Restaurant Brands Asia Ltd

NSE:RBA

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Restaurant Brands Asia Q2 FY '20 Conference Call, hosted by Nuvama Wealth Management. [Operator Instructions]

I now hand the conference over to Mr. Nihal Jham from Nuvama Wealth Management. Thank you, and over to you, sir.

[Nihal Jham, analyst]

Yes. Thank you, Sagar. On behalf of Nuvama Institutional Equities, I would like to welcome you all to the Q2 FY '24 earnings conference call of Restaurant Brands Asia. From the management today, we have Mr. Rajeev Varman, Whole Time Director and Group CEO; Mr. Sandeep Dey, Brand President, Indonesia; Mr. Sumit Zaveri, Group CFO and Chief Business Officer; Mr. Kapil Grover, Chief Marketing Officer; and Mr. Prashant Desai, Head of Strategy and IR. I would now like to hand over the call to Mr. Rajeev Varman for his opening remarks. Over to you, Raj.

[Rajeev Varman, executive]

Thank you, Nihal. We really appreciate it. Guys, Happy Diwali to everyone. And thank you for taking this time out this evening to join us on this call. On the onset, I just want to just generally tell you what Burger King India and Burger King Indonesia, combined under the umbrella of RBA, has been doing for the last couple of quarters and how the results of Q2, the summary of the results for Q2.

So the initial strategy, as we outlayed before this year started FY '24, was basically to bring in the traffic back, back into the dining business and back into our Burger King restaurants. So we usually don't share traffic numbers, but I'm going to take the liberty just to give you directionally what we have done. So both the quarters that have gone behind us, Q1 and Q2, both these quarters, we have increased our traffic in our restaurants with high single-digit numbers and not just in India, but also in Indonesia. So that has been basically the way forward for us is to bring more people into our restaurants to drive SSSG through SSTG, not just through by check.

And I'm very happy to report that we continue with that strategy into Q3 and Q4 with very similar elements that have given us the results in Q1 and Q2 with traffic increases. This also happens to be one of the great quarters for India. This is a quarter where we delivered the highest EBITDA we ever delivered in India. And I wanted to thank my team that's out in the field and everyone that's working in the office for all the hard work they have done in producing these numbers.

Generally, as we look into Q3, Q4, reflecting back on Q1, Q2, our strategy is no different. We'll continue to drive traffic into our restaurants, and we will continue to build our sales and our same-store sales through traffic. That's the main headline objective moving forward. Now Q2 results, if I look at the India results, we grew year-over-year 23% on revenues, delivering INR 453 crores in total revenue. This is on the head of SSSG of 3.5, which, as I already said, was led by very good traffic growth specifically in our restaurants. So thanks to all the work Cicily Thomas is doing leading the India business.

If I also look at the ADS, we delivered in Q2 126,000 ADS, which is 6,000 above the previous quarter, which was at 120. So again, all checkmarks on sales, on SSSG and ADS, right?

Coming to profitability. I already articulated that this has been a good quarter of our restaurant level EBITDA and company level EBITDA. So the highest ever EBITDA we delivered, if I give you the post-India numbers, that is INR 63 crores -- INR 63.5 crores, which is 51% above the previous quarter. And if you're interested in the 3-years [ 116 ] numbers, that number was INR 24.3 crores, which is 138% above what we did the previous quarter. So thanks again to the team for delivering that. EBT breakeven, first month that we have -- breaking even. I know Prashant always asked me, when are you breaking even on this one. So Prashant there, you know that's the number for you.

Growth, we have built 10 new restaurants in the quarter and we closed 2. So a net result of 8 restaurants that were NRG, net restaurant growth, as of September 30. Now we have got 46 restaurants that are in construction, right? And we are well on our way to deliver more than 450 restaurants by the end of this Q3 by December 31.

So that's the key KPIs and [indiscernible], and Sumit will go through the detailed numbers and so forth, but I just wanted to throw the key highlights here. The other thing that we're doing, and you might have seen this as you go through our restaurants, if you are visiting our restaurants, is we are now going completely digital in all our restaurants. It will take us a little while to cover all of them, but we'll spend the better half of next year and maybe a little bit more doing this.

We are turning away and going towards self-ordering kiosks, ordering at the table, table service. So this new digital parameter that we have already tested, the [ cloud ] equipment rolling, and this will be rolled out into all our restaurants across the country here in India. So a great initial by Kapil, and Kapil will speak more to that when it comes to the marketing section.

So great revenues. SSSG on top of SSTG which has been -- since I started doing this business many years ago, traffic was always called God of the business if you're growing the sales through traffic and you're doing a good job. And we have delivered that in the last 2 quarters and our focus, to do this in the next 2 quarters as well.

On the EBITDA front, I told you we have delivered a fantastic number and PBT breakeven. So thanks, Sumit, for all the hard work on making sure that we are very effective and efficient on our line items. But just coming to Indonesia business, and Sandeep will take the major chunk of the weight on this one, but I will share again with you the work that he's doing and his team is doing and frankly, Sumit has spent a lot of time there in putting together a fantastic strategy moving this business forward.

So if I look at the Q2 numbers, we delivered IDR 19.1 million [ NIA ]. I'm talking IDR numbers now, Indonesian rupiah, IDR 19.1 million, which is, as you remember from Q2 of FY '23, that was IDR 16.9 million. That grew 13% year-over-year again, on the head of some very good traffic numbers. Q2, again, on the SSSG, there a fabulous 6.5%. So Sandeep is now giving a run to Kapil and Cicily over here in terms of SSSG is climbing at a faster rate there. And listen to this number, 17% increase in traffic in dine-in in Indonesian Burger King. Fantastic job, Sandeep. Thank you for all the effort over there. So you see those numbers.

