Restaurant Brands Asia Limited (RBA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Burger King India Q3 FY '22 Earnings Conference Call hosted by Edelweiss Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nihal Mahesh Jham from Edelweiss Securities. Thank you, and over to you, sir.

Thank you, Aman. On behalf of Edelweiss, I would like to welcome you all to the Q3 FY '22 Earnings Conference Call of Burger King India. From the management today, we have Mr. Rajeev Varman, CEO and Whole Time Director; Mr. Sumit Zaveri, Chief Financial Officer; Mr. Kapil Grover, Chief Marketing Officer; and Mr. Prashant Desai, Head of Strategy and Investor Relations. I would now like to hand over the call to Mr. Rajeev Varman for his opening remarks. Over to you, Raj.

Yes. Thank you. Thank you very much. Good morning, everyone, and I hope you and your families are safe as we continue with this Omicron phase. I think it has been an exciting quarter for us. Actually, a very good quarter for us. We delivered revenue-wise INR 280 crores in sales, which is 14% higher than INR 245 crores that we delivered the previous quarter. So a good quarter. And I'm going to stop using the word recovery because our ADS, our average daily sales, actually surpassed the pre-COVID numbers. So with this quarter, we ended up at 104% of pre-COVID quarterly sales. So that was an exciting number as well. This was driven predominantly by sales that come through our delivery, which continues to stay stable at 160% of pre-COVID numbers. Dine-in sales also recovered. If you recall, our Q2 numbers were about 65% over pre-COVID sales. They moved from 65% to 78%. So that was also an improvement. Our regional-wise, West, we recovered, 119%. South & East, we were at 108%. And then North, we have still a little -- we had a little room of recovery. We were at 95%. However, in December, we crossed the 100% mark on the North numbers as well at 102%. So looking at the December exit number of Q3 as we kind of exited Q3, delivery sales ADS, 166%; dine-in was recovered, 86%. West was at 126%; South & East at 115%; and North, as I said, was 102%. So very, very good recovery in sales. And this is on top of us doing only 75% of the traffic. So we have done a good job with menu in the last few quarters, moving up the check to a substantial number and hoping that moving forward into Q4 and then moving into the next year, we are looking at, as the traffic recovers, to surpass all these sales. So a good quarter from that perspective. Also, just a quick note on the restaurant-level EBITDA. We delivered INR 48 crore, which is 17.2%. All these are post-India numbers. This is more than the Q2 number of INR 40 crore, which was at 16.6%. So that's -- that went up as well. The company EBITDA was at INR 32.8 crore, 11.7%, which is again over the Q2 numbers, which was at 10.4%, which was at INR 25 crore. So good from that perspective as well. And finally, just on the Indonesian acquisition. So we -- as you recall from our past calls that this -- we had the -- first of all, our Board had approved the offer -- to the offer to go ahead and buy Indonesia. And post Board approval, we made a proposal to the seller. That was also accepted. And the latest is that our shareholders have also approved this transaction. So thank you very much for that, really, thanks for all the support on that. This is an acquisition of about 83.24% of the Indonesian business. Enterprise value is at $183 million, which is clear of -- debt-free basis. So that's on that side. Just a quick couple of notes on our key pillars. We continued to build our restaurants. We built 20 restaurants in this quarter, moving up to 294. In fact, one restaurant just opened yesterday and we are at 295. And we continue to build restaurants. We have 9 in construction, another 65 waiting in pipeline as we kind of move them into construction and forward. The BK app, Kapil will spend some time talking about the BK app, but great work there by the marketing team. We have moved that quarter-over-quarter app sales by 41%. So thank you, Kapil, and thanks for all the work you are doing. And just on the cafe, we have opened 18 cafes. Now if you recall, we had talked about opening cafes in Q4. We pulled it upfront and we opened 18 cafes in Q3. There are still 8 or 9 of them in construction as we speak today and more going into construction into -- for this Q4 quarter. Stunner Menu continues to be strong. It is continuing to be accepted by millennial audience, and Kapil will talk a little more about that. So that's just basically a top-level summary. We will go dive into these areas on this call. What I'll do is now I will turn it over to Prashant. Prashant will carry you through some of the numbers and then Sumit Zaveri and Kapil will kind of follow after Prashant. So over to you, Prashant.

