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Edited Transcript of 505533.BO earnings conference call or presentation 23-Jan-20 12:00pm GMT

Q3 2020 Westlife Development Ltd Earnings Call

Jan 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Westlife Development Ltd earnings conference call or presentation Thursday, January 23, 2020 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

* Devanshi Dhruva;Investor Relations;Deputy Manager

* 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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* Anand Kumar Shah

Axis Capital Limited, Research Division - SVP of Consumer

* Ankush Agrawal;Stallion Asset;Equity Research Analyst

* Avi Mehta

IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary

* Latika Chopra

JP Morgan Chase & Co, Research Division - Senior Analyst

* Manoj Menon

ICICI Securities Limited, Research Division - Research Analyst

* Rahul Jagwani;SKS Capital

* Sameer Dalal

Natverlal & Sons Stockbrokers Pvt Ltd., Research Division - Head of Research

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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 Q3 FY '20 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to Ms. Devanshi Dhruva from Investor Relations. Thank you, and over to you.

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Devanshi Dhruva;Investor Relations;Deputy Manager, [2]

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Thanks, Anka. Welcome, everyone, and thank you for joining us on Westlife Development Limited's Earnings Conference Call for the quarter ended December 31, 2019. We are joined here today by Mr. Amit Jatia, Vice Chairman; Ms. Smita Jatia, Director; and Mr. Suresh Lakshminarayanan, our Chief Financial Officer of Westlife Development Limited.

Please note that our financial results and investor presentation had been made mailed across to you earlier and these are 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 thoughts from Amit, who will provide the strategic overview, which shall be followed by Smita to take you through the key business initiatives, and Suresh will cover 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 the 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 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, Devanshi. Good evening, everyone, and wish you all a very happy new year. I'm pleased to share that we've ended 2019 on a strong note. (inaudible) focus on this consumer has yielded strong results, making this quarter as the 18th consecutive quarter of positive same-store sales growth for Westlife with robust top line sales and margin growth. Consumer preferences are changing rapidly, including the food choices and the way they are using restaurants. At Westlife, our secret sauce has been to be able to anticipate consumer needs and evolve at a very fast pace and to be able to give them what they want, even before they demand it. This has helped us build a robust foundation for the business, and navigate cyclical uncertainties and volatility.

As you can see, our consistent results spanning over 4 years stands as the testimony to the success of our long-term business strategy. With this, we remain confident on delivering on our Vision 2022 that we had set out in 2016. Over the last few years, we have seen a consistent and sustained spike in our same-store sales. For example, a restaurant that had a sale of INR 100 in quarter 3 2015 is, today, selling over INR 163, which is a phenomenal growth of 63% in the same restaurant in 4 years. This has been possible because we've been extremely focused on building a brand that is relevant for consumers across all locations and dayparts, including coffee, breakfast, snacking, meals and delivery. Today, McCafé is being consumed with breakfast, between meals or even for a quick catch up.

With delivery, we are offering consumers the convenience to consume us at home or in office, making McDonald's a delivery favorite. Millennials absolutely love the digital-friendly [EOP] of restaurants, which makes us a preferred hangout destination as well. With continued growth in scale and penetration in each of these segments, we are now essentially a one-for-all and all-for-one destination for our consumers, a very unique proposition for any QSR in India.

Simultaneously in the last four years, we have continued to maximize efficiencies and move both our restaurant operating margin and operating EBITDA by over 400 to 500 bps, and that's almost 130 bps a year consistently. As you may know, we are the only QSR with a strong backward-integrated supply chain and long-term real estate lease structures with a high quality diverse portfolio, including drive-thrus. In the coming years, too, these investments will continue to serve us as a definitive competitive advantage and will help us propel growth aggressively. With all our Board initiatives, our Vision 2022 seems closer than ever and we very excited to chart our next growth phase.

I now hand over to Smita, who will share the highlights of the quarter with you.

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

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Good evening, everyone, and thank you for joining the call. We are pleased to report that we have yet again clocked a profitable quarter with strong top line growth of 16.8% and an SSG of 9.2%. This is on top of a high 14.7% SSG registered same quarter last year and indicates robust performance. With this, we have achieved the 18th consecutive quarter of positive SSG.

Moving on to Slide #4. Our consistently strong results are a testimony to the fact that our strategy is focused on a strong consumer proposition of value for money and experience is resonating strongly. In line with our plans, we have been adding new restaurants in key cities to enhance accessibility. We also continue to boost our value platform, brand extensions and customer experience. This, coupled with strong cost controls and enhanced operational efficiency, is aiding continued margin expansion. I am delighted to share that for 2 consecutive quarters, our restaurant operating margins and EBITDA and operating EBITDA have jumped by more than 200 basis points.

