Ladies and gentlemen, good day, and welcome to the Westlife Foodworld Limited Q1 FY 2024 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone telephone. We would like to remind you that certain statements made by the management in today's call may be forward-looking statements. These forward-looking statements reflect the management's best judgment and analysis as of today. The actual results may differ materially from the current expectations based on a number of factors affecting the business. Please refer to the Safe Harbor disclosure in the earnings presentation. I now hand the conference over to Mr. Chintan Jajal. Thank you, and over to you, sir.
Thanks, Melissa. Welcome, everyone. Thank you for joining us on Westlife Foodworld earnings conference call for the first quarter ended 30th June 2023. I am Chintan Jajal, Lead IR at Westlife. From the management team, I have with me Mr. Amit Jatia, Chairperson, Ms. Smita Jatia, Vice Chairperson, Mr. Saurabh Kalra, Managing Director, Mr. Akshay Jatia, Executive Director, and Mr. Saurabh Bhudolia, Chief Financial Officer. We will kick off today's conversation with Smita sharing her thoughts on overall business progress and outlook. This will be followed by Akshay taking us through operational, financial, and strategic highlights. Post that, we can open the forum for questions and answers. We will be referring to the earnings presentation and financial releases available on the stock exchange and the investors page of our website. With that, I now request Smita to commence the session. Thank you, over to you, Smita.
Good afternoon, everyone, welcome to the call. I am pleased to share with you that we have taken yet another firm step towards realizing our Vision 2027. It gives me great confidence that we not only finished last year on a robust note but have also started this year on a high. In the last six months alone, we opened 22 restaurants, and are on track to meet our global openings of 580. Our goal of openings from 580 to 630 additional restaurants by 2027. We also witnessed a significant increase in our gross margins of about 300 basis points in the last six months compared to the same period last year. Highlights the strength of our brand and our business strategy.
Over the last 12 months, we generated cash flow to the tune of INR 2.67 billion, which signifies our healthy cash generation ability. What gives us confidence is that we continued the momentum in our Quarter One performance as well, wherein we once again delivered industry-leading growth, backed by a strong focus on execution excellence in menu innovation, service quality, and supply chain management. We not only served our existing customers but also welcomed many new customers to our stores and online channels. Our consistent growth confirmed our faith in our strategy, be it building a great brand through effective marketing initiatives to elevate trust and win over families or bolstering our e-commerce platforms. These efforts are generating growth and strengthening our brand year after year. I take particular pride in growing the core of our business by building a robust platform for burgers, chicken, and coffee.
Finally, our D's, digital, delivery, and drive-through, have significantly contributed to our steady growth. In fact, 64% of our customers came to us through one of our digital channels. Our dine-in and convenience channels continue to complement each other to give customers more ways to interact with us. What makes us unique is the solid foundation of our people, the scale of our supply chain, the quality of our real estate portfolio, the agility of our system, and the power of the McDonald's brand, and most importantly, consistency in our strategic approach. To summarize, I would like to say that I am proud of our progress and excited about the future. Today, we have a strong management team, a clear strategy, and a growing market opportunity. We will tackle the year ahead with agility and a strong focus on execution.
Along with improving our operational excellence foundation, growing our digital advantages, and carrying out ongoing work on creative menu offerings will remain critical. With a prudent cost structure, increased productivity, strong average unit volumes, and healthy restaurant cash flows, we are well positioned to deliver accelerated business results and create long-term value for our shareholders. I thank you for your continued support and will now request Akshay to share the operational highlights of the quarter gone by.
Good evening, everyone. I'm glad to be here today to share our Q1 results with you. We saw a healthy, broad-based growth during the quarter amidst relatively soft consumption trends witnessed by the QSR industry. Our focus on elevating our brand, accelerating digital channels, and innovating in our core equities of burger, chicken, and coffee, helped us deliver differentiated performance and grow or sustain our traffic share in West and South India. Sales in Q1 FY 2024 stood at INR 6.14 billion, up 14% year-on-year on the back of 7% same-store sales growth. On-premise business grew 18% year-on-year, led by dine-in channel, which continued its strong momentum, backed by a robust increase in guest counts. The off-premise business grew 9% year-on-year on a high base, led by delivery.
The overall contribution of the off-premise business to the top line was broadly stable at 40%. We remain committed to an omni-channel business model. Menu innovation, being one of our key pillars of growth, continued with the launch of our Piri Piri McSpicy range in April. We also roped in the Mega Star Jr NTR as our brand ambassador to promote McSpicy chicken sharers and further strengthen our chicken equity in the South. Jain-friendly menu with no onion, no garlic, and no roots products was launched in the Western markets to democratize the menu. These strategic interventions saw great consumer response and benefited the brand positively. During the quarter, we also launched the McSaver Value platform, offering meals at INR 179. This platform is helping us accelerate the consumer frequency, footfalls, and salience of meals in-store sales.