Thank you, Raj. So coming to Slide #5. We are, as Raj mentioned, has reached 295 restaurants. You know, this year, our target was to touch 320. We are well on course to deliver 320 restaurants. Next year, as you know, our target is 390. So we will continue to meet that. You will notice on Slide #5 that we have not put the restaurant opening numbers for FY '23, '24, '25. We've gone to the [ MSB ] target of 700. And you will see later on also the guidance slide we have kind of moved that. And the reason I wanted to kind of share with all of you is we've actually delivered an additional guidance that we have shared with you with respect to store openings, with respect to the ADS guidance and with respect to our gross margin guidance. So what we will do is having achieved all the guidance for this year, we will come back with the guides for -- when we come back with the guides for the March quarter full year numbers, that's the time we will now [indiscernible] this guidance, including the guidance for the store rollouts in Indonesia, including the guidance for the BK Cafe rollout. As a result of this, we kind of excluded it from here. And when we come back to March, there will be 3 more -- 2 numbers in addition to the India store rollout, really the BK Cafe in India rollout plus the Indonesia store rollout. Raj spoke about this in terms of -- Slide #7 in terms of our recovery. What we have done is for your benefit we've broken this recovery down Q1, Q2, Q3 financial year 2021 and '22-wise. If you recall 2 quarters back, we have chosen to share with you that our pre-COVID numbers on annual basis where we ended March '20 was INR 110,000. And we said that it's better to compare our performance this year with the March '20 numbers because comparing with March '20 will always give you a very high SSSG. As a result of this, we will share this number with you for your benefit. As you will see in the last quarter as well, the recovery continues to grow and we are at INR 114,000 ADS for that for the March quarter -- sorry, for the December quarter. Raj spoke a little bit about Slide #8. As Raj mentioned, the delivery recovery continues to remain strong. And as you will see in the first quarter of this financial year, our dine-in recovery has slumped to 32% because of the second wave. We then moved up to 65% in Q2. Then we ended Q3 at 78% recovery. But [ hardly ] to note was the December number, where the dine-in result recovered to 86%, Similarly, the recovery on the delivery side for December was almost 166%. If you look at the Q3 overall number, the dine-in business currently is at 47% and delivery is at 53%. If you guys will recall, when we ended March '20 for the full year, our dine-in business was 65% of our business and delivery was about 35%. You've known our review, we've kind of shared this with you that we believe we are predominantly a dine-in business. And as the world opens up, as schools and colleges open up, as the dine-in traffic kind of completely recovers, we believe the balance of 65-35 would return back in FY '23. Talking a little bit about Slide #9. As I said, the recovery now stands at 104%. And if you just map by December month, the recovery is around 111%. Raj, again, mentioned this, because we have our MFDA gives us the rights to open restaurants all across the country, we shared with you our regional-wise recovery. West has again made this recovery at almost 120% in Q3, followed by South & East at 108%. And as Raj mentioned North, which was kind of lagging also in December, crossed the 100% recovery number. What I may do is quickly turn it over to Sumit, our CFO, to quickly share with you the highlights of our operating performance. Over to you, Sumit.

Thanks. I'll kind of summarize -- literally summarize what Prashant and Raj took you through. The financial performance slide, which is Slide 11, is actually summary of what we achieved during the quarter. We grew our sales by 14%, got to INR 280 crores of sales. We achieved a margin of over 66%. And you've been tracking our performance, which you realize quarter-on-quarter basis. We've been improving our gross profit margins. We are at 66%. We strongly, as an organization, believe that we should just continue to mean where -- what we've achieved or we improve on from thereon. So we strongly believe that what we've achieved is certainly sustainable and we can build our base on that going forward. Looking at the restaurant EBITDA margins, we got to 17.2%. Again, that we've improved from what we achieved over the previous quarter. And at the company level, 11.7%. In terms of company-level EBITDA, was an improvement from 10.4% to 11.7% on a quarter-on-quarter basis. So it's been a good quarter. We believe that we've created a base from where we can kind of work towards improving further. So with that, I'll just hand it over to Kapil who can take us through some of the initiatives that we took on the marketing side, which has certainly helped us in achieving what we achieved in quarter 3.

Well, thanks so much, and a very good morning to everyone on the call. In the last quarter, we've seen very good improvement in our sales recovery and especially dine-in while our delivery sales stayed very strong. Now we've been focused on strengthening our brand, and Whopper is a key pillar of that strategy. We continue to drive very exciting engagement programs and limited-time products to build that franchise. After a string of awards that we won for our social media campaigns like #DATETHEWHOPPER, which is around the Valentine's Day and the Great Cricket Hack, which we did around the 2020 cricket tournament. Last new year, we launched an incredibly fun campaign to engage with the youth and help them stay sober on the first day of the new year. While people celebrated new year's with abandoned caution outside or in the safety of your homes, Burger King made sure that they didn't need to worry about a delicious plain grilled Whopper or a crispy veg Whopper to start their first day in the new year on a good note. So the Sober Whopper was the customer's product. This is available exclusively on Burger King app. I'm very happy to share that the idea connected very well with the Indian youth and also caught coverage in countries like South Korea, Australia, France and Italy. So that's where we continue to build the Whopper franchise. I move to Slide #14. We've done a lot of foundational work on the Burger King app, where we are now seeing very good momentum quarter-on-quarter with a growth of 41% in sales in the last quarter. We now have 177 e-bikes on the ground, delivering orders which are placed on the Burger King app. And we will continue to grow the percentage of e-bikes in our fleet. We also continued to invest in driving BK app adoption through digital marketing. And by the end of last quarter, we would have cumulative 2.35 million installs and over 400,000 monthly active users on the Burger King app. So that part of the business continues to grow for us. Every quarter, we stay invested behind that. Now that brings me to the next slide, Slide #15, on the BK Cafe. Now Raj spoke about the fact that we've been able to fast-track this project and rolled out 18 cafes by 31st December. Now these cafes are a mix of high street, drive-thrus and malls, so we can get learnings and improve the model before we scale up. So far, we've seen that the consumers have given very positive feedback on the menu, both hot and cold beverages and the food. We're also seeing some very good patterns and improving overall beverage sales and traffic in key dayparts by offering this new proposition to our consumers. But as we said, it's very early days for BK Cafe and we will keep you posted on how this progresses over time. Now that brings me to Slide #16. And last quarter, we continued to grow Stunner awareness in trial, that's our value proposition. If we measure this versus July '21, which is when we launched a 360 campaign around Stunner, the Stunner Menu volumes have grown by 39%, which is, in a way, very strongly sort of correlated to dine-in traffic growth in the last quarter. So that tells us that the consumers have a very good acceptance and trial of Stunner Menu and we're getting fantastic feedback on the products. So that, in a way, sums up the marketing update for the last quarter. I will now hand it over to Prashant to talk you through the key performance indicators.

