Westlife Foodworld Limited (505533) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for joining us on Westlife Development Limited Earnings Conference Call for the Quarter and Year Ended March 31, 2020. We are joined here today by Mr. Amit Jatia, Vice Chairman; Ms. Smita Jatia, Director; and Mr. Pankaj Roongta, our CFO and VP Finance and Accounts for Westlife Development Limited. Please note that our financial results and investor presentation had been mailed across to you, and these are available on our website, www.westlife.co.in. I hope you had the opportunity to browse through the highlights of the performance. We shall commence today's call with key thoughts from Amit, who will provide a strategic overview, which will -- which shall be followed by Smita to take you through the key business initiatives, its overall operational progress, the impact and response to COVID-19 and the strategic imperatives that lie ahead. Pankaj will cover analysis of the financial performance and highlights during the review period. At the end of the management discussion, we will have a Q&A session. A request to all the participants given the disruption due to COVID-19, members of the management are joining the call remotely. And thus, there could be some lag when responding to your queries. I urge you, therefore, to be kindly bear with us. Before we start, I would like to remind you that some of the statements made or discussed on this call today may be forward-looking in nature and must be viewed in conjunction with the risks and uncertainties we face. A detailed statement and explanation of these risks is available in this quarter's press release, investor presentation and in our annual report, which is available on our website. The company does not undertake to update these forward-looking statements publicly. With that said, I would now like to turn over the call to Amit to share his views. Thank you, and over to you, Amit.

Thank you, Devanshi. Hello, and good morning to everybody. Thank you for joining the call this morning. I hope all of you and your families are safe. These are our full year results, and I'm delighted to share that we have continued to build on our growth momentum and delivered a strong FY '20. We believe we have built the business on the back of a strong long-term strategy grounded in consumer insights that have enabled us to remain relevant to our fast-evolving customers. As a result, over the last 5 years, our SSSG has grown by over 60%. Our revenues have grown at a CAGR of 18.5%, and we have improved our operating EBITDA by close to 400 bps, that's more than 130 bps a year. We started FY '20 on a strong note with great momentum of 18 quarters of positive Same-store Sales Growth. Through the year, we consolidated our position as a one-for-all and all-for-one destination and continued aggressive rollout of McCafé and EOTF restaurants. We have continued to invest in building a strong digital backbone through our apps. We saw significant growth resulting from these initiatives, which continued all the way up to January and February of this year. However in March, the pandemic caused a major disruption in the business. The lockdown led us to temporarily shut all our 319 restaurants overnight and presented unprecedented challenges. But as they say, when the going gets tough the tough get going. In the wake of this massive challenge, we came together as an organization and showed great agility to ensure business continuity with the safety of our employees and customers at the heart of all our efforts. We have always been committed to using our scale for good. And in the wake of the ongoing pandemic, we've ensured that we've reached out to communities that were most impacted by the crisis. We partnered with several NGOs and served safe and hygienic food to more than 56,000 daily wage owners and some slum dwellers across 5 cities, something I feel immensely proud about. Over the years, I have repeatedly mentioned that we have a high-quality of diverse real estate portfolio, long-term lease structures and a strong backward-integrated supply chain that together serve us as a definitive competitive advantage. It now feels almost prophetic, as through these challenging times, it was these spins that provided us the foundation to bounce back quickly and minimize the impact of disruption. We remain confident that our rock-solid foundation, agility and conviction to lead the way for the industry with big bold moves will help us maintain our strong growth momentum in the long term. Before I hand it over to Smita for an overview of our FY '20 and quarter 4 results, I would like to introduce our new CFO, Pankaj Roongta, who joined us at the beginning of this financial year. Pankaj brings over 20 years of experience across sectors and will later take you through the financial details of our FY '20 results. But for now, over to Smita.