McCafé sustained its healthy traction, led by cold beverages portfolio, including frappes, shakes, and coolers during the summer months of Q1. Our continued investments in consumer tech and talent are enabling us to now capture over 64% of our sales digitally. As a case in point, sales originating from our self-ordering kiosks installed in the EOTF stores have grown 3x over last year. Given the convenience, we believe the adoption of such points of sale is likely to grow significantly in the coming years. Overall, average sales per store on a trailing 12-month basis grew to INR 66.9 million as against INR 57.4 million last year. Moving on to profitability. Our gross margins improved by about 235 basis points year-on-year, led by stable input cost basket, cost optimization, and earlier pricing actions.
On a sequential basis, we saw a decline on account of one-off incentives received in Q4, as highlighted in the last call. Portfolio-level aggregate pricing was broadly stable on a sequential basis as inflationary headwinds abated. Our restaurant operating margins improved by 134 basis points year-on-year, with store payroll normalizing to around 9% levels. Royalty fees increased by 50 basis points as per the plan we've shared. G&A costs as a percentage of sales, was higher on a year-on-year basis, but lower sequentially, and is now close to normalized, sustainable levels. The operating EBITDA margin at 17.1% was broadly stable, while cash PAT at INR 670 million in Q1, saw a healthy 22% year-on-year growth.
Overall, we continue to work towards our target of operating EBITDA margin range of 18%-20% by 2027. During the quarter, we also saw a healthy improvement in working capital levels, thereby leading to a net cash position as of 30th June 2023. On the network expansion, we opened four new restaurants during the quarter, bringing our total network to over 361 restaurants, 315 McCafés, 69 drive-throughs, and 224 EOTF restaurants across 58 cities. We are on track to open 40-45 new restaurants in FY 2024, and the pace of store addition will pick up in the coming quarters. We achieved significant milestones over the past many years.
We are one of the most loved and valued brands in QSR. This is a testament to our strong business model, team, and culture. FY 2023 was a record year where we raised the bar. Given the strong performance, I'm delighted to highlight that the board approved an interim dividend of INR 3.45 per share, which is around 48% of FY 2023 profit after tax. On that note, I conclude my remarks. Thank you for your time. I now hand over the call to the moderator. We are happy to answer any questions you may have.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may enter star and one on their touchtone telephone. If your questions have been answered and you wish to withdraw yourself from the queue, you may enter star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have the first question from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Yes, sir. Hi, thanks for the opportunity, and congratulations, for a great set of numbers and, announcement of dividend. Sir, you seem to be outperforming in terms of growth. When we see your 2027 guidance, this implies about 14%-15% top line CAGR over FY 2024 to 2028, which seems to be a bit on the conservative side. How should we see this guidance?
You know, I think that we're talking about sustainable growth over the next four to five years. For us, that means high single-digit SSSG and, you know, around 12%-14% same sales growth or total sales growth. I think, you know, we've demonstrated that in this quarter, and we're confident that through the ups and downs, because obviously you will have some quarters that are up and some that are down, we'll continue to maintain this CAGR. We're quite confident and optimistic that the plans we've shared as Vision 2027 are the right plans, and, you know, we remain confident about that guidance.
Okay. Sir, PPT also mentions that SSG has been led by guest counts. In my opinion, there were two rounds of price hikes, which should have benefited us by about 5%-7%. Are we sort of seeing consumers sort of downtrading, or is it because of launch of these value offers at INR 179?
You are not very clear. This is Saurabh this side. I think, the pricing part, I think I picked up. We pretty much did not take any price increase post April of last year. It's been flattish all through, so there is not too much of pricing, comparative sale or same-store sale built in. That's the part I just got. Can you repeat the question if you've got any other query?
We had taken about 5% price hikes towards the latter half of Q1 last year, and if I remember correctly, there was 2% price hike that was announced in October. I was coming from that perspective that PPT mentions that it is largely led by guest counts. Is it because of downtrading or this launch of value offer at INR 179 sort of led to this?
Downtrading might not be the most appropriate word. Let me put it this way, right. There are different occasions. People come for different occasions, and different occasions gets opened up. For example, if you see a lot of college people coming back, you might not have the same amount of average check for that occasion, while delivery might have even a higher average check than what it was last year. I would not put it in those many words. I think the broad, the broad theme is a lot of this growth comes on the back of footfall growth rather than coming on the back of pricing growth. That's, that's the, that's the long story which we wanted to communicate.
Got it. This vegetable inflation has come as an incremental headwind. How are we placed here in terms of margin, any potential margin here? Also if you plan to take any price hikes going ahead.
Our guidance is very simple. I don't think this is anything out of normal. Apart from a couple of years during COVID, where inflation was really more than, which we call out of whack. Otherwise, if you look at 5%-7% inflation is a norm in India, right from 1996. It's very, very manageable. Food inflation is seasonal, vegetable inflation is seasonal, and we do a lot in supply chain to make sure it doesn't impact us. I don't think you will see any impact of inflation because, some months, for example, like you mentioned, some vegetables go up, we factor it, and we ensure that we do not have any supply issues as far as those vegetables are concerned.
