Restaurant Brands Asia Limited (RBA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Restaurant Brands Asia Q1 FY '21 Earnings Conference Call hosted by [Motilal Oswal Financial Services Limited]. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantee of future performance and invoke risks and paints that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to management. Thank you, and over to you.

Thanks, Cari. Good evening, everyone. Welcome to the conference call to discuss results for Q1 FY '27. I am Gaurav Ajjan, the Head of Corporate Development and Investor Relations. As always, joining us today are Mr. Rajeev Varman, Whole-Time Director and Group CEO; Mr. Sumit Zaveri, Group CFO and Chief Business Officer; Mr. Kapil Grover, Group Chief Marketing Officer; and Mr. Sandeep Dey, Brand President, Indonesia. We will start the call with a presentation, and after which, we'll open on the floor for questions and answers. With that, I'll hand over to Raj for his opening comments and the business update.

Thank you, Gaurav. Thank you, first of all, for your interest and joining your time this evening. It's probably time for you to get home. So thank you for joining the call. I will give you a very quick India overview as well as Indonesia review. And then I'll hand it over to Sumit Zaveri, who will go through the numbers with these guys. Now we have 2 businesses, of course, and improve different countries. And then we also have 2 brands that we operate. So I'll just give you a little perspective. Burk in India, we have 590 restaurants as of June and June 30. Burger King, Indonesia, we have 137 restaurants there, and Popeyes Indonesia. We have 25 stores. Now if you look at the revenue perspective, we have 83% of our business is really Burger King India from a revenue standpoint. 15% of our business is Burger King Indonesia, and then 2% of our business is Popeyes Indonesia. So that's the makeup of the revenue of our business. Now quickly on the India Q1 highlights. Now Q1 has been a very, very, very exciting year, exciting quarter for us. and some very good results that we are proud of, that we thank our entire team that has worked very hard to kind of deliver those results. So the top line for us is again, 590 stores, which is 71% year-over-year growth, plus 9 stores quarter-over-quarter growth, which gets us to 90 million Same-store sales growth was 12.6%. This is the highest we have done in the last 15 quarters, in fact, highest that I can remember as far as we go back several years. So congratulations to the operations and marketing team for delivering such a high SSSG number. Our ADS average daily sales for this quarter was 1 lakh 31,000 as well. Revenues, INR 682 crores, which was 23.6% higher year-over-year same quarter. Gross margin, 7.8%, which is over year-over-year and 0.6% quarter-over-quarter. So very good improvement in gross margin as well. Restaurant level EBITDA we delivered which is 68.1% over year-over-year. Our company EBITDA in India was INR 527 crores, and that is 133.6% year-over-year. So literally, I'm looking at a green page, SSSG 12.5 -- 12.6 -- looking at revenues up 23.6%, gross margin, 7.8%, restaurant level EBITDA of INR 90 crores and company EBITDA of INR 52.7 crores. So thanks to the entire team for an exciting quarter. Now strategy-wise, we haven't changed anything. We steadfast on the strategy that we spoke about in the last several quarters. I'll reiterate, we continue to be a QSR that leads in value leadership here in India, no different. We continued our pursuit in being the value leader with the 24x strategy, as you've seen us grow from standard and tasty meals at [indiscernible]. So whatever the strategy is it will all be consistent with our value leadership in the country. So we continue that on menu strengthening, we spend a lot of time because we had built a lot of traffic over the last several years. We call this value study induction or introduction of new customers into our business. And then we started about last year to start strengthening our core menu as well as our premium side to be effective in terms of our product mix, which saw this 12.6% kind of growth number. So we launched BK, as you know, in 2022. We continue to build those now approximately actually most of our restaurants all, if not all of them, have a cafe. So Burger King Cafe continues to grow. And we have long-term strategy to make this prominent part of our menu structure. This year and this last quarter, we also launched some co-branded desserts and shakes, which have started to grow and part of the 12.6% that you see over there. The Burger portfolio we launched, as you know, premium range, Korean. And now subsequently, we have launched Peri Peri, as you saw in July, both those promotions have been really, really good for the company and has drawn a lot of traffic through those promotions. One of the other pillars that we've been working on is digital. And as you already know, that SRK's self-ordering kiosk, BK app 90% orders are digital. And this is not only a good foundation of good management within the restaurant. But also, you will see that in the future, this database that we are collecting through our digital needs will become a foundation for the CRM program that we will be launching very soon. So that digital efforts continue here, and I'll speak in a minute what that means in Indonesia and profitability-wise, same focus, laser focus. First of all, our CapEx spending is very disciplined. When we opened restaurants, there's a disciplined process of outlaying that CapEx. So we opened good sites and good restaurants so that we continue to grow profitably. So the profitability focus was threefold, right? First of all, we continue to focus on menu product mix and gross margin. So gross margin is just not simply