Thanks, Kapil, appreciate that. So friends, as I was sharing with you earlier this slide used to be our guidance slide. Given the fact that we have achieved all the 3 guidances that we shared with you for the current year, what we want to do when we come back to do this March is now start incrementally sharing with you the new guidance because most of our guidance will now need to be revised upwards from what it was previously. So we will now come back to you in the March quarter full year numbers with our new guidance on store openings. It will also include the guidance on BK Cafe as well as our guidance on the Indonesian operation. Our view is that we should be able to -- now that the shareholders have approved this, we will be surely launching our QIP and subsequently the successful closure of QIP and acquisition of the Indonesian business, we will come back to you in the March quarter and guiding for the Indonesian business as well. Now with cafe starting, we will have to revisit our guidance upwards further. On the gross margin side, on the same-store side as Raj and Kapil both mentioned, still early days for tracking. Initial response continues to be extremely strong and promising, but we are just asking for another quarter from you so that when we come back with our March numbers we guide you much more appropriately, which we do with a very strong degree of confidence on that. So as a result of this, we kind of removed to the previous guidance slide and we will reinsert it in the next quarter. In terms of what's the update on the transaction. As you know, this was a related party transaction. These are related party transactions, the progresses we're not allowed to [ work ]. So the procedure was really with minority shareholders. So the minority shareholders overall in India voted in favor of acquisition of the BK Indonesia business. We continue to be very, very strong believers not just in the Indonesian story and the Indonesian Burger King story, but their growth as well. Now we have to go and raise this money to acquire this business. So we will very soon be launching our QIP as a result of this. And hopefully, with our current -- existing and new investors [ investing ] in our Indonesian purchase, we should be able to acquire the Indonesian business. We also have other development now with us acquiring the Burger King Indonesia business. We have proposed the name change to Restaurant Brands Asia Ltd. The shareholders have approved that. We will now wait for the ROC approval before we kind of change this. So that's it from our guidelines. A strong quarter. But just one small thought I want to kind of leave with you. This year was also, like last year, kind of marred with the second wave and now with the Omicron wave. So in all, we are actually looking forward to the next year. It probably will be a very, very busy for Burger King for the India business, for the Indonesian business getting consolidated with [indiscernible] now a very meaningful part of our business. Hoping that next year, we will have probably much lesser or almost 0 disruption because of this. Looking forward to the dine-in business, again, coming back, the classic bouncing back. As Raj has mentioned in the previous call, during this COVID period, our check sizes have grown by about 40%. And if traffic comes back vehemently next year, FY '23, we will have a very different FY '23. So with this, we will open the floor for Q&A. The team is here to take on any questions that you may have.

[Operator Instructions] The first question is from the line of Vicky Punjabi from JM Financial.

Yes. So sir, my first question is actually on the margin front. Now I was just comparing the current quarter with the December '19 quarter. So I see a gross margin expansion of 140 bps and an EBITDA margin expansion of 30 bps. I just -- when I look at 2 quarters in terms of character, there is definitely a high element of delivery in this quarter versus -- I mean, delivery mix this quarter versus the December '19 quarter. So I mean, just one of the implications that I could draw out here is that if we have a same kind of a revenue per store and the delivery mix is higher than what the dine-in mix is, it would have an adverse impact or on like-to-like basis the margin would be lower, the EBITDA margin would be lower. Is this a true understanding or the fact is that the incremental prices on delivery does offset the incremental expenses here?

So Vicky -- yes.

Sumit, go ahead.

Thanks. So Vicky, yes, what you are seeing is correct, that dine-in and delivery has a differential in terms of margins at an EBITDA level. But to your question, first, saying does the price differential offset the impact, yes, price differential and the idea of having a price differential is to offset and be competitive on the platform. So that does help retain the gross margins. There is an incremental cost to do that business and that does impact on the EBITDA side. But what we've always been maintaining that as the business starts recovering and as we see the restrictions on the COVID coming off, we very clearly see that the business will move towards and tend to move towards dine-in. That's actually the character of the QSR business in India, and that's what we've seen. If you look at even our slides on what we have observed ourselves of dine-in recovery, as the restrictions kept on moving out, we've constantly seen the share of dine-in increasing. And you can see, literally in the month of December, we go up to 86% of pre-COVID levels of dine-in. So while it does impact, we do strongly believe that as restrictions go back, we will go towards and closer to the pre-COVID levels of dine-in-delivery ratios. That's something, which we strongly believe. Secondly, I kind of did cover this as a part of my mention. The gains on gross margin that we've got so far, we strongly believe that we should -- we strongly believe that we will sustain it and we kind of improve from thereon. So just to summarize. We strongly believe that we are a dine-in-led business. As the restriction goes back, we will go towards a higher share of dine-in. And secondly here, the gains on the margin side that we've got, the gross margin side that we've got, we will be able to sustain and only grow from thereon.

