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Edited Transcript of 505533.BO earnings conference call or presentation 25-Jul-19 12:00pm GMT

Q1 2020 Westlife Development Ltd Earnings Call

Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Westlife Development Ltd earnings conference call or presentation Thursday, July 25, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amit Banwarilal Jatia

Westlife Development Limited - CEO & Vice Chairman

* Ankit Arora

Westlife Development Limited - Senior Manager of IR

* Smita Jatia

Westlife Development Limited - Non-Executive Director

* Suresh Lakshminarayanan

Westlife Development Limited - CFO

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Conference Call Participants

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* Abneesh Roy

Edelweiss Securities Ltd., Research Division - SVP

* Anand Kumar Shah

Axis Capital Limited, Research Division - SVP of Consumer

* Avi Mehta

IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary

* Vivek Maheshwari

CLSA Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Westlife Development Limited Q1 FY '20 Earnings Conference Call. (Operator Instructions)

I now hand the conference over to Mr. Ankit Arora. Thank you, and over to you, ma'am.

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Ankit Arora, Westlife Development Limited - Senior Manager of IR [2]

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Thanks, Jeremy. Welcome, everyone, and thank you for joining Westlife Development Limited Earnings Call

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2019. We are joined here today by Mr. Amit Jatia, Vice Chairman; Ms. Smita Jatia, Director; and Mr. Suresh Lakshminarayanan, Chief Financial Officer of Westlife Development Limited.

Please note that our results, press release and investor presentation have been mailed across to you earlier, and these are also available on our website, www.westlife.co.in.

I hope you had the opportunity to browse through the highlights of the performance. We shall commence today's call with key quotes from Amit, who will provide a strategic overview, which will be followed by Smita to take you through the key business initiatives. And Suresh will cover further analysis of the financial performance and highlights during the review period. At the end of the management discussion, we will have a Q&A session.

Before we start, I would like to remind you that some of the statements made or discussed on this call today may be forward-looking in nature and must be viewed in conjunction with risks and uncertainties we face. A detailed statement and explanation of these risks is available in this quarter's press release, investor presentation and in our Annual Report, which is available on our website. The company does not undertake to update any of these forward-looking statements publicly.

With that said, I would now turn the call over to Amit to share his views. Thank you, and over to you, Amit.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [3]

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Thank you. Good evening, everybody, and thank you for joining the call today. I'm pleased to share that we are off to a good start in FY '20. We have yet again dropped a profitable quarter with a healthy same-store sales growth. It marks the 16th quarter, our fourth straight year, of positive same-store sales growth. Over the last few years, we have constantly anticipated our customers' needs, substantially innovated on our venue, launched the group's full journey, maximized efficiency through our ROP 2.0 platform and integrated technology across our business. As a result, over the last 3 years, we have grown same-store sales growth by over 40%. Our revenues have grown at a CAGR of 18.4%, and we have improved our operating EBITDA by 360 basis points. In addition to this, we have also made a significant shift in our cash-on-cash returns on the restaurant base from 11.5% in 2004 to 20% in FY '19.

The global economic environment has been volatile, and volatility seems to be the new constant. Our Board move over the last few years and the robust business foundation that we have built put us in a strong position to continuously navigate this environment. This, as you can see, reflects in our business results. We continue to stay ahead of customer expectations. After the rollout of McCafés, the new value platform and menu innovation has helped make McDonald's the customers' favorite QSR. And the Experience of the Future restaurants are reporting as a key differentiator for us. Customers are loving the new branding experience. Positive customer reviews are resulting in better footfalls, which in turn is enhancing average volumes and operating efficiencies at these restaurants.

Our strong customer connect, the Good Food journey and our investment in digital assets are beginning to yield results. We have been investing significantly in our digital infrastructure, both at the back end and at the consumer end. We are weaving technology into our operations, restaurants and brand extensions. This has aided -- this is aiding drive superior customer experience and enhanced business efficiencies. As more and more millennials join our customer base, our business vision is to transform McDonald's into a brand that is in equal fast food and technology. We have a strong pipeline of initiatives that we believe will not only help in mitigating tough business environments but will further solidify our foundation. With this, we are well on our way to achieving our long-term goals and our Vision 2022.

Starting this quarter, certain regulatory and accounting changes have come into effect. This has had some impact on our quarterly results. However, these accounting changes do not reflect our true business performance. Suresh will cover this aspect in the financial section. Smita will now take you through the key highlights of the quarter.

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Smita Jatia, Westlife Development Limited - Non-Executive Director [4]

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Thank you, Amit. Good evening, and thank you for joining the call today. We have kicked off FY '20 with an encouraging quarter, registering a strong top line growth of 11.8% and a healthy same-store sales growth of 6.7%. This marks our 16th consecutive quarter of positive same-store sales growth, something we are extremely proud of.