Coming out to revenue, we did an IDR of 287 billion, which is 5.5% -- or 5.6% actually, year-over-year. Now this is despite -- so we had a higher revenue by 5.6% despite closing 17 underperforming restaurants. So we closed these restaurants and yet, we did a higher revenue. So a great job there as well.

Continue to generate some healthy ADS. If you look at the ADS on the Popeyes front, I'm now speaking about Popeyes, we are now kind of stabilized at about INR 46.3 million, which is about INR 6 million higher than what the Burger King business is doing. Now Sandeep starts to move this from 46 upwards towards [ 3 ]. Total revenues in these 12 restaurants that we have in Popeyes was INR 27 billion. And as we are moving forward, we are approximately now at restaurant breakeven. So our business, the Burger King business and the Popeyes business does not lose any money at the restaurant level. So that's the kind of crossroad that we have passed.

When I look at the growth bucket, we have 162 restaurants as of September 30 in the Burger King business, and 12 Popeyes restaurants by September 30. So that's the portfolio over there. Again, Sandeep will talk about this. But we rolled out the chicken in Burger Kings. And we told you that was a big gap that was there, and we have moved those volumes of chicken by 50% in those restaurants. That is where all that 17% traffic is coming from. And also on the burger side because Burger King continues to be a burger business over there, we have moved those volumes up by 35% as well. So Sandeep will talk more about that, and kudos to the entire team in Indonesia to continue moving this in a positive direction.

So's with that, what I'll do is I'll hand it over to Sumit to kind of go granular on some of these numbers and then we'll go to Kapil and [indiscernible]. Over to you, Sumit.

[Sumit Zaveri, executive]

Thank you, Raj. What I'll do is I'll just kind of talk about the key financial numbers and then also go a little more deeper to explain what we've achieved for this quarter in India, and then also I'll cover Indonesia as well.

As far as the store count [ numbers ] that Raj mentioned, we are -- we ended the quarter at [ 404 ] on our way to 455 end of this quarter. This was certainly by design that we did it where this quarter, we grew 8%, and we kind of [indiscernible] as a part of initial plan itself. The growth, which was towards quarter 3 of the year, so that's purposed by design.

We continue to open all our new stores with Cafe. We're currently at 297 Cafes, which is 75% of our portfolio. Now has Cafes, and Kapil, in his part of this discussion, will take you through what Cafes are now contributing as far as the overall business is concerned. At the back of a strong growth in terms of new stores, we added 70 stores over the last 12-month period. We've been able to sustain the ADS at the portfolio level in line with what we had achieved last year. If we really look at the quarter 2 FY '23, we did an ADS of 127. After effectively adding 70 more stores, we are still at 126 ADS, which effectively reflects that the stores that we've added have come much closer to the portfolio average in terms of ADS.

Our overall ADS growth led by traffic for the quarter, then we could see that over last 2 quarters itself has been 3.5%. We feel fairly confident of this number, and as we go along, as we get to the later part in terms of what we expect the year to end, you will only see that positivity towards what we will achieve in especially going forward is only going to be better than what we've done in quarter 1 and quarter 2.

As far as overall revenue is concerned, we grew by INR 51 crores quarter-on-quarter. Moved from INR 422 crores for the -- in the previous quarter to INR 453 crores in the current quarter. Gross profit margins, or the [ core that ] we could call it, [ which core be ], has always been, honestly, we strongly believe it has been our strength area. If you would have -- if you go back and see last 4 to 6 quarters of us through this entire inflationary pressure that we saw, we maintained the gross margin at 66.4% through that period.

And while we were doing that, we also ensure that we are building efficiencies to be able to take our journey to what we have been sharing as a part of our guidance that we'll start making the journey towards that. This quarter is our first step towards that, and we reported or achieved a gross margin of 66.8%. So if you really look at it from the perspective of a consistent 66.4% that we've been maintaining over the last 4 to 6 quarters, we moved the needle now by 0.4% and got to 66.8%. And this is our first step towards achieving the guidance or the targets that we've set ourselves for gross margins.

Happy to share that as far as restaurant SSR is concerned, we are reporting early double digits for the quarter. We did get 10.7% in terms of restaurant level EBITDA and a substantial shift at the company level EBITDA of where we got to INR 24.3 crores, 5.4% at the company level, a shift from INR 10 crores or INR 11 crores that we did last quarter or compared to previous year. So it's a shift of almost around INR 12 crores to INR 13 crores in this quarter, which is -- one is that it is effectively a very strong base shift that we've laid in our overall company EBITDA numbers at 24 crores.

Business seasonalities, hopefully in our favor. We should only be able to kind of do better if not sustain these numbers. So that's how we really see it, INR 24.3 crores. As Raj said, it is the highest ever company-level EBITDA numbers that we've reported so far. But certainly, this is not the end of it. We feel that this is just beginning of the best of quarters as we go along.

If I were to just quickly turn to Slide 7 and talk about the overall numbers as far as India is concerned, we generated a revenue of INR 453 crores. Some of these numbers are slightly repetitive, but I'll just kind of summarize these numbers with the gross margins of 66.8% and a restaurant-level only double-digit numbers are close to 11% and company EBITDA at 5.4%.

