United Foodbrands Limited (UFBL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Barbeque Nation Hospitality Limited Q2 FY '24 Earnings Conference Call hosted by Ambit Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Mr. Viraj Sanghvi from Ambit Capital. Thank you and over to you, Mr. Viraj Sanghvi.

Thanks, Malcolm. Good evening, everyone. Welcome to the Q2 FY '24 Earnings Conference Call of Barbeque Nation Hospitality Limited. From the management, we have with us Mr. Kayum Dhanani, Managing Director; Mr. Rahul Agrawal, CEO and Whole Time Director; Mr. Amit Betala, CFO; Mr. Bijay Sharma, Head of Investor Relations. Before we begin the presentation, I would like to remind you that some of the statements made in this conference call by the company may be forward-looking in nature and may involve risks and uncertainties. Kindly refer to the earnings presentation for a detailed disclaimer. I now hand over the conference to Mr. Kayum Dhanani. Thank you, and over to you, sir.

Thank you. A very good evening, ladies and gentlemen. I take the pleasure in welcoming you to quarter 2 FY '24 conference call of Barbeque Nation. While the demand environment continues to remain challenging, we see improvement on sequential basis, specifically versus the lows of quarter 4 FY '23. During the H1 FY '24, our operating revenues were flat at INR 626 crores. Operating revenues declined by 2.8% in quarter 2 FY '24 due to the impact of increased number of vegetarian days in the second quarter. This specifically impacted dine-in demand in our business as compared to the previous years. Our dine-in revenues were lower by 5% during the quarter and lower by 2% during H1. Our delivery revenue remained strong with a growth of 11% during the quarter and 12% during H1 FY '24. During the quarter, we opened 4 new restaurants, which included 2 restaurants in Barbeque Nation India, 1 in Toscano, and 1 in Barbeque Nation in International business. We closed 4 restaurants during the period resulting in the net network of 212 restaurants. In our core Barbeque Nation India business, our focus during the year has been to increase capacity utilization rather than addition of new stores. We were focused on rationalizing the existing network through market consolidation in few trade areas and the existing few underperforming Tier 2 and Tier 3 markets. We also launched our first Fiesta restaurants in Kolkata, which has seen encouraging initial response. Our Toscano business has grown at 20% versus the previous year with a strong operating margins. Similarly, our Barbeque Nation International business also continues to do well with over 25% year-on-year revenue growth and a strong operating margins. In October 2023, we also completed the acquisition of 53% stake in Blue Planet Foods, which operates a-la-carte pan-Indian cuisine restaurant under the brand name of Salt. The customer segment catered by the brand is similar to Toscano, and we believe both brands will complement each other well. We believe that the demand environment has bottomed out, which is evident from the sequential improvement that we experienced in quarter 1. Also, our revenue run rate per outlet in Q2 this year was better than Q4 FY '23, which is a seasonal stronger quarter. Our medium- to long-term growth plan remains intact. We remain focused on driving SSSG growth for Barbeque Nation India business and expansion-led growth for other businesses. Moreover, the launch of Fiesta and acquisition of Salt has resulted in the additional levers of growth for us in the near term. Our focus is on network rationalization, and therefore, our pace of network expansion will remain slow. Our portfolio rationalization initiatives will be completed by end of the year, and we anticipate an increase in our network expansion pace by early next year. For the last 5 years, we have diversified from a single brand-focused food service company to a diversified food service company, with a strong and scalable brand across All-you-can-eat, A-la-carte and Delivery segment. We endeavor to grow each of these brands to reach sizable scale, which is reflecting of the India growth story. With this, now I hand over to Rahul to take you through the performance during the year. Thank you very much. Over to you, Rahul.