Before we move ahead, I want to brace you all that starting this quarter, WDL is mandated to report financial results as per the Indian Accounting Standard. Due to the nature of our business, IND AS 116 that pertains to principles of recognition, presentation and disclosure of leases, has a significant impact on the company's financial results. Suresh will be talking about the new standard's implications on the financial results in detail later. I will, however, be sharing the comparable numbers that exclude notional accounting increase for all leased properties arising out of IND AS 116.

Moving to Slide 4. The key highlights of financial performance for quarter 1 '20 are as follows: Our revenue grew 11.8% to [INR 3.8 billion] with a PAT at INR 57.7 million. Our restaurant operating margin stood at INR 515.3 million, driven by enhanced operating and supply chain efficiencies. We registered a healthy same-store sales growth of 6.7%. Our operating EBITDA stood at INR 327.2 million. We opened 4 new restaurants, taking the restaurant count to 300 across 41 cities.

Our brand, our restaurants and our people, complemented by financial prudence, remain our key strategic pillars.

Starting with our restaurants. Our revenues continue to grow through the quarter, and we achieved a healthy SSG of 6.7% over a high base of 24% same quarter last year. Despite the headwinds that we are seeing in the economy now, we continue to invest in the business and grow. As you know, our strategy has always been to build the business for the long term and not get affected by the short-term quarter-on-quarter aberrations. With a strong pipeline of projects and a laser focus on increasing footfalls in our restaurants, we are confident of achieving our long-term task.

We added 4 new restaurants in this quarter, Maharashtra [and Karnataka] being our biggest markets with over

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restaurants concentrated, even as we continue to expand our footprint across key cities. This quarter also marked an important milestone in our journey as we opened our 300th restaurant in the iconic Churchgate area of Mumbai. Today, as I nostalgically look back at our journey from the first restaurant in Bandra in 1996 to our 300th in Churchgate, I feel a sense of achievement and pride.

During the quarter, we continued to expand our Experience of the Future restaurants, and these are now becoming the new normal for us. Customers are truly appreciating the contemporary look, the convenience of kiosks and table service, the payment options and our ever-evolving menu. We now have 46 EOTF restaurants, and we have seen increased footfalls in these.

Moving into our brand. Digitization is yet another important growth pillar for us. We are making great strides in building robust digital infrastructure to support our business, both consumer-facing and at the back end. As you may recall, last quarter, we launched the unique McDonald's app to give our customers personalized offers on a daily basis. In a short span of time, our app has seen over 1.6 million downloads with a healthy redemption rate. Our 1+1 offer on our

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burgers starts to bend this traction. The strategic intent of our business is to build McDonald's loyalists. When most brands resort to short-term discounting and giving freebies, we have invested in building a differentiated platform to give our customers everyday value. This, we believe, will help build loyalty and brand connect with our customers.

We started this year with reenergizing our value platform, McSavers, in a big, bold way. This quarter, we delighted our customers with the Free Fries on Us campaign. As a part [of the campaign,] we gave away a portion of our signature french fries, with the burger and beverage making it a complete meal. This truly brought alive our brand promise of value. To strongly establish this proposition, we invested significantly in advertising and promotion. We front-loaded our marketing plan and created 3 quality [PECs] to heighten awareness, along with other digital and BTL activities. As a result, we saw a significant uptake in the [mean].

We have taken a strategic long-term view to increase investment in E&P this quarter to strengthen our value and digital platforms. We are confident we will reap benefit of this additional spend in the coming quarters as well.

Our brand extensions are, as always, bringing in good news. McCafé is now an undisputed favorite for coffee lovers. This quarter, we introduced an innovative McCafé rewards program to incentivize regular customers and drive frequency. While the program is only a few weeks old, the response has been overwhelming. We launched 2 new coolers to beat the heat, and this took the total number of beverages at McCafé to more than 45.

We also added 7 new McCafés, taking the total count to 197. This makes us the second-largest coffee chain in India by units.

McDelivery clocked in its highest sales and guest counts ever in May and June 2019. We would attribute it to 2 things: extended delivery hours to 3 a.m. during Ramzan in selected restaurants. This ensured that our customers got their favorite food at the time convenient to them. And secondly, we launched attractive offers to capture the frenzy around World Cup and IPL.

We continue to expand our delivery footprint through, not only our own channels, but also our strong partnerships with third-party aggregators. McBreakfast is slowly but steadily becoming a habit forming. We have seen many customers become regulars [for breakfast] products. Over the last quarter, we took Breakfast to 17 more stores and ran a value campaign. This greatly helped in increasing trials in new stores and building frequency in existing ones.

Our people make us the leaders that we are. They are the ones who bring customer experience alive in the restaurants. We have yet again been recognized as a great place to work for the fourth consecutive year. We have also been awarded the Asia Business Unit Top of the Charts honor. This recognizes us as the top-performing market in Asia for 2018, a testimony to the great work we have been doing together.