Thank you, Amit, and good morning to all. I trust all of you are keeping safe. The COVID-19 pandemic is a black swan event that has disrupted businesses and economies across the globe. However, at Westlife, we saw this as a challenge, as a defining leadership moment, and embraced it to increase agility, take quick decisive actions and empower teams to come out of it bigger, better and stronger with a war cry Serving Happiness with Extra Care. I will cover Slides 4 to 6 by giving context of COVID to our business. At WDL, we started preparing for this crisis even before COVID-19 started gaining ground in India. We proactively stepped up our already world-class safety and hygiene processes and ensured that all our employees were well-trained and had complete access to all protective gears. We also went a step ahead to ensure that similar standards of hygiene were also being followed by our suppliers to give our customers food that was handled with utmost care and safety right from the farms to their plates. Staying ahead of the customer trend, we became the first QSR to launch the innovative contactless delivery service. Simultaneously, we brought alive the combined strength of our delivery, takeout and digital business, quickly increased both the scale and penetration of these formats and continue to serve our customers safely in times they needed us the most. As the government announced nationwide lockdown, we enabled Work from Home for the entire organization, including our frontline restaurant staff. This ensured that close to 10,000 young people of the country remained gainfully engaged through the lockdown, while getting an opportunity to upgrade and upskill. The crisis, in a sense, tested the agility, resilience and versatility of our business model. We entered this crisis with a strong balance sheet and a solid business foundation, but the situation gave us yet another opportunity to revisit our cost structures across the board and sharpen our focus on our operations, something that will give us added firepower to navigate this challenge and emerge stronger. Moving to Slide 8, and getting into details of our financial results, we are pleased to report that we have concluded a good year and registered a strong top-line growth of 10.4% for FY '20 with our recurring PAT surging by 71.9% year-on-year. In fact, FY '20 has been one of the most solid years for us with strong sales and cash flows. Even before the COVID-19 pandemic hit the world, FY '20 was marked with challenges. The consumer sentiment was tepid, and the economic environment was volatile. But we had conviction in our strategy, focused on value, customer experience and financial discipline that helped us deliver robust results quarter after quarter. Despite the macroeconomic challenges, we were able to build momentum across all our performance parameters in FY '20. Through the year, we saw our revenues, profits and margins grow. We marked the 18th consecutive quarter of Same-Store Sales Growth, followed by January and February registering a high SSSG of 12.3%. This provided us the foundation for maximizing operational efficiencies. As a result, both our EBITDA and operating EBITDA jumped more than 150 basis points for year-to-date February 2020. But COVID and the lockdown had a significant impact on the business in the last month of the year as you can see on Slide #10. If we were to exclude the impact of March 2020, you will see that the sustained SSSG over the last 5 years, we have been able to increase average sales per restaurant by more than 62%. Consequently, our operational profitability has also shown significant jumps. Coming to Slide 14, our performance was pivoted by 3 pillars of our strategy. These pillars provided us the strength and the foundation to navigate COVID-19 led challenges as well. Running safe and hygienic restaurants that our customers see as a benchmark helped us reinforce trust and permissibility for the brand. We were also able to leverage the width and depth of our delivery network to maintain business continuity even in the toughest times. We have a diversified portfolio of restaurant location distributed across high street, stand-alone drive-thrus and malls. We are also probably the only QSR to have long-term leases and sales-linked rental agreements. This proved to be yet another competitive advantage and helped us conserve cash. Moving on to key highlights of quarter 4. We entered quarter 4 2020 on a strong note with a focus of strengthening our value platform across day parts and furthering McDonald's as one-for-all and all-for-one destination. That has compelling offering for customer segments and occasions, including snacks, coffee, dinner, dessert and breakfast. McDelivery, McCafé and McBreakfast have been key levers to bring this vision alive, and we continue to leverage them to create brand relevance, get more customers into the McDonald's fold and a widened customer base. McDelivery has emerged as a delivery destination of choice with sales increasing over 6x in the last 4 years. This quarter, we further innovated to launch contactless delivery service that was the need of the hour. This ensures that amid COVID-19 concerns customers were able to get their favorite McDonald's food that was prepared without being touched by bare hands and delivered with all adequate social distancing measures. It is becoming increasingly apparent that convenience channels, such as delivery, take-out and drive-thru will be the biggest driver of business in the foreseeable future. With our 264 delivery hubs, strong strategic relations with 3 POS, along with the portfolio of over 70 drive-thrus, we are extremely well-positioned to cater to this exploding demand. Another feature in our hat is our in-house coffee chain McCafé that is growing exponentially, both in terms of its footprint and revenues. This quarter, we added 5 new McCafés, taking the total number of McCafés to 222. After celebrating McCafé's landmark of serving 10 million cups of coffee, this quarter, we leveraged our Handcrafted with Love campaign to showcase our coffee mastery. We have also been investing significantly in technology to deliver convenience and value to our customers. Our McDonald's app that was launched in last January, now has over 3 million downloads. Access to this kind customer base gives us a strong competitive advantage in the new digital sales that our industry will operate in. In the coming quarters, we are leveraging our technology backbone to provide services like On the Go and take-out to offer more channels, and hence, more convenience to our customers. This quarter -- moving to Slide 23. This quarter, we added 4 new restaurants taking the total number of restaurants across the system to 319 with 90% of them being modern and contemporary in design. 5 more stores were ready, but could not be opened due to the lockdown, which we will open on priority once normalcy resumes. If we take these 5 unopened stores in consideration, we would have added 29 stores in the year FY '20, much in line with our guidance. Moving to Slide 26. Our people have always been our biggest strength, and this quarter, especially, we saw them come forward to keep the McDonald's flag flying high. Our meal heroes made sure that our customers got safe and hygienic food through this tough time. But that's not all, they also helped serve over 56,000 meals to frontline warriors and sections of the community badly hit by the pandemic, including daily wage earners and slum dwellers. I now request Pankaj to take you through the financial highlights of FY '20 and quarter 4 FY '20.