Okay. So sir...

Just one thing I wanted to kind of build up on what Sumit mentioned in terms of -- as I mentioned that check sizes during this period has gone up. So though your percentage margin may have come down, but when you look at the dollar margin or the rupee margin points because your check sizes have expanded by 40%, overall, from a business standpoint it's not made a very meaningful difference. Though on a percentage basis, it will look up that way. But on an absolute basis, it's not make too much of a difference. Sorry, Vicky, go ahead.

So I just wanted to just clarify my understanding out here. What we mean is that deliveries stayed strong while dine-in recovers. So overall, once the dine-in recovers completely, we will have a higher revenue per store what we were seeing versus pre-COVID levels. And plus the margin -- the gross margin would continue to strengthen from thereon, partly also -- I mean, despite the dine-in proportions moving up. Is that -- is my understanding right out here?

Yes, yes. Absolutely, Vicky.

Just -- there's 3 numbers I want to share with you. We spoke about this in the last quarter. We said that we would exit this year, fiscal year in March, growing north of 66% on margins. We have already done that in Q3. We said that we would exit Q3 -- we would exit this year, fiscal year March, getting sales to back to pre-COVID levels. We have already got this in Q3. We said that we will get to 320 restaurants by March of this year -- fiscal year, and we are well on track to hit those. So that's why we kind of put this into a very good quarter because it helped us with all the opening ups and the market and the malls and so forth. It just kind of got us a quarter head start on all our numbers. And that's why we are kind of placing this as a good quarter.

No, sir. Yes. Definitely, it's a strong quarter. Just one more thing I wanted to understand on the BK Cafe expansion side, I mean, while we are currently kind of piloting the model. Once we have -- once we firmed up on the model side, there is something on the number of stores that's being expanded generally and then there is BK Cafe that comes in. So on the new store launches, what is the thought process here? Do we currently go without the BK Cafe and then in 3 to 4 years you have to again renovate to get BK Cafe? Or would we actually go with a BK Cafe across most of our new store expansions. Just wanted to understand the thought process on cafe expansion.

Yes, Vicky. Cafes are here to stay, right? So all our new restaurants are actually designed with cafes in them. So we will be opening cafes all across our portfolio. Now there's -- as I said, I think 2 quarters ago that there will be a full-fledged cafe. And then in the food court, we will have -- what we are calling as a B model, which will have a counter area and they will have the menu board and the cafe menu over there. But we are now imminently building these into our designs. So all the new design actually already -- we have already done that. So all the new restaurants that we're opening now already have cafes inside them. And this will continue as we continue to build restaurants next year and the year after that. I hope that answers that.

[Operator Instructions] Next question is from the line of Anish Moonka from JST Investments.

So when I tried to understand the long-term business economics of a QSR company, and please correct me if I'm wrong, customer retention plays a very critical role. So not just to check if the customer is coming back to us after visiting once, but also to check that is he or she coming to us in 7 days, 14 days or 28 days and thereafter to get data-driven insight as to how much the integration are we able to make in their day-to-day lives. So what does your data tell you and where is the direction?

Kapil, will you take that?

Yes. Sure, Prashant. So we are actually in the midst of working on a very comprehensive CRM tech integration and a long-term sort of play around understanding customer through data that is already in the box, and we should be rolling that out in the coming quarter. So far, what we are getting from researchers and customer interactions, both qualitative and quantitative, is that we have seen a good incidence of our products on the Stunner Menu and the new launches that we have done in every check. So customers are trying it and it sustains over time. So we're seeing that stickiness on the menu. But as I said, we are in the midst of working on a very comprehensive CRM program, and we should be able to share a lot more data-based insights in the coming quarters.

Noted. So secondly, on the menu. So as we see it, the majority of India remains dal roti and chawal eater and would go for a QSR not more than once a weekend. As we saw with KFC, when they were struggling 10, 15 years ago, to become every day brand, they introduced the rice box and that changed everything. So how is Burger King planning to position themselves as a week day brand as we understand that's where the untapped volumes are.

Yes. Thank you, Anish, for that question. If you actually reflect back on QSR usage in India today, it's approximately about 8x in a given month, right? So that's how often they are going into the restaurants. Those numbers in the other Asian markets, for example, China and Indonesia, are significantly higher. China being at about 28x a month and Indonesia is somewhere in between those 2 numbers. So that growth is happening as we speak now. When I came to India in 2014, the concept of burgers and Western QSR was basically a snack. And people would have that snack and then go back and have their dinner. We introduced and strongly went after the concept of combos. And we really took the lead in making sure we came up with some fantastic introduction strategies. At that time, we were actually taking a combo at INR 50. So take any product at INR 50 became a combo. So we included that kind of culture at that time. We have not looked back from there. We continue to drive that experience with our customers. And today, if you look at our combo percentage, it significantly climbed beyond what we used to do, which is at 26%, 30%, this has gone north of that. The other 2 things that I'll tell you is how we learn that these repeat businesses, it's through products. It's through our product mix. So if you look at our product mix, we started The Kings Collection, which is a gourmet line of products. And lo and behold, we are expecting to sell a few of those, and now today, we are selling upwards of 80 of those units per day. And that is not with 100% of the traffic back in our restaurants. So there's massive room over there. That's sustaining. It is not going up and down, it's sustaining. It's continued to grow from there, which tells us that, that entire menu, The Collection, has resonance with our clients and they like it. The second one is this Stunner, the introduction menu or the entry-level menu, and we shared those numbers with you -- or Kapil shared those numbers with you. Those are gaining massive traction. And you can imagine, we have not yet gone on TV this quarter and the only promotion we had was last year as we went on television with Stunner Menu. I think this is the other one, which will gain and will drive people into our restaurants at the entry level for trials. And then we have added menu to our Kings Collection to gain a check from thereon. So as we look at the business, we feel strongly that we have put in the discipline and the item and the structure -- menu architecture in place, which will give us long-term growth on not only repeat business, but also on new trials because of the entry-level menu.