We've been there -- have always been some discussions on the corporate G&A side, as we've been saying that now we would remain in the region of around INR 23 crores, INR 24 crores. Keeping that trajectory in mind, we were more or less flat at the corporate G&A level at INR 24 crores.

And with the revenue growth over quarter-on-quarter, we've only got better in terms of percentage of revenue. From 5.6%, we've gone down to 5.3%. We believe that this trajectory, again similar to, in line with company EBITDA, will only get better as we kind of get the benefit of the stores that we've opened or we plan to open, plus the growth that we see in the existing portfolio.

Quickly going on to the Indonesia part of the business. We moved -- as compared to last year, we grew from INR 156 crores in INR terms to INR 171 crores for the quarter. Our concentration, as far as Indonesia is concerned, has always been to kind of make short [ business ] as the business gets to start seeing the positive trajectory in sales. We've seen a substantial shift almost by 2.2 IDR million, which would translate to around INR 10,000-odd in Indian terms over last 12 months. These are probably [ ROD ] successes that we've seen over last -- over this 6 months period. And we feel that we've only created a stronger base on which we will continue to build.

At the restaurant level, we were close to breakeven and continue between both the brands. At the company EBITDA level, we were at around negative INR 15 crores, but we believe that, FYI, as we continue to build on to the base that we have, we'll only be able to take this trajectory onto the breakeven side as we go over the next few quarters.

As we look at the consolidated performance overall revenue, INR 525 crores previous year, last year, we've moved to INR 625 crores. Last year, overall at a company EBITDA level, we were at a negative INR 15.6 crores. We have reported a positive close to INR 9.5, INR 9.4 crores for the year. So we've certainly, as Raj said, it has been a good quarter for us. We have shifted some baselines, particularly in all key financial parameters. And we believe that we will only take the journey forward in the positive direction as we move forward. With that, I'll request Kapil to take us through the key highlights for the quarter on the marketing side, and then from there on to Sandeep to take us to the Indonesian side.

[Kapil Grover, executive]

Good evening, everyone. Let me start with reiterating the pillars of our growth that we outlined at the beginning of the year. Number one being the value strategy, it is a key driver of traffic and growth to our stores, followed by innovation on the core, Google platforms, premium offering and building adjacent categories like Cafe. The other focus areas about building digital experiences for our consumers and growing [indiscernible] diner sales. And last but not the least, building a strong engaging brand for Gen Z and millennials.

Now on Slide #12. Our value proposition is focused on associating a new platform, the Tasty Meals at INR 99. You heard Raj talk about how we have run that initiative for the last 2 quarters, and that was the focus here for Q2 as well. The campaign has clearly helped us drive dine-in traffic growth and offer consumers great value for their money. Again, you heard that we delivered 3.5% same-store sales growth in a very challenging environment on the back of this program.

The next slide showcases a few pictures of the execution, which help us drive awareness about this program across mall locations, high street locations and building traffic to our stores through this program.

The next thing I want to talk about is the Whopper. It continues to be a strong part of our portfolio. We continue to build this platform through a consistent string of innovations which we call the limited time offers. The last quarter was the Mexican Whopper, which had the salsa zing and the nacho chips, and we got a lot of appreciation from our Whopper fans as they tried this new idea offering. Every year, we launched 5 to 6 such new ideas on the Whopper platform to continue to drive our innovation credentials.

Slide #15 is about how we continue to create BK Cafe as a concept and generate trials around with that concept. With 297 cafes on ground as of 30th September, we continue to build awareness about the platform through social channels, through digital programs, effective use of influencers. Now please note here that this Cafe is now a standard part of the BK store. Every new store [indiscernible] opens with a Cafe, right? So we now start reporting a KPI of total sales coming from this business, right? And as you see on the side, the numbers, that INR 16,000 is the contribution to the ADS from BK Cafe range of products, which is on the coffee-based beverages and the milkshakes, right? So I'll just continue to pair this new range of beverages with their favorite burgers and enjoy the taste of very good quality, 100% Arabica coffee at a very affordable prices.

The next slide, Slide 16. Last quarter, we also saw the expansion of a very well-thought-through program of making our stores a new digital experience for our guests. We call this the King's journey model, where our guests are offered fantastic experience through digital ordering through the kiosk, app-based ordering from the table. So they don't necessarily need to queue at the counter. They can either go to the kiosk or take the mobile app, just scan the QR code which is placed on the table, place their orders, and they will be served their food on the table. So that's the new convenient digital experience that we're building for our guests in all our stores. And as we speak, we are rolling this experience out in flex stores. The intent is that we will cover almost 100% of our estate over the next financial year.

Last but not the least, working social feeds continue to drive very engaging content, whether it's part of creating awareness about our national campaigns, like the [ 1990s stimu ], celebrating Indian or international festivals, [ modern ] marketing, product stories and we make an attempt to speak the language of fans and stay connected with them in their tone and tenor. So that's it from my side. I would hand over to Sandeep to share the [ Indonesia ].

[Sandeep Dey, executive]

Thank you, Kapil, and a very good evening to all of you from Indonesia. In the beginning, Raj mentioned that we continue to have a little sharp focus on our 3 strategies for working business, and those are continue to build [indiscernible] in chicken, establish and retain our leadership in burgers and build a comprehensive dessert menu and drive incremental locations to that.