McDonald's has one of the best and most robust training programs globally. In India, we have implemented these programs with an objective to build skills for life for our employees. Last week, we signed a Memorandum of Understanding with the Ministry of Skill Development to provide training to youth to induct them into the retail sector. This is a great validation of

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our commitment towards skilling the youth of this country.

And finally, skill for good. Right

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we have been very cognizant about doing business sustainably, be it our supply chain, our equipment or our restaurant operations. We are embedding sustainability across everything we do. We launched the Good Food story, and re-energized the menu to make it more wholesome and nutritious. Now we have also invested heavily in deploying smart energy management systems, solar panels, waterless urinals and cooling solutions to maximize efficiencies and optimize resources. This is helping us reduce our carbon footprint significantly and will eventually also lead to long-term profitability.

We are committed to using our scale for good for the betterment of the community. Three years back, we launched Ronald McDonald House Charities

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the mission being to create and support programs that directly improve the well-being of [8] children and their families. We built a family room and the OPD in Bai Jerbai Wadia to give terminally ill children and their families a place to rest and refresh. This year, we have achieved a significant milestone by reaching over 5,500 families through our facilities since inception. We are proud of

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and are committed to expanding our network in other hospitals. All of you are welcome to visit our facility

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in Parel, Mumbai.

Even at the restaurant level, we undertake a lot of CSR initiatives to reach out to and help local communities with issues like sanitation, procuring basics and helping children. We hope to keep scaling these up as we grow our footprint.

With this, I hand it over to Suresh, who will take you through the details of our financial performance.

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [5]

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Thank you, Smita. As highlighted earlier, we have continued strong on our growth path with robust performance in Q1 FY '20, where we have seen positive same-store sales growth for the 16th consecutive quarter.

Moving on to Slide 27. As Amit and Smita mentioned earlier, starting this quarter, we are mandated to report financial business as per the Indian accounting standards. Let me just take a few minutes to explain IND AS 116 and its impact on [our financials].

IND AS 116 has replaced IND AS 17 and requires a lessee to recognize assets and liabilities for all fixed leases with a term of more than 12 months unless the underlying asset is of lower value. Accordingly, it recognizes right-of-use assets representing its right to use the underlying assets and the lease liability representing its obligation to make lease payments. Also, fixed rentals will be replaced by: a, amortization charge for the right-to-use assets; and b, finance costs on lease liability. This will result in an inflated operating EBITDA and lower PBT. It is pertinent to note that the impact of IND AS 116 is noncash in nature. Therefore, it will not affect the company's actual operating performance and most importantly, cash flows.

It is commercially prudent to secure long-term lease agreements in order to benefit in the future years as the business grows. In our case, our lease period of minimum 20 years as compared to the general industry trend of 9 to 10 years. However, accounting as per IND AS 116 leads to greater disparity in the reported net income statement in case of longer lease terms, thereby inducing businesses to sign short-term leases, which will be heavily counterproductive to the operating profitability, and we do not endorse this thinking.

Hence, in the subsequent slides, we will be discussing the comparable operating performance with you. That is the last 2 columns in the table mentioned on Slide 28, which excludes these accounting entries for adjustments arising out of IND AS. These numbers will help you provide a better understanding of the actual operating profitability of the company and its [comparability to previous] years. However, just for your information, the IND AS on lease rent terms would lead to an overall expansion of around INR 700 crores to INR 720 crores in the

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and a decrease of around INR 28 crores in the PAT for the full year.

Moving on to Slide 28. As mentioned earlier, this slide highlights all line items with comparative changes in the P&L statement pre- and post-IND AS 116. This will help you give a better understanding for these financials and provide a like-for-like comparison with Q1 FY '19.

Moving on to Slide 30. On top line, we reported yet another quarter of positive comparable sales, making it the 16th consecutive quarter of positive SSSG at 6.7%. Our total revenues witnessed 11.8% growth over Q1 of last year. Our focus on value platform, superior performance of brand extensions and enhanced customer experience through EOTF resulted in higher revenues. I'm happy to share

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3-year CAGR of around 18.4% from Q1 FY '17 to Q1 FY '20.

Moving on to gross margins and a strong operating margin on Slide 31. Our continued focus on improving efficiencies resulted in increase in gross margins of 12.3% Y-o-Y and [results in an ending] margin of 64.3%. In the last 3 years, gross margins grew significantly from 60.5% in Q1 FY '17 to 64.3%

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on back of continuous improvement in supply chain efficiencies, along with changes in our product mix and judicious pricing. As Smita mentioned earlier, we made significant changes in our marketing strategy and [front ordered some]

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that will have long-term benefits. Our restaurant operating margin this quarter declined

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to INR 515.3 million, largely on account of these A&P spends. However, we would also like to mention that for the full year

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remained in line with our earlier guidance.