Just to add to what Raj spoke about our menu being structured in a manner. To your question, we have also been very conscious of the Indian taste palate in the design of the menu. From the day 1 when Raj set up the whole piece of the leadership team, the entire menu that we sell in India is an India exclusive menu designed to the taste preferences of the Indian consumer. And even today, we continue to stay focused on that. So ideas like, for example, the Masala Whopper is a Whopper, which is made for the Indian taste palate. And you'll see many more ideas that come out like that. For example, the Tikki Twist burger, it's got products and ingredients which are -- because Indians like multi-textural food, it's called crispies and spicy sauce, right, the Makhani burger. So we have a menu, which does reflect the taste preferences of our Indian consumers.

The next question is from the line of Avi Mehta from Macquarie.

I just had 3 questions. First, I wanted to kind of just understand is there any divergence in the gross margin between time and delivery? What I mean is do people tend to order more premium products online versus off-line? Or does the check size have any difference in the gross margin?

Yes. So first of all, Avi, to your question on check sizes, we've actually seen very similar check sizes between dine-in and delivery. From the perspective of gross margins that we realized on both the product is very similar in terms of percentage as well as rupee margins. The reason is that we do follow a price disruption as the mechanism to kind of make sure that we do realize very similar gross margins from both dine-in and delivery as a business model.

Perfect. That's clear. And so I was trying to kind of see if that is a -- if the change in mix has any risk score and how earnings that there has been in that gross margin. Now I'm clear on that. The second bit is essentially on the operating restrictions that we have seen because of this new COVID wave. Could you give us any color over there on how the customer response has been from this disruption? And more importantly, I know it's crystal ball giving to some extent, but any expectations that you might have on by when do you expect dine-in to kind of get back to normal.

Yes. So yes, thank you, Avi. If you reflect on what's just globally happening, right, there are markets now opening up. U.K. is one of those markets that substantially opened up. We are seeing here, for example, in Karnataka, just recently they kind of opened up and removed the weekend curfews. Those kind of hit very hard to the business when there's a curfew on the weekend where we do a lot of business. So those are slowly kind of being taken off. And you're absolutely right, we don't have a crystal ball or we don't plan to have a handle or knowledge on how this is going to progress. But all that we're seeing around is that while we had a kind of a restriction here in January as Omicron kind of came and set in, it is kind of from whatever we are seeing in terms of the markets opening up kind of going into the rearview mirror slightly. I would say that cautiously because we have seen this go back and forth, and everyone on the call is aware of that. So -- but for us, we are looking forward to a very, very strong next year because we have -- see, the discipline is we have put the menu, the architecture, the business economics and the way we have structured our restaurants in the last 2 years. They'll plan ready for the next year. So we dressed ourselves mentally and physically in our restaurants with all the initiatives we have taken. A good example of this app. We launched our own app while we were doing transactions on deliveries through aggregators doing a fantastic job with that. We have a spring way above the average in the industry in terms of daily sales to aggregators. But we brought the discipline of coming up with this app. We have gained 41% quarter-over-quarter transactions on our app. This is a very strong tool. It's going to help us understand our consumers better. It's also going to give the last mile kind of experience -- a strong experience to our consumers. So this is another tool that we prepared going into next year. So if you would look at the dress-up, we've got Cafe ready to rock and roll for next year. We have got an app that is very strong and gaining momentum. We have got our entry-level menu, Stunner, which we launched during COVID, which is gaining traction and gaining gains. You will see that this will be something that we will be mass advertising across the country, right? So that's also in place. And then, finally, we have this -- the growth of our restaurants, which continue in the direction. We have not missed a beat after we -- came after the second wave, we haven't missed a beat. We have put up a pipeline together. Today, we have 65 restaurants in our pipeline. We have 8 or 9 in construction as we speak. So we are not skipping a beat. We have all planned ready to rock and roll for next year. We feel very strongly about that year.

Sir, if I understand correctly, you're saying that as of now, it seems the consumers are taking it in their stride and we should -- I mean, given what we've done, it seems hopefully, kind of touch wood or fingers crossed, things to kind of fall in place next year. Is that understanding, sir, I just want to clarify that.

Yes. Anish (sic) [ Avi ], as a company, what you do is you prepare yourself, right? You compare yourself if the business comes in next year, are you prepared for it? Are you prepared if there is going to be restrictions? And what I'm saying is this company has prepared itself from all lens. From technology, from the food side, the way we are constructing our restaurants, the way we are moving forward with our menu, we have prepared ourselves to actually go head on with the business next year. We expect and we feel strongly about next year, and we are prepared. We have put all our tools to get us to move forward next year.