Like Amit explained earlier, with sustained SSG, we have been able to increase average sales per restaurant by 63% and consequently, our operational profitability has also shown significant jump. Our brand, our restaurants and our people continue to be the key pillars of our strategy to drive exceptional customer experience.

Moving on to the details of key brand initiatives. Quarter 3, a quarter of festivities and celebration, has traditionally been one of the most critical quarters for our business. We ensured that we made the most of it by creating occasions for our customers to visit and revisit us through our (inaudible) sustained meal campaigns and festive surprises.

We kept our value platform buzzing with the launch of the all-new McSaver Combos campaign. As a part of this campaign, we offered more than 50 combos of burgers or fries with beverages at a compelling price point. This variety of value proposition hit home with our customers and improved our baseline sales.

In October, McCafé achieved the milestone of serving 10 million cups of coffee. We leveraged this occasion by asking customers to share their special coffee moments, which helped build further brand love. We celebrated in November a children's month, by launching a family meal campaign. This gave us an ability to reinforce McDonald's as a preferred destination for families. The campaign enhanced the meal uptake significantly.

We continue to launch campaigns with different themes to connect with our customers and further enhance brand love. This quarter, we decided to add some festive cheer with Not So Secret Santa campaign that enabled friends and family to share Christmas cheer.

As Amit highlighted, in the last few years, we have worked to create new occasions to drive more brand usage across dayparts and in between, be it coffee, breakfast, lunch, dinner, snacks, delivery. We have something for all customer segments, for those who want value or variety or convenience or wholesome foods that one feels good about consuming.

McCafé, McDelivery and McBreakfast have been the key drivers of this strategy that make McDonald's a QSR for all reasons and all seasons. This has helped us to widen our customer base significantly while ensuring that our existing customers, consume us more often, making us a one-for-all and all-for-one destination.

McCafé is now an established coffee destination, with 218 McCafés, we have the scale and the penetration to tap into this huge café market that is pegged at $9 billion, according to Euro Monitor. McDelivery is charting an exceptional growth path. In fact, India was among the top 5 global McDelivery market for most number of deliveries achieved in (inaudible) October. With 255-plus hub strong delivery network, we are very well-positioned to capture the booming delivery market through our own platform as well as the third-party delivery partner.

At the base of all our initiatives is technology and omni-channel strategy, to ensure consistent and seamless customer experience across all our touch points. Our innovative technology intervention, both in terms of our restaurants and our app, have hit home with our millennial core consumer. This can be seen in consistently good ratings that our Experience of the Future restaurants have been getting, and the fact that our McDonald's app has already had 3 million downloads within a year of its launch.

We continue to expand our restaurant footprint across key markets and cities as our growth plan. This quarter, we added 11 new restaurants, taking the total restaurant count to 315. About 90% of these 315 restaurants have modern and contemporary interiors. Our digitally enabled Experience of the Future stores has been doing very well for us and we aggressively expand our EOTF footprint.

Moving on to the next section. It is our people who bring our strategy alive and we remain committed to investing in them. In this quarter alone, we have invested over 60,000 man hours in training, one of the highest in the entire industry. A great testimony to our training processes is the fact that 3 of our restaurant managers have received the Ray Kroc Award, the highest international honor that recognizes the top 1% restaurant managers worldwide each year for superior performance and operational excellence.

This quarter, we also made it to the list of World's Best Workplaces, a feat we are extremely proud of.

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. Good evening, ladies and gentlemen. As highlighted earlier, we have continued strong on our growth path with a robust performance in Q3 FY '20 despite the challenging times. Similar to the previous quarters of this financial year, we will be discussing the comparable numbers with you, which excludes the adjustments arising out of IND AS 116.

On Slide 24, as you see, IND AS 116 has the impact of reducing actual rentals and inflating interest and depreciation and therefore, has a noncash impact of INR 83.5 million on our profit after taxes.

Moving to Slide 26. In Q3 FY '20, we have clocked an SSG of 9.2%, making it the 18th consecutive quarter of positive SSG and total revenue of business, 16.8% growth over Q3 of last year.

Our focus on value platform, superior performance of brand extensions as they help us to cater different day parts and occasions, coupled with enhanced customer experience, resulted in higher revenues. All our initiatives have resulted in revenue growing at a CAGR of 21.4% from Q3 FY '17 to Q3 FY '20.

On gross margins and RoM, as mentioned earlier by Amit and Smita, our SSSG has compounded by 63% in last 4 years. This has created significant role in addressing the reasons for food inflation. Our consistently increasing volumes and improving operating efficiencies, along with the good work done by our suppliers on productivity growth, has considerably helped in growing our gross margins. Over the years, we have also mastered the art of managing our product mix well with menu, value platform and brand extensions. All these factors have come together to boost our gross margin, which has seen a Y-o-Y jump of 248 bps to 66%.