a result of increasing price. It's also about a proper shift in product mix and making sure that the product mix that we delivered continues to grow our gross margin. We continue to work with vendors, continue to bring in new vendors. That strategy continues. We continue to do that through our supply chain initiative. As you know, that we continue to do a cluster approach every time we build the market. So that supply chain efforts continue in this quarter as well. And you've seen an improvement on our gross margin as well quarter-over-quarter. Initiative that Sumit Zaveri will speak next, started a few quarters ago, was on the utilities front. And he worked very diligently with our teams here, and we were able to and we continue to drive efficiencies through utilities, whether it is the installing of new equipment, we installed a new boiler that consumes half the energy of the old boiler but we also started the solar farm initiative, which several of our restaurants now are covered under that, and we continue to grow that as well. So we continue with that profitability focus. It's not about just building the top line, but it's a continuous effort to bring efficiency within the top line and the bottom line, which the team continues to deliver on. A quick word on Indonesia. So the Indonesia 137 Burger King restaurants delivered 80s of 102, and I'm putting these in INR, so that people here can understand. So 1 lakh 2,000 as revenues of total INR 124 crores and restaurant level EBITDA was INR 6.4 crores. So these Burger King restaurants, they're profitable at the restaurant level, and they delivered a positive EBITDA. And we are testing a lot of things, and I'll talk to you in a minute on where we are going with the Burger King business. The Popeyes business was exactly where it was when I spoke to you last time the 25 restaurants still continue to operate there with ADS of 69,000, revenues over there were INR 15.7 crores. And we actually had a loss of INR 3 crores over there. Combined losses in EBITDA, restaurant-level EBITDA in Indonesia was INR 3.3 crores, significant reductions that you've seen all because of all our strategy that I'll discuss with you. the value focus, now we had a 25,000 [indiscernible] deal program that we were running in Indonesia for the longest time, which was driving some traffic but didn't get us the kind of leverage we required in terms of volume. So we are now testing and probably by the end of September should be in good shape to launch a new value strategy over there. And I think that's very important for the Burger King business over there. And I'm talking about the Burger King business now. That strategy, once we put that in place, it was one of the missing links that we needed to put in Indonesia. When you look at the menu strategy, it's -- we kind of went backwards in Indonesia compared to India, where we built a very strong premium and core menu ahead of the value strategy. And that menu is doing very well. I think we had a few limited time options that we put out, and they were all doing well in Indonesia. We also had spend a lot of time in the last 3 years building a very strong chicken line. When I say chicken, it's bone-in chicken line, which is climbed from what you used to be 30% of sales to about 50% of the sales in the working business. We continue to stay true to that. We continue to provide different options on that by dunking the BIC and it becomes a good limited time offering to the businesses. But what we started to do, and I'm saying just 2 quarters ago and more prominently, last quarter is to focus on our burger line. The reason we're doing that is our UNS study that we did with the but consumers in Indonesia gave us a clear lead on Burger King as a burger brand. So burgers, when you ask consumers over there, their first choice is Burger King. So we started to promote and our value strategy will include our efforts in bringing burgers into the value platform and driving that business. We also installed self-ordering kiosks for the first time in the Indonesia, which has actually pushed our APC average per check up by about 4%, 5%. And it is just -- we just installed them, so we should see some progress on that as well as we move forward to unlock all the stuff that we have done here in India, but also to set the benchmark for CRM in the future. Our profitability focus in Indonesia continues in the same lines. Corporate overheads, as you know, we continue to reduce them, and we bought them down by 25%. So we have done a done a very good job. I think we have kind of reached a point where we have to optimize that. We continue to optimize our portfolio there. We closed some restaurants that are not profitable. So in all -- in the last couple of years, we have reduced that portfolio by 42 to the 137 that we have. And then delivery profitability is something that we started a few quarters ago. And now we are doing almost the same sales we were doing before. but significantly more profitable in our Indonesia Burger King business. So we continue to stay focused on that corporate overheads, portfolio optimization, delivery profitability. And now what we are doing is carrying the learnings from India when it comes to the equipment utility bills and the portfolio of -- that can go on to solar farms where we can reduce our utility bills. So all those will be transferred by our team from here to Indonesia. And I think that will give us a very strong P&L at the current Ads, not that we are looking at bringing in more EBITDA at higher ADSs, which we are working through the value strategy. But at current areas, we want to bring some efficiencies into the P&L as well. So this is basically the top line strategy and now Sumit will carry you through these numbers in detail. So over to you, Sumit.