The next question is from the line of Akshen Thakkar from Fidelity International.

Congratulations on a good set of numbers. I have 2 questions. One was a housekeeping question and one was a quick query question. Housekeeping question first. On the call, you mentioned that your margins across even delivery and dine-in on gross margins are same. Just wanted to double click on that a little bit. So if you have higher prices and gross margins are same, does that mean that you are treating delivery charge net off from sales or as a part of call? Or do you have it as other expenses? Because if it is part of other expenses, accounting would mean that gross margins on delivery are higher and at the EBITDA level maybe you are similar. So this is your questions on that. I'll get their answer and then ask my second question.

Sure. So Akshen, one is that, yes, there is a price differential. There is also discounting that happens in order to be competitive on the platform. And hence, that's the offset that allows us to maintain or manage very similar margins between dine-in and delivery. To your question on the delivery charge or the cost that we incur, that is the effectively kind of would sit part of other expenses line on our P&L. The cost that we incur to do that business is part of other expenses line.

Okay. Sir, is my understanding then is correct, the gross margins are similar for dine-in, and then for delivery that would mean that your EBITDA margins are lower today?

On the delivery side, yes, because there is a cost of -- incremental cost of doing that business, yes absolutely. And...

Okay. And when you compare -- you mentioned that you started the deliver with e-bikes. When you compare cost of delivery for [ cellphone orders ] versus on platform. So is that a difference today in terms of cost of order?

So at the moment, actually, we're just kind of starting to build that entire piece. And our intent is really speaking, strategic in nature when we are saying we want to do our delivery on our [ phone ]. And if I was to kind of market the entire piece, the first part, and in one of the questions that I think Anish had asked, we want to effectively just kind of make sure that we understand our customers better so that we can service them better. That's the first part that we want to kind of work towards. The second part is the experience that the customer gets when he gets the food at home. We want to make sure that, that experience is kind of far more superior when the order gets delivered through our [ phone ] platform. The third piece, and Raj was just talking about the technology investments that we've done. And today, our technology investments are done not from the perspective just in delivering or servicing the customer purely from a delivery perspective, but to engage with same or all different platforms or all different ways in which we service or connect with the customer, be it delivery, be it dine-in, be it takeaway. So it's a completely different perspective with which we are just building this entire environment. Of the environment, reducing or having our e-bikes is one piece. At this point in time, we are higher in terms of cost. We would be higher than what we would incur with respect to aggregators as far as we are concerned. But we -- there also, we've kind of very clearly laid out the path of how we would get in line with what we incurred with respect to aggregator and compared to what we -- aggregators very clear. And we see as well -- as we get scale, we would effectively be able to kind of get in line with those costs as well.

Okay. Got it. The second question is a little more quick query. I'm just looking at Slide 11 in your slide deck, and I'm comparing margins from Q3, where your -- what has seemed to have grown more or less in line with sales. I'm talking about restaurant level overhead and the margin improvement essentially come from a little bit of margin improvement and corporate overhead improvement. And you are, let's say, 11.5%, 12% handle on company level at this time and [ many things have to go through ] low teens, whatever lines up happening. The path to that, in your view, will be better absorption of corporate overhead? Or do you see that there is some scope of operating leverage on employee or other expenses? Since that you've seen recovery, but overhead absorption, I would -- above sort of corporate EBITDA level would have been slightly better, but that seems to be growing in line. Now it could be possible that in Q1 and Q2, maybe you had costs which were lower and that business has come back when you ramped up those parts. So maybe [indiscernible]. Just wanted to get your thoughts, we think about multimedia business -- will it be, a, gross margin; will it be, b, corporate overhead; or will it be c, other restaurants that are lower...

So maybe I'll try and kind of answer that and that maybe Raj can add to that. So very clearly, one is gross margin and we've been saying that we will work towards improving the gross margin through various efforts, growth in scale to kind of new categories. And Cafe is a classic example of that, which we strongly believe should help in improving the gross margins from where we are. So that's the first part. The second part. Initially, when we were talking about the recovery, we spoke about saying that we expect the business to kind of move towards more dine-in recovery kind of -- we very clearly at the same time understand that the opportunity that we have with respect to the sales that we can achieve at the store level is not fully captured in as we still are getting out of COVID. So effectively, at the store level, we expect that as we continue to kind of improve our sales from the current levels, we will see the broader absorption of the cost -- fixed cost at the store level as well. One of the key ones would be on the rent side, and that's something which we expect that should kind of also help improve. And then largely, there is -- we expect that the corporate costs in terms of growth will grow at a slower pace in terms of -- compared to the larger growth in revenue that we will see. And when we talk of larger revenue growth, it will be same-store as well as new expansion. So we do expect over a period of time, effectively, even the corporate costs should start kind of broad basing from the current levels that we have. So we -- it's very clearly defined into 3 buckets, very clearly for us, gross margin improvement, a broad basing of store-level fixed costs largely on the rental side and the broad basing of the corporate costs on an overall basis. So that's how we will look at it. It's not going to be just one line. Raj would give...

