Sapphire Foods India Ltd
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Sapphire Foods India Ltd
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Ladies and gentlemen, good day, and welcome to the Q4 and FY '24 Earnings Conference Call of Sapphire Food India Limited, hosted by Orient Capital. [Operator Instructions]
Please note that this conference is being recorded.
I now hand the conference over to Ms. Shivani Karwat from Orient Capital. Thank you, and over to you, ma'am.
Good evening, everyone. Welcome to the Q4 and FY '24 earnings con call. for Sapphire Foods India Limited. From the management, we have with us Mr. Sanjay Purohit, Group CEO and Whole time Director; Mr. Vijay Jain, CFO; and Mr. Rahul Kapoor, Head, Investor Relations.
I hope everybody had a chance to go through the results and investor presentation, which was uploaded on the exchange earlier today. Before we proceed, a reminder that this call may contain some forward-looking statements which do not guarantee future performance and involve unforeseen risks.
A detailed disclaimer has also been published in the presentation.
I will hand over the call to Mr. Sanjay. Over to you, sir.
Good afternoon, everybody. Great to have all of you all on this call. We are going to be talking about our quarter 4 and our full year FY '24 performance. I'll go straight to Page #6, where I will -- let's first talk about a 3-year scorecard. In December '21 after we listed, we have guided that our aspiration is to grow revenues by 25% year-on-year, grew EBITDA by 30% year-on-year and double the store count over a 3- to 4-year period.
If you look at 3 years since our listing, we've been able to achieve most of -- achieve all our objectives. Sales revenue has grown by 37%, EBITDA by 92% and almost doubled our restaurant count. When I look at specifically, when I look at specifically performance for the full year FY '24, we've grown restaurants by 17%, restaurant sales by 15%. Adjusted EBITDA has grown by 3% and adjusted PAT by -- has declined by 44%. What are the highlights of the year. When you look at the entire QSR industry and you will take all 4 parameters into consideration, revenue, scale and growth, EBITDA margin and growth and 1/5 of parameter of new restaurant additions, we believe that we've delivered the best all-round performance where revenue scale -- revenue has grown by 15%, our EBITDA margin of 10.5%, has grown by 3%, and we've added 129 stores.
So from an all-round perspective, revenue, size, scale, EBITDA margin percentage and growth, we feel that we have delivered the best performance in the industry. Within that KFC Sapphire has delivered our highest ever annual EBITDA margin of 19.7%, and we've had our highest restaurant additions at 88. We are quite proud to say that underlying these financial results is a maniacal focus on execution and improving customer and operational metrics.
We are ranked among the top 3 franchisees by Yum! -- on -- in both KFC as well as Pizza Hut on our customer metrics and our operating standards. We're also quite proud that we were ranked the #1 QSR in India, on our ESG score rated by Dow Jones Sustainability Index, and we are 95th percentile among all QSRs globally. We also achieved -- this is an internal metric that I'd like to share with you, we also achieved our best ever employee engagement score since 2018 that we have tracked.
And today, we have placed at the 88 percentile of all companies surveyed by the Global Gallup Engagement survey, all companies at this survey worldwide. When I look at specifically the quarter 4 highlights, our consolidated restaurant sales at INR 630 crores grew by 13%, EBITDA at INR 110 crores grew by 7%. And really, the story as we indicated even in February was that demand across all consumer product categories remains constrained. And now we've got the private final consumption expenditure metrics released by the government over the last 6 quarters, it's been the worst it has been over the last 2 decades.
In quarter 4, we added 23 KFC restaurants and our total count is 872 as of 31st March '24. Consolidated restaurant EBITDA declined 5% year-on-year and margin was 13.6%, down to 60 basis points. Consolidated EBITDA at INR 110 crores, 17.5% grew Y-o-Y by 7%. Adjusted EBITDA, that is [3IND 1116 ] at INR 54 crores in the quarter, 8.6% declined by 3% Y-o-Y. Consolidated PBT of 8 million or INR 80 lacs of 0.1%, adjusted PBT was INR 8.3 crores or 1.3%. PAT was INR 2 crores or 0.3% and adjusted tax, that is the non-Ind 116 PAT was INR 7.6 crores or 1.2%.
