Ladies and gentlemen, good day and welcome to the United Spirits Limited Q1 FY21 Results 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 opening remarks conclude. Should you need assistance during the conference, please signal an operator by pressing star, then zero on your touch-tone phone.
Please note that this conference is being recorded. I now hand the conference over to Anand Kripalu, Chief Executive Officer, and Mr. Sanjeev Churiwala, Chief Financial Officer from United Spirits Limited. Thank you, and over to you.
Thank you very much, and a very good afternoon, everyone. And a warm welcome to the Q1 FY21 results call. First and foremost, I just hope that you and your families are all staying safe. Before we open the line for Q&A, I want to provide some context for the results that we announced last evening. This was indeed a quarter like no other, and I do hope we never have to experience another quarter like this ever again.
For the period between March 24th to May 3rd, Lockdown 1.0 and 2.0, alcohol manufacturing and sales were completely banned in all states in India. From the 4th of May onwards, several states began allowing the sale of alcohol.
Off-trade outlets began to open in May, and subsequently, over the course of the next two months, about 80%-85% of the off-trade outlets gradually opened, including some that were doing only home delivery. So they were not open for over-the-counter sales, only for home delivery in places like Mumbai. On-trade outlets, an important channel for our P&A brands, continued to stay closed pretty much throughout the quarter.
Our manufacturing operations also followed a sequential process, with factories being allowed to operate based on the zoning criteria in line with the easing of the lockdown starting from the 4th of May. By the end of June, all our units became fully operational.
Having said that, what we have witnessed subsequently in July is that retail outlets in a few cities and a few of our plants had to again shut down temporarily in line with the second wave of localized lockdowns announced by various states, so in many ways, this will be a process of two steps forward and one step back till the pandemic comes more under control.
During this period, a positive development on the distribution side for our industry has been that several states have allowed home delivery and online ordering of alcohol, something that we have been trying to unlock for a very long time.
While this is still very nascent and the model is still evolving, we do believe that once states see the merit of the model, especially in terms of added revenue and improved compliance while enabling social distancing, there will be a stronger argument for this to sustain. On the other hand, what we also saw in the immediate aftermath of the opening of the industry was across-the-board tax increases in most states.
Some of the tax increases were exorbitant, going up to 70%-75% of the MRP. But the good news is that a few of the states have since rolled it back, including Delhi and Odisha, and we are hopeful that a few more will follow. Since these factors were external, what we did as a management team was to focus on what was within our circle of influence and within our circle of control.
I'm particularly pleased about a few things in particular that we have achieved during this quarter: supply chain readiness. The team planned ahead and made sure that the startups and shutdowns were quick. This was despite having to navigate a very complex state-level manufacturing footprint and having to procure several permissions to operate, in fact, several new permissions to operate.
The team simultaneously overcame many logistics-related hurdles, including labor shortage, and ensured that ramp-ups were faster than usual. This set us in place to protect our employees, be it thermal scanning, multi-point hand sanitation, frequent sanitization of equipment and facilities, and all while maintaining the appropriate social distancing in our factory. Second, we continued with the rollout of renovated mixes for two of our largest brands, McDowell's No.1 and Royal Challenge Whisky, in more markets and supported them with the right levels of investment.
We have had an encouraging response to these relaunches and are eager to ensure that consumers across the country experience these new mixes as fast as possible. We redirected our sales force to work more effectively in a virtual world, be it in terms of equipment or exchanging best practices during the lockdown, or indeed even having virtual connects with our customers.
Fourth, we also continued to persuade governments to minimize collateral damage to our industry, including obtaining necessary permissions for production and keeping the market open. In parallel to all this, we have been ruthless about the treasury, but at the same time, what is important is that we have not shied away from investing and supporting our customers, our consumers, and communities as per need.
We have also supported our CMUs and franchisees as well as our vendors to ensure the whole system remains healthy during this very tough time. In service of that, we recently launched Raising the Bar to support the revival and recovery of the on-trade channel. This clearly exemplifies our commitment towards growing the category in the longer term and supporting our communities at the same time.
Since we've already talked at length about this program on a separate call earlier, I'm not going to repeat that now. In terms of financial performance, you must have seen the quarterly numbers from our published results, and obviously, we will take whatever questions you have. But I think this quarter is full of aberrations, and comparing these numbers year on year is not really an apples-to-apples comparison.
I would just like to put a few things like aging-based provisions and COVID-led obsolete inventory provisions, and these have exerted further pressure on our industry, in addition to the negative impact of the operating leverage due to significantly lower volumes in the quarter. We believe that a part of these provisions should reverse over the course of the coming year.
Looking ahead, we will have to navigate several unknowns over the course of this year. As the pandemic continues to surge in India, the containment strategy being adopted in wake of local lockdowns lead to temporary closure of manufacturing and retail stores in Phase 2.
This is likely to be the environment in which we will have to operate in the next few months or quarters, and therefore, maximizing the opportunities presented to us each day while being agile to move from one day to the next will determine how successful we really are. Additionally, the real impact of recent tax-related price increases on demand will also become fully known and much clearer over the next few months, especially given the fragile state of the economy as well.
Another variable to watch out for and plan is the change in consumer behavior in the aftermath of the crisis, particularly the change in the ways of socializing and shopping. Having said all of this, we do continue to see some improvement with each passing month. Given the nature of this new reality, however, we must be cautious about escalating this into the future.
Therefore, we will continue to closely monitor the situation and constantly evolve while staying committed to investing in our business and in our brands and the success of the company. With that, I'm going to throw this open to your questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to answer may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Avi Mehta from IIFL. Please go ahead.
Sir, from the press release that you have mentioned about there being a month-on-month improvement in July and in August, would it be possible to know why sales have been or why it jumped in the environment? Anything helpful?
As you would imagine, anything specific is not possible for me.
Even a range would be useful. I mean, just to kind of help.
Yeah. So I think you have to read the sentiment. I think what you're saying is the worst is clearly behind that. With each passing month, we are seeing improvement. But given the nature of this beast, for months, we had many factories closed in Karnataka and Assam because suddenly there were local lockdowns. Now, those have reopened again now. So this is a really, really dynamic situation.
