. But, actually, the the you know, the some of the movements below EBITDA through into profit before tax are very much noncash, and the health of the business should be around generating cash flow, positive cash flows, and so on and so forth. So so so, you know, there's a bit of an interpretation here. We think these are the most important things for you to focus on. Obviously, we talk about PBT. We've got a full suite of accounts to to get into as well. But we talk about them because we think they're the most important thing for garnering value. And in terms of, you you know, sort of the the sort of the implication that we only put a positive spin on the stuff that we we talk about. You you know, I I think actually we're we're really, really candid about the stuff that we've got wrong. You know, as I said, we we we got a lot of stuff wrong when we built sites, particularly for Boom. There's a lot of improvements we're going back and making. You know, we identify a lot of things that we could have done better, and that's what we're trying to go back to fix. So we're certainly not looking to pull all over eyes.

34:40 We're just talking about things that we genuinely believe are the most important drivers of long term value in a business. This is sort of a similar question, actually, I I think which I can take that one. Yeah. Do you do wanna read another question? Yeah. So that the another question which came out, and I think probably you may have seen

34:57 published somewhere was around balance sheet concerns. So the question was the notes mentioned a £9,000,000 deficit between right of use assets and the lease liabilities. Can you elaborate on the reasons behind this deficit? Does it suggest there might be a higher number of loss making boom battered by locations than previously acknowledged?

35:16 So the first firstly, what I would just point out is I think this question probably just highlights the complexities of IFRS 16 and sort of misunderstanding at some degree as to how that's applied. So just to be absolutely clear, there is no impact on either the right of use assets or the lease liability from underlying trading performance in any of the sites. So if I can the the differences do arise as as you probably pointed out. The idea that when you when you start a new lease, the right of use assets is equivalent to the lease liability, and those two things should offset themselves. So the question, why does that gap between the two arise? And in our case, that gap is now £9,000,000. So how has how has that arisen? Well, the reason really comes from three things. The first and most important in our case is that under IFRS 16, excuse me, any landlord incentives such as a landlord contribution is netted off against the right of use asset.

36:19 So in a case where you've got £500,000 of landlord contribution, on day one, the right of use asset will be £500,000 less than the the lease liability. So that's that accounts for four those sort of things accounts for nearly 5,000,000 of the £9,000,000 difference. The other two reasons that you get differences is that depreciation is on a straight line basis, whereas, of course, with leases, interest tends to be higher at the beginning as the balance higher and the minute comes down as you as you pay down the so called liability. And so you get a bit of a mismatch where initially the the right of use asset will actually go down quicker than the lease liability just because of that fact that fact that factor. So a further £2,000,000 of the difference is just that timing difference between the two things. And then finally, with rent free periods where you're not actually paying down the lease liability, actually, happens at the beginning of the lease is the lease liability goes up because it's accruing interest on it, but you're not paying the cash flow.

37:22 And only when you start paying cash does that come down, whereas the right of use asset from day one has been depreciated. So that will also give rise to differences, and that accounts to a further for a further £2,000,000 of difference. So that that's that accounts for the 9,000,000. So just to be absolutely clear, there is no underlying operating performance which impacts that. And what we've said about our Broom sites, Broom sites generating 18% EBITDA margins is pretty is a cross piece. And in fact, that slide where you saw the return on capital generated by sites, you can see that all of those 11 sites, which have been operating for a year, are showing positive returns, albeit one was quite small, but offset by very, very high performance on the other side and and most in the middle. So, hopefully, that answers the question.

38:11 So then there's a question around the latest broker notes outlining around 10% revenue increase for FY 2025. Given current like for likes almost double that, are you expecting like for likes not to grow as fast?

38:23 So so I think here, I think what is possibly a little confusing in the broker note is the fact we're moving from a fifteen month period to a twelve month period. So I'm sure most of you around the call will be familiar with with with the fact that we're changing our accounting year end to the March 31, in fact, a couple of days' time. And so so that will have us in a fifteen month period, basically, that we're closing out right now. And so so when when people are talking about that 10% growth, I think what they're comparing is fifteen months moving into 12. So so so that's where that 10% is coming from. Sort of circa '50 five ish moving to 58. What what actually is the better comparison is sort of the twelve months. So, like, you know, we're we're talking about twelve months here to December of £45,000,000 of sales moving into £58,000,000 for the period in '25. So that represents something closer to, you know, just above 25% sales growth.