Thank you, Raj. So Raj has already covered the individual quarterly performance for India and Indonesia. So I'll start with Slide 17, and then we'll go into the details how the quarter-on-quarter performances are mood as we can see on Slide 17. On a consolidated basis, our store count with a in Indonesia stands at 72, up by 69 restaurants. The entire growth is led by India growth. Continuing with our overall revenue trajectory growth on a consolidated basis, as we've seen in stand-alone as well, our overall revenue grew by 18% to INR 823 crores for the quarter as compared to INR 698 crores that we had last year. Similarly, restaurant EBITDA showed a robust growth of 73.5% in a total of INR 93.3 crores. And this had a INR 3.3 crores of Indonesia as well. If you do compared to last year, you would realize that we were at a breakeven level in terms of restaurant EBITDA. From there, we have moved to 3.3%. And we will go into brand-wise as when we know which brand has performed well for us in Indonesia as compared in addition to India also performing very, very strongly. As far as company EBITDA is concerned, we moved from INR 12 crores last year to INR 43 or INR 45 crores. So it's almost over 3x growth in terms of company EBITDA that we've seen as compared to last year. So we are not only on a stand-alone basis, but even on a consolidated basis. we've had very strong performance. Now going on to Slide 18, and we will go into the nuances of the India performance and then Indonesia performance. We've already seen a constant focus on adding restaurants in India and to grow the brand in India. We ended the quarter at 590 restaurants. As We've always been stating that we will continue to grow at a pace of around restaurants on an annual basis, and that still continues to be our goal going forward as well. As far as DS is concerned, you could very clearly see that there is a step change led by very strong SSG growth that we've seen in quarter 1. We -- at the portfolio level, we stand at a radius of 1,000 with SSG growth of 12.6%. As far as revenue is concerned, INR 683 crores, 43%, 44% growth over last year. And devil mix continues to be a very similar tight race is 2% higher than what we had seen in quarter 1 last year, which is more comparable quarter from a seasonality perspective. Gross profit margin, you've always seen us improving on a quarter-on-quarter basis. That price continues, and we ended the quarter at 7.8%. We believe that this is a trajectory at which we should continue to grow our gross profit margin going forward as well. with restaurant EBITDA standing at [13.2%] at INR 90 crores, which if we look at it from a seasonality perspective, it is up from 9.7% in quarter 1 last year to 13.2% in the current quarter. And then translation of the restaurant appetite improvement is also reflected in company EBITDA numbers moving from 4.1% or a INR 22.5 crores, INR 23 crores to INR 53 crores for the quarter at 7.7%. If we quickly look at Indonesia, Summer and I'm looking at Slide 20 there. As far as Indonesia is concerned, AD-wise, we've remained fairly flat, but all the efforts that we've taken to improve the overall response EBITDA on the other things side by building efficiencies into the P&L, what Raj spoke about, including delivery profitability or looking at cost initiatives -- we have been able to move the needle to a store EBITDA of 5.2% as far as Burger King and Popeyes is something which continues to remain at a stable ADS of around 69,000 to 70,000 in terms of Indian rupees. And that is an area which we continue to work towards. But what is important is that at a consolidated level between the 2 brands, we have been able to move the needle to a positive EBITDA for fourth quarter, quarter 1 at INR 3.2 crores or INR 3.3 crores for the quarter. So there is a positive directional change that we are seeing in Indonesia as well. As we saw in India, obviously, India shift is substantial at the back of 1.6%. It's 12.6% SAG that we've seen. If we look at, and I would kind of take a moment to take Q2. Two to three slide 3, which talks about India performance on a post basis as well. You could see that on a post-Ind basis as well on India, we've made a substantial shift -- we are -- we reported a marginal profit of a tax loss of INR 3.2 crores, but there is an exchange loss that really caused the profit or actually be negative of INR 12 crores, which is on pertaining to the investments that we have in Indonesia. Otherwise, subject to that, directionally, we've also started to move towards making the company not only generate good cash, but at the same time also to directionally move towards positive after-tax numbers as well as we kind of see as far as stand-alone performance is concerned. Similarly, on consolidated performance, which is Slide 25. The profit after tax -- on a consolidated basis, we had a loss of INR 45 crores, which was also reduced by 27% to INR 33 crores. So we kind of believe that there is an all-in improvement in India as well as directionally, we started to move on the positive side on induration. We feel that on the Journey side, we are moving -- directionally, we are moving in the right direction, and we will kind of take this forward. So with that, we would open it up for Q&A. Happy to take the answer. Happy to take the questions that you all would have.