Thank you, Smita. Good morning, ladies and gentlemen. First, I hope all of you and your families are keeping safe and in good health. I'm now pleased to share our financial results for FY '20. The company continued its growth journey of positive SSSG for the past 18 quarters, all the way up to Feb of this year, resulting into a strong financial performance for the year. In fact, FY '20 has a very good year with robust sales growth and a strong growth in recurring PAT. Moving to Slide 29, similar to previous quarters of this financial year, we will be discussing the comparable numbers with you, which excludes the adjustments of Accounting Standard 116, a reconciliation of the same you can find in Slide 29. On the top line growth, registered our robust growth of 10.4% for the year. This translated into 18.5% CAGR growth over 3 years. In Jan and Feb, SSSG was very strong at 12.3%, as stated by Smita, with a year-on-year sales growth of 20.3%. However, due to sudden national lockdown, triggered by COVID-19, we ended with minus 6.9 SSSG growth for the quarter, causing significant disruption. Despite tough Q4, our full and top line growth was driven by our continued focus on delivering value, menu innovations, building occasions, increasing brand accessibility through digital and delivery and enhancing focus on hygiene and food safety. The growth was aided by our diversified real estate portfolio and the omnichannel approach. I'm also very happy to share that we were the first company in the QSR segment to launch contactless delivery that helped us immensely to tide over these challenging times, but also ensuring delivering growth in a very responsible way. Coming to Slide 31 on gross margins. Our continued increase in volumes, improvement in operating efficiencies has been improving our gross margins. Our menu innovations, McCafé, consistently helped us creating more occasions for customer visits. All of these, along with the cost optimization, helped us improve our gross margins by significant 450 basis points over the last 3 years. And for the year, gross margin improved by 171 basis point to 65.2%. And for the quarter, even higher at 208 basis point improvement to deliver 65.6% gross margin. Coming to restaurant operating margin on Slide 32. So along with the gross margin improvement and operating cost efficiencies, it led to an overall expansion of 360 basis points in restaurant operating margin over the last 3 years. For the year in discussion, our restaurant operating margin landed at a robust 14.6% and an increase of 20 basis points despite a very tough Q4. For the quarter, therefore, ROM landed at 10.8% of the sales, driven by the adverse impact of the lockdown implemented in March. I would like to highlight that in Jan and Feb, ROM was going strong at 15.4%. Coming to operating EBITDA. Coupled with the ROM improvement and the efficiencies in management of the management of fixed cost, it resulted in an operating EBITDA of 9.3% of sales, which translates to an increase of 15.8% higher than sales growth, also representing an increase of 44 basis points year-on-year. Overall, the operating EBITDA expanded by 400 basis points over the last 3 years, and our attempt is to move ahead in the same direction. Similar to ROM trend for the quarter, although Jan and Feb operating EBITDA was going strong at 10%, however, due to adverse impact of COVID, the margin dropped to 5.5% during Q4. Coming to Slide 34 on profit before tax. Our profit before tax stood at strong INR 494 million at 3.2% of sales, representing a strong growth of over 40%. Overall, PBT has witnessed 450 basis point increase over the last 3 years on the back of robust sales growth and our operating efficiencies. All of this resulted into a very strong recurring profit after tax, increasing by 71.9% to INR 366 million during financial year '20 at 2.4% of sales, which represents an 85 basis point increase over last year. In fact, our profit delivery was so strong that in 9 months year-to-date until December, the company had delivered whole profit of full of FY '19 by December 2019. Overall, our PAT margins have expanded by 366 basis point in last 3 years. Our Q4 recurring PAT impacted by lockdown was a loss of INR 51 million at negative 1.5% of sales due to significant impact on sales and P&L for the quarter. I would also like to highlight the company has recorded an exceptional item of INR 166 million towards inventory provision in the Q4 of FY '20, which was necessary due to impact of COVID-19 on sales and inventory positions. Coming to cash profit after tax on Slide 36, I'm also happy to announce that our recurring cash profits after tax stood at INR 129 crores, INR 1299 million at plus 19.8% growth over the last year, representing an improvement of 66 basis point over last year. So our cash profits after tax also grew faster than sales growth. And overall, the cash profits have doubled in last 3 years. To summarize, the company has delivered a strong financial performance despite a tough Q4, impacted by COVID-19. However, resilient, competitive operating advantage, operating efficiencies, resulted in strong EBITDA growth and recurring profit after tax for the year. As an outlook for FY '21, our focus is on survival during lockdown and revival as normalcy restores, wherein cash conservation, optimizing operating costs, targeting a healthy balance sheet remains our #1 priority. We also believe that with our heightened focus on providing assurance and convenience to our customers, while keeping a strong control on costs, will help us emerge stronger and bounce back swiftly. With that said, I will now hand it over back to Smita, who would take you through our survival and revival strategy ahead. Thank you so much.