I'm going to quickly take you through KFC. KFC during the quarter also continued to perform well in a tough demand environment over the full -- over the quarter. I'm referring to Page #20, a year. Over the quarter, we grew revenue by 16% and we added 23 new stores. Our brand priorities continue to be those 6 priorities, increased price chicken category relevance, build craveable taste, continue to expand on our value offerings offer the customer a frictionless experience, both online as well as off-line, improve our operations and improve accessibility.
In the month of April -- sorry in quarter 4, we relaunched [ Pizza LTO ] that did well. And this quarter, we've taken our burger game to the next level by launching 5 new burgers American, Caribbean, Mexican, Indian and Indian veg and Indian non-veg. we've relaunched also, which you will discover only at a store, the Indian veg option, paneer zinger. But the other 4 burgers are also, if I dare say so myself, absolutely outstanding. And we launched 23 stores in this quarter. So we are on track to double our restaurant count by the end of the year.
I'll hand it over to Vijay Jain, our CFO now for the financial numbers.
I'm on Slide 25, which covers channel-wise sales contribution for delivery mix remained steady at 39%. Moving on to the next slide, SSSG came at minus 3%, and ADS at 114%. Just to clarify, the ADS is also impacted by new store additions, which over the year almost at 25% restaurant additions. And as we called out, generally, the new stores takes time to scale up. And their ADS are generally lower initially the first year compared to the brand average. Overall revenue grew by 16% and while gross margins improved by 150 basis points, the negative SSSG meant that it impacted EBITDA, which came at 18.7% for the brand, down by 40 bps year-on-year.
Slide 28 gives you a 4-year annual performance and 5-quarter trend. You can clearly see Safire KFC delivered an industry-leading performance with 88 new restaurants 18% revenue growth for the year and highest annual restaurant EBITDA at 19.7%. Let us come to Pizza Hut now I want to first reiterate that Pizza Hut is our second pillar of growth in our multi-brand restaurant operation strategy. The quarter continued to be challenging on Pizza Hut, where there's been new growth where system revenue grew by -- sorry, declined by 3% Y-on-Y and SSSG declined by 15% Y-on-Y.
We have called out that we've got a simple and clear strategy on reviving consumer interest on the brand. In a tough demand environment added pressure of high competitive intensity -- we said there are 3 things that we want to do. One is how do we store consumer interest behind the brand? And to do that, we've got to be able to launch relevant market innovation, which is backed by significantly higher marketing spend. So in February, we had called out that you should be able to expect new innovation to come out in the next 1, 2 quarters.
On February 29, we launched Melt. Melts is an absolutely unique product. It is folded handheld pizza concept. and it is aimed at extending the pizza consumption to in between me locations. So it doesn't take on pizza directly, but it's trying to expand the number of occasions that pizza is consumed. And we backed that and have continued to back it with a multimedia marketing campaign.
Apart from Melts, I'm now looking at Slide #31. You can see the other innovations also that were launched. We had a range of partners, and we launched a very interesting thin and crispy crust pizza also. All -- this is I would say the start of the journey on the brand. We are quite excited with what is in store on the brand over the next couple of quarters.
The second part of our plan, we said is how do we improve our internal -- continue to build on our customer scores as well as our operational metrics. Our Dragontail kitchen planning tool rolled out in 100% restaurants. We have seen improvement in service levels, especially on delivery. The Dragontail is integrated with the aggregator platforms. It's never -- it's the first time ever kind of an integration. And we believe that this muscle is a unique muscle that we are building. Our lunch daypart activation also was rolled out and now 90% plus high-speed restaurants are open for late night deliveries. And in line with what we said, we'll be cautious...
Ladies and gentlemen, wait for a moment, we have lost the management connection. Wait for a moment while we reconnect them. Ladies and gentlemen, we are trying to connect the management. Please stay connected while we reconnect them.
Ladies and gentlemen, thank you for patiently holding. We have the management back on call.
I'll just -- I don't know where where we lost each other. But perhaps I'll just cover the last part of what I discussed on Pizza Hut, in line with our cautious expansion strategy, we did not -- we had net zero store addition in the quarter. And now I'm going to ask Vijay to please share the Pizza Hut Financials.