Operator, we can proceed with the questions if they're lined up. Thank you.

The first question is from the line of Aditya from CLSA.

So 2 questions. Firstly, we've seen a significant escalation in SSSG. Could you maybe bring that down into sort of pricing mix and volume or how that would -- how that was in the quarter? And how you expect that to play out for the rest of the year? And then secondly, when we look at the sort of return EBITDA in the context of the very strong SSG, we find that maybe the improvement isn't as strong. Would that entail that there has been a higher marketing spend or [indiscernible]?

Thank you for your question. Look, our total sales, whether it's delivery sales or dine-in sales is driven at the back of traffic increase. We didn't take any -- and you could probably reflect on our restaurant pricing as well. We haven't taken any significant pricing to have reached at 12.6 is driven by traffic that we have generated, and we believe that, that's what we have been doing for the last 3 years. We continue to stay in line with doing that. So as long as we continue building traffic, we will continue to see that SSSG number persistently going forward. And we have had a very good start to Q2 as well. So I can say that some of the things we have put in place is driving more people into our restaurants. The second question, which was on marketing, yes, you always see in Q1 that we have a higher marketing expense. This time, it was 6.9%. And usually, this kind of gets amortized over the year. Usually, we have a lot of spend initially, which we kind of tie up for the year. So that's higher -- if you bring that down to 5%, 5.5%, 5%, then yes, the growth, the EBITDA, there are some level will go up by that much more.

The next question is from the line of [indiscernible]

Like a final question on like negroni SST achieved this schedule. So what percent of revenue is located towards like advertising and promotion acts in India. Do you expect like a tie to remain at current levels and considering the season, which is like typically strong for meeting coming increase. And another question is on future synergy position. The other solution plan to integrate many options, is there any plan because we have not heard postexpiration any synergies and what is going to happen. So what do you think about since like we within is like the sole focusing on increasing efficiency, sourcing and everything -- so -- and also, we have fresh capital infusion coming in. So based on that, any strategy alignment to all ecosystem or rather in concrete cost and procurement colo-ing stores or anything happening in his direction.