Thank you, Pankaj. While COVID-19 led uncertainties will persist for some quarters, we continue to closely watch the evolving situation and respond with the customer first approach. At the same time, we are constantly taking learnings from other global markets that are closer to the cycle of recovery and studying consumer behavior to realign strategies for the new normal. Our immediate priority for the business is focused on survival and ensuring a strong and quick revival. Maharashtra, Tamil Nadu, Andhra Pradesh, Telangana and Gujarat, that have more than 75% of our total stores are amongst the worst hit states by COVID-19. And yet we have been able to ensure business continuity by activating our convenience channels. What gives us a big competitive advantage is that we are one of the few players to have a significant portfolio of drive-thrus and take-outs apart from delivery as a part of our convenience channel. We have also launched an innovative On the Go service that enables enhanced convenience and assurance for our customers. Aggregating the same, we will have 1000-plus touch points with all our customers. In the last couple of months, we have seen these channels perform phenomenally well. For example, last month, business from drive-thru channel alone in our store in Bharuch was the same as from its dine-in channel a year before. Another example is a store in Hyderabad, which has been breaking its own records for these convenience channels even in this tough time. We had predicted that the pandemic will lead to a huge movement of customers from unorganized to organized food chains as safety and hygiene will take precedence over all factors. These trends validate our hypothesis and give us confidence that we -- as we start opening our stores we will be propelled by a strong portfolio of delivery hubs, drive-thrus and take-out hubs and will recover faster than many others. In the coming quarters, customer assurance, convenience will be the key focus areas. We have already implemented a 42-pointer checklist across our operations to ensure our customers and employees feel safe every step of the way. From a CapEx perspective, we will be reevaluating our investments, but will continue to reimage restaurants and continuously expand our EOTF footprint. We are confident that our diversified real estate portfolio, globally known high standards of hygiene and safety, good food journey and high brand affinity will prove to be significant strength for us. With increased focus on hygiene and affordability, we will see IEO market move towards branded players with high trust scores. So in the new normal, even as the market size may shrink, we see a huge opportunity to increase our market share. I will now hand it over to Amit for his closing comments.

Thank you, Smita. In terms of outlook, we believe we have the foundation to lead a quick recovery in these unprecedented times with a strong balance sheet, focus on driving further efficiencies in our cost structure, diversified long-term real estate portfolio and an omnichannel approach along with a very high customer focus. We have all the right ingredients in place to get back to our previous growth trajectory as soon as the situation moves from panic to caution to the new normal. I believe our growth will be led by our strong convenience platform of delivery, take-away, drive-thru, which contributed to about 50% of sales, even pre-COVID. We have quickly redeployed resources to strengthen our digital platform along with the length -- launch of our new updated delivery app. I feel confident that we will restart our journey to pre-COVID level growth from the second half of the year. Finally, while we are not immune to the immediate pressures of this crisis, we entered this -- we entered the situation better positioned than most. We will continue to make bold moves to consolidate our leadership, set new benchmarks for the industry and emerge stronger from this challenge. With this, I now open up for question and answer.

[Operator Instructions] The first question is from the line of Avi Mehta from IIFL.

I wanted to kind of just revisit your comment that you expect pre-COVID growth rates to commence from second half. Kind of just parsing through this further way. Is the early trend on stores where dine-out has commenced, how has sales recovery being in terms of percentage of pre-COVID? Or how is the ROM then? Some clarity on that would be useful to kind of help us understand your thought. And if you could link it to that thought process as well? And why you expect such a V-shape recovery?

Okay. Avi, I'll just clarify. I said that we will restart our journey to pre-COVID level growth rates from the second half of the year. Obviously, there's too much uncertainty for us to be able to tell you with confidence that we will get there. But we believe that the convenience channels we have and particularly as we realized through this process, the 1000 touch points that we have, including the strength of drive-thru, is really being tested and giving us substantial results. So we feel that once the new normal sets in, and I'm using this from our experiences in other global markets as well, what we are able to see is people move to trusted brands and particularly western fast food, and we feel with the kind of diversified real estate, the convenience channels we have, we feel that we should be able to start our journey much faster than others. So that is really the crux of what I meant.

Okay. Okay, Amit. But if you could then share what the recovery levels have been in the stores that you started? Or has it been too early? Any comments on that?

No, that's all part of the next sort of this quarter. So it is hard for me to give you any data without making it forward-looking. The important thing I can tell you is that we are seeing very good results out of our delivery, obviously, but take-away and drive-thrus particularly are yielding good results. I mean, for the first time, we've really shared that we have 70 drive-thrus, which is not a small number. And particularly take-away is very, very important. Along with take-away, we've launched On the Go as well. So you don't need to -- you can order ahead, and we will come and deliver it outside. So that is what really it's all about. But I cannot tell you where we are heading, but every week we are seeing growth in sales.

Okay. And Amit, do you -- you said that you will continue investment in reimaging and this -- also, you highlighted that you have a very large portfolio. Would you be able to share what is the kind of variable cost structure that we have? Or how do we look at in this environment where a large number of -- I mean, a decent number of months have been lost because of the lockdown. How should we look at margins, which could help us pass-through that?