I'm on Slide #35. Delivery mix came at 50% for the quarter and dynamics improved to 35%. SSSG was minus 15% for the quarter and overall revenue declined by 3% for the quarter. And while gross margins improved year-on-year by 120 bps, the impact of negative SSSG and higher marketing spends meant that the restaurant EBITDA came at negative 2.7%. If we exclude the additional marketing spend done during the quarter, the brand broke even at the restaurant EBITDA level.
Slide #38 gives you the 4-year trend. Clearly, the brand is facing the challenging time. With the initiatives planned on the product, product side, which is backed by investments, both in marketing and improving or strengthening the consumer experience, we are confident that brand will emerge stronger in the medium term.
A quick update on Sri Lanka. So we are seeing green shoots of revenue growth. So SSSG grew by 4% and system growth of 8% in Sri Lankan terms. However, store operating cost inflation was a drag on profitability, and it is a challenge. But we remain confident that FY '25 should be better. And then when you look at the brand strength and I'm referring to Slide #41. It is undoubtedly the #1 QSR brand in the country, both from a name recognition perspective, from an accessibility perspective.
So as the economy improves, we have great faith that our Sri Lanka business also that we are seeing revenue starting to improve, will come back on track.
Slide 42, Lanka business channel-wise mix, delivery was largely stable at 37% for the quarter. The SSSG, which was the happening piece for the quarter was 4%. Overall revenue in lung centers grew by 8% and Indian rupee, it grew by 22% for the quarter. And while gross margins saw also an improvement even in Lanka business by -- up by 90 basis points quarter-on-quarter, Restaurant EBITDA came at 12.3%, impacted by Sanjay mentioned, the cost inflation which we experienced on the operating expense side of the store.
Slide 46 gives you a 4-year trend, we can see the green shoots of demand recovery in the country, which is reflected in form of SSSG. The quarter 1 has also started well for Sri Lanka in terms of SSSG. So we expect FY '25 to have an improved performance over FY '24 for the business.
With this, we can open the floor for questions, [ Shivani ]
[Operator Instructions] The first question is from the line of Jay Doshi from Kotak.
My question is over the last 45 days or 40 days or days in this quarter. Are you -- directionally, are you seeing any stabilization of same-store sales trends for KFC? Is it reverting -- or is it improving? Can you give us some idea in terms of how the year has started. And based on what you see right now, how do you sort of -- what's your outlook for the first 3 to 6 months.
So good to hear from you. As you know, I think generally, we won't give you guidance for the quarter. But however, having said that, if I look at how the first 40 days or so have started, April is not a competitive month for us from a KFC perspective because this year saw the full impact of the Chota Navratra. And during this time, both our North and West businesses get impacted significantly. May has -- May is significantly better than either Jan-March quarter. But I mean, it is more or less in line with improvement that we see on a year-on-year basis.
Sequentially, this quarter, so sequentially, this quarter is a better quarter if I remove bar and we are seeing trends along those lines. We are not seeing even further -- or we are not seeing further improvement in -- on KFC.
On Pizza Hut, we are seeing improvement compared to what we saw last year. But because the brand is has undergone a fragile a few quarters. I'm still wanting to see how it pans out. And perhaps before the next during the next quarterly results, we should give you concrete evidence that indeed we are starting to turn the corner on the brand.
Just to clarify, Sanjay, sequential improvement, which we traditionally see in this quarter, we're seeing on the KFC brand, and we're seeing that better upliftment compared to last year in Q1 versus Q4 on the Pizza Hut brand. I think you referenced some there year-on-year, it remains sequentially.
Understood. So basically, the March to June seasonal update is in line with the usual seasonality this year so far. And in Punjab,,it's a little better than what we saw last year.
Perfectly. Perfectly said.
One more question, if I may. A new sort of in your conversations with aggregators -- what is your reading of the fact that aggregator seems to be doing fairly well in terms of Y-o-Y growth rate. And overall QSR industry is started lagging meaningfully, even the brand that used to be much better about a year ago, that gap is widening. So how do you see this? Is this more of a structural trend? Or is this a temporary phenomenon? And how do you interpret this?
Yes. So one is that right now, we get only data from one of the aggregators and undoubtedly, their growth rates have been higher. When we drill down from a QSR, so there are 2 parts that they seem to be saying. One is there has been expansion of option and restaurants that they have taken on board. So there are more restaurants that are being served today. That is number one.