Thank you, Kayum. Good Evening, everyone. The company delivered an operating revenue of INR 626 crores in H1 '24 and INR 302 crores in quarter 2 FY '24. As compared to the previous year, the operating revenues were flat in H1 and registered a decline of 2.8% during quarter 2. Our dine-in revenue for the quarter declined by 4.9% to INR 258 crores. Our delivery revenue recorded a strong year-on-year growth of 11.3% to reach INR 44 crores. Delivery sales accounted for 14.5% of the total revenue during the quarter. Same-store sales growth for the quarter was negative 10.7% compared to last year, predominantly due to high number of vegetarian days during the quarter compared to the previous year. During the 4 months of July to October, around 76% of the period, as against normally 50%, was spread over days where non-veg consumption is not preferred in India. Matured restaurant portfolio reported an annualized revenue per restaurant of INR 6.1 crore during the quarter with a restaurant operating margin of 13.3%. We noted same-store sales growth decline in this portfolio. New restaurant portfolio reported an annualized revenue per restaurant of INR 4.7 crore with restaurant operating margins of 5%. With increase in average aging of new restaurants, the revenue run rate and operating margins of this portfolio improved on a year-on-year basis. Gross margin for the quarter was 65.9%, an improvement of 200 basis points on a sequential basis, and it was in line with our historical trends. Consolidated reported EBITDA for the period was INR 48.6 crores with margin of 16.1%. Our pre-Ind AS adjusted EBITDA for the period was INR 17.7 crore with a margin of 5.9%. The EBITDA margins remained relatively flat compared to quarter 1 FY '24 despite around 7% sequential decline in operating revenues. We were able to restrict the impact of operating deleverage and retain our margins due to improvement in gross margins, portfolio rationalization, and various cost control initiatives undertaken over the last few quarters. Our restaurant network, as of 30th September 2023, stood at 212 restaurants. This included 188 Barbeque Nation India restaurants, 8 Barbeque Nation International restaurants, and 16 restaurants of Toscano. During the quarter, we added 4 new restaurants, which included 2 Barbeque Nation restaurants in India, 1 Toscano, and 1 Barbeque Nation International. We also closed 4 restaurants during the quarter. Over the last 2 quarters, we had calibrated store expansion in our Barbeque Nation India business, and we are focused on increasing capacity utilization of existing stores. We focused on rationalizing existing portfolio through market consolidation and exiting a few unprofitable Tier 2, Tier 3 markets. Over the period of last 12 months, we have consolidated some of our matured trade areas and closed 12 restaurants in these trade areas. While overall revenues have shrunk due to closure of these restaurants, our overall restaurant operating margins increased by upwards of 10 percentage points, and remaining restaurants also registered encouraging same-store sales growth. The absolute operating profit have also been higher in these trade areas. Similarly, over the past 1 year, we have cumulatively exited 7 restaurants in Tier 2, Tier 3 markets. We continue to operate 50 restaurants in Tier 2, Tier 3 markets, and I have noticed improved performance in overall portfolio. We have another 6 restaurants under watch in our network rationalization plan, and we may decide to exit this in H2. This brings us to the end of our network rationalization plan. During the quarter, we launched our first Fiesta restaurant in Kolkata. Fiesta is a multi-cuisine, all-you-can-eat format with a vibrant and youthful interiors. The brand retains the core attributes of Barbeque Nation through its focus on value experience and service. The network rationalization strategy, coupled with cost control measures, has helped us to retain our margins, sequentially despite being a seasonally weak quarter. We anticipate the benefits of these initiatives to further enhance our margins in the coming seasonally stronger quarters. We also continue to invest in enhancing guest experience through culinary developments as well as restaurant upgrades. During the first half, we have completely renovated 4 of our existing restaurants, relocated 2 restaurants in the same trade area and also undertook minor refurbishments across 10 of our restaurants. The performance of Toscano remained strong, with year-on-year revenue growth of over 20% in quarter 2 FY '24. During the year, we have already added 2 new stores to the portfolio, and 3 stores are in pipeline, which are expected to launch this fiscal year. In our Toscano business, the focus would be expansion-led growth coupled with maintaining same-store sales growth. International business also continued its strong performance with year-on-year revenue growth of over 25%. During the year, we've added 2 new restaurants to the portfolio. Our focus would be to enhance capacity utilization of these newly opened restaurants and ensure that they reach their optimal levels faster. Delivery business continued to grow both on a year-on-year and sequential basis. Growth in our Delivery vertical was driven by volume growth for UBQ coupled with increased penetration of our biryani brand, Dum Safar. We have also added an additional lever of growth by acquisition of brand Salt. It currently operates 6 restaurants and other 2 are under construction, which are expected to launch during this fiscal. The focus for this brand would be expansion-led growth along with maintaining same-store sales growth for existing assets. Going ahead, we remain cautiously optimistic that various initiatives undertaken by us, coupled with upcoming seasonally strong quarters, would help deliver strong growth and improve our margins. Thank you. With this, we can open the session for Q&A.