All of these said initiatives, along with judicious price changes, have helped us improve our gross margins by a whopping 560 basis points over the last 3 years. Gross margin increase, along with some operating efficiencies, led to a higher RoM for Q3 FY '20 at 17.5%, leading to a margin expansion of 246 basis points Y-o-Y. The RoM improvement has resulted in a higher operating profitability, operating EBITDA margins have increased by 250 basis points Y-o-Y.

As we keep expanding (inaudible), we are strategically reinvesting our profits to back into the business to accelerate our growth journey. These investments, along with sustained focus on menu, value platform, product mix, brand extensions and supply chain efficiency, have enabled us to increase our operating EBITDA by 622 basis points over the last 3 years.

Moving to the next slide. Our profit before taxes stood at INR 309.6 million with PBT margins at 7.2%. Q3 FY '20 profit before taxes tripled over Q3 of last year due to higher sales and improved operating performance. From FY '20, the slide falls under the bracket of full tax rate and hence, to that extent, PAT with previous years may not be comparable. PBT would enable you to get a sense of the actual improvement in our profitability over Q3 FY '19. Our profit before taxes has grown 4x in the last 2 years and overall, we have seen a 790 basis points improvement in PBT margins in the last 3 years.

Slide 30 highlights our profit after taxes, which stood at INR 227.2 million, reflecting a growth of 228%, despite the influence of full tax rate from FY '20 onwards. Overall, our PAT margins have expanded by 590 basis points from the last 3 years. Our Q3 FY '20 cash profits stood at INR 449.6 million, witnessing about 52% Y-o-Y growth and a 3x growth in the last 3 years. In a nutshell, we witnessed a healthy top line growth, along with significant expansion in operating margins and bottom line. We believe that the company is well on track to achieve its Vision 2022. All the initiatives and investments made currently will propel us in the right direction to achieve our target of sales growth and margin expansion.

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

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

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Thank you, Suresh. We believe that the uncertainty in the economy will continue for some more time and consumer spending will remain cautious. Global events, too, may have a ripple-down effect. The task, therefore, for us will be to remain rooted to our core strategy that will help us navigate these uncertainties effectively and keep achieving our business results. We believe there remains a lot of untapped potential in our markets and a huge opportunity for the brand to grow. We will continue to invest in expanding our restaurant base, building on our menu platforms and providing exceptional customer experience. Our brand extensions have always been giving us a competitive advantage and we will continue to leverage them. With a whole lot of interesting consumer-facing initiatives lined up for the coming months, we feel stronger and more confident than ever to chart the next 5 years of accelerated growth.

Thank you. And with this, I open it up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is 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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Ankit, Suresh, congratulations, a very great performance. Just 3 questions. If I look at the sales growth you've witnessed in the third quarter, it would be useful to understand how the demand environment is panning out as we go forward and is this trend sustaining?

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

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Okay. I mean, we said that -- sure. You want me to respond to this or...

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

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No. I mean from whatever I can understand, if this trend is kind of going where it is, would you kind of re-look at or would you see SS growth kind of exceeding the 7% to 9% kind of expectations that you (inaudible) earlier in the (inaudible). That was my first question.

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

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Okay. So basically 7% to 9% is not great. We don't give guidance quarter-on-quarter and it's more a vision statement for a 3 to 4 year period. Essentially last year, impact, we did I think 16%, 17% same-store sale for the full year and the year before that was similar, 15%, 16%, but it's hard to predict quarter-on-quarter but therefore, we've given a 7% to 9% kind of indicator. As we explained on the call that we are 63% more than 4 years ago, and therefore, if 10% growth on 163 is INR 16, while 4 years ago, a 10% is INR 10. And finally, it's not about percentages, it's about INR amount. So we are quite confident that we will continue with this trajectory over the next 3 to 4 years but whether it'll be up or down, we don't like to sort of get into that conversation. But...

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

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Sir, where I'm coming from is -- because overall is -- sorry, sorry. Go on.

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

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I was just going to say that sequentially we've been working very hard on getting quarter-on-quarter things going right, so from 5.6%, to 6.7%, to 9.2%. But I wouldn't sort of jump on to say that next quarter will be 10%. So we maintain that, between 7% to 9% is really what is more realistic.

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

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So where I'm coming from, if I look at the broader environment -- FMCE, the other consumer companies we are sort of seeing the demand weakness or signs of demand weakness. And actually, very hard thing to see stand out (inaudible) and see actually a demand uptick from a quarter-on-quarter basis. That's what I was trying to understand. How do you see -- from an underlying, what exactly -- is this more a company-specific or is the industry itself seeing some signs of pick up as well?