And secondly, they're getting better growth out of high-value, high-value transaction and then largely happening through the earlier casual store Fine Dine restaurants who come on board and now are looking at delivery in a meaningful manner. Having said that, if I just look at our 2 brands, KFC's performance also is in line with the kind of growth that we are seeing, the one aggregator delivery.
Okay. So what I understand from you is the growth for aggregators outperformance that versus QSR is largely a function of if I were to sort of -- at a higher price point, premium restaurants, luxury restaurants are seeing more, the growth is driven by that and not the mid-priced restaurants or QSR for
So we have [indiscernible] on to only 1 of the 2 reasons. One is, yes, what's investing that SSSG is driven by whatever components. So if I look at the Q3 results of one of the aggregators, 27% is what we grew by 7% SSSG, which is largely driven at a premium and 20% came through restaurant additions. And if you look at the comparable number, KFC also grew at 18% for the year. So yes, it's largely driven through addition and a component of SSSG driven through premium restaurants.
The next question is from the line of Harit Kapoor from Investec.
I just have 2 questions. One was on Pizza Hut. So in light of the changes that you're making and you also said you kind of re-look at stores, et cetera. Could this be a fairly muted year in terms of expansion? Is that the fair way to look at it? And if there is any number, if you could share on that.
So again, you won't give out annual numbers or we have given out a guidance December '21, where we said we could double the count of both the brands over 3 to 4 years. We could clearly see KFC tracking on that for 3 years, in fact, rather than 4. Pizza Hut -- I think we are taking an extremely cautious approach. So yes, it would be muted. Now what that muted would be subjective, but yes it would be fair to say it would be muted.
Got it. Got it.. And the second question is on inflation. So are some of our tracker suggest that you've seen some reduction in the overall inflation environment. in Q3 and Q4. Just wanted to get your sense of what's the kind of scenario you're seeing going into FY '25 and -- is there a potential price increase the likelihood or in the current environment that's a bit to passage?
Whatever benefit had to come in into the P&L in terms of gross margin improvement, I think that lock largely starting Q3 of last year. And if you see sequential gross margin, we had called out that it will be ranged from plus minus 2 basis points. I think going forward, we expect that the gross margins would be range about plus/minus 2 basis points. And we don't see any price increase, material price increases happening. That would always be small revisions. But we don't see any material price increases happening at least in the H1.
The next question is from the line of Shirish Pardeshi from Centrum Broking.
You mentioned in the beginning, there is a competitive intensity is also one of the..
Sorry to interrupt you, sir. Can you please come near to the mic and speak, please?
No, I was just referring to your initial comment that competitive intensity is there. So I just wanted to see that in your comments specifically, has it gone up substantially in Pizza Hut and lowered in KFC or it's similar? That's my question. Basically, I wanted to understand whether these new innovations that we have launched in the market, will it drive the consumer occasion, what we've been planning to bring them to more footfall to our stores.
So the competitive intensity is not a quarter phenomenon, but a 2-year phenomenon. And last quarter also, I mentioned that we look at a 2x2 grid to determine competitive intensity. One is the size of subcategory within QSR, the larger the size, greater the competitive intensity and the ease of kitchen operations, the easier the kitchen operation, the easier or perhaps the greater the competitive intensity.
So if you look at the 2x2 metric, perhaps, pizza is the largest category. And relatively, it's an operations are easy. Relatively, it is easier. Therefore, that is why we are seeing competitive intensity I also called out that it's not as much physical infrastructure that is put up. So brands don't have omnichannel presence rather than we are seeing a multitude of cloud brands.
And when we look from a fried chicken category perspective, while now it is almost a second or with the large category, the complexity of kitchen operations means that to produce great product, is so much more difficult and therefore, competitive intensity there is lower. Perhaps if I look at burgers, the competitive intensity is significantly higher than fried chicken and perhaps even coming close to now pizza.
Having said that, I think the idea behind Melts and in general innovation on the Pizza Hut brand is to both both revised consumer interest and therefore, pull a little bit of market share from all the other pizza players also through Melt, there's an additional benefit of increasing the number of pizza occasions beyond meal time occasion. And therefore, in between meal snacking occasions also, the brand or the -- this launch is meant to -- this launch is meant to do that.
No. My second question is on the SSSG, though we have now taken a pause for opening more stores on Pizza Hut. Do you expect that next 2 quarters, the revival will happen positive SSSG for Pizza Hut business?