The problem, Avi, is that, of course, what we've done is we've looked at every single cost. And the whole thought process has been that okay, why the business should work on 20% lower cost and make the same amount of money, 20% lower of sales and make the same amount of money. So we focus very hard on our fixed cost. We are relooking at the supply chain in totality. We are looking at the portfolio of the 320 restaurants also very, very seriously. And that is sort of the best I can give you at this point in time. I feel that FY '21 is a tough one. But FY '22, we are hoping to sort of catch up and get back to the previous growth levels at least in the following year. In terms of margin, it's very hard for me to say anything because everyday we hear rumors that another shutdown is coming. So I feel -- the best I can tell you, I repeat, is that we are trying to ensure that if sales are 20% lower in the new normal how can we still make the same amount of money that we made earlier at the minimum. And the crux is fixed cost. We looked at every single item. We've made a lot of efficiencies already, plus we are working with our landlords, that's the other big thing, and we are looking at supply chain.

And lastly, if I may. Any -- given the situation, would royalty rate there -- would there be a discussion over there? Or how should we look at that number?

So that is -- I mean, 4% is a very, very good royalty rate. And we prefer to work on positive sort of movement in forward things. And there has been a bit of deferment in payment support. But at this point in time, that's not really the focus. Our fixed cost is really the big focus.

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

Sir, my first question is on the CapEx and expansion. 5 stores are ready you said. So when do you see that expansion coming? 10% of the stores are not in the modern format. So will that be now shelved until normalcy comes in terms of growth coming back next year?

Okay. So the stores, once the whole lockdown is completely over is when we should open because there's no point in starting the restaurant and having a rent issue then with the landlord with sometimes there are messages that it will lockdown again, sometimes it is not. So I feel that it will be in the second half of the year. That is point number one. Point number two, 90% modern as per McDonald's definition is a phenomenal platform already. But as Smita and I both talked about in our comments that we will continue with our reimaging and our expansion of EOTF stores. What we found through this COVID and this reopening is that because in EOTF we have those self-ordering kiosks that are very efficient, it allows us to make the restaurant contactless even in store, and therefore, we want to accelerate that. And we believe we do have the capability to do that. But I'll be able to give more color in the next call after our first quarter results.

My next question is on McDelivery. You have done a commendable job of exactly in 4 years. Now 2, 3 questions here. One is 264 delivery hubs, total 319 stores, so do you see whenever these stores open, which are still not having McDelivery, would you start that [indiscernible]? Second is, see unless pizza, which is a long product, which is a hot product, the perception and the reality is burger becomes soft and burger becomes cold by the time it gets consumed. You can definitely work on the insulations a bit, et cetera. So how do you proactively remove this perception and go the next level in terms of delivery? See contactless, et cetera, great initiative, but I think that everyone is now doing. So that is no more a differentiator, you might have done it first, but now that everyone is doing it. So how do you take McDelivery to a number which is close to somewhere in between say pizza and correct number of what you have? You can't reach the 65% number of the pizza chain, but how do you take it to the next level?

See, for us, it's not just about deliveries. You're underestimating the value of drive-thrus and take-away. There are restaurants where our take-away volume is more than the average store volume of the market. And we have built a 2-window system, so if you've seen our restaurants in Colaba and many, many other restaurants, you will see that sometimes if the store is on the first floor, there's a take-away window, and we have something called a transporter that brings product directly from the kitchen down. So the amount of infrastructure we've built with technology, we feel take-away is an amazing, amazing opportunity, especially with the high footfalls that McDonald's have always had. So coming to your first question, the 264 to 320, see, remember, we have a lot of restaurants on highways. There are many restaurants that are in food courts. So sometimes it doesn't make sense to have them do the delivery because we may already be penetrated in that market through another store that covers that delivery area. So selectively, as soon as possible, we keep expanding that. So will the 264 go to maybe 320, no, but will it go to maybe 280, 290? Yes. So that is a continuous effort. Secondly, when it comes to delivery, see delivery, whether it's burgers, pizzas, paratha or anything, delivery is a convenience driver. It's not really about hot or cold food. And there's a jury still out there that even pizzas in the global markets, at least when I hear, there are many sort of pizza players who believe that they should or they should not do delivery. While as far as burgers are concerned, I can tell you from a McDonald's experience that our delivery business globally is in billions of dollars. So we feel confident that, that is not a barrier. And the convenience is a key driver. And therefore, the kind of growth that we've seen of 70%, 50% clearly confirms our view. So I hope this gives you a perspective on the questions you had.

Yes, it was helpful. I had 1 question on the product portfolio. Recently, you come out with a INR 59 McSaver, that's an excellent pricing, in my view, so what is the thought process here? And second, does it dilute your margins -- gross margins?

No. In fact, we've had this INR 59 price point for a long time. It started in April 2019. And you've seen that our gross margins have only gone up. So we have our own methodology on how we manage our product mix to ensure that when we launch value platforms, one, they have to be sustainable. So we look at the margin profile over a 2- to 3-year horizon, so we will not launch something where we don't have the confidence that we can stay the course because we want to give the consumer everyday value in their thinking, and we don't want to change that because that has tremendous value from a consumer point of view. So I don't see that as an issue with margins at this point in time. And this has been around for a while, and we intend to keep that for the consumer, even though there is a process through this time.