That's encouraging, sir. Sir, last one from my end. This dividend announcement that we have done is sort of slightly or on the higher side than the 15%-25% range that we had indicated during the analyst day. Just wanted to check, is this the range that is likely to continue going ahead as well?
First is we had, we had actually released the dividend policy first, which was more than 25%. This was for the very first time we were declaring dividend. We declared a dividend which we felt we can afford alongside being able to accrue for the growth which we have planned for.
Got it, sir. That's it from my end. Thanks a lot for taking my questions.
Thank you. Participants, if you have a question, you may enter star and one. We have the next question from the line of Varun Singh from ICICI Securities. Please go ahead.
Thank you, sir. Congratulations for a good set of numbers. My question is on gross margin expansion. I understand that, like, I mean, all the three vectors that you mentioned: cost optimization, but price hike benefit in the earlier quarters, maybe no price hike during current quarter, et cetera. Still, I mean, if you can also attribute that, what would be the expansion because of the mix benefit, given the higher contribution from McCafé and beverages to our overall revenue? If you can share some insights on how the mix is changing, that will be helpful, sir.
We don't break down and give guidance on each one of them, broadly, we've always said that our job as a business is to make sure we drive the cash back and overall profitability of the business. Gross margin is one of the levers in the entire line item, right? We don't get too much worried about it. For example, if you create a value platform, it might not give you gross margin percentage, it might give you leverage across the other line items of the P&L with higher sales, and so on and so forth. Normally, we do not break up everything one by one in terms of when we are giving guidance. Essentially what you will see is like we've always done, you will see improvement in overall margins of the business year-on-year.
You will see a Delta over last year when we had said that last year is a good base number for us to track our improvement against. That's where we stand, and that's what our guidance is.
Does that mean that incremental margin benefits from superior revenue mix will be reinvested back into the business by giving better offers in the core product portfolio?
No, that is not what I said. You can interpret as per your needs, but broadly, what we are saying is there is a P&L to manage. There are a lot of things which work around in a P&L. There is inflation, there is new stores, there is sales, and then there is cost improvement, which we make year-on-year. At the end of it, the net-net sum is we have shown a great track record of improving costs or removing costs out of the system and improving our margins year-on-year. You will see that Delta happening even this year, is what we are trying to say.
Understood, sir. Very clear. My second question is on the delivery side of the business. I mean, if we look at your performance compared to peers, even on the delivery side, you have outperformed. Just wanted to understand that, what is what is it that's driving strength on our this piece of the business? If you can share some objective insights with regards to what we are doing in this segment, sir.
I think on delivery, you know, we've done a very good job over the last few years, especially based as our learnings through COVID. We've had very strong partnerships with the aggregators, be it Swiggy or Zomato. We've had very, you know, collaborative relationships with them, where we've partnered and driven growth together. We've also recently launched our new McDelivery platform app and backend, which have also kind of, you know, been received well by our customers. As a result, our delivery, you know, leadership continues to grow in our region, and you've seen differentiated results for our off-premise business and, as a result, for our entire business.
Sir, I meant if you can share insights with regards to like, incrementally, how we are thinking about own delivery compared to Swiggy or a third-party aggregator. Where do we stand right now, and how are you strategizing going forward?
You know, like I said, that's why we have our own McDelivery platform. We launched a new app and backend this quarter itself, and we've invested heavily into that in terms of both resources as well as Manpower. I think that we are very committed to growing our own platform, which is one big differentiator. Second big differentiator is we have a very complementary relationship or collaborative relationship with our aggregator partners, which allows us to drive volumes even during periods where, you know, other brands are facing stress. I think these are our, you know, competitive advantages, and these are some insights we can share in terms of how, you know, we've scaled out our own delivery platform and grown our delivery business.
Understood, sir. Very helpful. One last question, if I may, regarding our chicken brand equity that we have strengthened with the new brand ambassador in South. If you want to share some color on that part of the business with regards to. I mean, of course it is performing well, but how if you can give some timelines with regards to the scale-up of the chicken business?
Chicken is a long-term play for us. We talked about it in the Investor Day also, that we have got three products where we would like to build our leadership. One was burger, second was chicken, third was coffee. Around chicken, what you're seeing is a start of a journey. We are very encouraged by the results which we have seen, including with Junior NTR. We've got our best numbers ever in chicken in the month of June, that's the broad guidance I can give you. Beyond that, this chicken game is not a short-term play for us.
You will see this game playing out over a period of time. You will see everything, whether it's menu, whether it's promotion, you will continue to see us continue to deliver on these three top three strategies of creating differentiation in burger, chicken and coffee.
Got it, sir. That's it from my side. Thank you very, very much, and wish you all the best.
Thank you. We have the next question from the line of Amnish Aggarwal from Prabhudas Lilladher. Please go ahead.