For the next few minutes, I'm going to share with you some of the work we have done to move forward with strategic pillars. As you know, Indonesia has a very, very, very strong fried chicken market, and having a winning product is a key motivator in this category. And we had a gap in our many [ modes ] with regard to taste as well as variety.

So in the last 6 months, we addressed those gaps and then launched these products about 2 quarters back, and for a very aggressive trial price of IDR 25,000 for a meal and also supported that with a conference at [indiscernible] marketing campaign. The results are quite positive. In fact, Raj did mention in the beginning that incidents of chicken improved by 20% and volume grew by almost 50%. But what is more encouraging is that these numbers are not just the initial numbers, but this numbers are sustained for over 6 months now.

I'm now moving to the next slide, which is Slide 21.

The next strategic priority is to establish burger leadership, and that we intend to do through taste credibility, flavor innovations and very importantly, offer strong value propositions across the entire menu there. Now for this category, we have a 2-pronged strategy. First, we call it value [indiscernible] strategy. Here we offer some of our flagship and preferred products at very aggressive pricing of IDR 17,000 for a patty burger where [indiscernible] [ practically endure the counter value there ] almost up to 50-odd percent. Now this is helping us not only drive a massive amount of dining traffic back into our restaurant, but also building the Whopper equity. The volume growth for this burgers have increased by more than 35% and an overall increase of 11% in burger incidents.

The second part of the strategy on the burger category is on the premium side, where we continue to provide new excitement through taste innovation and brand-led collaboration every 2 to 3 months at an alternate basis.

The third growth pillar is the dessert category, and that's a big business opportunity in this market. And our strategy was to have indulgent dessert innovation every quarter, which we religiously do, either through branded dessert or local service. And for the last 6 months, we are witnessing a sustained volume growth of almost 2.5x.

And finally, I'm going to give a quick update on Popeyes, which is my last slide, Slide #23. It's been 10 months now we launched this brand. And as we speak, we have 15 operating restaurants. We continue to deliver very strong new store launches and have already put 10 stores under construction. So by end of December, we should have 25 Popeyes, and our strategy is to pull this brand into a chicken destination. See, basically, we are culinary brand, and we are not only winning products with regard to taste, but also variety to address different [ needs taste ]. We are actually the only QSI in this category to have a grilled chicken on bone product. And this unique Louisiana grilled chicken contributes to almost 30% of our chicken on bone portfolio.

And we are building this brand with a digital-first experience. A lot of restaurants have kiosks. Every single restaurant has video walls which runs brand content and product videos. All our drive-through renewables are digital renewables. So our long-term ambition is to have 100% [ new diners' sales ]. In quarter 1, I did mention that 37% of our dine-in sales was through kiosks, and we continue to encourage that guest behavior. And by end of quarter 2, that number has grown up to 70%. So that's from the Indonesia side of the business. And now I hand it over to Prashant to share the outlook for the overall business.

[Prashant Desai, executive]

Thanks, Sandeep. From an outlook perspective, 2 changes. One, as you would observe our SSSG guidance given the first 6 months have been challenging for the industry, we are revising that to 6%. 6% means that given that we are now entering the festive period, we are expecting a great festive season in the first quarter of next calendar year, which will be very high single-digit same-store growth. And then the overall yearly same-store growth is at around 6%. Nothing -- no other changes, except the Indonesia business, which there, as Sumit mentioned, we are hoping to break even that business closer to the end of this year. So otherwise, all the guidance remains the same.

With this, we can open up the floor for Q&A.

[Operator]

[Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Dhwanil Desai from Turtle Capital.

[Dhwanil Desai, analyst]

Congratulations for very good numbers. Sir, firstly, if you can give some idea about the economics of Popeyes store, what is the CapEx, how do you look at the payback, those kind of things. And since we are on a low base, we need to add a lot of stores and we need to incur lot of CapEx. So considering that most of the QSR brands in the early years kind of not spend money to grow, do we need to get capital from Indian business to grow Popeyes? That's my first question.

[Sandeep Dey, executive]

We are currently -- Popeyes is still very early in the [indiscernible] we are not sharing. We are -- the business is stabilizing, so too early for us to share details with respect to paybacks and breakeven. But the CapEx for the store is approximately USD 400,000. So that is the data that we can share with you as we speak. As we had explained when we had acquired the Indonesia business, the capital for Indonesia business will be provided by the Indonesian and India business growth on its balance sheet. So there is no major allocation of capital from the India business into Indonesia business. It will grow on the strength of its balance sheet and the cash flow that the business will generate.

[Dhwanil Desai, analyst]

And my second question, I think in the remarks that was mentioned, that in spite of 70-odd stores getting added, our ADS is almost at the same level. So can you give us some color as to what kind of ADS growth we have -- in more mature stores, which are 3 years from [ order ] vis-a-vis some U.S. store. How does the gap look like? And as the proportion of the new stores [indiscernible] increases, naturally the ADS growth has to be significantly higher. So can you give some insight into that?

[Sumit Zaveri, executive]

Dhwanil, I'm presuming you are talking about Indonesia. So Indonesia, we grew 5% in terms of SSSG, that is one. If I was to look at the same numbers from India perspective, the newer stores, we will see slightly better SSSG, which is what we are also seeing. As they move into SSSG after the end of 13-month period, that's what we kind of take. We will see a slightly better SSSG with respect to those and hence, those would also contribute to better SSSG at the portfolio level.