On to operating EBITDA on Slide 32. As compared to the strong operating margin, our operating EBITDA margins declined

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G&A efficiencies, and the same stood at INR 327.2 million for Q1 FY '20. As a result of our sustained focus on menu value, product mix, brand extensions and supply chain efficiencies, we have been able to make significant growth in our operating EBITDA over the last 3 years, where it has increased from 5% in Q1 FY '17 to 8.6% in Q1 FY '20. This slide also highlights the major levers that contributed to the Y-o-Y movement in operating EBITDA in Q1 FY '20, as mentioned earlier.

Moving on to profit after tax and cash profits. Our PAT stood at INR 57.7 million and cash profits at INR 282.1 million, impacted largely due to [influence] of tax and operating margins. In a nutshell, although we witnessed a healthy top line growth and expansion in gross margins, our operating margins were impacted due to some strategic investments in brand marketing, the benefit of which we will be able to reap in the coming quarters. We believe that the company is well

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Vision '22. All the initiatives and investments made currently will propel us in the right direction to achieve our target sales growth and margin expansion.

With that said, I will now hand it back to Amit, who will take you through outlook for FY '20 and give the closing remarks.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [6]

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Thank you, Suresh. Consumer sentiment may continue to remain weak in the near future as we see some macroeconomic headwinds visible from the GDP data quarter-on-quarter. However, we believe that Westlife has the financial and strategic strength to continue on its path to deliver Vision 2022. With relentless focus on running great restaurants and delivering exceptional customer service, we will continue to expand our EOTF restaurant footprint. We already have a significant coverage in Mumbai and Bangalore, and we will soon be taking EOTF to new cities. Our aim is to more than double the numbers year-on-year.

Technology has become a cornerstone of our strategy. We continue to integrate the digital platform across our business to enhance customer experience and boost profitability. Our brand extension will continue to be strong levers for growth for us. There are key differentiators that help us maximize dayparts, leverage occasions and broaden our customer base.

Another pillar of our growth in the coming years will be sustainability. We are being very mindful. We have been mindfully integrating sustainability in all our business processes. We are leveraging cutting-edge technology to implement initiatives across our business to minimize resource consumption, including electricity, gas, diesel and water. With a scale of 300 restaurants, even small steps at that end will snowball into significant savings, both in terms of carbon footprint as well as business costs. With this, we are well on track to achieving Vision 2022 and deliver enhanced value for all our stakeholders.

Let me now open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have the first question from the line of Avi Mehta from IIFL.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [2]

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I just wanted to understand from the last comment that you made about consumer sentiment being weak in the near term, but you are on a mission to deliver Vision 2022. Would that mean that our initiatives kind of give us a confidence to sustain SSS growth in FY '20 close to the steady-state level, which we kind of looked at 7% to 9%?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [3]

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Absolutely. So it is 7% to 9% sustainable, which is what we've been saying for a while. And yes, we will do that in FY '20 as well.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [4]

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Perfect, sir. The second bit is, given this -- the macro -- the consumer sentiment being weak, do you believe that you would need to invest in sustaining demand, and hence, EBITDA margin expansion, which we aim for on an annual basis. Because that is one of our kind of big drivers, would it be difficult [to be] driving? Is it going to be delayed? Is that how I should see it?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [5]

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No. No, because one, as Suresh and Smita both mentioned, both advertising and brand-building efforts still are on the same basis as we have been for the last 4 or 5 years. They normally stay within 5% to 5.4%. I think we are very confident of the foundation that we've built over the last 5 years. All the -- and basically, these are platforms. And that's my big point to everybody that these are differentiators. They are not onetime quarterly promotions.

So we feel that we will make a delta in our EBITDA margin this year as well. Like I mentioned, over the last 3 years, it's 360 basis points. So similarly, we do expect to make delta over last year on our EBITDA margin percentage as well.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [6]

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Okay. So I mean, sir, the reason why I was asking it is we have seen across the industry some kind of employee cost inflation kind of inching up. I just wanted to kind of -- in that context, while you are right, that ad spend is a phasing issue. Would the cost in your own, [with] 7% to 9% SSS growth and our product initiatives be able to kind of take care of the inflation...

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [7]

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Basically, my view is that India has always been a high-inflation market. And if the sustainable SSG that we talked about is 7% to 9%, it has to be dovetailed with significant cost efficiencies coming in every year. I don't think any company, in fact, globally, can go away from that.

So we have a 3-year window by which we have an expectation of certain amount of cost benefits coming back into the system. And therefore, I've always maintained that this SSG is going to maintain tight control on costs. So we have reasonable confidence as we have through these difficult periods. So I'm not giving you trends of 1 year or 2 years, but you look at the trend even over 5 years, you'll see us sort of moving forward.