And sir, last question, you see commentary of many sectors, they say that work from home is something which is not just a temporary thing. If you see IT companies, they are saying 90% workforce will eventually work from home even longer term. And across sectors, this number can vary. So how does this impact your McCafé and breakfast? Because I think these will be normally most from the offices? And second is, if you see, ice-cream sales for ice cream companies have collapsed. So for your cold products, cold beverages, what can be the near-term channel? Because, again, some show, ice cream, can be that people don't want to fall ill. So they will not consume cold products that much.

No, we have enough of a play between hot and cold beverages, and all these things, we've seen it enough over 25 years, even during SARS. So I'm sorry, but that last part, I feel at least doesn't worry us at this point in time. The other thing is when it comes to McCafé and breakfast, see, we have a diversified portfolio that services across different generators. And when I say generator, this home, work, education, et cetera. In fact, we've been one brand that has not skewed towards IT parks because we believe in multiple generators and not being fixed to one generator. So actually, we are the most, I would say, widespread, multi-focused brand that is not dependent on any one type of generator for our business. Last point I want to make is, finally, we have 230 McCafés. Let's say, we may have 20 stores that are linked towards offices. But we have a whole bunch of stores that are diversified in their generators. So I don't see that as a problem pretty much at this point in time.

[Operator Instructions] Your next question is from the line of Aditya Gupta from Goldman Sachs.

First, little clarification, at least mentioned delivery, drive-thru and take-away contribute around 50% of sales? Is that -- and is it for the fact?

Yes, that is. That is a fact. Yes.

And is that for fourth quarter or is that for the whole of fiscal '20?

As I have said, it's pre-COVID.

Pre-COVID. Okay. And second is -- my call dropped in between, so I don't know if you answered this. How has the performance been so far in April, May on delivery wherever you've been able to start operations?

So we can't share that data because that is a different quarter and that's forward-looking. But I can tell you the day on day, week on week sales have been getting better as consumers are moving from panic to caution, and we feel the next phase is new normal, and when the new normal comes in, we feel, as I mentioned, that western QSRs have to have an advantage, especially if the brand trust scores are high. And with all our convenience channels, we feel we are in a good shape -- good position to address that.

The next question is in the line of Arnab Mitra from Crédit Suisse.

My first question was on the post-COVID situation. So in smaller towns, where the fear is possibly much lower than in Mumbai or a bigger city, are you seeing a direct correlation between what kind of recovery patterns you see in the smaller towns versus the bigger centers? And is it like a substantial difference that you see in the ramp-up there?

Yes. Actually, small towns are doing quite well. And from their volume point of view, they are doing far better than what they used to do.

Okay. And because delivery now becomes a very important component, and you rely a lot on the aggregators for that. Any change you're seeing there in terms of their ability, their network size, their delivery times versus what it was pre-COVID? And any thoughts on that?

No. In fact, it's been phenomenal because we've worked always on a partnership approach and never taken short-term views. Their -- they find us as valuable as we find them. So this partnership is what has got us through the last 3 months, and we continue to do very innovative stuff. You will see that play out quarter-on-quarter. The good news is that because of drive-thru and take-away, along with delivery, we talked about the 1000 channels that the consumers can use us at, we feel that we are quite balanced. And yes, delivery -- all these 3 will continue to play a significant role. And you see us lead along with On the Go business as well.

Sure. And my last question from my side on take-aways. I'm just trying to understand what kind of consumer -- the requirement that take-away serve -- I mean, in the western world, it's basically you get down in a subway on the go, you pick up something. But in the Indian context, is it largely to do with retail spaces or you're in a mall and you take-away? Why I'm asking this question is, is it possible that take-away actually recovers as slowly as dine-in because people are not really out shopping like they used to.

No. I don't agree with that. In fact a lot of people have been dying to get outside food, and they find -- because our takeaway is also contactless and because our take-away is as quick as you would do in-store ordering with -- at McDonald's because it's a global strength that we have with 2 windows in most cases. We think that in many cases, we are seeing that take-away is very nicely substituting the in-store business. And between take-away and deliveries and in the end drive-thru, in many instances, we are seeing sales pretty much at the old levels.

The next question is from the line of Tejas Gutka from Tata Asset Management.

My line got dropped off a couple of times. I am sorry if any of this is repetitive. But I seek your comments on 3 areas largely. First is that despite the 12% strong SSSG that we'd seen in the first 2 months of the quarter, the restaurant operating margin was lowered compared to the last 2 quarters, and I'm talking about sequentially. So if you could throw some light as to what led to this? Second was on rentals. Are you in the process of renegotiating them or moving to a revenue share model? In fact, if you could help us if all the recurrent rent is fixed or a mix of minimum guarantee plus revenue share? And the third is that in light of these COVID-related disruptions, what happens to the 2024-25 targets that we had talked about earlier?