[Operator Instructions] The first question is from the line of Harit Kapoor from Investec.

I just had 2 or 3 questions. First thing was on the store expansion. So, Rahul, if I look at -- we will be going from 212 to 220 and probably closing 5 or 6 also in the process. That would be like a 14-store addition and with 3 or 4 being non-Barbeque, probably 8 to 10 kind of stores in Barbeque for the first -- for the second half. Assuming that next year, we don't have any closures because you'd be done with it by then, would that be a gross run rate to look at, like a 20-odd store expansion? Or is it still too early to kind of finalize F '25 plan?

So thank you, Harit, for this. So I'll tell you, when we say 220 by end of the year, we also include Salt that we started consolidating in our numbers from quarter 3 onwards, which is 6 restaurants currently. Like we mentioned, today, we have around 4 brands that we can grow. Toscano will have around 3. International, we don't have any pipeline currently. Salt, again, we'll have another 3. And in Barbeque Nation, we have around 5 restaurants under construction, under pipeline. But when all these put together, including some closures, we expect the network to be around 220 by end of the year. Next year, again, I think my guess is we will be in a range of between 25 to 35 restaurants, which will be a mix across all these 4 brands, which is Barbeque Nation, Fiesta, Toscano, and Salt.

Got it. The second question is on Fiesta. So if you could just kind of explain what kind of customer set are you looking at, why you felt that there was another need of all-you-can-eat kind of a format, and is it just the fact that this is a lower price point, did you feel there was a kind of an ASP issue at Barbeque and that you could use through another price point, just -- if you could just give some thoughts on why Fiesta?

Yes. So I think we are just capturing the food services market, and specifically, all-you-can-eat food services market at a different price point. This is -- there's some difference in cuisines. Barbeque Nation cuisine is more tilted towards high protein items, like seafoods, prawns, and also North Indian cuisine. This is pretty much multi-cuisine, which addresses a different segment. We don't have live grill on the table, which also reduces the cost of CapEx in this segment as of now. And the menus have been also suited to give a different option to the same Barbeque Nation customers or also look at opportunities to grow in some of the Tier 1 and metro markets that we are in. So the response from -- the first response from the store for 2 months has been very encouraging. And we'll wait for maybe a couple of quarters to look at how this unfolds and then kind of take it forward. But currently, we're also under process of looking at opening 2 Fiestas this year.

Got it. Got it. And the third question was on the demand side. So you did mention, obviously, this has been a unique year where some of those days have been lower. I would understand that even October would have been challenging. So anything to suggest that maybe the second half of October or early November has seen an improvement in growth because I think you've not had more than 2 weeks of data to kind of talk about it, but I just wanted to get your sense on it.

So you're right. So the 2 weeks data, and during the [indiscernible], which is again vegetarian days, I know the business was slow. But post that, 2 weeks have been very good. But I would not jump to make any conclusion in such a short time frame. I think we should wait for maybe November to go and see how this improves. But just to answer, these 2 weeks have been good for us.

Right. And basis -- what you've seen in terms of -- sorry, last question is on the margin side, so would it be fair to assume that given that even though you've shut down these stores, and I think that's driven to at least maintaining sequential margins versus in spite of a lower growth, would the shutting down of stores or the mix would have been the key factor driving it?

So yes, one is that, and also improvement in the gross margin. And there are some cost initiatives that we have taken both at the front-end and at the back-end level. So it's a mix of all 3. And if you look at the history of our company, quarter 2 has been one of the lowest margin period for us. But if you look at over the period of last 3 quarters, maintaining those margins, and in fact, gradual marginal increase on this is very encouraging for us.

[Operator Instructions] The next question is from the line of Harsh Shah from Dimensional Securities.

My first question is on gross margin. Was it aided by lower cost of supplies or it has to do something with better realization? And a follow-up would be, what would be the trend in realization going ahead? I believe the discounts had pulled our realizations quite a bit in last few quarters. So what is the trend we are expecting from here on?