Yes. So first of all, on the question that you had, the first question, which is on the end customer trend and SSSG. I think I answered that earlier, but I'll reemphasize that we have actually developed more and more customer base through our value strategy. And now with our premium strategy, which has become very popular with our kimchi Korean promotion. And then recently now, you have seen what we have put out with the very, very promotion, both of those there is a big success for our company. Now as we move forward, synergies, you spoke about look, both the businesses and you're talking about is brand business are operated independently, and they will continue to operate independently. We do have a lot of learnings from the promoters because as you know, [Ayush Garvan] has actually set up the entire Inspira pool business, which is Chinese walk from scratch. So while you're running a brand, a global brand and building a business, -- he's actually got a lot of experience in building a brand, not just building businesses. So I think those energies from there will definitely be transferable to our RBA business. most people ask, what are they going to benefit from that. This is what RBA is going to benefit from. So I think that's -- we are excited about it. A lot of good things feedback in the last few days, we have had a lot of meetings with them and a lot of questions on efficiencies and so forth, which have been very, very useful for us to understand. We'll continue to have that kind of discussions and whatever we can transfer into our business here in RBA, we will continue to kind of move forward into that.

Okay. Okay. So there is no plans for any co-located store expansion strategy as of now? Like is it continues to be independent?

Yes. I think yes, there are 2 very different businesses. They operate very independently. They have their own teams and their own CEO who operates that business, and we operate our own.

Next question is from the line of Dhwanil Desai from Turtle Capital.

Congratulations for extremely strong set of numbers. Sir, my first question is, I think if you look at last 4 quarters, every quarter, progressively, we have increased the FFG. And generally, what I understood is that QSR is a momentum business, once the momentum picks up, it continues to carry on as we have enrolled more customers when they come to a store, spend more. So given this, how do you look at next 4, 5, 6 quarters, should we be able to kind of grow at double-digit as on a longer-term basis? Because earlier, we were guiding for 5% to 7% type of and we have far exceeded that number this quarter.

Very good question. Look, I think you spoke about the last 4 quarters, but I would say even in the last maybe 6 to 8 quarters, we generally got on calls and listened to very muted sales in the industry. right? You've seen some negative sales, and you've seen very muted sales for a very long time. And this quarter, you've heard nothing but positive from the industry. So it should tell you where the industry at large, the food business in the country is going. So we are very blessed and everyone is benefiting from it and so are we, right? Now if you have this kind of environment and you have the right promotions in place and the right strategies in place, which we have had for a long time, then they benefit in ample amount when things turn positive and the wins behind your package and instead of in your face. So I think those are the things. We don't make forward-looking statements, but I submit to you that we have started this quarter very well in Q2, and we feel very good about the market.

My second question is a lot of capital will get infused into the company. And as a shareholder, that is something we want to understand how this capital will get utilized because our profitability increasing cash flows will make sure that even 70, 80 stores eventually will be slight sustained, maybe not now be 6 quarters later. So what is the plan on the capital that we will have in the company? How do we deal with it will we again not get into that more of acquisition and then investment again and then waiting for next 2, 3 years. So how do you want to kind of your thoughts on that?

We are in the process. So you can appreciate that this is the first call with the new promoters, and we disclosed the deal just a few weeks ago. So you would appreciate that we would like to have some time to put together a strategy moving forward for the next 3 to 5 years. We are working with them on a strategy to move forward. how we are going to do capital allocation, what is going to be the growth rate, what is going to be the different efficiencies we can bring in what is the back of the house integration. So a lot of conversations happening. Once we have a steady plan put together that we are all fully energized and behind then we will be in a position to share those plans.