I think it's no -- there's no silver bullet on the brand, Shirish, as I would like to give you a very optimistic outlook, but I think we are optimistic about the direction that we are taking, but it is going to take time. There's no doubt about that. It's going to take time. And it is not helped by a demand environment that is so soft. And again, when we look at all the quarter 4, many of the consumer product companies also that have come in, I think some of them are in some of their results are indicative of the pressure that we are seeing on consumer demand.
The next question is from the line of Karan Taurani from Elara Capital.
My first question was on KFC EBITDA margin. I think despite the improvement in gross margins, frankly, the margins have been stable as compared to peers maybe in the burger and the pizza category where we're seeing margin disruption. So what's your take on margin going ahead? Do you believe that margins will remain stable -- or do you believe that there's a potential for expansion as well?
Karan, are you complementing us? Are you saying our margins in KFC has not been as good so, just wanted to know maybe...
I am complementing it has been stable. I am complementing this is stable. But are we expecting too much that -- what is the potential for an expansion, if at all.
Yes. So Karan, again, the overall long-term guidance on KFC margins have called out that we would like to be in that 20% zoom. If it goes higher, the idea would be -- can we expand even faster and invest in the new stores? Because we are quite comfortable with the ROCE, which we generate at a 20% margin level. That's the long-term guidance you have always called out. Right now, it's come down to 18.7% because the SSSG not helping. So if the SSSG remains challenging, then yes, the margins would be under pressure. But the moment SSSG is back and if it's positive in the range of 3% to 6%, we expect the margins to be, again, going near to 20%. But no, we don't intend to take it beyond 20%. In that case, we will expand this faster.
Got it. That's I think. Second question was on complement [indiscernible]. So there have been players like [indiscernible] who are now looking to expand on a pan-Indian basis. I think [indiscernible] is also somewhat scaling up in metro cities. So do you foresee that because of potential competitive intensity, this could lead to prolonged pressure and growth, which could in turn lead to more margin pressures over the medium term? I mean, what's your sense on competitive intensity in general.
So 2 parts to the answer. Number one is, if you saw what we are trying to achieve on KFC, how do we grow KFC is to enhance the relevance of the fried chicken category. So from that perspective, competition actually creates positive noise around the category, and we should see greater adoption of fried chicken going forward. So in that sense, competition is only good.
Now the second part to that question is that. However, at the scale that KFC operates, we undoubtedly have economies of scale also. So it is difficult for any competitor to come in and be a cost leader and, therefore, impair margins. So I don't think that should happen, point number two.
The bigger question to ponder over is similar to the scenario that Pizza Hut is in. Pizza Hut over 25 years has got a very strong equity in the consumers' mind. But as a #2 player in the large pizza category, still needs to clearly differentiate itself from the market leader. And that's our attempt and we can see as to -- it's not -- even then it's not easy, even with the size and scale that Pizza Hut has, the important part, therefore, to see is that other upcoming brands offering anything that is different to KFC from a consumer proposition perspective, I'll leave the judgment to you. If you ask me, I would say no.
But some of them can undercut in terms of pricing, which could lead to pressure on growth, which could lead to pressure on [indiscernible] Can that scenario were to play out?
In fact, I mentioned that in my second point that to be able to do that either you're going to take a significant hit on your margins -- and therefore, you're going to be out of pocket. And even for a large player like the #1 player in pizza, it's going to impair their margins. So -- and because they don't have the economies of scale, the economies of scale are at 2 levels. One is not only the sourcing economies, but also at a store level, if you don't have a critical ADS, critical sales per store, then also your store operating costs as a percentage of the store P&L go up quite high.
So again, in this entire, I don't think the QSR category, generally, we have seen someone coming in and being a price leader because in food, people play the opposite game and be perhaps INR 1 or INR 2 more premium and show quality rather than the opposite way. So I think Karan it is unlikely.
[Operator Instructions] The next question is from the line of Devanshu Bansal from Emkay Global.
I want you to check --
Sorry to interrupt you, sir, your voice is little list. Can you please use your handset.
Sure. I'm already using my handset. It will be a bit louder. What is the -- within the 3% SSSG decline for KFC, what is the kind of transaction growth or decline that we have seen this quarter?