Also, the most important thing is over the last 5 years, our portfolio, we've made that quite solid. We've made a lot of significant shifts and movements and investment in re-imaging and McCafé. So I talked about it in my commentary that in 2014, our cash-on-cash return at the restaurant level was 11.5%. Today, we are at 20%. So we've made changes, and that's going to sort of help us moving forward.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [8]

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And just to understand -- post the IND AS implementation, 116 implementation, how should we look at the EBITDA margin guidance? I mean does that have to be revisited because clearly, the numbers now are all across the board in terms of the [the year-end] are kind of treated. So the 13% to 15% that we were kind of aiming for Vision 2022. See what it do...

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [9]

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That is outside the impact of 116 -- IND AS 116. And that's the way it's going to be because that's, to some extent, real slow, and therefore, using that to cloud our judgment on what's right for the business is not really the way to look at it. On a comparable basis with the same trajectory of the past, we continue to believe that by 2022, that's the sort of EBITDA we will hit that -- hit.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [10]

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Perfect. And lastly, any indication on the likely CapEx, given that we are looking to add about 25 to 30 stores?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [11]

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Yes. So essentially, it's in the same territory, about INR 1.2 billion to INR 1.4 billion, that it will be in the same territory. So we don't expect to see our debt move up or anything. We'll stay in the same territory, where we're already. Obviously, which means it reflects what we expect out of EBITDA as well.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [12]

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Yes. And congratulations again on this greater success performance, and I look forward to something similar.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [13]

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Thank you, Avi. Thank you.

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Operator [14]

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The next question is from the line of Vivek Maheshwari from CLSA.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [15]

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A few questions. First, I don't want to over read this aspect, but let's say, first quarter '20, SSSG 6.7% versus fourth quarter, 5.6%. So I mean in the context of, let's say, the macro indicators and all, is there anything which helped, given that [base] was almost similar in the 2 quarters?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [16]

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No. Vivek, basically, there's been a lot of initiatives to our digital app, which we launched in January, has been a phenomenal driver for us. So as I've maintained this across our individual meetings with different people all the time is that what we learned out of 2013, '14 and '15 is that we need to build a pipeline where the economic environment is going to remain volatile and strategic advantage is [achieved].

So therefore, like, for example, launching the app was a very important thing that we figured 12 months ago. Similarly, we already started what we are going to do in 2020. It's already in the pipeline in the field somewhere in our territory. The whole idea being that we've identified, based on our landscape study with the consumers across beverages, eating out, et cetera, one of things that will -- through these difficult time, continue to add average unit volume. And we are, for example, quite confident, therefore, that as this has sort of come through with the GDP being a bit more challenged, we still remain quite confident about where we are heading. So it's actually a lot of internal changes we made in '13, '14 and '15.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [17]

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I see. And this 6.7% SSG, I mean, how was June number? I mean was there any slowdown or it was pretty much even through the course of the quarter?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [18]

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Well, we don't sort of break that out, but remember, Ramadan, was, in fact, in May, which is normally a very important month for us. And even through that, I feel very proud that we've done 6.7% because while Ramadan earlier was within the same quarter. But it's shifting into May, which is sort of a very, very important seasonal period for our business. And then yes, having us manage to sort of deliver the 6.7% clearly talks about the work our team has done.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [19]

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Okay. Sorry, if I'm harping on this point. But my only reason of asking you June, [our exit] is basically have things been kind of worsened or are looking stable at this moment as we are in almost end of July?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [20]

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So Vivek, I mean from my thought process that I'm saying, we maintained 7% to 9%. You can clearly see that the confidence is there. So you can see where the trends are heading, at least from our point of view.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [21]

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Okay. On the product prices, any changes, weighted average number that you can give if you have taken any?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [22]

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Sorry? No, price increase in last quarter, we did not take.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [23]

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Okay. And just curious, Amit, when you say 7% to 9% SSG, what is implied price hike that you build in this assumption? Because your comment about India being high on inflation also means that the products' price hike will be -- will need to offset that. In case, let's say, if you are in a scenario where inflation is benign, what could that do to SSG? So what is the implied price hike in 7% to 9%?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [24]

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So it's always the 3% to 5% that we do. And essentially -- sorry, I'll just correct myself that we did on April 1 take a price increase of about 2%. Sorry, I reported those in the previous quarter. But it is about that. And typically, we will maintain the 3% to 5%. So we did. As I've always maintained, for us, it's like a 20-mile march. We recognize that inflation in India is at a next point.