Okay. And last question, sir, and I will come back in the queue. Sir, on the Indonesia side, I think earlier, we were working on proof streams. One is, of course, making the business go to the profitable part, but the alternative stream was again to kind of sell off the business or Hi. So are we still on the same line? And I think last call, you indicated that at least on the top side, you are working on a very urgent basis to do something about it. So any updates on that? Any change in thought process if you can update on that one?

Yes. No, thank you for your question. Very aligned on what we spoke last time. Look, the working business is improving there very well, right? You get a feel of it, even though you don't see the numbers immediately, you get a feel from the market whether what you're doing is right. So we have that focus over there in terms of our value platform that we are launching. But we already see that the restaurants have started to generate a positive amount of EBITDA. And we see that there is a lot of inefficiencies that we have bought in India, the efficiencies that we have bought here that we can transfer to Indonesia very quickly. So we are now working on those we feel the Burger King business is stronger than it was a few quarters ago. And I think we want to continue to put a focus on that and make sure that we strengthen all those things that we have done in India. We kind of parallel those off into Indonesia. The value strategy being a big one the utilities and the middle of the P&L refinement, that's another one. The delivery strategy where we have an opportunity. We have already done some progress by making it more profitable. I think there are still some work over there. So we'll complete all those things and stay focused on that. Popeyes, like I told you, we are now in very deep conversations with the new promoters. It is a tough business, and it is something that we will not exclude any strategic decisions on that. And we will inform you as we kind of arrive at a path that is visible to us. But either way, if you appreciate it, whatever we do with both those businesses, bringing efficiency into both those businesses, making sure those businesses are moving towards profitability is important in the near term anyway. So we haven't left our eyeball from that. And we continue to look at some strategic options on Popeyes.

The next question is from the line of Devanshu Bansal from Emkay Global.

Just continuing on the discussion, right? So firstly, congratulations for a very strong performance in Q1 be you sort of answered to this from an acquisition perspective, right, in your currently phasing on the strategy. I also wanted to sort of get some clarity because promoters may have taken some debt to consummate the stake acquisition, right? So do we have, as a company, any plans to share dividend going ahead to sort of maybe service that are taken by the promoters? So if you could also sort of maybe provide clarity down the line on that front, it would be helpful. Secondly, I wanted to check that your delivery channel performance has been pretty different from that reported by peers this quarter, right? So your mix has actually increased. Checking, if you are also benefiting from relatively lower competitive intensity on that channel, if you could throw some idea there.

Yes. So look, just let me answer the second question first, and then I'll turn it over to submit on the path and the dividends. Look, our strategy on delivery has been very consistent, right? We continue to focus on driving traffic, right, and profitable traffic, not just traffic, but profitable traffic. We started doing that a while ago, we have been reporting positive delivery, sales flow through for a while now. And we haven't stopped improving on it. We continue to improve on it. So when we do delivery sales, we actually do that more profitability, more profitably than we have done it in the past. So that journey continues in those lines, and we're not shaking away from it. You saw a kind of shift in some of those delivery numbers because there are certain markets we had some good delivery businesses because of certain events in those areas, whatever that those may be. But we will take all sales, whether it's delivery or [indiscernible] as long as it's coming in profitably. And that's how it came in. And so that's why you see those numbers in EBITDA as well as on revenues, which is up 23.6% on revenues, SSG, up 2.6% and EBITDA restaurant level and company both up 168%, the other one, 33%. All this is because these things kind of lined up well. As far as...

Yes. So Devanshu, I'll just take the first question. As far as the business is concerned, we are very clear that the cash that the business generates will be utilized for the purpose of growth of our businesses. And that's something which is were clearly kind of agreed as a part of our long-term plan. So we are very clear, we continue to kind of use the cash for the purpose of growth of our businesses, the current businesses that we have.

Got it, Sumit. Sumit, just one more clarification. You did mention there is some ForEx-related loss, right? So your pre-Ind AS head office cost is somewhere around INR 37.6 crores, but you're posting their head office cost comes out to be around INR 50-odd crores, right? So what is this exact difference and whether this is expected to continue in the coming quarters?