And secondly, as far as quarter 2 is concerned, we will also see -- or H2 is concerned, we'll also see that because there was a baseline effect in H2 last year, a better tech strategy in H2 as well, we are guiding overall full year [ SIG ] at 6%, our expectation is that it will be closer to around -- overall portfolio will be closer to around anywhere between 9% to 10% of our [ SIG ] for H2.

[Prashant Desai, executive]

Dhwanil, just to add to what Sumit mentioned, one of the things that we are experiencing, one, as the brand is getting more and more stronger, as we are opening more stores, both on the high-speed side as well as spending money on television to kind of build the brand, as your size is increasing, all of [ that aspect, 5% ] of our revenue and marketing, as the brand is becoming stronger, one big trend that we are observing, all the new stores that we are opening are doing significantly better year-on-year. So earlier, it will take us 3 years to reach the portfolio average. Now we are seeing this timeframe shortening as the brand is becoming stronger, and that's the bigger point that Sumit was trying to make that despite opening 70 new stores, we have seen an increase in ADS.

[Dhwanil Desai, analyst]

Okay. And I think in earlier -- in our interactions, you've indicated that more mature stores have generally 20% higher ADS than the average number. So that benchmark remains? Or is there any change -- the more mature stores are growing faster? Any sense on that?

[Sumit Zaveri, executive]

Yes, we are not sharing cohort-wise data, but by and large, you are on track.

[Operator]

[Operator Instructions] The next question is from the line of Shirish Pardeshi from Centrum Broking.

[Shirish Pardeshi, analyst]

To start with, I think it's really a good experience that you have maintained the SSG at 3% plus in the first half. However, the guidance has revised lower. So 2 questions. What makes you confident? Because if I see the average of 6%, the second half has to be pretty strong. So could you share what is the confidence level? Is there a lot of innovation which you are planning to launch or already launched? Or is the optimism is because of the base, because last year quarter 3 was very weak for the entire QSR industry? And maybe some color on how do you -- the current World Cup has added the numbers in the month of October. Per se, I'm not looking specific, but the time if you can share.

[Rajeev Varman, executive]

Thank you very much for that. A couple of things. One is, obviously, the festive season is in front of us, right? Second is in spite of the fact that we are sitting at about 3.5% SSSG, 3.6% in Q1, what I said on the onset of this call is it's driven by some very fantastic traffic numbers. So it's not on the basis of check increases. So we -- this year, we have been driving more traffic into our restaurants. And generally, if you look at the burger industry, the word out there is -- and most of the experts have written around this, is that the burger category continues to grow. Both in dine-in as well as in delivery, this category continues to grow, right? So we're just kind of leveraging and working on those numbers of driving more and more traffic. And also, you see there's a whole bunch of restaurants we opened last year in this Q3 which will start to comp. And obviously, as you know, these start at lower numbers and they start going to higher numbers in the following year. So we are -- again, we are confident on the traffic because we've got a very good promotion in place, which is driven by Kapil and his team. That continues to drive traffic. And on the head of this traffic number, we think that we will -- and then the fact that you heard the last year, the quarters were kind of a little soft, as you remember, Q3 and Q4. So that's -- those are the driving factors in where we think we're going to move this forward.

[Shirish Pardeshi, analyst]

That's helpful, Raj. Just to get a little more clarity on the question was in the beginning that I asked. You mentioned in the beginning saying that you're seeing a traffic growth single digit. I was more curious that this traffic is basically from the dining or delivery, maybe some quantitative explanation if you can be able to help us.

[Rajeev Varman, executive]

I can tell you that our dine-in traffic is growing. I will not split those numbers. We don't share this. I don't think anyone shares those numbers, and for competitive reason, we want to kind of keep that close to our chest. But I can tell you that both in Indonesia and India, both the strategies have been and you will see, and if you just look at the strategy, the offer that we have is in dine-in. It's not available in delivery. So you should understand that, that's to drive dine-in traffic, not delivery traffic.

[Shirish Pardeshi, analyst]

Okay. My second question, I'm referring to Slide 6 and I'm trying to do some mix and match of numbers. Prashant did mention that on a Y-o-Y, we have added 70 stores in Burger King India. But when I look at, we have added 117 BK Cafe. So if I look at, and again, the first point is that ADS increase from BK Cafe is about 16,000. But when I look at the Y-o-Y areas #127 and #126, which is now this year, it's remained largely flat. What explains, or maybe if there is a qualitative explanation, if you can help us?

[Sumit Zaveri, executive]

[indiscernible] I'll just take this. One is we've added all the new stores that have come in with Cafe and hence, effectively, you've also seen total overall Cafe [ count ] going up from 180 to 297. So that's one part.

Secondly, just to kind of clarify the number, as Kapil was mentioning, When we said Cafe contributes to 16,000, that is a share fee that [indiscernible] incremental sale number. If we refer back to some of our earlier presentations or discussion, you would realize that incremental sale on the Cafe portions have only been in the year from INR 7,000 to INR 8,000. So if we kind of do the base effect of those additional 100 stores, then it will only be affected around INR 1,000 to INR 1,500 on the [ PD ] just to kind of build up the numbers there.