Yeah, hi, and congrats on good set of numbers. I have two, three questions. My first question is on the, you can say, the demand scenario. If I look at other players in the industry, they are facing some sort of, you can say, much more tepid demand scenario than what we are witnessing. Is it due to, you can say, some sort of, you can say, increased competition or penetration issue in a particular category, or is it driven by, you can say, your pricing going up? Because when I look at your results, the pressure on demand doesn't seem to be that much. It will be helpful if you can give us some color on what is happening in the industry.
As Akshay mentioned earlier, there is headwinds as far as consumption is concerned of overall category in terms of eat out and Western fast food. To us, India gives such a big opportunity, right? What we have to be able to do is have a right strategy and be committed to that strategy. To me, the results which you see is a part of the committed strategy, where we had talked about being very, very serious meal players and continuing to maintain our lead during snacking, and then doing it through various channels and being a really omni-channel brand. We are seeing that play out. I wouldn't say that the demand situation is very rosy, but in India, the curve is never linear.
There will be good quarters, bad quarters, but overall, we are all committed to India's growth, and we are all committed to our strategy. The way we look at it is, it's a good situation as long as you're committed well on your strategy, and we are committed to our meal strategy.
That's pretty useful. The second question is that, for example, we have got, you can say, tie-ups with Swiggy and Zomato. We are also having our own app. Now you have this ONDC is coming. I think our products are also available on that. How are we building traction on ONDC, and any, you can say, initial learning which we have over the past few months on that?
While we don't give breakups, to me, Swiggy, Zomato are our partners. ONDC is another added partnership, another channel to sell, right? The strategy to what will we sell and who will we sell to is more critical. We don't give breakups of what is Swiggy, Zomato, ONDC, but we have seen growth across, which is very heartening. We have also seen growth, a little higher growth from our own channels. It has been an overall good growth in terms of the delivery bits.
Okay, how is the pricing? Because usually, generally it is perceived that when you order through ONDC, the prices are, you can say, on the lower side. For us, as a realization, are we taking any hit on that?
No. From our standpoint, the realization is almost constant across all channels on digital. It depends on what the platform is charging versus what service they are providing to the consumer. ONDC also, there are tie-ups through other channels, and then depending on what they charge, we do not have too much of a say in that, neither do we command how they run their business. To me, ONDC is another channel where we are working through partners, beyond Swiggy and Zomato, to crack open that market.
Okay, that is very useful. Just finally, last bit. Now we are having, say, 220 stores under the EOTF, whereas the total number of stores is more than 360. How many stores this year we plan to, say, bring it under the EOTF concept? Some clarity on, say, how much of incremental CapEx we would be doing per store for this conversion.
We don't give generally the guidance on what is the incremental CapEx on this number, but what I got to tell you is that we are internally or by 2027, we should be 100% stores on EOTF. However, the qualification is that food court stores don't have an EOTF experience, so they generally have a self-ordering kiosk being added, but nothing beyond that. There is food court stores which will never get converted, but beyond that, rest of all the stores should get converted in the next two to three years.
Okay. Is there any guidance for the current year?
Typically, if you look at the last two, three years' track record, we are converting 30 to 50 restaurants year-on-year. We should be able to do the same thing this year also.
Okay. Thanks a lot, sir, and congrats on coming on the dividend list.
Thank you.
Thank you. We have the next question from the line of Percy Panthaki from IIFL. Please go ahead.
What I'm trying to ask is that the value meal strategy works out to approximately 25% price cut versus the earlier price of the combo. I'm comparing combo to combo, not individual meal items ordered versus the new combo price. Even the earlier combo available versus the combo price now, there's approximately 25% price cut for the dine-in SKUs for combos that you have. For the delivery, you actually have more number of combos. They are not exactly comparable to any other combo you have had in the past, so I can't really judge a price cut. Similar combos were available, if not the same, earlier. If I look at the similar combo prices versus what they are now, that is also roughly a 25% price cut. Two questions here.
Firstly, what is the need for such a sharp sort of pricing cut especially when the business is going on so well, and we have people willing to sort of pay the prices that we command? Secondly, how do you manage this from a P&L point of view? Because especially for the dine-in, where it's a pure price cut and there's no sort of change in the product offering, how do you manage the margins for this kind of a business? Because I'm sure that while it's only a part of your business, more and more people will gravitate towards this price point. The salience of this business will also increase versus what it was earlier. Sorry for the long question, but I just wanted to ask this.
Thank you very much, Percy. I think you've done more studies than what we have done on our own menu. I don't think that whatever the cut was, actually, we did not take any price increase, neither we took a price reduction. We managed by increasing some prices and reducing this. As a portfolio, we've got a net zero effect on the P&L, on the gross margin on this. Obviously, we want more and more people to come, and we believe due to the contribution margin of this product and new customers come, and they come more often, we should be able to make this a very profitable proposition.
If you look at it from the marketplace standpoint, the price point is INR 179, and we wanted to make sure that we have got the third lever of meal strategy, which was affordable EVM, which we have been talking about from last couple of years. We were just waiting to build the baseline through the gourmet burgers and the filling burgers. This meal is available with McVeggie and McChicken. That's where pretty much where the price reduction is happening. We are very excited that we will be able to have a INR 179 meal, which people can use us regularly for during lunch and dinner.