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

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(inaudible) I think to some extent, company specific. I mean, if you see last 4 or 5 years, we've invested in reimaging and modernizing the consumer experience. But mostly, we built new occasions for the consumers to use and that has now got scale and traction. As we talked about 10 million cups at McCafé sold, that's a whole lot of consumers. And the point is as this continues to scale, we feel that this whole idea about new occasions for the consumers to use, and this one-for-all and all-for-one, it is much more than a statement. And I feel it is -- this is primarily what is helping us differentiate over the rest of the marketplace at this point in time.

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

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Okay. Perfect. The second is just on the margins. Last quarter, you had highlighted that there is no one-off in the gross margin side, whatever has been from the back of initiatives. Is there any one off related mix impacting this quarter or this is again cost-driven enhanced and we can assume this is kind of the base, all this kind of level should sustain as we go forward?

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

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If you do something consistently over 4 years or 5 years and we talked about our gross margins going up, I think Suresh mentioned 600 basis points, then it cannot be a one-off. I don't think (inaudible) ...

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

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No, no, no. I didn't mean from an expansion point of view. I mean the absolute level this quarter.

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

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No. (inaudible) It has no one-off in it. Obviously, when our suppliers are seeing volume go up and the sales go up as Suresh explained earlier in the conversation and along with that, we introduced the McSaver Combos. The McSaver Combos, we actually took the price of a bunch of others down to INR 59 and yet we were able to deliver margin. I think we really understood the flavor, on how to manage that right from a consumer point of view and that's working for us, along with the efficiency in the supply chain.

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Avi Mehta, IIFL Research - Assistant VP & Lead Analyst of Consumer Discretionary [14]

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And lastly for the food inflation that we are kind of hearing. We do enjoy a very strong supply chain. That's one of -- we've seen a lot of energy from it. Just wanted to kind of get your thoughts on given the strength and -- would you still envisage right now the way food inflation is that you would need to consider price increases or it's manageable?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [15]

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No. See basically, we maintain that we will scale with a 3-ish percent to 4% price increase every year. If I were to take the McSavers, it actually reduced prices, then our actual price increases will be even lower. So essentially, we will stay within the 3% band and then we have to take it from there. But you know, Avi, if we look at 4 years, sometimes onion prices go up, sometimes tomatoes, sometimes milk, so it's kind of built into the platform. And as long as the company, mind you, is pushing towards productivity growth of 100, 200 basis points every year, knowing that inflation will hurt you by that extent somewhere or the other, I think you are all right and that's what worked for us thus far.

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Operator [16]

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The next question is from the line of [Gordon Yu] from (inaudible) Partners.

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Unidentified Analyst, [17]

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Amit, congrats for a wonderful quarter. I have 2 questions. Could you give us a little bit more color on the delivery side of things? I mean, great same store sales growth. Any sense of how much delivery contributed to that? Does that change your thoughts on whether you need to sort of invest more behind delivery, that's one. Second question is does this -- now that you've got the format right, the cost base, the operating structure, does this mean that you can open more stores going forward? Does that change your focus at all?

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

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Thank you for the questions. As far as delivery is concerned, why we don't share the breakup. Obviously, there's a lot of energy and resources going into getting the delivery business to where it is, and I don't see it stopping in the medium term for sure. So essentially, I don't know if that answers the question, but all the energy that is needed to go into delivery will continue but our overall thought processes that delivery is another occasion for use, that part of McDonald's customer doesn't change. The focus on in store business is as strong and actually that's been delivering results, which is why we've got a decent balance on our same-store sales growth and margins.

As far as store openings are concerned, I feel that we are as aggressive as we should be and we continuously change as we see things. But growth in terms of store openings is all dependent on how the frequency of eating out in the marketplace changes and the ability of city to absorb more restaurants. I think we are sort of inching towards the 27, 28 numbers right now, at least on a gross opening level. But we are constantly working hard to take it to 30 but you got to understand that until frequency of eating out takes a sharp uptake, it is not about anything else other than that. So in our view, we've still been aggressive because if you look at the quality of the stores that we are opening, the locations in which we are able to go in with the same 20-year deals. Like recently, Mumbai, we opened in (inaudible) which is an amazing market. If you look at Chennai, the Pondy Bazaar which is a very, very hard market and we have a free-standing McDonald's in there.

In Goa, in Calangute, there's a free-standing McDonald's, it's right in the heart of the Calangute Beach. So for us, the quality of the real estate, the portfolio, the deal structure is material, and along with that, the absorption in the market. So we are pushing ourselves, but I would still keep it in the 25 to 30 range at this point in time.