So it's both. The bigger one is increase in realization. So if you remember, in quarter 1, we have done some aggressive promotions, which have reduced our gross margins, and -- but those were discontinued in quarter 2, it helped improve. Secondly, we've also seen softening of some of our input cost, mostly meat items. Under the meat items also, while pretty much the entire meat basket have reduced in terms of cost, we got some benefit also on prawns, fish this quarter. So the gross margin impact has been mix of both. Going forward, I think we don't intend to increase our prices. I think we'll remain at where we are. While there are some projects undergoing in terms of cost initiatives, but I feel comfortable that gross margins would be pretty much around 66% that we have been reporting for quite a few quarters now.

And have we removed the discounting that we were doing during Q4 and Q1? Or some impact is still there in Q2 numbers?

So Q2 numbers have usual levels of promotions and offers going on. We typically don't do significant discounting. But in order to attract demand at different day parts or different weekdays or weekends, we tweak our pricing in different markets. But -- sorry, quarter 2 doesn't have any abnormal discounting or some of these tweakings.

Got it. Got it. And next question is on the opposite behavior trends that we have seen between dine-in and delivery because I believe having more vegetarian days will impact both businesses. So I just wanted to understand such a stark contrast because dine-in is down by 5% almost, delivery is up quite a bit. And even between matured and new stores, our matured portfolio fared poorly. I think SSSG was negative 7%, 8%, while new stores did relatively well. So I just wanted to understand the contrasting behavior.

So frankly, for Barbeque Nation, our dine-in business is a very group-oriented, celebration-oriented brand, be it in terms of we -- our average group size is approximately 5 right now. So when a plan is being made and the group -- somebody follows strictly these vegetarian days, then it gets tilted towards maybe individual consumption or a-la-carte sort of space or something. So in Barbeque Nation is also pretty prominently known for non-vegetarian. So that does impact dine-in business. On delivery, we're also coming off from a very small base -- a lower base in the previous financial year. Otherwise, on delivery, we have seen decent growth pretty much across both our brands, which is Dum Safar and UBQ.

[Operator Instructions] The next question is from the line of Mythili Balakrishnan from Alchemy Capital Management Private Limited.

Thank you for the opportunity. This is...

Sorry for interrupting you, Mythili, your voice is very faint. Could you speak a bit louder or from the headset?

Right. Is this better?

Much better. Go ahead.

Got it. A couple of questions. One is if you could help us understand whether SSSG trends were different across the different formats that we have, for example, Toscano or others. Just wanted to get a sense of is there any difference between what we are seeing in the core Barbeque brand versus the others?

Yes. So Toscano is positive at low single digit, International also is positive again at low single digits, and Barbeque Nation in their business is negative overall. Delivery itself, SSSG is positive. And in India also, I think specifically North, West, they have done better than South.

So North and West have done better than South?

Yes.

Got it. Also, to get a sense of the OCF, if you could help us understand the pre-Ind AS OCF for the first half of how we have fared on that front?

So overall, we have around INR 42 crores of operating cash flow in the first half. This is after accounting for lease rents.

Lease rentals and all that. Got it. Got it. In terms of the improvement that we have seen in the margins, especially for the new outlets, right, just wanted to get a sense from you of -- is this a function of the aging of them? Or is it a function also that even the new ones that you have opened are sort of performing well?

Well, it's a function of aging specifically. Plus, also what happens is when you add new restaurant during the quarter, there is a drag from those new restaurants. So those drags, as we're not opening many more over the period of last 2 quarters, those drags are also not there. So as the existing portfolio that we opened up maybe 2, 3 quarters back, thereby aging are naturally doing better.

Got it. But just to also get a sense of the movement in those restaurants or the sort of operating performance change, which is happening in those restaurants, is it different from our past experience or is it the same in line with that for the new restaurants?

No, it's pretty similar. So some of the new ones that we opened up in, say, malls, so they are doing much better right from beginning and some of the new ones that we opened up in, say, Tier 1 or Tier 2 markets in high street sites, they have a natural part of increasing as their age increases.

[Operator Instructions] The next question is from the line of Giriraj Daga from Visaria Family Trust.

Just a couple of questions from my side. First, you mentioned 220 numbers, that was including Blue Planet? Or you mentioned that we will open roughly next 4 restaurants in the next 2 quarters, and we will end the year with the 220?