Referring back to what Prashant was mentioning, that our newer stores generally could come slightly lower than our portfolio average. We've only been getting that up. So if we were to -- we've been able to maintain the ADS at around 127 to 136 largely because the newer stores that have come, one is [ especially ] 3.5% that we got over last year. And the newer stores that we opened, plus a marginal increment that we got as part of Cafe on the overall portfolio level, we've been able to maintain the ADS at 126. So newer stores coming closer to or better ADS than what we've seen as the brand matures. Cafe margins are impacting [ at 3% and surging ] while we've been able to maintain the ADS at 127 to 136. Otherwise, in the past, [indiscernible] growing rapidly, and the base of new stores being higher, we've generally seen that while we would have positive SSSGs, the portfolio averages would be equal or negative.

So this is literally now with the weight of existing stores increasing, we've been able to sustain it at the 127 level. So this is rather a positive shift is how I would see it, Shirish, rather than saying that while we've not been able to move the needle upwards.

[Shirish Pardeshi, analyst]

Okay. My last question. On the guidance front, Prashant mentioned that we have revised downward the SSG. But I'm more curious because we have already achieved the 66.8%, closer to 67% gross profit margin in India, and you're still holding that guidance. So what is the hesitation? Is the volume growth the strategy which we are employing so will not give us the margin lever? Or we have been conservative at 67% at this time.

[Prashant Desai, executive]

[indiscernible] 67%. So it's not one of the things that you have mentioned. I am saying Sumit was trying to explain in his commentary was that you guys are aware of the inflationary challenge. You guys are aware of the fact that we launched a IDR 99 value.

With despite that, we are retaining our margin guidance of 67%. It's not conservative, it's not optimisitic, it's realistic, and we would like to remain at 67%. A couple of things I will still add, Shirish, maybe you were not part of the earlier calls that we did. Our margin, gross margin or our cost of goods sold includes our primary and secondary distribution cost. So that is one thing you will need to keep in the back of your mind when we talk about 67%.

[Shirish Pardeshi, analyst]

I got that, Prashant, what you're saying. But directionally, the milk and cheese inflation is expected to come down very sharply. That's what at least the other players are [indiscernible]

[Prashant Desai, executive]

I appreciate that. As I said, [indiscernible] every quarter. Should we choose to up the guidance, we will come back to you. As of now, factor 67% as your gross margin guidance.

[Operator]

[Operator Instructions] the next question is from the line of Mr. Tanmay Gupta from Motilal Oswal.

[Tanmay Gupta, analyst]

Sir, I'm just looking at the Slide 22, where I see that we have introduced a lot of desserts menu in the Indonesia side. Just wanted to understand, like what is our collaboration or strategy to launch the Kit Kat or Oreo kind of desserts in India in order to improve the ADS going forward?

[Kapil Grover, executive]

Yes, this is Kapil, so I will take that question. Yes, that's a very good initiative that the Indonesian market has done, and we obviously will continue to explore similar opportunities in India as well. It's just a matter of time that we strike a good co-branding opportunity. So we continue to explore. At some point here in the calendar you will see those innovations in India as well.

[Tanmay Gupta, analyst]

So any other innovations lined up like other than the desserts or something like in order to improve ADS?

[Kapil Grover, executive]

So yes, the India business will continue to launch new products. In fact, if you visit our stores today, we have already introduced a couple of new products. We've recently launched nuggets, which is a new addition to our menu. You can go and try them in all of our stores as of today. And we have also, in the last quarter, I shared introduced premium wraps in our menu. So we continue to find these consumer insights and gaps on our menu and make sure we keep plugging them and offering consumers the products that they need for a good experience at Burger King India.

[Operator]

[Operator Instructions] the next question is from the line of Mr. Mayur Gathani from OHM.

[Mayur Gathani, analyst]

Just wondering, on the Indonesia side, do we still see more closures on the Burger King stores, or this is going to be an ongoing thing?

[Sumit Zaveri, executive]

So Mayur, it will be an ongoing thing as a part of our current assessment that we went through at the start of the year. Wherever we felt that is part of the portfolio, it does not warrant to be part of our going-forward portfolio. We've already taken that cost there, and we are now at around 162 stores as we speak. We will continue to look at that part of the Indonesia part of the portfolio very closely. But as we speak today, we would pick the journey forward from here at 160 stores. As we continue to review if we feel that we may want to prune this -- any part of the existing 160 store portfolio and prune it further then we would take that comp. But this on that side at the moment is still not -- we don't see now going forward a substantial shift on the downward side on store portfolio in Indonesia. But if there is a need, then you will certainly continue to take the call to make sure that the portfolio remains healthy on that.

[Mayur Gathani, analyst]

And quarter-on-quarter, the revenue was down in Indonesia. So is that -- I mean completely that these 17 stores closure is the reason that you would give?

[Sumit Zaveri, executive]

Yes. It is -- it was purely because of the store closures. If you look at it from the perception of ADS, then we've been on a quarter-on-quarter, the ADS has been at a median of 19.5% and that is now seems a very strong pace that we've been able to establish there. And hence, effectively, another number to really look at is the shift that we've been able to do on a year-on-year basis from almost on 16.9% to 19.1% over last year there.

Mayur, the other thing is that what we have seen in terms of seasonality and what we've really been able to see and do in Indonesia is quarter 1 has a strong holiday seasonality. Last year as well as this year, we got to 19.5% all quarter 1 last year. And then as soon as the seasonality went off, but we had dropped a little down to 16.9% last year quarter 2. This year, the same seasonality, but post the seasonality we really been able to hold onto, and what Sandeep mentioned, the initiatives that we took out to the new side and the offer side. We've literally been able to hold onto the ADS similar to quarter 1 and to quarter 2. So we believe that we'll be able to create a very strong base to build on going forward there. So the reduction [indiscernible] store, store closures, but a much stronger base of 19 million for us to build on from here for all the initiatives that Sandeep mentioned.