So again, we have seen a translation decline as well. We have not given out a specific transaction growth numbers even previously. But yes, it's safe to say that transitions have also declined. Generally in the similar range, I would say, single digit, low single digits on.
Got it. Vijay, Iwantyed to check how aggressive are we going to protect our order count share here? So like this, we are seeing that the leader in the pizza segment at least has a delivery charges just to, in my opinion, gain the order count share. So I wanted to for KFC view people are the leader. How aggressive are we going to protect our order account share here?
How aggressively you're going to protect what?
Our order count share, I think how..
Transactions?
Transactions here.
Yes. So today, we are not finding too much of a difference between our same-store sales growth and our transaction growth. Our pricing has been largely stable, Devanshu. So the specific example that you took off is 1 tactic that one player has used, not necessarily that tactic works for everyone else. Suffice to say that our -- the biggest play that we are making is in ensuring that pricing is kept to an absolute minimum. That's the front foot betting that actually we are doing.
And then our launch of our snackers range at 99%, we've got a full lunch range at INR 149. So there are enough and more value option that will drive transactions. So I think we are being aggressive in trying to grow exercise of the brand undoubtedly. Did that answer your question, Devanshyou?
Yes, it did, Sanjay. Second, I wanted to check our CapEx at about INR 385 crores, is similar in FY '24. while we have added less number of stores in the year. So just wanted to take what is the reason for that?
So again, it's a combination of a couple of things. It also depends upon what kind of refurbishments you have taken this year versus previous year. What kind of other CapEx on tech investments you have done this year versus previous year, the number of closures this year versus previous year. So all those factors come into play when you're comparing of CapEx this year versus last year. As I called out previously, if you look at the CapEx per store per format, so KFC CapEx is generally in the range of first for [indiscernible] 1,500 to 1,600 square feet. Pizza Hut, we are seeing it in the range of 1.42 to 1.45 [indiscernible] per store on Pizza Hut.
Got it. Vijay, can you call out as in where a major part of the difference has gone in, in terms of refurbishment or technology?
Devanshu, if we can come back to you on that particular thing on exact details of it.
The next question is from the line of Gaurav Jogani from Axis Capital.
My question is with regard to the Pizza Hut margins. Now despite the lower demand scenario, and negative leverage, we decided to go for an aggressive marketing campaign leading to actually an EBITDA loss. So in this scenario, given that the near-term demand also looks weak. How are you looking at the overall margins for Pizza Hut for the coming couple of years?
So again, without the additional marketing investments, you have broken even and with the kind of uplift we are seeing. And again, as we said, too early in the quarter, but the kind of uplift we are seeing, combined with the seasonal uplift, we don't see the brand going into negative on a full year basis in the coming quarters as we move forward. However, we do expect the restaurant EBITDA to remain in a single-digit restaurant EBITDA, what we experienced prior to this quarter. Until the ADS level goes back to that 50,000, 55,000 levels. We expect the restaurant EBITDA to be in single digit.
Yes. If I just add more color here as Gaurav and on the brand, the issue is improving or the answer is improving demand. And we have been quite forceful in saying that we are not going to be big sims of the low demand environment. But we are going to try and put ourselves out there and actually change the and change the trajectory of the brand.
And hence, the emphasis on greater level of innovation and marketing investments. So I'm -- this is indeed the way to go on the brand. And now you look at how many brands will be able in a scenario like this, to actually put in the additional investment. And this is a great opportunity for Pizza Hut rather than the -- looking at it in a negative manner.
Sure, sure. No, so just wanted to get a perspective at what level the tolerance level is for the margins. I mean, what is the balance that you would like to see between the marketing end and the margins, so that was the broader question.
Yes. So as long as I think they're quite comfortable as long as the brand is not losing money on an annual basis and we are [indiscernible] at a quarter in isolation, we are quite comfortable spending that kind of on because at the end of the day, idea is to get the ADS of doesn't really matter if we're hitting 5% restaurant EBITDA mark or 3% or 7%? How do we get the ADS up and get the restaurant EBITDA back to double digit, that's the objective. So yes, it will be a single-digit restaurant EBITDA and as long as we are not losing money on the brand on an annual basis, I think we're quite comfortable.