It's not that I don't share, but I want to be very clear in cautioning people regarding things when there's not enough data trends. But just keep trending that things are getting better selectively, but I can't say that they will stay better permanently, okay, because of the nature of the beast we're dealing with.
Okay, sir. And sir, the second bit was essentially on the gross margin. Now, we have seen some one-off impact, which is related to the inventory obsolescence. If we kind of remove that, would the gross margins have improved QOQ versus quarter? If you could kind of help us, what has helped that to kind of drive?
So, I'll pass this on to Sanjeev, Abhi, for him to give you a share as best as we can. Yeah? Sanjeev?
Abhi, hi. Sanjeev here. But absolutely, as you can see, the gross profit margins, the underlying GP margins have kind of declined by 508 basis points. And of course, there are a lot which are playing a big role out here. A couple of things for everyone. Number one, this particular quarter, you will see our franchisee income have been badly impacted. It's quite soft. It's almost down by 40-odd crores.
It's like us where we see our business decline close to 50%. Our franchisee business, they've also seen their business badly impacted, right? On top of it, because of the smaller operations, they had to face a lot of operating deleverages. Many of them have been making big losses. So we decided to kind of, in a spirit of a win-win situation, support our business partners. So as a result, our franchisee income is lower by 50 basis points.
That's impacting our gross profit margin almost close to 160 basis points. Second is, in line with the continuation and in line with our prudent policy, accounting policy, you just mentioned about the SLOBs, we have ensured that we continue to provide for slow and non-moving inventories, which could be a combination of raw material, packing material, finished stocks within ours, and of course, finished stocks lying at the corporations.
What you see in the corporations line is everything to do with the inventory, which is owned by us besides the corporations. That had a major impact. We had to take a hit of INR 21 crores, which has impacted our gross profit margins by about 152 basis points. Of course, we also continue to have the 2% average inflation, which is impacting the gross profit margin by 100 basis points.
So all these three factors put together is about 450 basis points barring other small items. Now, how do we see this as compared sequentially? I think the way I like to decode is when I look at my ENA, which is a big component of my COGS, have been flattish. I will not say benign, but at least, as we said in the previous quarters, that the peak is out now. And hopefully, we should see a softer environment as we move forward, right? So sequentially, to that extent, the ENA would definitely support in not pushing the inflation any further.
Hopefully, as Anand said, if we see some gradual recovery happening in the market, right, we might see a better utilization of the capacity and a better operating leverage coming through, which in this current quarter is really bad because what you see is inefficiency, which means our manufacturing capacities have not been optimally utilized, leading to a lot of inefficiency. So hopefully, yes, this is where we are in terms of the current gross profit margin and some thinking as we move forward.
Okay. Okay. And sorry, you said ENA glass, also if you could kind of highlight that somehow.
Yeah, so glass is the overall industry is in somewhat staggered, glass industry, and over the last few quarters, because of the lockdown situation, because of some other industries, the way it has played out, many of the glass industries have been under a lockdown situation and is gradually opening up. So to that extent, we will see some inflation in glasses. It's not really flattish. There will be some inflation, but not the kind of inflation we saw a year back. That's for sure. So yeah, I think it's good to kind of build in a normal inflation happening in the glass.
Perfect. This is very intensive and extremely helpful. Just one last bit, Anand and team. On how we have been extremely prudent in our credit policies. I don't think there's a credit risk with the corporation sales, but I would love to understand your thoughts on how we look at corporation sales and the credit that we kind of provide on subsales. That's all from my side.
I think as compared to many other FMCG players, we are really lucky in a way of speaking that 70% plus sales has happened to corporations. As you're aware, corporations are basically state government bodies. To that extent, the credit is completely secured. It's a government sovereign debt. So as such, there's no problem. Some states, yes, we did face delays in payment, which we have called out.
Things are improving. The provisions that you see is essentially not because unexpected loss might happen. It's just because that the aging of the inventories lying at these corporations, right, is not looking great. Why? Because we had a complete lockdown situation for 33 days, and thereafter, the economy opened slowly. It took time for the supply chain to ramp up.
So, as a result, towards the year end, when we see towards June end, you see a deteriorating aging situation. Of course, because we are following a prudent policy, we just provided basis this aging. But as we move forward with some better deflation happening and some steady supplies happening, we should see the aging situation improving in the subsequent quarters, and you see part of that reversing. So yeah, it's not about any credit risk. It's just about the prudent accounting policy.
And if I can just add a line to what Sanjeev said, is that I don't think that credit is coming in the way as we speak now of sales, right? We're not having to curtail credit because they're not at alarming levels.
At a time we used to in the past curtail even sales to make sure that credit doesn't go out of control, we're not in that situation. But actually, coming out of the COVID crisis, it's not a bad situation to be in from a pure credit and cash standpoint.
Yeah. Anand, I would just add something more, and I know this question will come up subsequently, Abhi. So let me just finish this off. When we look at our overall debt situation on 31st of March or 5th of June, we are in a far better situation. There has been an aggressive drive on collections. As a result, we have comfortably placed our overdues have come down significantly.
We have also reduced our overall working capital. As a result, we've been able to repay debts also, right, and this is a time when cash is the king. We are in a difficult situation. Our balance sheet is very, very healthy. Our working capital is right at a very, very optimal level. We've been able to reduce our receivables and bring down the risk, actually.
So I think it's all to really serve the market well as and when the market opens up.
Thank you.
Okay. Good.
Before we take the next question.
Next question. Yeah.
We'd like to inform participants that in order that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have follow-up questions, we request you to rejoin the queue. The next question is from the line of Abhaneesh Roy from Edelweiss. Please go ahead.
Yeah. I said good sales performance given five weeks of lockdown and 25% sales coming from pubs was not there. So wanted to understand some insights on two benefits. So one is, of course, duty-free shift. So have you seen better performance in the mid and premium in the big cities? I think we're in the bulk of the duty sales. And second, beer companies clearly are suffering because of the bulkiness of the purchase and refrigeration. So any versus beer industry?