Okay. You're saying that, while there has been, this new meal at a lower price, you've also taken some other price increases in other SKUs, and that's why the net impact on pricing is zero. Is that understanding correct?
Yes.
Okay. I'll probably take this offline with Jiten, because the price increases I saw were more in the mid-single digit, kind of numbers, versus this is like a 20%-25%, but I'll take that offline. Secondly, I just wanted to understand, I mean, in the original question also, one part is spending, which is what is the rationale for such a drastic, kind of, price cut?
There is nothing drastic about it. What we do is, we would do something known as a conjoint study to understand what's the price point which people are comfortable eating meal, because EVM would naturally be an extra value meal, a strategy where they can afford a meal which provides fillingness, because it's a lunch and dinner occasion. To me, it's about those two products of McVeggie, McChicken, where we decided to position it in a certain manner. It's a part of a strategy. It was always the third pillar of the meal strategy, which we are playing out with bone-in chicken and gourmet or filling burgers. That was the third lever, which was always a part of our planning process. That's how it happens.
It also upgrades customers who are buying individual items or two items to the third item, and actually it helps increase average check as well.
Right. Right. That makes sense. That makes sense. Next question is on the same-store sales growth trajectory. You've clocked a 7% this quarter, and the base is now completely normal. Should we given how sort of the demand environment is in QSR in general, although not for you, do you think you'll be able to, for the next few quarters, hold this 7% kind of a number, or do you see a downside risk to this?
Number one, we don't give forward-looking guidances. To me, what you will see is a differentiated result in the marketplace, given that we have committed to ourselves to a strategy. Like I said earlier, we are not short-term players. In fact, that's why our guidance is actually a Vision 2027, because we are committed to it. There is always one good quarter, bad quarter, here and there. We don't get bothered about it because the point is to drive our strategy and execution to its natural conclusion. For us, we are fairly confident of our strategy and what it's been giving us as results. What's gonna happen next quarter, next to next quarter, I cannot look at anything and tell you that what will be the case.
What I can tell you is the results should be differentiated in the marketplace.
Sure. That's all from me. Thanks. All the best.
Thank you. We have the next question from the line of Saurabh Kundan from Goldman Sachs. Please go ahead.
Hello. Sir, there was a thesis that burger category became more affordable versus, say, pizza over the last, over the inflationary period we've seen in the last few quarters. Your price hikes were also lower than pizza. Now, going forward, as that difference narrows, let's say, if cheese inflation comes down, you see that as a headwind to your growth, as consumers on average shift a little bit towards other categories? Is this something that you see playing out, and are you taking any tactical pricing or menu actions to counter this?
To me, every organization needs to look at its consumer very, very carefully. We don't look at it as a narrative of saying, "Okay, this is what competition is doing, this is how they are feeling." I think there is a use case occasion, and there is generally a price point linked to that use case occasion if you've defined your target audience very, very sharply. For us, we look at it always in that manner. Just because some pizza is cheaper than burger, will it create issues for us? We never look at it that way. We believe that there's a price point for every occasion, and we've got to be able to cater to wide spectrum of customers. In fact, if you look at it, we launched the Giant Burger.
I don't think the Giant Burger's price point is anywhere less than INR 200-INR 250. We saw a lot of customers in some restaurants taking those orders. I think it's about use case occasion. It's not about what burger category, because once upon a time, everybody used to think burger cannot be delivered. Today, everybody is saying burger is better in delivery. These are things which everybody makes up. For us, it's about staying true to the consumer and staying true to our business. As long as we do that, we should be able to get to where we want to get to.
Right. Thank you. That's it.
Thank you. We have the next question from the line of Gaurav Jogani from Axis Capital. Please go ahead.
Thank you for the opportunity, and congratulations on the numbers and dividend announcement. My question, you know, with regards to one point in your PPT, where you mentioned, you know, that the metro cities this time have grown faster than the metros, sorry, the non-metros one. Earlier, you know, when we used to see, you had mentioned that, you know, the smaller towns are growing faster. Is there any slowdown that you see, or is it the acceleration in the growth of the metros on the other end that you are seeing?
See, to us, it was very clear. We've always talked about it, saying it's been overall rounded growth. Both metros, non-metros, and small towns have performed well. It was always a baseline. Last year we had talked about metro growing higher. This time we are saying, non-metro growing higher. This time we say metro grew a little higher. That doesn't mean there is no growth happening in other areas. It is just because we have been maintaining continuity so that people know it's a well-rounded growth, even metros did contribute to growth this time around.
I'm actually asking the same, you know, that the metro you mentioned is growing faster this time around versus the net non-metros, is what I think is mentioned in the PPT.
Yeah.
I think earlier, because you had mentioned non-metros were growing faster, so that is where the difference is, what I was trying to ask.
Yes, it's all marginal. It's between some basis points here and there. I wouldn't read too much into it. The point is, the brand is doing well, both metro, non-metro, and in small towns, too.