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Operator [19]

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The next question is from the line of Manoj Menon from ICICI Securities.

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Manoj Menon, ICICI Securities Limited, Research Division - Research Analyst [20]

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Congratulations on a brilliant performance. Okay. The 3%, just on this delivery piece actually. One while I understand the competitive sensitivity about disclosing the percentage. But one comment, is it a material number? Is it, let's say, something like about 20 is what I believe. I just want to understand if I'm completely off or if it is somewhere in that ballpark, if you may. That's one. Second is the delivery, which goes through the own fleet and the aggregators. Again, it is interesting to hear about the investments or the activities which you are doing on the owned fleet side. The third question is the relationship with the aggregators. I understand it takes highly symbiotic, both needs each other, et cetera, (inaudible) which comes for a longer period of time is (inaudible) utilization (inaudible) in terms of owning the customer, which may potentially have some indications on the margins. So those are the 3 questions.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [21]

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Okay. Sure. I mean it's all around delivery for sure. It is becoming an important part of the business, there's no doubt. We just don't share breakups but what we will do, we have our Investor Day coming up, which we do every 2 years, and that's is when we deep dive and give a bit more information and color on each of the brand extensions. So we definitely will take your question and see what we need to do with it. The good news is that the in-store business is also growing because McCafé is in-store, value is in-store and there are -- breakfast is in-store. But yet at the same time, yes, deliveries is becoming quite important. Even in rupee terms, in absolute numbers, even if you forget the percentage.

Secondly, in terms of our -- we are pushing our own apps and all also very hard but we absolutely love aggregators. They bring a much wider audience to us to consume our delivery offering. It's like being in a mall in a food court where all players are around, but it's the brand that really makes it work for us. I don't know if that answers your question but we feel there's a good balance. We like to push our own app as well because we want to be present in the delivery platform, while at the same time, the aggregator, we've developed a very good partnership with them. And please remember it is a partnership and that's the way we treat and work with them.

Now obviously in my view, we've seen this in other global markets where McDonald's operates and we think that there is reasonable competitiveness within the aggregators, and we feel that we bring tremendous value to the aggregators in the way we integrate with the platform and our ability to service customers faster than anybody else. And therefore, I feel that as long as we continue to bring tremendous value to them and they bring value to us, I feel it's a balanced partnership and that's why we are also ensuring that our own assets are doing quite well also. So I hope we answered your question, but more in the Investor Day, which is coming up soon.

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Manoj Menon, ICICI Securities Limited, Research Division - Research Analyst [22]

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Understood, understood. Just have 2 follow-ups on this. One on the business, which comes through the aggregator (inaudible). Who owns the customer data? If it is possible to deliver that. And point number two, I mean, just thinking of the McDonald's product, portfolio what we have. Do you have to make any tweaks to the product itself to make it a little bit more delivery compatible? Related to something like fries, which needs to be consumed immediately. Doing delivery, probably takes 50 minutes to reach my home. So probably the product experience is slightly different than what you experience in-store. So 2 questions, who owns the customer data? And point number two, do you have to make any product changes per se to ensure that the experience is closer to the store?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [23]

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Okay. One second. Smita, will you?

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Smita Jatia, Westlife Development Limited - Non-Executive Director [24]

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So we have different arrangements with different partners (inaudible) sharing of the consumer data. So we wouldn't want to say, but we do have. And even with the ones who don't give us the full customer data, we get analysis from them and this makes it easier and better for us to be able to do more targeted marketing. Second, when you're talking about the food products, we don't do anything differently on the food products, (inaudible) differently is what we do in the packaging part. So if you order a french fries, you will see that the packaging you will get is different from what you get in the store, which helps to preserve the french fries quality. But however, our insights on the consumer is that when it comes to delivery, it's not only our brand, any brand. They are willing to go a little bit in terms of what they expect on quality in the store and what they expect on quality in the -- at home on delivery.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [25]

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For convenience.

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Smita Jatia, Westlife Development Limited - Non-Executive Director [26]

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From a convenience point of view because obviously, they're getting it at their home. And we have not got any feedback, which is negative on quality aspect on delivery platform.

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Operator [27]

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The next question is from the line of Latika Chopra from JPMorgan.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [28]

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My first question was around the food aggregator space. Since you track various markets closely, what's your sense on the discounting intensity? In your view, is this going up, is this coming down? Any trends that you see?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [29]

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We think it's coming down.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [30]

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Okay. And secondly, 9.2% SSG's very heavy. What would be the quantum of pricing growth in here? Did you take any price increases during the quarter?