It's just too early to read this, right? So we are doing things as best as we can to woo people who would have bought duty-free stocks, right, to woo them through either direct contact or running promotions that are like duty-free promotion. Okay? But finally, it is duty-paid, and the prices are the prices that will be there in duty-paid versus duty-free, and it's too early for me to see or read that those sales are actually shifting.
Anecdotally, I can tell you that some of it has to shift, right? Because if people aren't traveling, and you know that I've said this before in the past that people don't downtrade easily in this category. If you're used to drinking Johnnie Walker Black Label, you don't easily downtrade, right, to Johnnie Walker Red Label or to BII, right?
You will find that few thousand rupees extra so that you can continue to drink your brand of choice. So I think it will, but I don't have enough data points to tell you for sure that it's happening already, right? But I cannot believe that part of it will not move. All of it won't move because there is a price elasticity demand as well. As far as beer is concerned, again, we do believe there is a shift happening to spirits, right?
And spirits is advantage over beer for all those reasons. There's an interview in the papers also today from one of the senior beer company leaders who's talked of the fact that beer is stressed because it's easier for people to just carry home spirits and consume spirits.
And because as long as the bars and the pubs are shut, those tend to be more beer occasions when people go to those kinds of venues to drink. Now, your option is to actually take something home and have that with a small group of friends because you're not having that in open spaces in large groups. Again, the data is just too short, but anecdotally, again, I must say, that is absolutely what we believe is happening and will happen on both these points.
Let's wait. So that's belief based on consumer trends and insights. Let's wait for data to corroborate that this is indeed the case.
That was useful. My second and last question is home delivery. So there are two subsets here. One is Mumbai kind of city wherein just home delivery was there. So has the performance in Mumbai also been largely similar to your overall India performance given there will be more of bigger packs buying by consumers? Second is in the sixth, seventh states where home delivery has been allowed, any insights you can share? There was a reversal in Jharkhand, but how is the performance in rest states? It's a short period, but any insights?
Yeah. So home delivery itself, so first of all, actually, the win, Abneesh, is the fact that it has started in a few places. Okay? That's the big win. Okay? And we need to just evolve this model. Now, the contribution is still relatively small in places where over-the-counter sales is also being allowed, right? Relatively small, but not immaterial. If I look at places like Orissa or West Bengal, it is not immaterial, right? So it's picking up slowly.
Okay? But if you look at Mumbai, it's either home delivery or no sale, right? So everyone has found a way to contact their nearest store and get home delivery happening because over-the-counter sales are not being allowed. So there it is material.
Now, I don't have the data offhand on whether Mumbai is selling in line with what it would have sold if retail stores had been fully open, but I can tell you it's significant. The amount of home delivery sales happening in Mumbai is significant. Okay? So that's really what I can tell you. But I think on this, the fact that the seeds are getting sown for an alternative route to market for the future is the big aha, and we have to sustain this because this can be the biggest unlock for an industry which was constrained by accessibility. Okay?
So why is Bengal Odisha doing better? Why is Bengal Odisha doing better?
No, it's not about doing better. There are national players that have already operating there. So the Swiggys and the Zomatos and the HipBars are all operating in Odisha and Bengal. Okay? And even Amazon and Flipkart and so on have got permission. Big Bazaar, I think, have got permissions to start in West Bengal, and they're all perfecting their model. So I think just more scale players versus a retailer doing the home delivery on his own, right?
And there also, the ordering can be done more efficiently through online portals and stuff versus calling up the conventional call-up. It's like the [Foreign language] "send Johnnie Walker or send McDowell's No.1." All right? So that's what's happening. So it's a crude not an organized home delivery model. It's a local store-led home delivery model, right?
The big bang comes when you have scale players coming in and doing this.
Okay. That was useful. Thank you.
Thank you. The next question is from Arnab Mitra from Credit Suisse. Please go ahead.
Yeah. Hi. My first question was on the tax increase and price increase from states. So we know there's been a lot of two steps forward, one step back, even on the tax. So if you could help us understand at a national level, what is the approximate higher consumer price that all the set of tax hikes that have happened till now is leading to? So what is the range of higher prices that consumers will have to shell out? And any price hikes you've got from the state governments in terms of your own realization?
So we have received actually price increases over the last few months in seven or eight states.
Okay?
Modest, but still meaningful.
Okay?
We've got some price increases. So as far as the I'm not going to give you an average weighted increase, but let's put it this way. The big outliers were states who had done a 70%-75% increase or 38%-40% increase. Those have corrected, right? Andhra Pradesh is not corrected, but our business in Andhra Pradesh is down to almost nothing because of the route-to-market changes and regulatory challenges that we are facing, right?
Amongst the balance, Delhi and Odisha were amongst the highest states in terms of tax increases. Corrected down, no tax increases, which I believe the consumer will accept because it's more routine, right? The range of tax increases there.
There are a few states that are still there in the 25-30 range, right, where we are still trying our best in those states to try and get tax increases down because those states are also seeing a sharp drop in revenue, right? And unless revenue also grows, it's a lose-lose model, right? No place for a lose-lose model in business, right? Everybody wants a win-win model. And therefore, we are still talking to those states with data to see whether they will temper it down, right?
And then there are lots of states that were more nominal, right? Up to 10-odd% kind of increase or low double-digit increase. And I'm saying unless we see a crash of excise revenues, we're letting it be. And there are also some states that have not taken any tax increase, right, which continue to operate like normal.
By the way, there are also some states that have taken a meaningful tax increase where volumes are doing really well and are not suffering. So again, it's just not easy to read because it's kind of a fixed bag, yeah? But giving you an aggregate number is oversimplification of what's happening and almost misleading because the differences can be many.
So the way I want you to think about this is to say if it is more nominal tax increases, which is up to kind of double-digit price increase for the consumer and the revenues are going up, we leave that as it is. Where the tax increases are in the 30 range, 25%, where there's been a drop in revenue, we are aggressively going after those states with data to try and get it tempered.
So there's some tax increase in most places in the country, but none of them are such that it is detrimental to industry, right, or detrimental to excise revenue. So that's the way we're approaching this.