I think it's about broad-based growth, right? We keep talking about that, whether it's geographies or channels or products, it's because we have the ability to drive broad-based growth that we offer, you know, differentiated results.
Sure. In terms of the gross margins bit, you know, under the new reclassified gross margins, the gross margins are now at around 17 .5 % for this quarter around. I just wanted to ask, you know, how much scope there is further, you know, to expand the gross margins from here on? Considering now the raw material prices are better off what was the last year, do you see still some scope of expansion during the current year as well?
See, it's, this is Saurabh. It's not only about the gross margin, as we just discussed couple of minutes back, that we always focus on the real profitability at a PAT level. Between the line item, definitely we always keep working to figure out the efficiency, that how and where we can improve the margins. As we have already given the guidance for 2027, and I believe, this is those guidance, we are completely on track, and it is very much achievable.
Okay, sure. Just bit on the store opening bit, you know, you mentioned that, you know, you'll be opening 40-45 stores, the guidance is maintained for FY 2024. On that bit, is it on the gross level or is it on the net level that you are guiding for?
Yeah, definitely. No, we are seeing that new stores will be opened in the range of around 40 to 42. It doesn't matter whether if there are any stores which are getting closed or not. At a gross level, definitely we are on track, and we are very much sure that 40 to 42 new stores will be opened by the end of this year.
Yeah. If I'm understanding it right, so this 40-42 would be on a gross level, and there might be some store closures, if any, that might be there. That will be reducing this number, right?
Yeah, right. As such, we are not expecting any kind of major store closures for the year.
Okay, sure. Thank you, and that's okay.
Thank you. We have the next question from the line of Avi Mehta from Acuity. Please go ahead.
Hi. Hi, team. I had four questions, so please bear with me. Just first bit was on the space of store additions. You said 40-42 store additions, versus I think last time it was 40-45. Is that too much to read into or, I mean, just kind of find?
Hi, Avi. Hope you're doing well.
Yeah.
Yeah, too much to read into, it is still 40 to 45. It's ballpark number. We're confident we should be able to do 40 +. Now, it's 42, 43, 40, we can't say at this point in time.
Sure. Sir, in terms of the thought is, you know, given the way first quarter has been, is there a thought to kind of take it based on the environment or, you know, and hence a lot of this might be backended once the environment kind of changes, or no, this would be respective? Just wanted to understand that part.
Avi, typically to achieve the quarter four, if you look at it, we almost did 18 restaurant openings in quarter four. The momentum goes towards the. It builds up to the year-end. It's a start of the year. We saw there was four stores. We are still sure of achieving 40 +. That's pretty much what it is. If you look at it historically also, we haven't opened too many stores in quarter 1.
Okay. Perfect. Fair enough. The other bit was on the 2027 guidance. You know, you have indicated better profitability. Would you help us understand in terms of numbers, because earlier you used to say your mid-teens margin is what we look at from a pre-Ind AS basis, you know, 300-350 points, around 18% or so, give or take. Is that something that has changed now? Is there a new number that we should look at, which is why the wording has changed?
No, still we are very much sure that 18%-20% of the guidance, what we have given last time.
We are, we still stick to the same guidance, and we feel that by FY 2027 we can e xpect for the similar kind of number.
Okay. Okay, perfect. The last bit was on the store size. I wanted to kind of you know, we typically do about 3,000 sq ft stores. Have we, you know, thought about approaching the brand owner for a smaller size format for India to essentially accelerate the pace of store additions, given there are other, you know, there is a discussion, has that been thought through? Is there something that is in the pipeline? Because the pace that we are kind of hoping to kind of look at from a store addition perspective seems to suggest a very sharp acceleration as we go forward. Would love to hear your thoughts on that.
Thank you, Avi. This is a question which keeps on coming. I think you had also discussed this back in 2016, 2017. We have evaluated this multiple times, we have come to a place where if we want to do average unit volume, our omnichannel strategy has come to life. In fact, if you look at it, we have also given guidance in Vision 2027 to have more drive-throughs. Drive-throughs typically means we might have almost 1/2 acre of property in which there'll only be a McDonald's. We don't look at it. We are not. We have pretty much closed that. As of now, we are not looking at any small size format.
We are committed to our base size, which we have, which you've already mentioned, 2,800-3,200 sq ft. That's something which we believe can give a core omnichannel QDF experience to our consumers. Having said that, you would see drive-throughs, you would also see a few food courts here and there, but that's about it. We are not actively chasing any smaller size format for now.
The way I should look at this is, you know, real estate availability is not a constraint, it's just capability, and hence, we don't need to relook at a store size reduction. Is that the right way to kind of rethink about this?
Our model?
Yeah.
So, uh-
Yes, yes.
Correct. It's a model discussion, and we've got to be able to make sure that we get the right real estate in the right area at the right price in order to unlock. From where we stand, we are pretty confident to be able to do the growth which we have talked about.
Avi, this is Amit.
Yeah.