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

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In fact, we introduced the McSavers Combo at INR 59 and there were no price increases in the quarter.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [32]

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This will largely be volume led and would volumes be higher than this number?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [33]

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I mean yes, we don't share the breakup again, but yes, it is driven by footfall as well.

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Operator [34]

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

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

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Congrats on a great performance. Just a few questions from my side. So firstly, I mean we've seen very good growth in (inaudible) but then despite that your margin improvement and expansion has completely come largely from gross margins. We haven't seen that much leverage play out. I mean so this would be a quarter phenomena or that means that 9%, 10%. Shouldn't you start seeing more leverage as well?

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

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See, that's the point, that if you do this for 4 years, 5 years consistently, 130 basis points in operating margin every year, I feel it is operating leverage. Gross margins don't come out of the blue, especially if you're aware, recently the inflation on food is very, very high. But when on supplier fees, the volume in 4 years, have gone from 100 to 163, right? That gives them tremendous buying advantage on their side as well, along with the productivity gains because the same fixed cost will spread over a much wider base. That, coupled with some of the efforts we've put on product mix, is really the benefit of that. So one operating leverage comes from there as well. Two, as delivery has been growing consistently, do you see that anywhere show up in our margins? Because obviously, the delivery margin as we've always maintained, is slightly lower. It's obviously very accretive, but it is not. So obviously, it is the other benefits that we get that is taking care of this growth in the delivery commission payout. And therefore, you will see all other line items quite flat.

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

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Okay. Perfect. And I just have one thing here. The McSaver Combos and all that has launched. Would percentage margin would broadly be in line with the company average gross margins or they will be (inaudible)?

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

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We don't share that breakup. But I think to give ourselves some good credits, is that after launching McSavers, with a 9.2% same-store sales growth, without taking any menu price increases, I think whether we grow gross margins or whether we grow anything, I feel it is very, very nice and (inaudible).

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

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No. It is commendable. Yes, it is commendable and great job there. So can you just on this EOTF roll out, I mean can you share the -- let's say, the percentage of stores now that would be under the EOTF?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [40]

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We have -- I mean again, we like to share this one, our new business but roughly 60, 70-plus.

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

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60, 70 of the 315, so roughly (inaudible) EOTF now?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [42]

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Correct. Correct. Out of.

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Operator [43]

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The next question is from the line of Ankush Agrawal from Stallion Asset.

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Ankush Agrawal;Stallion Asset;Equity Research Analyst, [44]

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I have 2 questions. Firstly, where do you see gross margin, EBITDA margin moving over, next, let's say, 2, 3 years? And what would the factor that would contribute to such growth? And secondly, sir, can you give, like absolute number of this trend and additional expense for this quarter?

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [45]

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So we've said in our Vision 2022 and we were bold enough to say it in 2016, where EBITDA margin was 6% or so, And essentially, our EBITDA margin target is about 13% to 15%. We don't whip up targets around gross margin but essentially from an EBITDA margin point of view, 2022, the idea is to come within the teens, low to mid-teens. The second question was...

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Unidentified Company Representative, [46]

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(inaudible)

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Suresh Lakshminarayanan, Westlife Development Limited - CFO [47]

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So yes. No, we don't give breakup but advertising, I can give you generic sense that by the end of the year, typically, it's between 5%, 5.5% of sales, but we don't break up rent from a quarterly basis.

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Operator [48]

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Our next question is from the line of (inaudible) from the (inaudible) Investments.

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Unidentified Analyst, [49]

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My first question is right now, the gross margin is 66%. So how sustainable these margins are in next couple of years?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [50]

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Well, as far as we are concerned -- I go back to history, and essentially over the last 4, 5 years, we've grown it by 600 basis points and the key focus for us is really to grow operating EBITDA margin. We don't really focus on individual line items and when we make any decision, we are looking at finally, the sale. Is it adding to the bottom line? Because if you look at PBT and all of that, over 760 basis points in just the last 3 years alone. So I don't want to be very myopic but we feel that, yes, 100 basis points here and there, definitely sustainable. But please focus on operating EBITDA, which essentially we've done about 500 basis points of improvement in the last 3 to 4 years. And we gave the Vision 2022 number, so we do expect that to continue to grow in that same manner.

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Unidentified Analyst, [51]

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Okay. Okay. And my second question is you gave us a target of 400 to 500 restaurants in 2022, so are we on the track towards to achieve that target? Because till like -- till now, we opened 316 restaurants until now.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [52]

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Yes. So I had said that we will be at the lower end of it, so around 400-plus restaurants is where we expect to end up in -- as per Vision 2022.

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Unidentified Analyst, [53]

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Okay. And my third question is, is there any price increase in Q3 or are you planning to increase in next quarters?