So that's the last question. I know you answered to Abhaneesh's question that there are a lot of uncertainties and there's also restocking in the trade channels, so very difficult to read the near-term trends. But from whatever data you've seen, the way I'm coming from is you have that 25% on trade, which is going to be literally zero for some time. Do you get a sense that the off trade or the outside on-premise business can actually make up for part of this based on whatever you've seen till now?
I'm not going to say whether we can make it up because that's like telling you that we are selling equal to pre-COVID levels. I'm not willing to make that statement today. Okay? Now, some shift from the on trade to off trade is bound to happen, yar. I mean, it's obvious now, right? Some shift of the beer will move to the spirits consumption in the off trade, right? All this is logical and is going to happen, right?
Now, the question is how much and to what extent, and will it compensate for the entire on-trade business? And I think I would just be misleading you if I said that it's going to fully compensate for the on-trade business.
Now, having said that, it will be our intent to activate the off trade as best as we can to capture as much of that shift as we can while it's open, right? That is going to be the endeavor of management and our commercial and marketing team, right? That's what we are going to go after, right? And hopefully, the on-trade will selectively start opening as well as people just get tired of these lockdowns and say, "Chill out, yar.
We want to go out and have a drink somewhere. Let's go to a place that's not crowded and let's go to a place that's safe." And that's where our Raising the Bar program comes in, right, to create those safer environments for consumers to go out but go out safely. So I think you'll just have to wait and watch this space.
As we get more data, we will share it with you, right? But as you understand, it's just so dynamic that I just do not want to give people the wrong message.
Thank you so much and all the best.
Thank you.
Thank you. The next question is from the line of Latika Chopra from JP Morgan. Please go ahead.
Yeah. Thanks. Hi, Anand and Sanjeev. You did talk a lot about the.
Lovely.
Yeah. About the supply side, there has been a lot of skepticism on how consumer attitude towards consumption will be affected due to this pandemic. I just wanted to check with you, could you tell us a few key aspects of consumer behavior which have surprised you either positively or negatively over the course of June and July month versus your expectations, say, two months ago?
This could be on mixed trends. In the earlier call, you had talked about worries on the downtrading aspect. Has something of that sort panned out? How has it caused sales? Has there been supply disruptions which have weighed on that portfolio, large pack sizes versus small ones? Any certain space that has been any of this which probably surprised you versus your expectations a few months ago?
Yeah. So there are probably shifts that are happening. I don't know about what is surprised us and what's not, but there are clear shifts that are happening. Obviously, shifts away from large parties, large banquets, large weddings to smaller groups socializing. Absolute shift to larger SKUs, right, because of in-home consumption and in-home purchases and people who store at home, which I think is actually a great attitudinal bust, right?
We shouldn't be extensive with it, but it's a big attitudinal barrier that was there about alcohol at home and consuming at home for a lot of people. And hopefully, that would have broken down as one of the, I would say, tacit benefits of this entire thing happening. Downtrading, I cannot read yet, right? But I will say this, right? And I can't read because the data is too erratic. There is no massive trend of downtrading, right?
It's kind of balanced. In some states, you can see a bit of it. In some states, you see the converts. Okay? So there's no massive absolute crash to the bottom of the pyramid kind of shift from prestige and above down to the bottom of the pyramid. There's no massive movement of that kind. You know in our category is that whenever there have been shocks to this category, right, the basic category trend comes back, which is about people drinking better, right, and not downtrading, right? And once the shock is over, I think there are longer-term strategies of focusing on premiumization, investing behind the more premium brands. I think that will absolutely continue, right? Because I think that strategy will be the right strategy, right, when peace plans come after this war period is actually over, right?
And then the other consumer change, obviously, is the moment of shopping. So the way of socializing is changing. People are not going out. So there's more exposure in shopping from home. And that is an opportunity that was shut for us till now. And that could open a change. And maybe that's been one of the surprises about how permissions for home delivery and e-commerce in certain states started. In peace times, my God, we would have gone on and on and on lobbying with the state government. We wouldn't have got the permission, I can tell you that, right? And the fact that it started. And hopefully, other states will follow. And that's our effort anyway. So those are the broad trends. Now, I'm surprised by the amount of shift that at least we are reading from beer to spirit.
I don't think we anticipated that because we don't also read beer as closely, right, because we're not directly in that business. And that shift, right, and the function of both the on trade, the bulk, and the need for chilling, fridge space, right, I don't think we read that much. So I will say that's a positive surprise, right? We don't understand the numerical impact of that. That's a positive surprise. And in crisis times, it's good to have positive surprises as well rather than only negative surprises we're all getting used to. So those are the kinds of things, Latika. I will tell you this: that we have our insights team tracking consumer trends continuously to keep a finger on the pulse because it's very dynamic. And we are redeploying resources in the business towards emerging opportunities, right? So we said, "Sanjeev, listen, key accounts shut right now.
On-trade is shut." Let's make home delivery and e-commerce to happen, right? So the way we're playing this game is to reach consumers, pick the ones that we believe are meaningful, and put resources behind that opportunity and time to make it. So that's what I can tell you that we haven't just left it to feel. We're actually doing it in a perfect way.
Sure. And just to cross-take this, is it supply disruption, which is still there on Scotch imports, or it's normal?
Scotch import supply disruption? No, nothing material. No. Nothing that is stopping us from doing what we need to do in terms of our business. No.
Sure. Thank you so much.
All right. Thank you, Latika.
Thank you. The next question is from the line of Amit Sinha from Macquarie. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. My question was on the competitive intensity within the whiskey space. So I just wanted to understand, I mean, is it fair to assume that the larger players and the bigger brands would have done well in the last two months or so? And yeah, I mean, any color on market share, even if it is a very small period, will be helpful.
So we don't have data to share, really. But I can say this: that we would believe that companies with scale and strong cash flows should be able to come out stronger from a situation like this, all right? I don't have data to bear it out. But that's the belief that we have the staying power, we have the cash, we have the relationships to leverage that to our advantage. Okay? So that's what I would say. I obviously can't tell you about shares and stuff like that. But what I will tell you is this: that our ability to start up after the lockdowns were lifted, right, has been better than what I would have expected, particularly in terms of supply chain ability to service the market, right? I think we were pleasantly surprised about. I was really worried, by the way.