No, 220 is including Blue Planet, 6 restaurants of Blue Planet.

Okay. So like we are looking for the end of the year with the 220 kind of a number, right?

Yes.

Okay. Second, when I look at your gross overhead costs, basically, I'm doing gross profit minus EBITDA, so last year roughly, it was about INR 690 crores. And this year, looking at the first half number, we are putting that at about 4% to 5%. So let's say we end the year roughly about INR 730 crores, INR 735 crores kind of a number, what should be the number we should look at? Like I'm excluding the impact of the new opening restaurant, like so the base number should grow at what rate?

Sorry, I didn't catch your question.

So last year, we had a gross margin of -- gross profit of about INR 818 crores -- INR 819 crores. We had pre-Ind AS profit of about EBITDA INR 127 crores. So that overhead cost was about INR 690 crores, okay? This year, first half number, we are growing at that overhead number by about 4%, 5%. So we are probably likely to end that year roughly about INR 730 crores kind of a number, full year. Now I'm saying assuming let's say we are not growing anything or not opening new restaurant, the base number of INR 730 crores should be how much in FY '25? Should it take 5% growth? Should it take 8% growth? Should it take 10% cost inflation there?

In FY '25?

Yes.

So I think at the same base without any new store expansion, our inflation numbers would be anywhere between 3% to 4%. Now, this doesn't assume any variable linked costs that are in these cost structures. So for example, we also pay incentive at the outlet level, which is linked to the sales. So if sales number grows, then those incentives will also grow. But, otherwise, in terms of my fixed cost, which is rent, manpower, all these high-fee cost items, the inflation will not be more than 3% to 4% next year.

Okay. And second, assuming, let's say, this incentive must be billing above second level of SSSG, right?

Yes. So if the sales come down, then it's a certain percentage of the top line.

[Operator Instructions] The next question is from the line of Manasvi Shah from ICICI Prudential AMC.

Sir, my first question is about the multiple new formats that we have started or have acquired, right? Does this in any way reflect a reduced confidence on our core format, which is Barbeque India, and hence, the need to diversify and do multiple formats across brands?

So no, we don't look it that way. So if you look at a 5-year journey and not the recent 2-quarter journey, like we also mentioned 5 years back, our core India dine-in business, which is I'm assuming you're referring as core, was around 97%, which today is around 72%, and even the beginning of the year, was around 75% base. So very consciously, since last 5 years, we are incrementally adding areas of growth in a very cautious manner and seeing what can help us to grow. Our -- while we had very initial setbacks in our International business, but for the period of last 3 years, our International business has been delivering very good results, and we are very cautious about how to grow it year-on-year at an upwards of 20% growth rate, right? Similarly, we did that with Toscano just before COVID came, so sold post-COVID. Year-on-year, this business has been growing 25%. We are never saying that we will grow this business at, say, 100% growth rate, but cautiously growing it at upwards of 20%. And I expect to -- that this will continue in the same format for another 5 years, right? Similarly, Salt, which is also managed by one of the founders of Toscano, came as a natural extension. And in the current avatar also, out of 6 Salt, 4 are actually correlated a bit with Toscano. I think we've got the right opportunity to look at consolidating that business with Toscano and that's when we went ahead with that. And as we refine size for Toscano and maybe take it from being a Bangalore brand to other locations, we'll also do it for Salt. Importantly, the business was very good. The customer feedback was very good, as well pricing was right for us, and we took that decision. On other formats, Dum Safar has been a natural extension to our core capabilities of serving biryani for 17 years. That business itself we started almost a year back. Today, on run rate basis, that's upward of around INR 30-odd crores. I see a lot of potential in that brand. We are experimenting it with an offline model. We'll see how it performs and then maybe speed up that. And Fiesta is just a different twist to what our learnings have been over the years in Barbeque Nation, right? So nutshell, once we -- not that we are doing this now because our belief on Barbeque Nation brand has come down. What we're saying about Barbeque Nation is that the market opportunity is there, but given our current response of the market, it's better to not expand Barbeque Nation brand so aggressively and consolidate yourselves. And once we believe that this has come to the expectation levels of where we have delivered in terms of revenue per store margins, we will, obviously, also go and start expanding Barbeque Nation brand.