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

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We can't talk about the future but in Q3, there was no price increase. Essentially in fact, we kind of took a price decrease if you think about it with the launch of the McSavers Combo at INR 59.

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Unidentified Analyst, [55]

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And my last question is, like which one is more profitable at giving higher margins, McCafé or McDonald's? If we talk about it?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [56]

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Both are the same.

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Unidentified Analyst, [57]

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No. Like if we -- obviously, but at the McCafé, the story is the coffee thing and the McDonald's is like some food stuff, so like that's giving higher margins.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [58]

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We don't see them separately, to be honest. And I've explained our 1+1+1 is equal to 5 clearly earlier. If we talk about the café standalone, obviously, these numbers just can't be delivered. So therefore, this is a combination of everything. At the gross margin level, normally beverages do give you a higher gross margin, but at the total business level, you've got to look at that together.

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Operator [59]

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(Operator Instructions) The next question is from the line of Sameer Dalal from Natverlal & Sons Stockbrockers.

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Sameer Dalal, Natverlal & Sons Stockbrokers Pvt Ltd., Research Division - Head of Research [60]

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Congrats on the good set of numbers. A quick question. The first is any update on the royalty for next year with McDonald's International? And the second one is, on your new stores and modernized outlook, what is the kind of maintenance CapEx you're having to spend on a per store basis? If you could give some guidance on that?

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

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Sure. Royalty has been announced for the next 5 years and it's in the public domain on the website so you can get that from there. As far as maintenance CapEx is concerned, we don't share breakup. But typically, almost 80%, 85% of our CapEx is going into new stores and the bulk of it, the rest of it goes into reimaging, (inaudible) and things like that. So CapEx for maintenance is quite small actually.

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Operator [62]

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The next question is from the line of (inaudible) from HSBC.

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Unidentified Analyst, [63]

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Congrats on a great set of numbers. Can you please take me through that unit economics? If you tie up with Swiggy and then you deliver? So what is the amount you have to pay INR 100 or anything like that. So that you can kindly explain the unit economics, please?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [64]

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Sorry, we don't share the breakup and we don't share our unit economics with each of the aggregators. As we have maintained before is that it's margin accretive, because as we discussed slightly earlier in the call, the delivery business is rising dramatically. And in the last Investor Day, we have give some sense on the average volume that our restaurant was doing as well but yet, we are generating extra rupee margins. I think, therefore, it works for us. That is the best we can share when it comes to aggregator numbers.

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Unidentified Analyst, [65]

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Would it be possible to say that the discount given on some of these ads paid, that amount is taken on the balance sheet of the aggregators or are they taken by us partly?

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

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So we, McDonald's, HRPL, Westlife, we don't give any discounts on delivery, on third-party apps.

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Operator [67]

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The next question is from the line of (inaudible) from (inaudible).

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Unidentified Analyst, [68]

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Congrats for the good set of numbers. You have 315 restaurants. So out of that, only 218 have McCafé. So are the remaining stores -- is the space available for the new McCafé concept to be introduced in those stores?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [69]

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Yes. Yes, they are. The idea is eventually get 100% penetration.

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Unidentified Analyst, [70]

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Okay. And all the new stores have the McCafé concept introduced in it?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [71]

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Mostly, yes. I mean the idea is to open restaurants with McCafe.

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Operator [72]

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(Operator Instructions) The next question is from the line of [Rashid Doshi] from [Proinvest] Wealth Managers.

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Unidentified Analyst, [73]

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Great set of numbers. In Maharashtra, the state government has decided to keep open mall and (inaudible) stores, so would this add any value to us? Like have you talked about it?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [74]

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Yes. I mean we have been working very proactively with the government to introduce such a thing and we think it's very progressive of the government. McDonald's does this across the world and we've been sort of really asking the government to help us doing a 24/7 opportunity. So we are definitely going to take opportunity from there. And yes, it's very interesting. It will help the brand and the business.

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Unidentified Analyst, [75]

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So what's the plan? Like to keep all the stores open or to try it out on a pilot basis? Or the mall -- available stores at the mall will be open?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [76]

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So leave it to us. We will do it in the right manner. I mean because the law does not allow us to do it across the board, so want to first completely understand what they are talking about and then take it from there. So like we've done McCafé, the EOTF rollout, we are pretty seasoned at getting a sense of how to go about it but whatever we do, it's going to be aggressive and it's going to be quick. But it's a very good beginning from the part of the government.

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Unidentified Analyst, [77]

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Right. And I just wanted to understand your definition of same-store sales growth. How do you do it?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [78]

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Our definition is quite simple. It's global. Of course it's in more detail in the press release and all that. But from the 13th month of the store having opened, it goes comp and it grows comparables.