It's very easy to stop a supply chain, but to restart a supply chain, starting from your vendor's raw material to the vendor to the truck to arrival in your factory to making it in your factory then trucks to send it, that whole thing had been stopped suddenly for six weeks, right, or five and a half weeks, right? I've been pleasantly surprised by how, given the strategy that we pursued of keeping our CMUs and franchisees supported in the business, making sure their employees were paid, right, minimize the impact of migrant laborers on our supply, those kinds of things, I think we've been pleasantly surprised at what's happened, and therefore, I think in the opening up, right, I think we have done well, right, in our ability to supply when things opened. Because in the beginning, it was all about who can supply, right?
I think we've done well there, right? I'm pleased with how we've done there. But that's really all I can really share. I can't share relatively small players, big players, what's happened at this point.
Sure, sure. And in that context, I mean, how would have your franchisee, because you very clearly mentioned that the franchisee income during quarter was hit, and so given that these guys are smaller with lesser resources, overall supply chain disruption would be much bigger. Is it fair to assume that in the near term, franchisee income will continue to be hit?
That's absolutely right.
Okay. Sorry. Go ahead.
Yes.
Go ahead, Sanjeev.
Yes, so just like our business has been impacted this quarter, franchisee business have also been impacted. Even at the bigger scale, as you rightly said, there are smaller operators. As a result, they do get into a lot of inefficiencies during this time. What we have done is just to ensure that we create a win-win situation and a good relationship with our working partners here. We have decided to share the pain also with them, so while we have a contracted space of fixed income, they always cannot get into a situation where they say, "Hey, you make losses, and we'll make all the profits," so that doesn't really work with us. We have ensured that they do get their fair share of income, and we have kind of worked together with them. This quarter, as you see, our franchisee income supported is fairly soft.
It's about INR 40-odd crores lower. When I look at it on an annualized basis, in a pre-COVID environment, we earn about INR 160-odd crores of franchisee income. Our sense, and it's too early to really give a number to it. We don't know how the chain will pan out, but of course, the business will remain slow, and their businesses will be getting impacted. We think that the franchisee income should be about 40%, probably lower, going forward in the next few quarters, but we'll keep on revisiting and recalibrating those numbers as we move every quarter because it's too difficult to say how exactly their business will recover from the crisis, and it's the same situation for us, so we are kind of living and breathing every day, every quarter.
Yeah. Sure. My second question was on your basically McDowell's No.1 renovation. And just wanted to ask, in how many states have you relaunched the new bottle, and how has been the consumer response to that?
So we are in about a third of the country, okay? But we are rapidly rolling it out during this period, right? So over July, August, September, we'll see a rapid rollout to at least two-thirds or 75% of the nation in terms of the weighted contribution of the brand. And I'll say that I'm very encouraged by the response from the marketplace. Obviously, again, the reading has been complicated because things started, things shut, and so on. But I would say that by and large, wherever we have gone in, right, I think the response has been very encouraging. And like I said, I want more and more consumers across the country to experience this new bundle in terms of the new McDowell's No.1.
So we're continuing to grow, and that you only do if you feel that you've had your action standard kind of met in places where you started rolling it out, right? So we are extending it now.
Sure. So just very small bookkeeping question. So you mentioned that aging-related provision impacted the other expenses this quarter. Is it possible to share the number of this provision?
Yes. I think it's about INR 44 crores.
Okay. Thanks a lot, sir. That's all from my side and all the best.
Thank you. Before we take the next question, a reminder to participants to please limit your questions to two per participant. We take the next question from the line of Manoj Menon from ICICI Securities. Please go ahead.
Manoj?
We seem to have lost the line for Mr. Manoj Menon.
Yeah.
We move to the next question. The next question is from the line of Harit from Investec. Please go ahead.
Yeah. Hi, team. Good afternoon. I just had two questions. One was in the franchisee income again. So when you say that you booked a 40-crore lower number this quarter, it would basically imply that the franchisee income is next to nothing in this quarter. In that context, I also wanted to check that are these very temporary arrangements now with the franchisee to support them? And once things get back to normal, you will kind of get back to your normal run rates on the franchisee income?
Sanjeev, you're on mute, I think.
Sorry. Can you all hear me? Yeah. The franchisee income for this quarter is about INR 10 crores, and for a similar, I think the corresponding quarter, you had about INR 50-odd crores, so as compared to the quick growth, you see about INR 10 crores now, hence there's a decline of INR 40 crores. Now, this INR 40 crores is basically a true-up of the impact that we had on the franchisee business, and of course, we saw a declining business right from the beginning of the first quarter
with the overall GDP and the economic conditions going down south, and of course, a much bigger impact during the current quarter where we saw a big lockdown. As a result, when we discussed with the franchisee partners and we looked at the income earnings of the operations, we felt that it's quite prudent that we kind of share a part of the pain.
And hence, we kind of let go about 40-odd crores. And as I said, going forward, looking at the current state of the economy, the way things will move, the impact of the pandemic, we don't really know how things will be. But our sense is the franchisee income would be about 40% lower. Now, we'll keep on revisiting that every quarter. But yeah, I think the business will be down. And to that extent, the franchisee income will get impacted between 40%.
Okay. My second question was on the new launches for number one and Royal Challenge. Does the change also have to do with the mix in terms of the liquid? And if so, is this a premium liquid mix that you've changed there, or is it just a packaging and communication change?
It's an all-new McDowell's and Royal Challenge, right? So in McDowell specifically, pretty much all aspects of the mix have been improved, including the liquid. Okay? Now, whether it's more premium or not, I don't know. But consumers prefer it to be a real liquid, right? That is one of our tests and our in-market feedback that we have. Royal Challenge is also an improved liquid. And again, that is preferred by consumers based on our test results. Okay? So it is not just, within quotes, a packaging upgrade, which is more smoke and mirrors, right? It's not old wine in new bottle, to put it literally. Okay? It is new wine in new bottle. So that's how I would like you to see it. And it is therefore a comprehensive improvement in the product offer and the mix.