No. That's a comprehensive answer. So basically, I mean, your rents, I mean, that's a big chunk over there, right, if you look at that number over there. That's a direct reflection of top line, right? So as you top line grows, you move from MG or minimum-guarantee rents towards percentage rents, right? So as that change happens, as volumes increase, you will find that number shrink in the middle, the expense line. And the corporate overheads that you can see between Q2 and Q3, you've seen a significant decrease in overall corporate overheads. And those -- as the business grows, and that's why we call this a scale business -- scale cash business, because as that number of restaurants grow, the number of -- the sales grows through those restaurants, Cafe sales gets added on and so forth, it does not add additional corporate level kind of expenses. So you will find that number kind of shrink as we continue to grow. So that's a direct. So both those lines are actually a direct reflection of the sales numbers on top, both existing restaurant sales as well as new restaurants coming in and adding new sales.

The next question is from the line of Pratik Rangnekar from Credit Suisse.

And congrats on a good quarter. I think in one of the earlier calls, you had mentioned that in the North region, some of the protests and all were having an impact on your revenues or your ability to capture sales. But if I look at the jump between the quarterly average and the December exit, I would have probably expected a bit more sharper jump in the North area. Any thoughts on why that region is lagging?

Yes. So that's a good question. The answer is no different than what we gave before. It is exactly the reason for it. We have a significant of our portfolio in -- on metro stations. And as you can look at the metro, especially in the NCR area, it is still not back, right? It's running a percentage of what it used to run pre-COVID. So that's a significant impact because those stores, we had, I think, between 18 to 20 stores in that market -- in that metro market. Also, if you see that we have built basically half our portfolio up in the North. And many of these restaurants are in malls. And the number of malls also in the North is higher than what we see in West or what we see in South. So you will find that as the malls completely open up, whether it's this policy of double-vaccinated people going inside the mall, but today, the malls are open. You can go to the food court. You can buy the products, but you cannot sit there and eat. Those things are still in place, right? They're still in place in several markets. And as those things get removed and we come back to normalcy as whatever the new normal is, then you will find that these will effectively click it very quickly. Very quickly, you will find because it's a captive audience, right? Metro is a captive audience and so are the malls. So as soon as the restrictions are removed, very -- you will see a very immediate action on the other side with sales increasing. And that's just direct correlation for that.

Got it. So one question on the gross margin part is very encouraging to see the continuous progress that we have made here. Any color that -- any more color that you can provide on how this has come across? Is there a pricing element here or maybe some breakup that you can provide between pricing and mix here? And also if you could quantify maybe probably the impact of RM inflation that you are taking this quarter?

Yes. So first, I'll just quantify saying that we are supposed to add 66% as we exited Q4, we have already done that. See, basically, if you look at gross margins, right, how do these gross margins improve as you grow up? For example, I'll just make this -- simplify this, it's not as simple as it is, but I'll simplify this. You have a restaurant that is potentially a remote restaurant in a city where you're transferring your trucks for one restaurant. As you build 2 restaurants, the same truck is carrying food for 2 restaurants. When you go from 2 to 5 restaurants, the same truck's carrying food for 5 restaurants. So your transportation cost, which is secondary transportation costs, will continue to go down, right? So that has an impact on your total GP. Secondly, as you build a significant amount of portfolio in a certain market, then you are able to get local vendors. Whether it's vegetables or other products, you can get local vendors there and that drives down even more the transportation cost as well as bringing in more vendors is always attractive in terms of total buying ability and the cost of buying. So these things are cumulative. And we have a very strong supply chain department led by Sandeep Dey. And when we did this in 2014, we set this travel journey. We have spoken about getting to 66%. We have spoken about going from 66% to 68%. None of that has changed. All the work behind that, whether it's in transportation, whether it's in the way we get different new vendors to come in or whether it's basically engineering our products, whether it's going down to ingredient levels, we even negotiate ingredients on behalf of our suppliers that process our food. We go and negotiate ingredients. So the ingredients purchased by them go cheaper and then that goes -- gets transferred directly to us. So it's just hard work. And it's not something that we are all brilliant people here. We're just hard-working group of people that continuously work hard every day to continue driving this number below, and Sandeep and his team does -- do a great job doing that.

Our next question is from the line of Pranav Tendulkar from Rare Enterprises.

Sir, just 2 questions. What are the long-term view on the royalties? I might have missed it in previous conversations. That is one. And second is what is the KPIs, top 5 KPIs, and priorities for them?

