United Foodbrands Ltd

Ladies and gentlemen, good day and welcome to the Barbeque Nation Hospitality Limited Q2 FY24 Earnings Conference Call hosted by Ambit Capital.

As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing “*” then “0” on your touchtone phone.

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 FY24 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 and 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 Q2 FY24 Conference Call of Barbeque Nation.

While the demand environment continues to remain challenging, we see improvement on a sequential basis specifically versus the lows of Q4 FY23.

During H1 FY24, our operating revenues were flat at Rs. 626 crores.

Operating revenues declined by 2.8% y-o-y in Q2FY24 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

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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 four new restaurants which included two restaurants in Barbeque Nation India, one in Toscano, and one in Barbeque Nation in International Business. We closed 4 restaurants during the period resulting in the 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 exited few underperforming tier two and tier three markets. We also launched our first ‘Fiesta’ restaurant in Kolkata, which has seen encouraging initial response. Our Toscano business has grown at 20% versus the previous year with a strong operating margin. Similarly, our Barbeque Nation International Business also continues to do well with over 25% year-on-year revenue growth and a strong operating margin.

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 FY23, which is a seasonal stronger quarter.

Our medium to long term growth now 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

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rationalization initiatives will be completed by end of the year, and we anticipate in increasing our network expansion pace by early next year.

For the last five years we have diversified from a single brand focus to a diversified food services 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 aligned to India growth story.

With this, now I hand over to Raul 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 Rs. 626 crores in H1 FY24 and Rs. 302 crores in quarter two FY24. As compared to the previous year, the operating revenues were flat in H1 and registered a decline of 2.8% during Q2. Our dine-in revenue for the quarter declined by 4.9% to Rs. 258 crores. Our delivery revenue recorded a strong year-on-year growth of 11.3% to reach Rs. 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 four 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 Rs. 6.1 crore during the quarter with a restaurant operating margin of 13.3%. We noticed same store sales growth decline in this portfolio. New restaurant portfolio reported an annualized revenue per restaurant of Rs. 4.7 crore, with restaurant operating margins of 5%. With increase in average aging of new restaurant, the revenue run rate and operating margins of this portfolio improved on year-on-year basis.

Gross margin for the quarter was 65.9%, an improvement of 200 basis points on sequential basis, was in-line with our historical trends.

Consolidated reported EBITDA for the period was Rs. 48.6 crore with margin of 16.1%. Our pre-IndAS adjusted EBITDA for the period was Rs.

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17.7 crore with a margin of 5.9%. The EBITDA margins remained relatively flat compared to Q1 FY24, despite around 7% sequential decline in operating revenues. We were able to restrict the impact of operating leverage 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 four new restaurants which included two Barbeque Nation restaurants in India, one Toscano and one Barbeque- Nation internationals. We also closed 4 restaurants during the quarter.

Over last two quarters, we had calibrated store expansion in our Barbeque Nation India business, and were focused on increasing capacity utilization of existing stores. We focused on rationalizing existing portfolio through market consolidation and exiting few unprofitable tier two & tier three 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 the remaining restaurants also registered encouraging same store sales growth. The absolute operating profits have also been higher in these trade areas. Similarly, over the past one year, we have cumulatively exited seven restaurants in tier two & tier three markets. We continue to operate 50 restaurants in tier two & tier three markets and have noticed improved performance in overall portfolio. We have another six restaurants under watch in our network rationalization plan, and we may decide to exit these in H2. This brings us to the end of our 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 band retains the core attributes of ‘Barbeque Nation’ through its focus on value, experience and service.

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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 four of our existing restaurants, relocated two restaurants in the same trade area, and also undertook a minor refurbishment across 10 of our restaurants.

The performance of Toscano remains strong with year-on-year revenue growth of over 20% in Q2 FY24. During the year we have already added two new stores to the portfolio and three 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 have added two new restaurants in the portfolio. Our focus would be to enhance capacity utilization of these newly opened restaurants and ensure that they reach to optimal levels faster.

The delivery business continue to grow both on year-on-year and sequential basis. Growth in our delivery vertical was driven by volume growth for UBQ, coupled with increased penetration of our Briyani brand ‘Dum Safar’. We have also added an additional level of growth with acquisition of brand ‘Salt’. Currently it operates six stores and another two 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.

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Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Harit Kapoor from Investec. Please go ahead.

I just had two or three questions. The first one was on the store expansion.

If I look at, we will be going through 212 to 220, and probably closing five or six also in the process. That would be like a 14-store addition and with three or four being non- Barbeque probably 8 to 10 kind of stores in Barbeque for the second half. Assuming that, next year we don’t have any closures because we would be done with it by then. Would that be a gross run rate to look, like a 20 odd store expansion or is it still too early to kind of finalize at FY25 plan?