That's very helpful, sir. Thanks and all the best.
Thank you.
Thank you. The next question is from the line of Vishal Biraia from Aviva Life Insurance. Please go ahead.
Thank you for the opportunity. So I have a few questions. The first one is on what would be your capacity utilization for July, if you could give us some perspective there?
I can't give you a capacity utilization number, right? I would only say this: that we are not capacity constrained, right, unless it's shut, of course, right, which is also the case in a few places. And therefore, it is now demand-led production. So the capacity utilization is based on the demand, right? And we are working as hard as we can to make sure that our factories are able to meet the demand. And I would say, by and large, right, it's demand-led now and not supply-led. So I just say this: we can produce in all factories to pretty much pre-COVID levels of capacity. So if the demand was at pre-COVID levels, we could produce at pre-COVID levels in our plants, right, with all the new norms in place.
Okay. Also, the second question is pertaining to this for this quarter. We would have seen higher sales in the hinterlands, semi-urban markets, and rural markets as compared to the metro, which was shut due to lockdown. So is there a shift that you would see that some of these customers who are in the semi-urban India or rural India are demanding a different kind of product? Or the premiumization that could have happened has not happened because of this geographical change in distribution, or it is just because of COVID that people are downgrading?
No, no. First of all, I'm not clear that people are downgrading, like I said earlier, right? And if they are, then it was of COVID. Also, you see, most of our sales happen in urban and large towns. The consumption may happen as product finds its way through unconventional channels to consumers in smaller towns and rural. Okay? Now, so that's how it flows. And I don't think they want a different product, right? But we have products that can service the bottom of the pyramid to the absolute top of the pyramid, right? And they could move to any of our brands within that top to bottom of the pyramid, right? I don't think they want something different or new, right? They may choose something else from the portfolio, right?
In the short term, if they choose to downgrade, if they choose to downgrade because of economic challenges, job loss, whatever else it may be, right, then they will hopefully choose one of our brands that are there lower down, right? And then hopefully come back when the sun shines again. Hopefully, they won't stay unemployed. Hopefully, they'll come back. And they'll have the same aspirations when they come back that they had before, right? And they'll come back and then hopefully buy again. So I think any trends that we are seeing right now, we have to believe they are short-term and COVID-related. Longer-term trajectory, we believe, at least right now, will go back to where it was pre-COVID. The only question I do not know is how long it will take. That's the only question I don't know the answer to.
Okay. Just one last question on the receivables. Could you give some perspective as to what is the increase, if at all, in the receivables from the states as of 30th of June?
Increase in receivables, Sanjeev? Are we sharing that now?
Yep. I can give a general understanding of this. While for this quarter, we don't report our balance sheets, you will not see the numbers. But I think it's wise to state that we are kind of in a much better situation when it comes to the overall receivables. Our overall receivables have come down. It's much better. And so is the health of the receivables. Our overdue receivables have also come down. So I think we have been very aggressive during this lockdown situation and also in May and June to ensure that we collect better and ensure that we're kind of ready to serve the market. And the market is not constrained because of the COVID. And we have done quite well. This has also resulted in an overall reduction in working capital and overall reduction in our debt situation.
While I'm not reporting the quarter numbers to you, when you see the H1 numbers, you'll see it for yourself.
So when you say reduction, this is from 31st March to 30th of June. These are the reference points.
Yes.
Okay. Thank you very much. Thank you very much for your thoughts.
Thank you.
Thank you. The next question is from Pulkit Singhal from Motilal Oswal Asset Management. Please go ahead. Mr. Pulkit Singhal from Motilal Oswal, you may go ahead with the question.
Maybe he's not there. If I can just announce to everybody, because apparently there's still a large number of questions in the queue, and in order to accommodate as many as we can, we're going to extend the call from 15 minutes till 1:15. So, because I just want to make sure people don't log off before that, if you still have a question and you want us to answer it, then we will stay on till 1:15 to help you understand the situation as best as we can. Sorry. Back to the question.
Yeah. Hello. Am I audible?
Yes.
Yeah. Thank you for taking my question. I just wanted to try to understand the mixed impact during the quarter because we've shown a similar kind of decline in P&A and Popular. At the same time, we know that the On-Trade channel is a higher margin one and has been impacted more. So I'm not sure how the mix changed within P&A and why have there been similar declines in P&A and Popular.
My advice is don't try and read into this, right? I mean, this is such an unstable quarter, right? And what happened may be a function of just which factory was open where in which state and which outlets were open or which outlets just shut. And we are trying to read a pattern or a trend with that data. So my advice is don't look at it because we can't read that at this point in time. And we should just wait for a bit more data. Right now, all I can tell you is this. There is no clear trend that there is downgrading from P&A downwards, right? There was some short-term Scotch disruption and so on and so forth because family weddings and banquets and those went away. The On-Trade shut, right?
We have to see how much of that will shift to the On-Trade and the Off-Trade and people will take it home, right? Let us just wait for a few more data points, right? But there is no clear trend, by the way, of downgrading within P&A or from P&A to Popular, right? The data does not bear that out, right? And there's too much noise in the data, like I said.
Sure. The second question is on gross margin impact. I mean, if I just add back the obsolescence impact as well as some part of the franchising income that is add back the 20 crores, not 40 crores entirely, we are coming to almost a 44.8% kind of gross margin for the quarter, given that I think RM prices are also a bit benign. So is that the right gross margin number to look at going ahead? Because this is probably the worst quarter. And I'm just trying to understand how should I look at this line item going ahead?
It's very difficult to decode how the gross margins will look going forward. But I think some of the things that you see, as you rightly said, that the ENA prices perhaps have stabilized. The grain prices would be kind of in the inflationary zone, moderate and not the kind of huge spike that we've seen in the past years. We also think that the SLOBs that we've seen this quarter is kind of massive because of our prudent policy. But with the market opening up and with the depletion happening, the aging will improve. And to that extent, the SLOBs will be lesser. But we would not like to decode and try and extrapolate from these numbers how the gross margins will look like going forward.
Okay. Sure. Thank you and all the best.
Thank you.