Okay. So royalties, we kind of have spoken about this several times, but I'll just kind of reiterate that. We started off in 2014 paying 2.5% royalties on restaurants we opened that year. The following year, the royalties went from 2.5% to 3%. And when I say we have 2.5% for the ones we opened in 2014, those were for 10 years, right? For 10 years, they will maintain 2.5% and then they will go up to 5%. Those that we opened the following year where we had 3%, they stay 3% for 10 years and then go up to 5%. The royalties are capped at 5%, right? They're capped at 5% and they don't go up from there. Our agreement -- our master franchise agreement is until 2039, right? So we have the luxury of a very good royalty rate and that royalty rate is capped. So that's good news for everyone investing in this business, certainly very good news for all of us over here. Now the KPIs we are talking about, the first KPI of this business is the most important KPI and that's traffic. How many people come into your restaurant on a daily basis, how many people place an order? It's called -- we call traffic as the blood of this business. The blood is what dictates every other number that happens in this business. So traffic will be one of the biggest and strongest KPI of this business. Sales obviously with check APC, simple definition of sales. As I tell my team over here is how many people come in and how much do they buy? That's sales, basically, right? So that's a major KPI. Our gross margin, we have spoken about in a big way, it's a major KPI. Growth is a KPI for us. We want to make sure that we are continuing the growth. When we say sales, we not only take sales with existing restaurants and new restaurants, we also look at things like Cafe coming in, adding sales during breakfast daypart. Cafe coming in and adding sales between lunch and dinner, right? So this is very strong initiatives that we put in, whether it's Stunner menu, whether it's The Kings Collection, whether it's the Cafe, whether it's our app, all these are to drive sales. So that's a major KPI. Growth is -- obviously, I just spoke about it. And obviously, our restaurant-level EBITDA margin and our company-level EBITDA margin. So this is how we run our business. These are the boxes that we put on our chart. If you come and see our MBOs, our management business objectives, all our people have these business objectives on their MBOs. Hope that answers. Thank you for your question.

[Operator Instructions] We'll be able to take one last question. That is from the line of Shirish Pardeshi from Centrum Capital.

Just 2 questions. The first question is on -- if you can spend a minute or 2 how we should look at the BK Cafe business and maybe if you can share some commercials just purely from the building our model perspective like 2 to 3 years. Maybe if you can outline what is the number which you are looking? And quickly a follow-up on that. What is your experience average? Too short, I mean almost 1.5 months, you would have spent some time on building this business. But initial feedback on the customer traffic and things, how it is moving.

Yes. I'll turn it over to Kapil to give you what the customer reaction so far, has been very positive. But just on the guidance and numbers, I think Prashant said it on the onset, give us some time. We don't want to be sharing half numbers. We want to understand it very well. When we say we have 18 restaurants open, many of them are open only for a week -- maybe a little more than a week. So we don't want to, at this point, sit here and kind of share half numbers. So please give us some time. We are extremely delighted with what has happened with this Cafe business. We are extremely delighted with the products that we have put forth. Our objective and subjective, both quality and -- qualitative and quantitative research, whatever, we have done that. Kapil will share his thoughts on that. But it has been overwhelmingly accepted as a very good rollout, and we are extremely happy with it. That's why we pulled it up. We are supposed to do this in this quarter, during Q3. And we are not taking a pause. We are going forward and continuing to build these cafes. So it can tell you how strongly we feel about it. Kapil, you want to add anything?

Just to add to what Raj said, see, it's about how we have laid the foundation of this business and we continue to learn from all the experience that we're gaining from these cafes. First of all, good traction on the menu. We're getting good feedback, as I said in my slides, on beverages, both hot and cold and also on the food because now there is consumption of a lot of hot beverages in the North because it's very cold there and a lot of cold weather in the West because of weather. That mix could shift as the weather changes. So as I said, we'll keep learning from it. The food menu good traction and we keep optimizing it. We keep adding new products based on customer feedback, and you will see that menu evolve over a period of time. In the next quarter, we will definitely have more to share with you on this business.

Okay. Just last question on the Burger King Indonesia acquisition. Somewhere I read, you have done the acquisition of 83%. While it also says that cash-free and debt-free basis of 100% acquisition, slightly confused, is it that 100% acquisition? Or if it is not, who owns the balance 17%?

Yes, I take that, Shirish. So currently, as you know, we explained in the details in the call when we declared for the Indonesia business. The balance is owned by the original franchisee in Indonesia. It's a retail group out of Indonesia, very large retail group called Mitra Adiperkasa Group. If you go back to those transcripts, you will realize that besides acquiring 83% of this business, one of the conditions to bid for this business was to infuse $40 million into the Indonesia business because the Indonesia business is likely to grow from where they are today, which is about 176 restaurants to about 350 over the next 5 years. So if you look at that $183 million, that's the enterprise value post all the adjustment in terms of lease, lease liability, debt-related, normalized working capital. The equity value of this will come anywhere between $125 million to $130 million. We are currently acquiring 83.5%. Post the infusion of $40 million as the primary infusion into the Indonesia business for their expansion, we believe we will end up owning about 90% of the Burger King Indonesia and 10% will continue to be held by the partner, which is Mitra Adiperkasa Group.

Thank you. Ladies and gentlemen, due to paucity of time, that will be our last question for today. I now hand the conference over to the management for their closing comments. Thank you, and over to you.

Okay. Thank you. Thank you so much. Again, really appreciate everyone joining the call. Your enthusiasm with the questions, thank you for that as well. We have had a good quarter, and we're not sitting on it. As a team, we are continuing to address the business, address the tools of the business, continue to plan around the business getting ready for next year. I think this acquisition of our business in Indonesia and continuing to grow that business over there, growing the business over here, building cafes here in India, building cafes in Indonesia will become part of what we will be doing going into next year. We feel strongly about next year. We feel that as things come back, normalcy, that the economic model that we have put together in the last 2 years is becoming even stronger. And we feel that this will be a driving force to what we will do in the next year. So thank you, again, for joining the call. Really appreciate it. Please stay safe, and have a good evening.

Thank you very much. Ladies and gentlemen, on behalf of Edelweiss Securities, that concludes this conference.