Sure, sir. That helps. And my second and the last question, sir, is with regards to if you look at the absolute ADS numbers also, I mean, for the year, I mean the ADS numbers are actually lower versus even the COVID impacted year as well. So what should we gather from this? I understand that it is impacted because of the lower the separate demand scenario. But do you also think it is also a concern of the sizes that we have cut down and now somehow it is impacting us because the pent up has gone down the delivery and also resumed to normalcy. So -- could we look at these ADS numbers?
You're referring to KFC or pizza or both in general?
Both in general.
Let me take the second part first. So it's not impacted by us cutting down the size of the restaurant, a lot of our restaurants would still be delivering significantly higher ADS than the brand average. So capacity is not at all an issue. The ADS reduction is a function of 2 parts. As you keep adding 20%, 25% restaurants every year. Typically, as we have called out earlier, the new restaurants come at 70% to 80% of the brand average in year one, they will take 3 years, 4 years to mature and move towards the brand average.
So 25% additions would typically take down the ADS by 5%. However, generally, that gets offset by a 5% to 7% SSSG, which the brand could generate in a general scenario, which keeps the ADS steady. So if you are not getting the SSSG as it's been the case with Pizza Hut for last 6 quarters and KFC for last 1 year, the additions are diluting the overall ADS. But the balance in terms of new store additions, combined with the overall cost management meant that we are still improve on our profitability for the KFC business and deliver the highest ever restaurant EBITDA.
Sure. Sir, just a follow-up on this. I mean, so if we continue on this 25% kind of store addition for both the formats that is -- and as you mentioned that the usual impact is around 5% on the overall system.
So addition would lead to 5% impact that can be offset of 5% to 7%. Then the ADS remain steady. That's broad thumb rule.
So even if we, for example, do a 5% kind of assets going forward, it will still be fair to assume that then the ADS could remain flat and to drive higher ADS per store, we would write -- I mean we would have to do a higher kind of -- would that be a [indiscernible]
[indiscernible] not be required, because if it's the additions, which are planned and SSSG of 5% to 7%, which we are quite comfortable with to deliver the margins of 20%, those ADS levels are fine. While we always love to have higher ADS, but those levels are completely fine for us to deliver a targeted number for [indiscernible] numbers.
Yes. So my question is not on margins here. It's largely only ADS bit only -- so I mean, as you said, that 25% addition.
Sorry to interrupt. May I request you to please rejoin the queue for a follow-up question.
Just completing this point.
Gaurav, we can connect again offline again.
The next question is from the line of Akshen from [ Sidelity. ]
Most of my questions have been answered. Just one question on Pizza Hut. I saw that there are no store additions this year. And I think you had flagged that that's something that you would do if you see as going below a certain level. So just when we think about getting back on to store addition for Pizza Hut. What are the markers you would have us look at? Should we be looking at a certain level of ADS? Should we be looking at a certain level of margins before which we start adding capacity?
Yes. So we have no additions for the quarter because we somewhere called out for the year. So for the year, we still have the addition last the year gone by, we added 33 restaurants for Pizza Hut, yes, for the quarter, zero additions. And for the previous quarter, it was 8%. As we called out, the expansion will be cautious. We are not saying we are going to be zero or pausing completely. It will be extremely cautious suffice to say that. The markeresult, I would say, 3 markers which will track internally.
One is certainly looking at can the SLG come back on the brand. The first reasonable ADS at a store. So moving towards 50,000 ADS level marks again gives us some comfort, which helps us to manage costs more efficiently and deliver some sensible level of profitability.
And the third would be the profit itself. I think moving towards 8% to 10% mark restaurant EBITDA gives us confidence to increase the pace of expansion significantly till that time, I think we would be cautious on store expansion.
Okay. Great. And then last year, we had quarter-by-quarter, things were a little noisy because demand was slowing down and then you had impact of festive, [ adhik mass, ] all that sort of stuff. Now when we look at what would be the best way to gauge underlying trend? I'm not asking for a guidance at all. I'm just trying to say, would a year-on-year metric be a better way to look at it would be a sequential build out be a better way to look at it because you follow what I'm saying, right? Like last year...
So I just answer it in a combination of this because unfortunately, over the last 3 to 4 years post COVID every year and every quarter that there has been some of the other exceptions as a result the trends, which are sequential trends or year-on-year trends, some quarters where it gives out a good picture, some quarters, they are not strictly comparable. So this year, if I look at quarter 1 has Navratra falling in April. Last year, it was across 2 quarters. [indiscernible] would not be there this year, which should help the quarter 2, but quarter 3 last year had some impacts on start, which has moved to quarter 3. This year, it probably will be in quarter 2 definitely will be negative.