Thank you. The next question is from the line of Abhishek Joshi from CGS-CIMB. Please go ahead.
Yes. Thanks. It's my question. So a few weeks back, our parent company, Diageo, had announced that they will be sold in paper bottles from.
I'm sorry. I'm just not able to hear.
Yeah. Can you hear me now?
Yeah. Okay.
Yeah. So a few weeks back, Diageo had announced that they would be selling Johnnie Walker in paper bottles. So would we be doing the same for McDowell's brands next year? Any thoughts behind it? And if yes, then how does it impact some gross margins compared to another one?
No, no, no. So listen, I think so first of all, the Johnnie Walker has to come in that packaging which has been distributed, and then we'll see if it comes. There's no plan to move McDowell's No.1 with that kind of packaging. But also remember that in India, you have something called Tetra Pak. A large part of our volume is in Tetra Pak. And that's a paper-based packaging at the end of the day, right? Yes, it has an aluminum foil. That was paper-based packaging. And we have introduced No.1 in Tetra Pak in the state of Karnataka, and it's doing very well. The very small SKUs only, 90 ml and so on, right? We have actually done that, and it's doing very well, all right?
Now, having said all of this, we are constantly looking at packaging innovation on our brand, which will upgrade the image of the brand, which will aid functionality, reduce two-year inventory fees, yeah, and also lower cost. So there's a constant endeavor to look at different kinds of packaging formats, and we will continue to do that.
So what would be the contribution of our sales from Tetra Pak normal times?
No. So if you look at our total business, right, Popular plus Prestige and above, Prestige and above is negligible, by the way, in Tetra Pak. Almost zero, right? Very, very low. But if you look at our total business, a quarter of our business is in Tetra Pak. All our Popular in Karnataka is in Tetra Pak. Some of our volumes of Popular is in Tetra Pak in West Bengal. Okay? And some of it is there through franchisees, right, in certain states like UP, right? So Tetra Pak is a very big contributor to the packaging for our Popular business.
Thank you. That's all from me.
Thank you.
Thank you. The next question is from the line of Aditya Soman from Goldman Sachs. Please go ahead.
Hi. Good afternoon. Thanks for the extra time. Yeah. So the first question is on digital spending. Given that, I mean, in-store marketing spend would have been lower, I'm assuming, this quarter, has there been any sort of thought or increased spending on digital spending? And do you see any differences in reaching out to consumers using digital?
So absolutely, the intent is to move more and more media towards digital, and particularly given the digital explosion that has happened and the data consumption explosion that's happened with COVID, right? Absolutely, that's the place to be. However, Diageo globally, and we in India, believe in doing the right thing. And as you may have read, Diageo is amongst several other companies who have decided to stop paid advertising on certain global digital platforms. Okay? So therefore, we are absolutely honoring that commitment that has been made. But we are looking at alternative ways to still create the reach and impact that we want through digital. Okay? So absolutely, that's our intent, right? And that's our work with our agency partners to make that happen. And particularly to support our innovation, right? I would say it's digital first in terms of the media choice that we're making, right?
How best can we make an impact starting with digital and then following with others rather than necessarily the other way around, right? Because in this environment, I think that's what really works.
No, I understand. That's very useful context. And in terms of the cost of digital, is there any sort of way to measure the efficiency versus, say, your traditional in-store advertising?
No, there are many ways to measure it, and I don't have it on my fingertips now, but there are obviously many ways to measure it. Digital, by the way, is far more measurable than conventional media, right, in terms of the impact, the number of people who viewed, who viewed part of it, viewed all of it, of the content, etc., etc., but it's not only about viewership. It's also about engagement and involvement that we're able to generate, and that comes back to how creative is your digital work, right? Because it's not only about reach. It's about impact and engagement of the consumer, and there are ways to measure a lot of this stuff, and we do, and we have very robust tools, by the way, in our business to measure the ROI of our advertising. Okay? Very robust tools.
In fact, there are global Diageo tools which we also use in India, all right? And we use that constantly to prune and tweak our media plan. And that's what we will continue to do.
Thank you, and lastly, just to follow up on the franchisee economics, has there been sort of any fundamental change, or could you see any of the franchisees sort of stop doing the business with you in that situation, or would you have to appoint new franchisees or take back that business? Any situation of that sort that is around?
Let me just say that I'll take this on you because it's just about. So philosophically, there has been no franchisee who come in and throw the towel and say, "I can't do business with you anymore," right? Now, we are constantly looking at how to improve our franchisee. So for instance, one of the things we have said is we are going to institute a principle of doing joint business plans with our franchisees to support them in areas of pain that they may have where we can bring some expertise to the table. Okay? So whether it's on brands or whether it's about sales or even if it's about efficiency, what can we do to help and support them? Because it's our business also at the end of the day, not only in business, right? So we're doing that.
Equally, we will constantly keep looking at whether franchisees are delivering effectively for this business that they are supposed to be doing, right? And everyone is up for scrutiny on performance. We are and so are the franchisees. And if people do not deliver, right, then we will look at ways to improve them or split with them if we have to. But there is no plan as of now.
Thank you. Before we take the next question, we will request participants to please limit their questions to one per participant. The next question is from Varad Shah from ASK Investment Managers. Please go ahead.
Well, we all understand what happened to the sales. And given the situation, what best could have been done in terms of managing that was done. But I wanted to understand, how did we internally deal with, probably given the change, expenses and managing the profitability, the challenge of the situation? So what I'm surprised by is the losses at operating profit level. I mean, reduction of.
Losses at operating profit. Okay.
Was understandable. But operating losses is something that surprises me, and I want to see, understand what kind of fixed cost and variable cost and what kind of efforts have been made to contain the impact.
Yes. So Sanjeev, he wants to really understand what's being done on our cost base during this period. And he is surprised by the losses at an operating level. That's the question. So maybe I'll hand it over to Sanjeev.