39:22 But to look so so hopefully that clears that up, and apologies if it wasn't clear before. But, you know, specific to the like for likes, you know, would we be sat here today expecting like for likes to be maintained at 17% for for Escape Hunt, 29% for Boom? No. You wouldn't because of you'd expect them to come down with a maturity curve over a period. But but nonetheless, would we expect very positive like for like sales volume led? Yes. We would. I think the next question was, please show the the calculation for ROCE communicated 48% doesn't add up. There are a number of questions on that because obviously referring to the boom ROCE.

40:07 It's not all that easy to find your way through in the numbers that are disclosed because, obviously, this is a sort of divisional ROCE, but let me just explain. So the way we calculate our ROCE, which is an EBITDA ROCE over the gross capital invested net of land book. I'm gonna say gross as pre depreciation, net of land book contributions, I. E, the total that was put in. We calculated over the stores that have been opened for twelve months. Obviously, our calculation excludes Dubai, Canterbury, and South Bend, and it doesn't include the franchisee sites that we require. But, actually, if you did include those and gross up their performance for the back half of the year, it actually gives you an even higher number because, of course, they were through Christmas, so it's not it's not quite like for like. So we've left those out. But, actually, if you if you just sort of square back to what's disclosed, if you take the site EBITDA for BOOM of 5,200,000, about 1,500,000 of that related to sites acquired during the year or new sites built during the year.

41:04 So that leaves you with around about 3,600,000 of EBITDA. If if you look within the fixed asset notes, I don't it's not broken down by by division, but I can tell you that the if you take the opening gross investment on Boom and the closing gross investments on Boom, you take off the landlord contributions, you take off the acquisitions during the year, and you take off the new investment during the year, you come out with an average of about 7,500,000. And if you take that 3,600,000 of EBITDA from those sites over the seven and a half, that gives you a 48% ROCE. So that's it does all come out of the numbers. It's just because you are applying it to to to the sites that have been open. It's not always directly visible.

41:50 I mean, just to take the example, if you say back, right, the difference of 1 600,000 on the sites that we acquired and we built during the year and add back the the CapEx that we spent on them and averaging out, it actually gives you a ROCE from those size annualized at about a 120%. But that's largely because we went through Christmas at the end of the year. So once you put the seasonality in, I would expect it to be much more normalized from that perspective. So, hopefully, that explains it. But, essentially, what we're doing is we're taking the EBITDA from the sites that have been open for twelve months, and we're dividing it over the gross the average gross CapEx on that site during the year. So I've got a question on cash fund runway. So with the current cash balance of circa £4,500,000 and a slow site opening program, can you elaborate on the company's cash runway for continued operations and future investments?

42:42 So I think what I'm gonna do here is re reference a couple of numbers which Graham spoke to when he was going through the cash flow. And what Graham mentioned was that on a sort of pre IFRS 16 basis, £7,200,000 was being generated in cash from the five and a half of EBITDA, which we reported. And then he explained that a million of that was, if you like, a sort of a debtor clawback, so to speak. So, really, you're talking about 6,200,000 of cash being generated from that five and a half. So so with that as given, obviously, are certain things which which we have to spend below the line. There will always be a degree of maintenance CapEx. There will be a degree of interest payments, etcetera, etcetera. But with all of this given, we think we have somewhere in and around £3,500,000 to spend on new sites should we wish to place our capital there in at our current scale. And, obviously, you would imagine that that number increases you grow.

43:42 So £3,500,000, we should be able to organically fund six or seven sites between both Escape Hunt and Boom should that be what we wish to do. Now I would make the point that we will always look for the highest returning opportunity first. So if there is an opportunity to go back into the existing estate with some of that capital, you might see one less site, two less sites as we instead make a very high return investment in the existing site, a little like the bar in the o two that Greg mentioned putting additional capacity into a skate park, find new rooms, etcetera. But, fundamentally, from the organically generated cash flow, we should be able to create six to seven sites, I would suggest, as we stand today. Now I suppose the secondary point is that given that we've gone through that three year journey that I showed you graphically and we've gone from, you know, really kind of stepping up through our cash generation and profitability, I think our likelihood to be able to put in place a very vanilla debt facility in RCF is probably a little higher than it's been in the past. And and whilst we do not want to be a highly levered business, this idea that maybe we could manage to net debt equals zero, if we were to achieve such a facility, then that would allow us to go a little bit faster than six or seven sites that we could organically fund. So, hopefully, that answers that question.