When we say 220 by end of the year, we also include Salt that will start consolidating in our numbers from quarter three onwards, which is six restaurants currently. Like we mentioned, today we have around four brands that we can grow. Toscano will have around three, international we don’t have any pipeline currently, Salt again will have another two-three.

And in Barbeque-Nation, we have around five restaurants in under construction/under pipeline. But when all these put together, including some closures, we expect the network to be around 220 by the end of the year. Next year again, my guess is we will be in the range of between 25 to 35 restaurants, which will be a mix across all these four brands which is Barbeque-Nation, Fiesta, Toscano and Salt.

Got it, thank you. The second question is on Fiesta. If you 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 format, and is it just a fact that this is a lower price point, did you feel there was a kind of ASP issue at Barbeque and that you could use to another price point, if you could just give some thoughts on why Fiesta?

We are just capturing the entire food services market and specifically all- you-can-eat food services market at a different price point. There’s some difference in cuisines, Barbeque-Nation cuisine is more tilted towards high protein items, like seafood prawns, and also Indian cuisine, this is pretty much multi cuisine and address a different segment, we don’t have live grill on the table, which also reduces the cost of CAPEX in the segment as

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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 one and metro markets that we are in. The initial response from the first store for two months has been very encouraging.

And we’ll wait for maybe a couple of quarters to look at how this unfolds and then can take it forward. But currently we also under process of looking at opening two Fiesta’s this year.

Got it. And the third question was on the demand side. We 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. Anything to suggest that, maybe the second half of October or early November, has seen an improvement in growth, because you have not have more than two weeks of data to kind of talk about it, but just wanted to get your sense on?

During the Shradh and Navaratra, which are vegetarian days, the business was slow, but post that two weeks have been very good. But I will not jump to make any conclusion in such a short timeframe. We should wait for maybe November to go and see how this improves. But just to answer this, the two weeks have been good for us.

Last question was on the margin side, so would it be fair to assume that given that you have shut down the stores, and that driven 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?

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. It’s a mix of all three, and if you look at the history of our Company, quarter two has been one of the lowest margin period for us, but if you look at over the period of last three quarters, maintaining those margins, and in fact gradual marginal increase on this is very encouraging for us.

Thank you. The next question is from the line of Harsh Shah from Dimensional Securities. Please go ahead.

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My first question is on gross margin. Was it aided by lower cost of supplies or has 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. Sir, what is the trend we are expecting from here on?

It’s both, the bigger one is increase in realization. If you remember, in Quarter 1 we have done some aggressive promotions which reduced our gross margins but those discontinued in quarter two and it started to improve. Secondly, we’ve also seen softening also for input cost, mostly meat items which has reduced in terms of cost. We got some benefit also on prawns, fish this quarter. The gross margin impact has been mix of both. Going forward, we don’t intend to increase our prices we’ll remain at where we are, while we have 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?

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. Q2 doesn’t have any abnormal discounting, or some of these tweaking.

Got it. And next question is on the opposite behavior trends that we are seeing between dine-in and delivery, because I believe having more vegetarian days will impact both these so, just wanted to understand that if it’s 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, SSSG was negative 7%, 8% while new stores did relatively well, so just want to understand this contrasting behavior.

For Barbeque-Nation, our dine-in business is a very group oriented, celebration oriented brand. Be it in terms of our average group size is approximately five right now. When a plan is being made, and the group somebody follows strictly these vegetarian days then it gets tilted towards

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maybe individual consumption or a-la-carte sort of space or something.

And Barbeque-Nation is also pretty prominently known for non-vegetarian so, that does impact dine-in business. On delivery, we also coming off from a very small base or lower base in the previous financial year otherwise, on delivery we have seen a decent growth pretty much across both our brands which is Dum Safar and UBQ.

Thank you. The next question is from the line of Mythili Balakrishnan from Alchemy Capital Management Private Limited. Please go ahead.

Toscano is positive at lower single digit, International also is positive again at lower single digit and Barbeque-Nation India business is negative overall. Delivery SSSG is positive. And in India also, specifically north and west have done better than south.

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

Overall, we have around Rs. 42 crores of operating cash flow in the first half, this is after accounting for lease rents.

And in terms of the improvement that we have seen in the margin especially for the new outlets, 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?

It’s a function of aging specifically, also what happens is, when you add the new restaurants during the quarter, there’s a gap from those new restaurants. So, those gaps, as we are not opening up many more in over the period of the last two quarters, those drags are also not there. So, as the existing portfolio that we opened up, maybe two, three quarters back, there by aging are naturally doing better.

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Got it. But just to also get a sense of the movement in those restaurants or 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. Some of the new ones that we opened up in, say malls, they are doing much better right from the beginning and some of the new ones that we opened up in say tier one or tier two markets in High Street sites, they have a natural path of increasing as their age increases.

Thank you. The next question is from the line of Giriraj Daga from Visaria Family Trust. Please go ahead.