So while we don't share the data, there's a tremendous amount of focus on initiatives around costs. So a lot of the sustainability work we are doing around water, gas, around units, all that is also helping us, in fact, on our cost basis. If you look at our 2 balance sheets, which are sort of there in the public domain for FY '19, FY '18, FY '17, and if you look at the utility numbers, you'll find it reasonably flat. It would be much lower than [coming straight] to the growth in sales. So it's initiatives like that, which gives us the confidence that we should be able to maintain.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [25]

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Sure. 2 more questions, if I may. One is occupancy and other expenses, 15% to 20% Q-o-Q, Y-o-Y. Can you elaborate a bit on this? I believe this is bulk of -- this is because of the A&P stance that you spoke about, the marketing investments. Anything beyond that?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [26]

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No. Largely, it is A&P. As I've always maintained, that, for us, it's about the total ad spend in the year. And we don't -- for us, it's what's right for the consumer and for our business. Therefore, our Board has maintained it quarterly because even a small impact of 5 crore advertising spend here or there can sort of make an impact on the quarterly balance sheet.

But it is basically -- it's largely on account of -- on advertising. And there's a marginal impact because of the World Cup, et cetera, IND AS related to cost. And therefore, from a rupee -- from a percentage point of view in our [Q], even though the contribution margin is positive.

So it was largely advertising, along with a bit of delivery sales.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [27]

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Got it. And last one question, it's a small number, but just conceptually, why IND AS 116 impacts food and paper costs?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [28]

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No, it does not. One minute, yes...

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [29]

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Vivek, This is actually technical and we can actually take it off-line. So basically, what happens is in terms of classification, there are 2 costs involved. And our food promo that basically, while we consider this marketing, IND AS requires us to classify it as food costs. That's it -- it's a technical classification.

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Vivek Maheshwari, CLSA Limited, Research Division - Research Analyst [30]

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Okay. I'll speak to you offline, Suresh.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [31]

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Thank you. Thank you, Vivek.

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Operator [32]

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The next question is just from the line of Anand Shah from Axis Capital.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [33]

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Just first question on the gross margin. I mean we've seen 30 bps expansion, Amit, despite you're running a third leg, free fries and 1+1 on breakfast and all. So should we take this trend to continue or should accelerate, especially going...

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [34]

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As I've been mentioning for the last few quarters, that 60 -- we are kind of about there when it comes to gross margin. We don't want to push the needle, although -- but luckily, for us, it's been product mix-driven more than anything else. So you should not expect any more growth in gross margin.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [35]

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Okay. But on an aggregate level, especially your platform in terms of McCafé, McDelivery and all, I mean are they gross margin accretive?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [36]

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Yes. Definitely, McCafé. Delivery also, I think, gross margin, it is accretive. Yes.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [37]

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I mean -- so these are faster-growing platforms, right? I mean, they are contributing to the growth. So I mean, technically, you should continue to see a gross margin expansion, right?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [38]

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Yes. I mean, it depends you see on rate of change. So on a year-over-year basis, you will. But on a quarter-on-quarter basis, you see if you are adding 5 to 7 McCafé, it's not going to make a world of a difference. But when you come across the same quarter and a year later, you have 14 new McCafés. So yes, on a year-on-year basis, that might be marginal because finally, they're still a smaller percentage of our coffee business.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [39]

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Okay, okay, okay. And then just a second on the staff costs. I mean on a per-store basis, also you've seen about a 7% inflation. Last year, it was about 3%-odd. Any change in any of the minimum wages in any of your states or something?

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [40]

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Yes. So basically, there was no -- beginning of this financial year, there were some readjustments in a couple of states. And also there are some -- there are some impacts arising out of the judgment of the Supreme Court regarding clarification of [AS]. So those are the things, which you actually see. Plus, when you look at this quarter versus the last year in terms of the [this change, you also see] the full year impact of the new stores as well as the raises that have happened during the last year.

So this, generally, we will get even though over a period of time. But what you're seeing, basically, in this quarter, is largely a [readymade], as I told you, a couple of changes in couple of states on account of [newer prices] as well as some adjustments arising out of the [fee of judgment].

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [41]

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So on an annual basis, what should one building on a [personal business or location]. It would be like a 5% number, 7% number?

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [42]

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But that, if you look at -- no. In terms of historical trend, if you look at it's been around that range. I think so basically, as far as your model was, I think we should factor that.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [43]

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Okay. Okay, perfect. And on store guidance, you are maintaining in that of 25...

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [44]

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Yes. Absolute.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [45]

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Okay. And just one last thing on this tax thing. I mean your tax, there's an entry there. So as the [rollovers] are now expired and you're sort of starting to show tax on the P&L.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [46]

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Full tax. Yes. So...

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [47]

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So [about tax] guidance...

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [48]

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You are right. You're right. That's the thing that's happened over last year.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [49]

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And so what would be your guidance for FY '20? And I'm assuming FY '20 will be complete full tax.

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [50]

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Yes, it is.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [51]

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Even this year, it will be 30%-plus?

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [52]

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Yes. Yes, yes. [It will be 30 point] 9 4.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [53]

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Okay. Okay. So it's already gone there.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [54]

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Yes. And [for now] has given an indication, they might take it to 35. So we are keeping our fingers crossed.

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Anand Kumar Shah, Axis Capital Limited, Research Division - SVP of Consumer [55]

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You are much ahead of the bar.