45:06 So I think the next question was adjusted EBITDA and operating profit calculations. Many investors rely on EBITDA and operating profit metrics for financial analysis. Can you explain the significant difference between reported operating profits and the excluded lease finance charges of 1,800,000? Can you justify excluding these costs when evaluating profitability? I mean, first of all, obviously, again, this is an IFRS 16 issue. If I'm honest, I disagree with the approach of IFRS 16, but that is the the standard that we we are required to follow. There are also other IFRS impacting issues such as, you know, the impact that we had to revalue the contingent consideration, which was all settled in a fixed number of shares, which get led to a £313,000 charge to our p and l. So, actually, if you strip that out, you know, again, it's it's just the way that we require to report these things. From a profitability point of view, you know, the reason that we focus on the site level economics, and particularly, we talk about the 5,500,000 pre IFRS 16 EBITDA that is after those rent charges. Internally, we absolutely see rent as an operating cost and not a debt repayment.

46:18 So that is how we manage the business, and we manage to cash flow and cash returns and, hence, our focus on ROCE. Ultimately, by getting strong cash generation out of those units and even after maintenance CapEx, you know, this business should be become very profitable. So can you justify excluding these costs when evaluating profitability? The answer is we don't. Internally, we look very much before that. Obviously, the way we have to report is that those are shown as as below the line. Just coming back to the maintenance CapEx point on that, and one of the questions which I think will come out is, you know, to what extent do you think the ongoing maintenance CapEx or what how big is that? If you take Boom as an example, you know, whilst it's still a new business, I mentioned that we've done £600,000 of maintenance CapEx £700,000 of maintenance CapEx in the year. That's probably not at a at a run rate for Boom. You know, when you build a Boom site, £900,000 of investment, usually about 60% of that is the infrastructure in in the building, which is gonna last the the term. So it's the toilets. It's the electronics. It's the machine and engine, those sort of things. And about 40%, so 350 to 400,000 is gains and sort of cosmetics.

47:31 So if you think if you did a major refurb every three or four years where you spent, let's say, a £250,000 or something along those lines, it'd be significant compared to that sort of declaration. You're talking about an average of, let's say, somewhere between 60 and £80,000 a year on average per boom site. Well, if a boom site on average is doing somewhere between 1.8 and £2,000,000 of turnover, you can see that that's gonna come out somewhere between 35% of turnover. So, again, that probably is is is more of a sort of long term rate. So if you're making a 20% margin at a boom, it gives you 15% free cash margin after maintenance CapEx at the sort of maturity and sort of future level, which, again, compared to the investment cost, you're still making between 3045% return on capital after maintenance CapEx. So that will drop through to the bottom line, and those really the metrics we look at for for evaluating profitability.

48:28 And, ultimately, with growth, you know, the accounting standards will we will we will be profitable, but, you know, there is quite a lot of noise between the sort of fundamental operating metrics of the business and the bottom line because of these standards which require you to value things in different ways. So, hopefully, that answers the question. So I've got escape pilots still using the original games in most sites. When will you need to replace and refresh? Are you ready for this with new games? How much spending needed to swap the new games in? So, yeah, excitingly, they are, and indeed, as we mentioned, those original sites still growing at 16%. So what that tells us is there's no need yet to be thinking about replacing and refreshing those games. However, the way that we build now is such that we build off sites. We have a a wonderful production partner that allows us to build games ahead of time, keep them in storage, and these games are indeed now modular.

49:19 So the extent to which we do need to start replacing games, I suppose there's two things. If we're putting in a new game from scratch, that will cost us around £50,000. But if we are moving one of the modular games that we have from another site to an existing site, I e, simply refreshing content, then we think that would be more £15,000, something in that sort of ballpark. But excitingly, we've not yet had to do it, as I say, because of the underlying like for like growth in those sites. Yeah. So it's moving on. We've got a few more questions. We've got a few minutes we've got. So question, why has there not been more communications sent out to potential investors over the past year? I think probably the way to answer this is several looking forward, what are the communication points going to be into into the current year?

50:05 Obviously, with the change of year end, we've got our financial year at the end of this month, which means the the sort of, I suppose, schedule events which we'll have for announcements and hopefully updates to the to the market are we will do a trading update post our close. That's probably sort of mid to early to mid May on on trading just to give us a sort of view of where we are for our year end. We will, of course, also be attending various retail events we plan to during the year. And then we've got results will be published in late summer. AGM and probably a statement at that point in September, we thought. Interims in November, December, we'll have a Christmas trading statement probably back in January. So, hopefully, that means every sort of three months or so, we'll have a a reason to speak to the market. Yeah.