Just a couple of questions from my side. First, you mentioned 220 numbers that was including Blue Planet, because you mentioned that we would open roughly net four restaurant in the next two quarters, and we will end the year with the 220? 220 is including Blue Planet, six stores of Blue Planet.

Okay. So, we our looking at the end of the year with a 220 kind of a number, right? Yes.

Last year, we had a gross profit of about Rs. 818 - 819 crore. We had a EBITDA of Rs. 127 crore. So, the overhead cost was about Rs. 690 crore.

This year, first half number we are growing that overhead number by about 4%, 5%, so we are probably likely to end that year roughly about Rs. 730 crore kind of a number? Right.

Now I’m saying, again let say we are not growing or not opening new restaurant. The base number of 730 crore should be how much in FY25, should it take 5% growth, should it take 8% growth, should it take 10% cost inflation there? In FY25?

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Yes.

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

Okay. And second assuming let say this incentive billing will be above certain level of SSSG right?

Yes. It’s a certain percentage of the top line.

Thank you. The next question is from the line of Manasvi Shah from ICICI Prudential AMC. Please go ahead.

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

No, we don’t look it that way. If you look at a five-year journey, and not the recent two quarter journey, like we also mentioned five years back our core India dine-in business, which you are referring as core was around 97%, which today is around 72%. And even the beginning of the year was around 75%. Very consciously since last five years, we are incrementally adding areas of growth in a very cautious manner and seeing what can help us to grow. While we had initial setbacks in our international business but for a period of last three 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. Similarly, we did that with Toscano, year-on-year this business has been growing 25%. We are never saying that we will grow this business at 100% growth rate but cautiously growing it at say upwards of 20% and I expect that this will continue in the same format for another five years. 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 six Salt, four are actually

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correlated with Toscano. We got a right opportunity to look at consolidating that business with Toscano. And that’s when we went ahead with that. And as we find sites 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, the 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 upwards of around Rs. 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 learning’s have been over the years in Barbeque Nation.

In nutshell, we are not doing this because our belief on Barbeque Nation brand has come down. What we are saying that the market opportunity is there for Barbeque Nation. But given our current response of the market, it’s better to not expand Barbeque Nation brand so aggressively and consolidate yourself. And once we believe that this has come to the expected 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. a follow up on this, what are the synergy benefits that you think you can draw out of your core business into this new entity, and the second is, any constraint or any changes required to ensure that management bandwidth is not an issue?

You are specifically speaking about Toscano and Salt, Toscano has been part of our Company now for more than three years, they are very exceptional set of operating teams and they run day-to-day operations.

And we at Barbeque Nation given that we have very strong backend structure be it in term of site development, IT, HR, Finance, we provide all the required backend support to help them grow and move from just a single city in Bangalore to multiple cities. Similar structure will also be followed on Salt. So, this is very well integrated in our in our system now.

And it doesn’t take additional bandwidth of the Barbeque Nation team.

And like in Barbeque Nation, one of the reasons for success has also been that you’ve been able to standardize food and operation quite a bit and

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hence it was relatively easy to scale up in multiple parts of the country. Is a similar thing possible with Salt?

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

Okay. Just one last question from my side. Any other acquisition, on the card from a medium term perspective say two to three year?

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

Thank you. The next question is from the line of Nirav Seksaria from Living Root Analytics. Please go ahead.

Sir 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?

We are currently at around 15% that ratio hover around the same number.

Okay. And I missed the number, how many stores are we planning to open next year, and could you also give the split between Toscano, Barbeque- Nation, and International?

In the range of 25 to 35 and as of now it’s very difficult to give the split. But broadly, international, I don’t think would be more than three. And between Toscano, Salt and Barbeque Nation we would have remaining done.

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

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No, we are not looking to reduce our reliance. Barbeque Nation is a very strong brand Rs. 1,000+ crore plus revenues brand in the country, it does well, the feedbacks are great. What we are only saying is that, today the time is not to just invest more in adding more stores, the time is to try and utilize the capacity that you have already put in and maximize the revenues from those existing assets, which in turn obviously will flow down to your margin. That is the short-term plan. But on the medium to long term, not opening of Barbeque Nation restaurant doesn’t mean that we believe that opportunity is dead. 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 five years. So, it’s a phase which is what is the conscious call taken by us to go slow in the expansion of Barbeque Nation India Business.

Okay. So, 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 and international business is at, they should growth at upwards of 20% and at Barbeque Nation level given the base is high it will grow slower, but I would wait for the next two quarters to pass. Let’s see how the demand pans out over next two quarters and then look at it. 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 are just sticking onto that.

Thank you. 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.

Thank you all for joining and we look forward to see 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.

16 | Barbeque Nation For further information, please contact Bijay Sharma Head of Investor Relations Barbeque-Nation Hospitality Ltd. +91 8069134900 Investor@barbequenation.com