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [56]

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Thank you.

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Operator [57]

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The next question is from the line of Abneesh Roy from Edelweiss.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [58]

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Sir, my first question is on the Swiggy. When they open, I see 30% off, slip up to INR 75 [apiece]. So will it be largely there for food tech app or it will be a balance wherein both of you are giving this?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [59]

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We are -- we don't give discounts on third-party aggregators.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [60]

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Sir, the other QSR said, the dinings have seen huge pressure last 2 quarters. So I clearly see you're still bucking that trend by proactive measures. But are you seeing this in the broader industry that dining in last 2 quarters have really started something? And could it get worse for the industry?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [61]

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So we are fortunate that we have initiatives like McCafé and a couple of others like breakfast that's also building and then coming along for us. But typically, when the delivery business grows at this rate, there is pressure on in-store. It's a reality. Absolutely, for the whole industry. And obviously, we face those headwinds as well.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [62]

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So when was the last time you had given free fries? And is it, again, a proactive measure in the current slowdown or the food tech apps promotional strategy? And are you able to quantify in some way that 6.7% SSG? Some way, are you able to quantify how much could be? Because I know it's difficult.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [63]

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First and foremost, you see our gross margins have been maintained. So clearly, discounting is not the way we do it. Basically, let us -- Smita...

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Smita Jatia, Westlife Development Limited - Non-Executive Director [64]

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We've always given a good value on our meals. So if you look at it historically, over so many years and if you've been to the stores, that's what we call everyday value.

That is when you buy an a la carte product at an x price, and when you bundle it in a meal, you get anywhere between 25% to 30% discount. Instead of calling it a discount of 25% to 30%, we just bundled it as fries, which is obviously the customers' favorite product. So it's a more customer proposition and not something new what we have done.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [65]

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Okay. And sir, finally, in terms of McBreakfast in the breakfast option, are you now happy with it that you have taken 280 stores? But are you happy with the entire -- in the customer, have they really taken this in a big way? Because -- the early morning rush, clearly.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [66]

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Globally, breakfast is very important for McDonald's. And all the reports you might read, breakfast is actually a very, very core offering from McDonald's. I have seen the evolution of breakfast in every single emerging country where it starts as a small bun, and then it keeps building, building, building.

These are core platforms where you invest in. And for us, it's really -- since we rolled out the new breakfast platform a few years ago, we've consistently, quietly been rolling this out. And first, we focused on Mumbai, but Mumbai already got the awareness. Then we added Pune, then we added another city. So for us, it's working quite nicely, but it requires a lot of time, effort and energy.

And we put specifically people, brand managers who are sort of running breakfast for us. And that investment, along with especially working on the menu and constantly reinventing it. Recently, we launched the breakfast value platform. All of this put together has really sort of helped us grow the breakfast business, and we expect to continue that.

So these are all investments, which add elements to the business, which is how you counter a difficult economic environment because you are firing sort of on all cylinders. And you are growing different occasions, different dayparts. But good news is that we have many such more initiatives that we are quietly working on.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [67]

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And the last question on delivery. The other QSR is doing delivery on this all, although they are unsolicited on food pickups. In your case, you are outsourcing it. So in terms of brand, of course, the experience of the customer is different. Is there an inflection point wherein you start doing the delivery on your own?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [68]

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No. No. We -- globally, you see we follow our own norms. We don't really sort of -- there is some delivery that we do of our own, but third-party deliveries are done through them. For us, it's all right. We don't mind. Globally, by the way, if you know we tied up with UberEats. And UberEats basically delivers for McDonald's globally, as an example.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [69]

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But you said that some places, it's your own. So why are some places your own?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [70]

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Not at some places. You see we have our own app, right? So when we have our own app, what I meant is that when customers order through our app, it is our delivery rider who goes and delivers. But pretty much all third party, and the delivery riders are also outsourced. For us, we work with a couple of these rider companies, and our technology platform is completely integrated, both with third-party providers as well as with -- as well as with delivery rider companies.

So most of the third-party deliver -- or third -- 3 POS, deliver on their own for us, while for our own business that comes to the app, we deliver with our own riders.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [71]

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But bulk of the delivery will be through the food pickups currently, right?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [72]

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So we don't share that breakout actually.

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Smita Jatia, Westlife Development Limited - Non-Executive Director [73]

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So can I just position this in a little bit different way? So the customer or those for different needs. Sometimes the customer wants to only order McDonald's food. And if it is a loyal customer who will come on our own app, and that is where we are delivering our own food through our third-party via their integrator, but the other comes on our own app.

However, there are times when people or families or friends order food from different food operators. That's when they use Swiggy as an aggregator because then they don't have to go through different brands' app and all that. So we see a healthy growth of delivery orders from own app or through our McDonald's loyal customers and also from [third party] aggregators. And as I said in my comments, we've partnered with them. Therefore, there is a win-win both for this third party as well as for us.