Yeah. Sanjeev, first on a philosophical level, we all knew that because of this COVID, the last quarter, the quarter ending June, would be a complete washout, right? And to that extent, when I look at the analyst consensus as to what they felt, how the profitability will look like and how the P&L will look like, just to share the number, most of you in your consensus said that the top line declined by close to 50-51%, right? And we see the real numbers is close to that. In terms of the EBITDA, right? And this is your question on what could have been done better. The consensus was close to about 11 or so of positive EBITDA, whereas for practical purpose, we lined it up with close to about INR 80 crores of losses, right? So there's a deviation of about INR 90 crores.
So let me interrupt you for a second. Consensus numbers is a market game, and that is not a gospel truth one. Secondly, if you look at scores of businesses, results which have come out so far, in case of many of the companies where considering the kind of obvious challenge, there have been far more clear, visible methods which have been at work to create a financial impact much lower than what one would have thought or to actually improve and give a positive surprise. So I'm more coming from that context. I mean, in a market, consensus numbers and all this is a popular sport, but I don't think we should pay much attention to that.
You're right. I was just setting the context, and I was coming to exactly what you're thinking about. So yeah, for the timing, let's forget consensus. Let's look at what it is. The fact is this business, as compared to any other business, was completely impacted, right? As compared to many other FMCG players. We were in the situation of a complete lockdown for 33 days, and thereafter, our supply chain resumed normally. And a lot of effort was put in to kind of almost get to a pre-COVID level in terms of our readiness for the supply so that as and when the market recovers, we could kind of completely look at that. What have we done internally to ensure that we can at least minimize the losses? If that's the question to you, I think we have put a complete brake on all the discretionary cost.
Today, when you look at our overhead, while on a pure reading of the reporting numbers, it's about a decline of 3%. But because of the one-time impact that we had, if we had not had those SLOBs accounting policies, which is more of a non-cash charge than a cash charge, our total expenses would have been lower by about 22%, right? So that's a big impact in terms of the effectiveness that we're trying to produce by having a complete control on the cost element. Now, a lot of this SLOBs accounting policy, which is nothing but provisioning for the aging inventory, will give us, as I said in the earlier questions, because as the market is opening up, we'll see more deflation happening, and the agings of these stocks will improve, leading to a substantial improvement in terms of these provisions.
This quarter, which is, of course, not also the right thing, but we also realize that there's a complete shutdown. Doesn't make any sense for us to keep on doing on-the-media advertisements, right, and keep on spending money on the A&P advertisements. So as you can see, there's a significant cutdown on the A&P spend as well this particular quarter. Now, of course, because we have a huge manufacturing footprint company with 37 locations in an environment where your sales are down by almost 50%, your manufacturing fixed overheads won't get fully absorbed. A large chunk of the manufacturing and other absorbed fixed costs are also sitting in these numbers, which hopefully, as and when the market improves, we'll see some operating leverages also coming in. What are we then trying to do? We're trying to have a very clear policy on curtailing all sorts of discretionary spend.
We are trying to really manage our A&P, which is and make it much more manageable in terms of effectiveness and efficiencies. We are trying to really cut down on all sorts of needs for based on work, right? We have really managed our receivables very well this time. We have really managed the cash situation very well. As I said, we've been able to reduce our overall working capital. Under this scenario, which was quite challenging, but we did that dramatically. I'm not giving the numbers, but as a material deduction of the debt that we also accomplished. So all the steps that the company could have done in terms of protecting the P&L, the shape and size of the business, making the business much more healthier, having a much stronger balance sheet, right, has all been done.
Everything that we're doing is only going to make us stronger and much stronger as and when we move into the next phase as and when the unlock happens. And we are very confident that our performance should finally start improving as and when the market opens up. And we are actually very confident on all the measures that the company has taken so far. It was an unprecedented environment for all of us, getting the consumer trained, the customer's requirement, trying to understand when the lockdown will unlock or when another lockdown happens was very, very difficult and challenging for all of us. But we are very happy that as we speak to you, we are in a complete readiness on our supply strategy, the complete readiness in terms of serving the consumer and customer better. I think we have come a long way.
And I suppose with this, we're almost coming to an end of this session. So maybe we can, Anand. You're fine. We just take the last question.
Yeah. So we'll take one last question now before we close the call.
Sure. Thank you. We take the last question from the line of Vishal Punmiya from Nirmal Bang Institutional Equities. Please go ahead.
Thank you. My question has been answered. Thanks.
Okay. Then we'll take one more.
Sure. Thank you. We take the next question from the line of Shirish Pardesi from Centrum. Please go ahead.
Hey, hi, Anand. Thank you, Sanjeev. Just a quick question on what you said about seven corporation markets you have got price increase. Is that right?
There are seven corporation markets. I said seven states.
Yeah. There are seven corporation markets.
So seven states, we have got the price increase. Non-corporation markets.
Yeah.
Yeah. So what kind of price increase do we have got?
So I'm not getting into the specific percentages. They're all modest.
Give the range.
Yeah? I mean, I don't have the range handy here. It started with Telangana and then there were other states. But I would say they're ballpark, they're about 4%-5% kind of increases. But we can check that for you and get back. But it's a range, plus minus.
Sure. Sure.
4%-5% in those states.
Sure. Related to price increase, we have launched two new products, RC and McDowell's No.1. What kind of price premium do you have in these two products?
So we've not, I mean, it's not that easy to take up the price in this industry. So you have to improve your product offering and just be more competitive, right? Now, we have a strategic view of where our pricing should be, but you'll find that because of history, in some states, you might be at a premium, some states you might be at par with the segment and so on and so forth, right? So I would say that don't think of this as the ability to take a premium. Yes, we will try and take a premium as and when we have the flexibility to do so, but have the opportunity to at least grow share and grow the segment, right? And that would be, I would say, the primary focus.
Okay. Just last on CSD business, if you can give some color of how the things are shaping up there?
CSD business is fine.
I think they're not under lockdown now. By and large, I think the government CSD canteens and messes and so on are operating as far as I know, right?
The CSD business is fine.
There's no real problem that I see with the CSD business as of now.
Okay. All right. Thank you and all the best. That's it.
Okay, well, thank you, everyone. I just wanted to thank everybody for staying on for this call and your continued interest in United Spirits.
Thank you very much.
Thank you very much. On behalf of United Spirits Limited, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.