Just because the right size of store is not available in the marketplace, does not mean that we are gonna change what is right, the right thing to do. In Mumbai, real estate always been challenging, but we have 100 restaurants with 3,000 sq ft in every square inch of this city. We think it's the right way to go forward, and we are gonna stay with this.
Got it, Amit. Got it. Perfectly clear. Just a clarification: You indicated that the demand environment may not be rosy, but that doesn't deter us. We would focus on growing ahead of the market. Would you kindly also share how is the input cost environment? Is that something that we, you know? We hear from other players that it is kind of improving, so would love to hear your thoughts on that as well. Thank you. That's all from my side.
We are not seeing any kind of surprises over here. As we discussed that, yeah, definitely there is a seasonal factor anyway, which is very much applicable in the food industry, and this is that anyway we have already planned, and we have the sufficient budget to cater these kind of fluctuations between the seasons.
Perfect. Thank you very much. That's all from my side.
Thank you.
Thank you. Before we move to the next question, we would like to request participants to limit their questions to two during the initial round. We have the next question from the line of Deep Paragbhai Shah from Equirus Securities. Please go ahead.
Yes, thanks for the opportunity, and congratulations for the great set of number. Just one question from my side: If you see, we have highlighted that there has been 50 basis points kind of a increase in the royalty rate. Earlier it was expected to be in the range of 4.5% during FY 2024, and we were expecting 5% in FY 2025. Is there any change in overall scheme of the royalty for the.
The only difference might be GST included and excluded. It is still 4.5% for the year. You, if you include GST, that's the difference you will get.
The plan is available on our website.
Yeah. Yeah, I just checked on that part. There was 4.5% during FY 2024, but when I calculate based on the press release data where I, where you have highlighted INR 32 crore kind of a royalty, it translates into 5.2% kind of a royalty rate.
Yeah. It's 4.5% + 18% GST, for which we don't get input tax credit.
Okay.
It's effectively the cost on the P&L. That's the GST difference what you're talking about.
Okay. Thank you.
Thank you. We have the next question from the line of Shirish Par deshi from Centrum Broking. Please go ahead.
Hi, Amit, Saurabh, thanks for the opportunity. Just two quick follow-ups. I mean, I joined little late, so I'm not sure if you have covered, but just for the sake of my understanding. I'm looking at the presentation on the Piri Piri McSpicy and Jain-friendly menu. I just wanted to understand qualitatively, if you could share, I mean, though Piri Piri was a limited intervention, what it means to our contribution to sales, if you can help me to give certain parameters on which you have evaluated, and such interventions will bring really a new customer. That's the thought which is there, but also it adds to our menu and contribution to sales.
Second, on the Jain menu, though, the presentation says that we have introduced in, the western part, is there, on ground, if you can give me qualitatively, if there is a cannibalization which has happened or there is a new customers which has been able to walk in and the footfall has improved and the sales has improved?
I'll answer both of your questions in a little bit of. Let me answer the Piri Piri one directly. Actually, it's a policy of LTO, which is a limited time offer on creating excitement to a very big equity platform. McSpicy for us is a very big equity platform and done historically very, very well. What we did do was to bring excitement to this platform. We introduced a new kind of spice, which was Piri Piri, and did the festival on the back of it. We saw strong growth in the McSpicy platform, and we saw incremental growth on the McSpicy platform. What the number is, obviously, we don't give details in terms of the broken down manner.
We were very pleased with the outcome of what we had planned for the limited time offer of Piri Piri and what we were able to achieve. Second question on the Jain menu, it actually came out of the brand trust. If you look at the McDonald's brand, we always try to make sure we are there, and we have something for everybody. Whether it was the EatQual platform, where we worked for the handicapped people who've got the upper limb disorder or upper limb disability. We did do a packaging innovation for them. Now, these are not necessarily sales imperative, because you don't at a system level, you don't sell too much volume. Similarly, this time around, we felt that this community always never had anything to come into a McDonald's for.
Given that we already had a product where we, if we removed onions out, the raw onions out, would be a Jain product, we felt that it was high time that we included this community. We have seen tremendous amount of growth from a very limited restaurant, which are in the community neighborhood. Nothing more, it doesn't impact business results dramatically. This is the all-inclusive platform of McDonald's, which you will see continuously see something or the other keeping to keep on happening on inclusiveness of every part of the community.
No, Saurabh, thanks for that explanation. What I wanted to check with you, is Jain menu innovation is also a LTO, or it's going to be a permanent reset?
Jain menu will be a permanent reset. It's actually a Jain-friendly menu. We have given the guidances. It doesn't create any root vegetable, but it's prepared in the same kitchen, where there might be root vegetables kept alongside. We're calling it the Jain-friendly menu with no root vegetable. This will be available.
I'm again, sorry, there are many friends who have really appreciated this kind of gesture from an international brand like McDonald's. What I wanted to check, and you have not answered: Is this intervention has been able to bring new footfalls and whether it has been really able to add up to our SSG?