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [74]

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So we don't see any brand impact because -- to get Swiggy, Zomato, all these guys are brands themselves. And when people order on Swiggy and a Swiggy order goes, the impact is more on Swiggy than on us.

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Operator [75]

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(Operator Instructions) The next question is from the line of [Bhavesh Shah] from [Gilead] Capital.

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Unidentified Analyst, [76]

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Congratulations for a very good performance.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [77]

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Thank you.

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Operator [78]

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[Bhavesh,] I'm sorry to interrupt, but we can barely hear you. If you could speak a little louder, please.

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Unidentified Analyst, [79]

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Yes. Am I audible now?

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Operator [80]

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Yes, sir.

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Unidentified Analyst, [81]

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So 2 questions. So first is the free delivery, which I think you started from your app. There you were charging INR 30, INR 35 for delivery. So the -- so is that a big number right now? And is it showing in the cost side or...

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [82]

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No, it's just a promotion. It's just a promotion for a temporary period. Just to create and give consumers some engagement.

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Unidentified Analyst, [83]

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Okay. So have you started now or it's still going on there?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [84]

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I am not an -- it stopped. It will almost stop -- it is stopped. It is stopped. It was the right deal in World Cup, it was specific to that.

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Unidentified Analyst, [85]

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Okay. Okay. And sir, second question on the occupancy and other expense of -- so you mentioned in some part of this due to A&P. So should we assume that this number should be constant -- more or less constant for the next 3 quarters? Or -- because over the last 2, 3 years, as a percentage of sales, this is the highest. It's something around 36%. So how should we build this for the next 3 quarters?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [86]

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No. I mean the important thing is to see it from a year-on-year basis. For the year-end March 2019, it was around 34%. So obviously, the 2% is just, if you think about it, it's about INR 7 crores or so. So the rupee number is not really that large.

What we are trying to say is that advertising per se for the whole year will remain at between 5% and 5.5%. And therefore, it will even out through the year. So I feel last year's number is closer to sort of where I would think about.

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Unidentified Analyst, [87]

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Okay. So you're saying in terms of -- of course, in terms of your -- in the sales side, the percentage of sales.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [88]

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Correct, correct. Yes, yes.

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Unidentified Analyst, [89]

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Okay, okay, okay. And in terms of the menu, what we're offering, do we see any major competition after the third-party delivery has come in? Like I said, burger as a food product, not many competition is there. When you see -- say, for example, pizza, you have a lot of competition. So how are you seeing that scenario? Is the customers just offer, say, only a burger for a meal?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [90]

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So I mean, I feel it's great for us because burgers are more difficult sort of environment to build. If you visit a McDonald's restaurant, you will realize what it takes to get sort of our products right. And therefore, we feel that, obviously, you're right. But for pizza, I can see a lot of other local players who also play in the local market and the local trading area. While for burger, you don't see that many. So that's a great advantage for us, which is why we've always loved delivery because it's incremental business for us. So we don't see delivery as a threat. We see it as a very positive influence on us.

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Unidentified Analyst, [91]

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Of course. And second, and to take it forward, so you've launched sort of new menus like rice bowls, you've launched a couple of other items in the past 2 years, 1, 2 years. So how is that shaping up in your total, like product basket? Is it -- so would you call that a very successful? Or is it still developing versus if you compare this product launch versus something, which you must have launched historically, how is it doing now?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [92]

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We've learned a lot with it. And essentially, we understood what is sort of a line extension versus what's the platform. So we've generally been very, very smart about it.

The consumer loves variety. And essentially, for example, doing a Mexican aloo Tikki, doing a Lebanese aloo Tikki or doing Indi spicy -- McSpicy. So what we have done is we've taken our core products and we extend them to the consumer, and they love that.

At the same time, there are platforms like rice. So by and large, I must say that we've done reasonably well over a 5-year period on menu. And we had more successes than failures. And therefore, we are very, very sort of -- we keep a very strong [app]. And we do change products as well. There are products that we take off from the menu as well, and we keep adding them. There's a very process-driven system by which we deal with that. So I hope that answers your question. As we've learned a lot over the years, and we've applied that quite recently.

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Unidentified Analyst, [93]

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So going forward, do we see more line extensions or platform extensions?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [94]

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Mostly line extensions will be more platform. You don't build every day. We have to be very smart and selective on platforms. But yes, over 2 years, 1 platform, we feel, is still possible, while it will be mostly line extensions.

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Operator [95]

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Due to time constraints, that was the last question. I would now like to hand the conference over to Mr. Amit Jatia for closing comments.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [96]

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Yes. So well, thank you, everybody, for joining the call. We really appreciate your taking the time. And have a good, lovely evening, and we hope to talk to you again on the next call. Thank you.

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Operator [97]

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Thank you very much. On behalf of Westlife Development, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.