So yes, especially for KFC, those seasonal impacts, unfortunately, quarter-on-quarter, we'll have to judge, looking at annual, nothing like it, but that's the best way to look at it. But yes, some people may not be comfortable in judging the [indiscernible] annually. But quarter-on-quarter, there will be exceptions, which have to be carved out to come out at a real SSSG for third quarter.
The next question is from the line of Dhiraj Mistry from Anti Stock Broking.
Congrats on good performance of KFC. My question is on Pizza Hut. So if I look at this SSSG decline, can you divide that between AOV and transaction value for the and whether the Fun Flavor Pizza and under the value innovation which we have done, has that really led to the transaction growth>
So again, while we're not giving out specific numbers, we have seen double-digit SSSG impact. And yes, the transaction impact has been also close to double digit. So largely, you can say it's a transaction-driven impact, which we are seeing on the brand. The Flavor Fun, the growth which we saw on the both ADS levels and transactions level in the initial period, what we have seen right now, we have not been able to sustain that upside, which we gained in H1 of FY '23.
Right now, I wouldn't see any particular impact coming from flavor Fun, after it has lapped that last year. If anything, we saw the growth in transaction year-on-year. Having said that, again, it's not been a reason why the brand is losing SSSG or transaction. When we look at our analytics and the customers who have actually bought floor from vis-a-vis the customers who have not bought flavor for. I think that first step is doing better relatively vis-a-vis the other set.
So that definitely helped the overall brand without claver fund, the numbers could have been far worse for the brand.
Got it. okay. And second and last question on the Slide #30, which you have mentioned on real estate of Pizza Hut that 3% to 5% portfolio collection you will be taking in the next 2 quarters and 10% [indiscernible]. Can you update on that? What kind of connection you will be taking and it stores basically?
So what we meant by portfolio correction was basically closure of loss-making stores, which have been there and we have carried them for a long time. We will use this opportunity to close down some of the stores. The action has already started. And we believe by H1 of next year, those actions will get completed H1 of this financial year, sorry, that [indiscernible] had completed on portfolio correction, which is essentially closure.
Reforms basically mean that stores which have gone old beyond 5 years, we will do a refurb so that consumer experience doesn't take a hit. So that's what we meant by reefers.
The next question is from the line of Saurabh Kundan from Goldman Sachs.
So my question is on Sri Llanka. What is now the aspiration on ADS as well as margin in that business? If you could give us something like you gave for the Pizza Hut India business that ADS needs to reach about 50%, 55% for margins to sort of recover?
So again, for the -- I think the upcoming year, the key would be whether we can deliver the SSSG of that 5% to 7% range that could help us take care of the cost inflation. Hopefully, there are no further shocks on the cost inflation and from the economy side. We have seen it quite steady. I think the last piece was on the operating cost inflation, which happens between Q3 and Q4 of last financial year. So if we are able to see that kind of SSSG, we believe we should be in terms of margin in mid-teens on that particular brand.
Post that, if that's a steady state, we can take a call on how we will go about our expansion. Until then, we'll be again very cautious on our expansion. You could see it a single digit in terms of a store count addition for the financial year.
Right. And what is that comfortable margin level? Like for Pizza Hut, India, it is 8% to 10% for Sri Lanka would be?
For Sri Lanka, actually getting it back into the -- hitting those mid-teens level, I think, will be key. So being at 15%, I think in and around that 15% would be good place to again look at expanding aggressively.
Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Thank you, everyone, for joining. Just to reiterate, from a 3-year perspective, we have called out revenue. We have said our aspiration was to grow revenue by 25%, EBITDA by 30% and double the store count. Over a 3-year period, currently, we have clearly beaten those beaten that aspiration a year might be up and down, but we hope to continue at least our revenue and EBITDA trend line.
And given a tough year in FY '24, yet we believe that all factors put together, which means a combination of revenue scale growth, EBITDA margin growth and net new restaurant additions. On an overall basis, Sapphire clearly is the best performing QSR company.
So with that, I hope to see you all next quarter and have a good summer vacation, and thank you for joining us again.
On behalf of Sapphire Food India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.