I did, I did answer that. For a system-level impact, I don't know whether we've got population who eats out, substantial enough to create a difference in SSG. There are definitely community stores in Gujarat, in Indore, where it's created a substantial difference.
Okay. My second question, to other Saurabh, at this time, what are the input raw material looks inflationary? I mean, I'm again, repeating this point. I'm not sure whether it is covered before. Just a sense, what is the inflationary environment today? What ingredients are looking. Because largely, to my understanding, cheese and milk is, now started inflationary.
Yeah, definitely. As I just clarified that we are not seeing any kind of major surprises over there. This cheese and milk we have already factored, and we were very sure that this is the inflation which is going to hit in this quarter. Accordingly, the entire thing has been planned well in advance. For the balanced quarter, as such, also, I believe the way we have planned our ABP and the business plan, the way business plan is in place, we are not expecting any kind of major ups or downs.
I agree, but I just wanted to understand, other than tomato, is there any other first surprises you have factored in?
On tomato, we did not see any inflation, which is beyond the normal. These are seasonal inflation we had actually approved for, in fact, planned in advance. We did not have any tomato outage whatsoever in our region, and we did not see any tremendous inflation coming out of tomato out of the ordinary.
Okay. Okay, that's it from me. Thank you and all the best.
Thank you.
Thank you. Ladies and gentlemen, we will take one last question from the line of Chirag Lodha from ValueQuest. Please go ahead.
Thank you for the opportunity. My first question was on average unit volume, basically sales per store. I'm just referring to your Vision 2027 document. What you have said is, say by 2027, your top line would be in the range of INR 4,000 crore-INR 4,500 crore, and total store unit would be 580-630, which essentially implies, you know, sales per store of INR 6.9 crore-INR 7.1 crore. Today, already, you know, at 100 basis points, we are at INR 6.8 crore, and on top of it, we maintain that we'll be able to do high single digit kind of SSG over the next two years. I'm just not able to get the math right. Please help me understand, you know, how to look at this.
There is no math. These are things which are not, Chirag, done exactly as per math, right? Tomorrow, there might be opportunity coming up on tremendously on highways. Might not do the average unit volume due to not having deliveries. Will something else plan out? Not plan out? What we've done in Vision 2027 is looked at the business from multiple angles, looked at our history and said, "What is the number which we should be comfortable with average unit volume?" That's what we have given. Actually, the top numbers you need to assimilate is that we are doubling our sales, we are doubling our number of restaurants with solid improvement in profitability. That's the broad outlook.
Because we wanted to give more flavor, because a lot of people were pushing us, so we gave flavor around other things. Now, they might not always pan out the way you have planned. You could always go more or less here and there, but I wouldn't look at it that way.
Essentially, key number to look is top line. You might be able to achieve the similar top line by opening lesser stores. I mean, that is the biggest takeaway, right? That is how.
Not necessarily. I mean, it's a broad range. You see, 2027 is five years away. We've given you some sense of where we are heading, and it's not mapped. That's the key point takeaway.
Right. Right. Secondly, on G&A line item. You know, in the opening remarks, you mentioned that G&A line item has increased on a year-over-year basis, but this is the new normal, and now we'll see that number, which is at 5.8%. Now, you know, we have seen improvement in average unit volume, throughput, et cetera. I mean, do you envisage any operating leverage coming through this line item, maybe this year, next year? Any sense there?
See, largely, G&A should remain in this kind of range. We are not expecting any kind of major fluctuations. Yeah, as the business will grow, some level of the economy of the scale benefit definitely should flow down to the G&A.
G&A, I would look more as a fixed value with marginal incremental rather than looking at a percentage. What we have said is, this is probably the guidance of how new normal could look like, with marginal gains coming out of sales. Otherwise, you can look at it being a INR 35 crore- INR 40 crore line item for the quarter-on-quarter.
Okay. Perfect. Just lastly, on dividend policy. This dividend policy of, you know, nearing 25% payout, is it on cash profit or reported profit?
See, definitely it is on the dividend policy always works on the reported profit, because as per the statute, we have to abide with the numbers, what we are being presented in the financials. The endeavor will always be there, that how the dividend payout can be maximized on a higher level.
Right. The context for asking is almost the payout for the year or this quarter is like INR 55 odd crore. If I just do 25%, you know, maximum payout you would have wished to give, then it comes to INR 220 odd crore, you know, kind of number.
No, no. 25% is the minimum guidelines, what we have given, subject to certain exceptions, which anyway, it has been carved out well, properly in the dividend policy. Otherwise, if there is a free cash flow which permits the company to take care about its strategical growth, and if there is a left out amount, definitely it should be paid back to the shareholder as part of the dividend.
Got it. Got it. Thank you, and I'm done.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, that was the last question, and I would like to hand the conference back to the management for closing comments. Please go ahead, sir.
Just thank you, everybody, for participating on the call. We appreciate it and look forward to talking to you again next quarter.
Thank you, members of the management. Ladies and gentlemen, on behalf of Westlife Foodworld Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.