50:51 So a number of investors on our form are anticipating significant expansion overseas, in particular in The US where we felt this would be an amazing business. Is The US still a possibility? So you're right. We had initially talked about potentially growing the estate fund business specifically via franchise in The US. And at the point when we were talking about that, we were very, very, very much smaller business. We were still learning the way, so to speak. And whilst I think that the opportunity is still really interesting in The US, what it's worth, I think the opportunity is probably very significant for both businesses in The US. Given the number of strategic options we have available to us, we have deprioritized it. And the reason for that, I guess, is is is probably multifold. One, you've got the obvious strategic option about do do you play out in The UK or abroad? Two, do you own and operate, or do you franchise?

51:47 And what we're seeing now is such participation in The UK particularly that the idea of really doubling down and scaling out across The UK feels like a very smart thing to do. And then when we talk specifically about ownership structure in the context of escape pumps, escape pumps dynamics are such that it is a low sales, very high margin business. And so, you know, to put that in numbers, if if an average franchise escape pump was to trade at, let's say, $500,000 a year, which would be a little bit lower than we achieve, I don't know, but let's assume it trades at $500,000 a year, we would receive a $50,000 royalty on that against which we've got costs. So maybe we net 30,000 US. When you consider that the average EBITDA from a UK site today is £225,000 on escape parts, it is and we return capital at 46%.

52:41 I'd argue that it's a much better use of our efforts today to go after that owner operated business, so that's why you're not seeing so much in and around The US. Great. Next question, which is on the live panel and was actually submitted before, but could you break down the main items of 7,300,000 of other payables and accruals? Yeah. That's it is it is relatively sort of generic sort of stuff. Most of it is likely to continue. It's made up I'll just give you some detail. There's obviously there's a VAT payable of about 1,800,000, which would be bigger than normal because it was off to Christmas. PAYE and other taxes of about 1.3. There's rent accruals on the balance sheet, which principally relate to sites where either there was no IFRS 16 liability just because the structure of the lease or to some extent where there's some turnover rent involved, although that's relatively modest or pre IFRS 16 is 2,300,000.

53:38 That will unwind over a period of about twelve years. So quite sort of modest as that happens. They send just general rates and utility accruals of 700,000, other sort of audit fees, bonus provision, labor accruals to do with the close of the year because we pay payroll before before Christmas of 700,000. And then just generally an other uninvoiced costs, things like security, cleaning bills, what have you. We tend to only get the invoices later several weeks afterwards. There's 1,400,000 of those. So of all of those, the only one which which will actually unwind to some extent you'll get these in cycles, obviously, depending on on on activity levels in the business. But the only one that really unwinds is the rent accrual, and that will unwind over a period of about ten to twelve years. So the rest of it, we we do have a relatively high level, and it it just speaks to this negative working capital cycle that we have in the business. So I got a question.

54:35 You've held up price increases in 2023 and explained the reasons clearly in your statements. However, where do prices for Boomer and Escape Hunt sit against your competitors? And is there scope should you wish to to rate to to increase prices without losing customers? So good question. As I've spoken, I think, quite extensively about the fact we feel philosophically that being very affordable for customers, particularly in a market that has some prevailing headwinds, is a really, really important thing to be able to do. And we think that actually driving volume led like for like growth is a much more powerful marker of future success than than just kind of forcing price, which we consider to be quite a short termist sort of activity, which typically comes to bite you a little bit further down the line. So in my experience, at least, you put prices up, you look great for six months, and then all of a sudden things start to fall off. That said oh, in fact, sorry, to pick up on the first part. Where do we sit relative to the market for both businesses?

55:32 Well, escape hunts, it definitely sits at the premium end of the escape rooms market. I would suggest that given the quality of the fit act, quality of the sites, quality of the team, and the investment that we put into the sites, I'd say that the value proposition is very, very strong for Escape Hub. I would suggest that whilst we might be a little bit more expensive than some of our competitors from a value perspective, Well, I think we we index incredibly well on that business. And as for Boom, we're definitely sort of upper mid level, I would say. So if we were to take a bar analogy, you know, we're not Weatherspoons. We set above Weatherspoons, but we're also not, you know, in in the domestic socialized world. We're not a clutch shack. We're not a flight club. You know, those are uber premium. We're sort of more the excessively premium all by one type level, if you like.

56:23 I'd I'd suggest that's sort of how we're positioned. And in so doing, we think that we attract a much larger audience, and we think that it provide know, it provides us with this big old runway opportunity to go after. So that's why we like that positioning. Now could we write could could we increase prices? I suppose the obvious answer to that is probably yes insofar as, you know, there would seem to be scope given very, very obvious measured latent demand, and we can map that quite clearly. But we believe that a smarter way to fill latent demand is try to create additional capacity and go after volume instead. So so I hope that answers that question. And, Graham, there's a few questions on on the screen, some of which some of which I think we've already touched on. But So this this first one speaks to price. You've already answered that, I think. Bear bear with me. I think we've touched on sites.