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Operator [79]

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The next question is from the line of Latika Chopra from JPMorgan.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [80]

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Just a small follow-up. If you could share how many of your restaurants today have the breakfast option. What was that number about a year ago?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [81]

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Currently, about 199 restaurants have breakfast, so say, 200. I think it was 155 earlier.

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Latika Chopra, JP Morgan Chase & Co, Research Division - Senior Analyst [82]

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It was 155 earlier and now, sorry?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [83]

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199, say, 200.

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Operator [84]

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The next question is from the line of (inaudible) from Centrum Portfolio.

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Unidentified Analyst, [85]

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I have a couple of questions. What is the nature of the raw materials that you use? If I can kind of track the material prices if you can help with that.

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

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Sure. I mean it's chicken, tomatoes, onion, vegetables, flour, oil. I mean typically whatever you would see in a food business. Chicken, potatoes, oil, packaging material, which has to do with paper, for example, what else I'm thinking. A lot of vegetables, potatoes, peas, carrots, wheat. Yes, wheat is important. I think broadly, this would be the category. I mean if you think about it, buns, patties, milk, cream, sugar, cheese all of that is pretty much (inaudible).

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Unidentified Analyst, [87]

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And how frequently milk is in your raw material in terms of (inaudible)?

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

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We don't share the breakup.

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Unidentified Analyst, [89]

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Okay. No, because from the point where I'm coming is that milk prices have gone up in past few months.

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

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It has gone up for the past 5 years many times, up and down. So you see the point is, as I said before, we are dealing with commodities and something or the other is going up. And there are times that where we have seen where everything has gone up. While one of the things are going up, one of the things are going down. Over the last 10, 15 years, trust me, we have a pretty good sense. Yes, we are taken by surprise sometimes but I've always maintained that quarter-on-quarter. Obviously, we can't deal with it but on a yearly basis, we've been able to work on that quite nicely. Because today, there is 10 years of data for industrial in the public domain and you will notice that I think we generally handled that quite well. So we have long-term contracts, there's a process, a proper process, we work with farmers, we have a fully integrated supply chain backward linked all the way into the farm. The cold chain is run by our third-party suppliers. So it's a very well-oiled machine.

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Unidentified Analyst, [91]

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Got it. Got it. Second, on the delivery commission fees that you have to pay to the food aggregators. Where exactly does it get reflected in the P&L? Which line item specifically?

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

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Yes. Occupancy and other expenses.

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Unidentified Analyst, [93]

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The occupancy and the -- (inaudible) ...

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

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(inaudible)

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Unidentified Analyst, [95]

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Okay. Okay. And below the -- so if I look at the restaurant operating margin, that is inclusive of the delivery fees, the delivery fee commissions, right?

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

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Absolutely. Absolutely. That's why it's called restaurant operating margin, so every cost except depreciation and corporate overhead, it's all in there. I think that's why we decided from day one to clearly show you restaurant operating margins.

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Unidentified Analyst, [97]

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Right, right. And below that, the selling and general, the SGA expenses are basically corporate overheads?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [98]

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Correct. Correct.

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Operator [99]

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The next question is from the line of Rahul Jagwani from SKS Capital.

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Rahul Jagwani;SKS Capital, [100]

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Congrats on a great set of numbers. I just want to ask now, now what's the plan further? I mean basically you do -- you grow EBITDA margins. I mean will you just be increasing share of, say, McCafé, which is contributable to margins or are there other areas where we can cut costs or -- I mean what are your thoughts about that?

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [101]

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See, I mean again, the good news is I think we've been probably the only brand that actually rolled out our Vision 2022. And if you look at a couple or 2 investor presentations that are also available on the website, you will see how we are predicting the growth in the future. We've said very clearly that it is operating leverage and we feel it's playing out, whether it's playing out in one line item or another, the important thing is that it is playing out. So primarily, it is the menu and the restaurant experience, along with different occasions for use, which is beverages, which give us certain occasions, whether it's breakfast or whether it's the delivery business, each one of these items is where we are going to grow. Five years ago, when the numbers were slightly different, it was the same question and it's the same question today but the important thing is these drivers finally. And finally we are a QSR, so these are the 5 trend drivers that we have. It's going to continue to be these drivers.

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Operator [102]

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Ladies and gentlemen, I now hand the conference over to Mr. Amit Jatia for closing comments.

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Amit Banwarilal Jatia, Westlife Development Limited - CEO & Vice Chairman [103]

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Yes. Well, thank you, everybody, for patiently listening to our call and for being on the call. If you have any additional questions, please do reach out to Devanshi. And of course, you have the website as well. Thank you, have a lovely evening. Bye.

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Operator [104]

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Thank you very much, sir. Ladies and gentlemen, on behalf of Westlife Development Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.