Sure. So in terms of SSSG, I mean, if you look at our presentation, and you look at Slide 33, where we share the breakup of -- Slide 32, actually, I'm just going to that slide. Yes. You'll see that, actually speaking, our quarterly restaurant operating margin was running very strong. It was running at 15.4%, if you just take January and March -- sorry, January and February. Now if you add March to it, the drop is pretty significant because a lot of the fixed cost, G&A -- sorry, G&A is after, but a lot of the fixed costs at the restaurant, whether it's utilities, whether it's even rent because March we were running pretty much the whole month. So the rental relief, if at all, we've got is about 10 days. So I feel this is not the right sort of way to look at it. I feel the important thing is that our trajectory as much as up to February was very, very strong. And we were quite hopeful that we would finish the year as strong as quarter 3. And I'll come back to that if you still have more questions on that. But moving to your second question, so the good news is that as we built a very strong real estate platform, most of the malls, 90% plus, we have a straight revenue share deal. And we always take an approach of partnership with the malls. So even though these 3 months have been very difficult, finally, it's a 20-year relationship because we have 20-year deals. And finally, the end is not there yet. We believe that once we are through all this, even if it is 18 months, finally, we have to work with them as partners. So the good news is that they've been very, very accommodative, at least to us. The second good thing is that because we had only straight revenue share, obviously, that became easier for us to work with our landlords, particularly in malls. On high street locations, we do have minimum guarantees and revenue share or only minimum guarantees. There, again, we work very closely with landlords. And we work not only to try and get support for the 3 months where the restaurants have been closed, but we are working with them to work with us and help us through at least this year, so that things work out for both of us. So it's all still work in progress. Now coming to the year '24-'25. Basically, our Vision 2022 still holds, obviously, the number of stores might become a challenge because to catch up on store openings is always very difficult, especially if we uphold the standards we've used on long-term deal structures, rent increases every 5 years, straight percentage of stale deals in most sort of mall locations. So we will come back to you with more clarity around that in the second half of the year. But the endeavor is to at least try and get margins moving to that number as quickly as we can with the cost structure reduction that I talked about in the previous question. So I hope this answers your 3 questions.

Sure, sir. Just a small clarification on the first one. What I meant was that your Jan, Feb restaurant operating margin at 15.4% was lower than what we saw in Q3, which was 17.5%, and Q2, which was, I think, 15.9%. And both these quarters had a lower SSSG compared to these 2 months.

So it's important to note that February has a couple of days less in the month. And that impacts that. You got 2, March is 31 days, February is normally 28. So that has a role to play. So the Jan, Feb you cannot take us for the whole quarter. Secondly, to compare in our business, it is seasonal. So you have to look at quarter 4 to quarter 4, quarter 3 to quarter 3 and quarter 2 to quarter 2. Because each quarter has a different cost structure and different sales impact. I have said that earlier as well. So it's not new to that extent.

We will move on to the next question that is from the line of Jatin Chawla from First Voyager.

You spoke about rental costs. The other large fixed cost in the business tends to be employee cost. Any effort you're taking to kind of [indiscernible]?

See, in the employee thing, the good thing about us is that we have a very large pool of part-time workers. And the whole purpose of keeping part-time is so that we are able to manage our businesses where -- which is strong on lunch and dinner. While there are certain day parts, where logically, you won't eat that much. So that is helping us in managing our employee costs quite nicely. Obviously, we give a minimum of 4 hours and a maximum of 8 hours. And because I think over 60% of our employees are part-time that gives us unbelievable flexibility. So that is how we are managing it a win-win, both for employees and for us.

So we'll move on to the next question, that is from the line of Pritesh Chheda from Lucky Investment Managers.

Yes. Sir, one clarification, you mentioned a certain number on drive-thru, delivery and take-away as a percentage of sales, actually I missed that number. What is it?

That's about 50% of sales.

And second clarification, you mentioned somewhere that you're trying to achieve a similar profitability at a 20% lower sales as well. Now I was just doing a basic math. At 20% lower sales, you tend to actually breakeven. So if you would help us connect the dot as to what efforts are you putting in to achieve the target that you have set at 20% lower sales and similar EBITDA? Or I'm missing something in this?

No. See, that's firstly an attempt. We are working on the 3 things I talked about. One is we are looking at the real estate portfolio very carefully. And essentially, we are looking at all the stores that are slight laggards and what can we do to deal with that. The second thing we are looking at is all fixed costs, including corporate G&A, which is a very, very big focus for us to kind of see what efficiencies we can bring in there. And the third thing is we are reimagining supply chain, assuming we are starting from ground zero. Also remember, commodity prices have come off quite nicely, and we are looking at what advantages we can take with that as well. So that's the endeavor. I think we'll be able to tell you a bit more in the coming quarters. But the whole idea is we are imagining for FY '21, specifically. We are imagining that sales are going to be lower. Obviously, we pretty much lost the first quarter. So how do we still try and achieve not for this year, but progressively, how do we bring the cost structure down so that at even the 20% lower sales that I talked about, we at least maintain our profitability as a percentage. That's really what I meant, and those are the 3 initiatives that I talked about.