Okay. Sir, a follow-up on this, and what are the synergy benefits that you're looking, you can draw out of your core business into these new entities? And the second is any constraint or any changes required to ensure that management bandwidth is not an issue?

So if you're specifically speaking about Toscano and Salt, Toscano, and these have been part of our company now for more than 3 years, I think there is very exceptional set of operating team, and they run day-to-day operations. And we at Barbeque Nation, given that we have very strong back-end structure, be it in terms of site development, IT, HR, finance, we provide all the required back-end support to help them grow and move from just a single city in Bangalore to multiple cities. Similar structure has also been followed by -- on Salt. So this, I think, is very well integrated in our system now, and it doesn't take a -- take additional bandwidth of the Barbeque Nation team.

And like in Barbeque Nation, I think one of the reasons for success has also been that you've been able to standardize food and operation quite a bit, and hence, it was very -- it was relatively easy to scale up in multiple parts of the country. Is a similar thing possible with Salt?

Yes. So at Barbeque Nation also, it has been a journey over last 10 years. So as we moved from 20 stores to 200 stores, give or take, we kept on improving ourselves, right? I think the advantage that both Toscano and Salt will get is some of these learnings, which can be applied as they also grow, right? So today, if you ask me at the current scale that they're in, I think that can be very well managed with the existing culinary team that we have. But as we start expanding here and as the management bandwidth dilutes over the top operation culinary team, we, obviously, move towards -- moving towards standardizations and like we have done in Barbeque Nation. I think the only -- in that journey, the path which Barbeque Nation has already taken will only help both the brands.

Okay. Just one last question from my side. Any other acquisitions on the card from a medium-term perspective, say, in 2 to 3 years?

So we are evaluating a few, but nothing at a stage where we need to come and discuss that with you.

The next question is from the line of Nirav Seksaria from Living Root Analytics.

Yes. Am I audible?

Yes, Nirav.

Yes. So I just wanted to know what is the amount of revenue mix that we are looking to split between dine-in and delivery in the future.

So I think we would be at around 15% to 17%. We are currently at around 15%. That ratio should hover around the same number.

Okay. And sir, I missed out in the middle, how many stores are we planning to open next year? And could you also give the split between Toscano, Barbeque India, and International?

So I think we'll be at a range of 25 to 35. And as of now, very difficult to give that range. But broadly, International, I don't think it will be more than 3. And between Toscano, Salt, and Barbeque Nation, we would have remaining done.

Okay. And sir, as we are adding new brands under our portfolio, are we looking forward to reduce the reliance on Barbeque India?

No, we are not looking to reduce our reliance. I think Barbeque Nation is a very strong brand, INR 1,000 crores plus sort of a brand in the country, it does well, the guest feedbacks are great. I think what we're only saying is that today, the time is not to just invest more in adding more of those, the time is to try and utilize the capacity that you've already put in and maximize the revenues from those existing assets, which in turn obviously will go down to your margins. So that is the short-term plan. But on the medium to long term, not opening up of -- aggressively opening up of Barbeque Nation restaurants doesn't mean that we believe that the opportunity is dead. I mean, in our journey, when we were 70 outlets, we had a period where we slowed down the growth and then obviously restarted it and got it to 200 levels over the period of next 5 years. So I think it's a phase which is what is a conscious call taken by us to go slow in the expansion of Barbeque Nation India business.

Okay. So sir, in the future in the long-term basis, what kind of revenue contribution do we see the other brands giving to the top line? Is there a specific range in mind or so?

So each of these brands are having their own growth trajectory. My belief is that given the base at which Toscano, Salt, International business is at, they should go at upwards of 20%. And at Barbeque Nation level, given the base that it is at, maybe it will go slower. But I think I would wait for the next 2 quarters to pass. Let's see how the demand pans out over the next 2 quarters and then look at it. I think what I'm clearly saying is that the focus has been margins, very thrilled to see gradual improvement in margins, even though it's marginal in a very seasonally weak quarter, and we're just sticking on to that.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for the closing comments. Please go ahead, sir.

Well, thank you all for joining, and we look forward to seeing you again in the next quarter. Thank you.

Thank you very much. On behalf of Ambit Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.