57:17 Do you consider share buybacks based on the lock the the low stock valuation? We certainly consider it. It's a very difficult thing. Obviously, we clearly, as I'm sure most management teams do, feel that the stock is materially underpriced relative to where it should be. Do we therefore consider buying shares back? Yes. We do. But the the the tricky thing for us is because we return on capital so well, it kinda feels like the better longer term play should be to invest there. But, yes, it's something that we consider. We've talked about changing the games for escape hunts. I've talked about maintenance. Yeah. Exactly right. Do we measure visits per annum for every unique customer, and what steps do you take to drive this up? This is this is quite a weak area of data for us.

58:05 Being honest with you, we don't have accurate figures for the number of customer returns that we have in in in either business. There's a whole bunch of reasons for that that I don't probably need to bore you with other than it gets complicated because the person that books typically books for four people. So if another person if one of that four then rebooks, you kind of lose a little bit of the clarity around the data. So we need to work on how to get better at that. What we do do is understand where people who have booked, certainly for escape hunt, a game, how likely is it that they're gonna come back and play again. So our better performing games will show you that in 18% of instances, people that have played so and such a game come back to play another one within the twelve month period, but we need to improve our data on that.

58:56 Do if you open five to eight sites a year, will you focus on boom battle bars or escape hunts? Well, this is interesting. If you'd asked me this question a year ago, I would have told you that we would probably focus on escape hunts. I'm sorry. Forgive me. We would probably focus on boom battle bars because we anticipated the capital returns to be quicker because of the benefit of landlord contribution. As it is now and as we've discussed, with with with the rates of return on capital that's broadly equivalent, actually, this is a great position for us to be. So we're broadly indifferent where we put our capital. The the deciding factor will be the quality of the unit that we see as being available. And this is a good question. Will the national living wage increase next month impact the business? I suppose the short answer to that is yes. If everybody's aware that the national living wage is increasing by 10%.

59:48 Whilst the effect through the p and l for us won't be as high as that, it will obviously be fairly significant, and we would want it to be such. You know, we pay a premium to the market. We think it's the right thing to do, and we will continue to do so. To put that in context, on escape hunts, labor's around 30% of sales. On boom, it's around 25%. So you're talking about a 3% impact and a two and a half percent impact were the full 10% to flow through. As I say, it won't be that much. So how are we gonna deal with that? Well, we we we have a number of levers. Obviously, the key one for us is continuing to drive sales. Extent to which we can drive sales over and above that two and a half or 3% is the extent to which we can at least stay still. And because because of that and because of a few other dynamics which are going in our favor so for example, if I take Boom, operationally, we're getting more and more efficient. We're getting a little bit better at what we do.

1:00:44 So that will drive natural efficiency through the p and l. We're getting we're gonna get quite a good utilities benefit back through that business this year as well. Obviously, utilities, you know, went through the roof last year. We absorbed that cost in the numbers. That will now reverse out as we normalize through the year. So that gives us quite a lot of benefit back. And, similarly, we've done quite well winning quite a lot of rates arguments, business rates arguments too. So it's a long winded way of saying, yes. It will impact us, but we believe that we can build and increase margins without needing to pass it through to the customer. Well, that's great. And, Richard Graham, you've taken all the questions from investors, and thank you once again to everybody for your engagement. If any more questions come through, guys, we'll make those available to you post today's meeting. Richard Graham, I know investor feedback will be important to you both, and I'll shortly redirect those on the call to give you their thoughts and expectations.

1:01:36 But perhaps for one more time, Richard, if I may just come back to you for a couple of closing comments. Well, firstly, thanks ever so much, Mark, to you and to your platform. Thank you ever so much for listening to us for the last hour. Hopefully, you've come away with a sense that this is a really exciting business. It's gone through the really hard yards of getting scale. We're now starting to generate the cash flows in in the sort of quantum that I hope you would expect to see. And hopefully, you can be excited to sort of stay with us on on our journey with the foundation well set for quite a lot of future growth to come. That's great. Richard Graham, thanks once again. Can I please ask investors not to close this session as we'll now automatically redirect you for you to provide your feedback in order to guys can probably understand your views and expectations? This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of management team of XP FACTORY PLC, we'd like to thank you for attending today's presentation. Good afternoon to you.