[Mayur Gathani, analyst]

Which is fair and great job on that side. You had a positive kind of restaurant EBITDA, just a kind of flat EBITDA in this Indonesia business and you are negative in quarter 2. So again, I would relate, are there any closure costs that are added on to this and hence, it is lower -- negative?

[Sumit Zaveri, executive]

We have kept [indiscernible] as a part of these numbers, the closure costs, we've kept it out. If you -- we've made that remark as well in our -- on Slide 8 as well. This is more because [indiscernible] really speaking from the [indiscernible] of pushing the sales and get more traffic into the business. We had to take some calls on the pricing side or the offer that we run. And the drop is only on account of the gross margins coming down quarter-on-quarter, but not on any other reason for that. We have certain -- right, I wouldn't -- I won't be able to share some of the numbers. On the cost side, we have certain upsides that are available which we should be able to see going forward into H2 as far as Indonesia is concerned.

[Mayur Gathani, analyst]

And seasonality-wise, quarter 1 is the best for Indonesia, just for our understanding?

[Sumit Zaveri, executive]

We would see quarter 1 and quarter 3, the upcoming quarter, acts very similarly. So one is the local qualities that they have or what they call [indiscernible], whereas quarter 3 will have Christmas as another positive seasonality. But one other thing is that, and just going a little more granular on this, we have been able to kind of beat the needle in quarter 2 [ slight costs ] in India. August is their independence month, and we'll literally kind of with a very, very similar to India as to what we did during the quarter 1 peak seasonality. So those are for the positives that have worked in our favor in Indonesia. But seasonality wise, quarter 1 and quarter 3 are the peak seasonalities, to your question.

[Mayur Gathani, analyst]

And on the gross margin side, what is the...

[Operator]

Sorry to interrupt you. May we request you to return to the question queue for any follow-up questions.

The next question is from the line of Mr. Prateek Poddar from Nippon Asset Management Company.

[Prateek Poddar, analyst]

Could you just [indiscernible] line on line item, how should I think about capability for the [indiscernible]. Maybe you can just spend some time as to make me understand what does this [indiscernible] et cetera, as well as [indiscernible]?

[Prashant Desai, executive]

Sorry, if you could just repeat the question [indiscernible] INR 1.29, is that what you...

[Prateek Poddar, analyst]

Yes. So you brought down the prices [indiscernible] items INR 1.29 versus INR 1.99. That's a sharp cut, and that's only on dine-in. I'm just trying to understand what happens to your margins when you take such a sharp price cut. And how does it overall play out sequentially as well as on a longer-term perspective as well as from a brand [ renewal ] percentage?

[Prashant Desai, executive]

I think exactly the point I was actually trying to make to Shirish, right? When we are guiding 67%, it factors into account all the initiatives that we spoke about, whether it was [indiscernible] or the new value promotion at Whopper. In terms of its performance very, very, very early days, just launched, we are now this is the first weekend of Diwali that we will be entering. So just give us some time to kind of come back to you again. But from a margin perspective, when we are guiding 67%, it factors that you [ grow ].

[Prateek Poddar, analyst]

And when you say Indonesia cash [indiscernible] would be [indiscernible] run rate basis, you mean exit rates in the same Q2 FY '24 is where we see Indonesia cash breaking even? Is that going to be take about?

[Prashant Desai, executive]

[indiscernible] quarter-on-quarter across mergers across points, we are only making progress. We are feeling reasonably confident about that the worst is behind us. And yes, ideally, you would have wanted to break even this business this quarter. Yes, some of those things are not under your control. But directionally, I think we believe by the time the end of this year, we should not be losing money and hopefully make some money for all of you guys next year. So directionally yes, Q3, Q4, we should hopefully break even at a company level, Prateek.

[Prateek Poddar, analyst]

And last question, I think Sumit was also highlighting it. Just wanted to ask, whatever improvements we have seen in terms of employee costs, other expenses, corporate costs and the operating leverage playing out, is that something sustainable? [indiscernible] in Q3, you're adding a lot of [indiscernible] that you're adding will be against [indiscernible] in terms of other expenses? Or do you believe these margins which we have achieved are kind of sustainable and we will only build from here on, we will not go back?

[Prashant Desai, executive]

So I think the better -- already answered this question for you would be despite all the challenges that we saw in the first 2 quarters, you have seen the operating leverage. And we've been consistently mentioning this, right, that you need a base of about 400 restaurants for the size advantage to pick it, whether it's in terms of the brand build and the ADS impact and its impact across line items. What we would probably want to conclude that if the festive season goes well, which we are all, touch wood, hoping for the festive season to go well, all we would say is the next 6 months will be significantly better compared to the first 6 months, whether it's on a restaurant level or at the company level for India business.

[Operator]

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

[Devanshu Bansal, analyst]

Sorry, I joined the call a bit late. And my questions are repeat, please don't answer, then I will [indiscernible]. Just wanted to understand some, you launched this INR 99 meal. So despite that, our gross margins have improved both on a potential as well on a Y-o-Y basis. So just wanted to understand what was the -- how do you sort of manage the negative impact of this [ non-funded ] gross margins? What was a positive tailwind, if you could explain?

[Prashant Desai, executive]

I know where you are coming from. Honestly speaking, it's a tough question to answer on an open call with everybody listening. Broadly I can tell you, sir, this is a marketing strategy to get people in at INR 99. This offer was available purely on dine-in, not on delivery. Then you kind of get customers to add on to cheese, you make people switch from a pastry to a coffee for which is the extra [ non-veg ] part of the business does not come in the same discounted portfolio. There are a lot of levers that you pull to do that. And hence, I won't go deeper into each of these. But I would fairly say, I think Prateek was also coming from that point of view when you ask in terms of the same similar question on the other offers stuff that we've launched. And trust me, there are a lot of things that we do under the hood to kind of ensure that it's not gross margin dilutive for us. Unfortunately, Devanshu, tough for us to go further into detail on this for competitive reasons.

[Devanshu Bansal, analyst]

Second thing which I wanted to understand is your marketing spends are down sequentially and your other expenses are also down by a similar amount in terms of [indiscernible] between Q1 and Q2. So [indiscernible] is all of the expenses that we incur on a sole level or are all these variable are linked to revenue? Or we can maybe get some sort of operating leverage going ahead?

[Prashant Desai, executive]

So there was your marketing spend. If you see, we mentioned this in detail in the first quarter that as a brand, as per the agreement that we have signed with Burger King Global, we are mandated to spend 5% of our revenue on marketing. And for a full year basis, this number will remain at 5%.

First quarter is normally when you plan for all the shoots in the campaign and there is a production cost involved in that. As a result of that it's high. So marketing spend, as you will move forward, given that we spend aggressively in the first quarter, you will see this evening out as we kind of go forward. As far as other expenses or all other expenses are concerned, you will see, as we have been consistently saying, whether it is rental, whether it is people costs, whether it is utility costs, as you gain and grow your ADS, you will see leverage playing out on there, which is what you are a seeing a reflection of that, whether it's in improvement in our restaurant level EBITDA margin or at a company level EBITDA margin. And as Sumit was to kind of allude to this quarter under the back, we are feeling reasonably confident that we've now finally reached this and hopefully, if things were to go well, quarter-on-quarter, you will see across the board operating leverage coming up.

[Operator]

The last question is from the line of Mr. Aditya Soman from CLSA.

[Aditya Soman, analyst]

Just one question from me. Can you maybe throw some light on consumer affordability? So I get a sense that obviously we are seeing a pickup in footfalls that we drive promotions. Is there -- is affordability -- first part of this is affordability similar in smaller towns compared with like the 10 store in an existing town? Or do you see affordability in smaller towns also be higher for the first store and then dropping off as you expand into more neighborhoods? Any sense on consumer affordability?

[Rajeev Varman, executive]

Very, very good question. Look, we were just chatting here with some of the people in the industry this morning. And their belief was very similar to what I articulated in the onset. So generally, one is most of the people that have reported any positive SSSG at all that is this is on the head of traffic, growth in traffic. That's number one. Number 2 is that the burger sector, and you can go back and reflect on all the studies that have been done, have continued to grow even this year, and there's a history of 4, 5 years of growth of this sector. This is continuing to grow. Obviously, this is not a planned purchase, it's more an impulse purchase. So it's driven and then it's driven through traffic. You should feel that, that business is on the growth track.

The other thing that I learned this morning and which was also my belief is volumes are increasing more in Tier 2 and Tier 3 towns. Look at the smaller towns, they continue to -- and even during the holiday seasons, you'll find that if you are building a stronger portfolio, you're getting a bigger portfolio in Tier 2, Tier 3 towns, you're finding that those volumes continue to grow as well. So that's where we are sitting at and that's what we believe in. And that's why I think the industry literature is on -- kind of supporting on the same lines.

[Aditya Soman, analyst]

Fair enough. Very clear. So I mean to summarize, you're saying that it's key to drive traffic even if it means it comes at a, say, cost of average on the revenue, that's not [indiscernible] long term moving forward, that's the right summary?

[Rajeev Varman, executive]

Yes. I mean this is a long-term game, right? We have an agreement until 2039 and beyond that, right? So our efforts are not here to try to hit the ball out of the park. It's about to make a very strong business in the long run, right, to build a client pool that has a repeat business, to build a good value strategy in the long run, to continue building products and innovation to drive those customers that come in for innovation. So these are the platforms that we have put in place. And being a young company with a tenure of less than 4 years if you take the average of restaurants that have been opened, this will all build. And if you put the right tools in, if you put the right platform, then we support them over the next 5 years properly, this will become a very strong business.

And I've seen this. When I was in Europe, when I was in North America, it was the same thing. If you did the wrong things and you pushed the wrong buttons just to drive a single quarter or a single market, you usually hurt yourself in the long run. So we are just -- we have a plan in place. We put it in place in 2014. We strictly continuously took work on the plan, adjusting for whatever things happen. For example, that bad quarter in Q3 last year, we [ didn't ] expecting it, no one was expecting it. We made adjustments, and we keep doing that, right? The fact of the matter is, the effort needs to be about building strong platforms that drive not only new business but also strong [indiscernible] in the long run.

[Operator]

We would take that as our last question for today. I now would like to hand the conference over to the management for closing comments.

[Prashant Desai, executive]

Thank you, everyone. I wish all of you a very, very happy Diwali and a great festive period, and look forward to again engaging with all of you with the Q3 numbers. Thank you.

[Operator]

Thank you. On behalf of Nuvama Wealth Management, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.