And in today's cost structure at what lower sales we actually breakeven?

No, we don't share all that, but I feel it's redundant because today's cost structure does not exist. It's a new cost structure already.

Okay. And lastly, on the 3 parts, which is take-away, drive-thru and delivery sales, have you mentioned that those 3 parts, which is 50% of sales, is actually at the pre-COVID levels or actually it's growing?

Yes. I mentioned it's at pre-COVID levels, and it's obviously meant to grow.

Is it at specific stores or it's at the company level?

No, I told you company level. Pre-COVID company level, that was the number, and I'm expecting it to grow as things settle down.

The next question is from the line of Sabyasachi Mukerji from Centrum PMS.

A clarification on the kind of part-time staffs, part-time workers. Are those on your payrolls? Are they on your payrolls?

Yes. All are on our payroll.

Okay. And any -- are we doing any kind of restructuring or flexipay or hourly based incentives? Our peers have done, that's why I'm asking.

No. We don't do that. We have incentives on performance and store SOPs and all that, but we don't do variable to that extent.

Okay. Okay. Last time, when we spoke, I think on the business update you gave March end, I think. You mentioned that you're trying to convert the mall stores to delivery hubs. Has that thing worked or the mall store still remains shut?

Malls -- because malls have been shut, it didn't bother us because we have a very strong real estate portfolio around retail locations. So for example, in Mumbai, we have 100 locations, and malls might be 20, 30. So we are very well penetrated. And basically, a few stores have covered the whole city. Remember, traffic is also down. So we've used -- because every restaurant that we opened, we wanted to maximize our throughput. So I think our operations team have managed it quite well.

So basically, your reach has kind of -- for every store, your reach has increased.

Correct.

Okay. Last question on the aggregator side. Any change in commission rates you are seeing over there these days?

No.

Okay. Okay. One last question on the stores. You said that you have a hard look on your real estate portfolio and probably look at the laggards. Are we looking at any store closures this year?

No. That's hard to say at this point in time. I mean we are still working through the details. But in many cases, we are looking at sales that we were doing earlier, the rental structure. So I think by the next call, I might have a little more information on that.

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

So my first question was around, clearly, there's a lot of talk of a long tail of restaurants incrementally going find it tough to survive this crisis. From a promotional or pricing perspective, do you think -- I understand you are a value platform. But would you anticipate that the promotional intensity in the industry will be lower and might sustain lower for a while as we emerge out of this crisis?

Yes. We are hearing that a lot of brands have moved out of value for money, but we will continue with our value for money platform. But -- 1 minute, let me have Smita respond to that.

Yes. So we've always maintained our value platforms, whether it's the McSavers at 59, 69. And these are going to continue because these are our long-term value bundles to our customers. Yes, we are hearing that a lot of players have taken away discounts because currently assurance and availability are bigger drivers. However, we don't see any change in our value for money strategies.

All right. My second question was Amazon entered delivery. They're trying it out at some big stores in Bangalore. Have you partnered with them yet? And do you anticipate any material shift in the landscape in case Amazon decides to scale this up meaningfully?

No. I think we've been able to develop very strong positive partnerships with all the players. And similarly, they find value in what we have to bring to the table. So we will continue our conversations with all such players, including Amazon, and I'm sure we are in conversation currently, and I don't -- it's too early to say if there will be any changes. But they will be a significant player, and we feel it's good for all. It keeps a balance.

Yes. True. That's true. And you said it can help bring down the take rate for the industry.

Exactly.

Right. In my last, it was on -- was related to the fact that now we have a franchising in place for North and East, and we understood because of various disruptions, probably the brand equity suffered in that part of the country. Just wanted to understand between both of you, how do you manage? Are there common expenses, ways to leverage and improve McDonald's brand equity? How do you do your dealings with the parent in this regard? Any incremental updates there.

The company has changed. And I mean, remember, we've been around for 25 years. And pre -- there was a franchisee in the past as well. So we've got good sort of methodologies of working together, and McDonald's also is a very big franchise or company that understands how to work. So, so far, it's all been very positive, and it's coming along well. Cannot get into specific details. But yes, I mean, we were already leveraging our individual supply chain volumes with our big suppliers, and that effort continues on moving forward.

[Operator Instructions] Ladies and gentlemen, we will be taking the last -- due to time constraints, we will be taking our last question, that is from the line of Sankarshan Mehra from Premji Invest.

Just one clarification. So this 208 bps gross margin improvement in the fourth quarter, which is actually better than the full-year number, despite the disruption. Could you please parse out where this improvement is coming from?

We don't share breakups, but essentially, primarily, it's been around pro mix. And sometimes, obviously, if we've done well through the year on volumes, we get some benefits there as well. But primarily, it's got to do with sort of the 3 levers we have, which is raw pricing, product mix and menu prices. But it's primarily product mix and some benefits on raw pricing.

Sure. And does the change in the mix from -- in dining versus delivery -- does that have a role to play here as well?

No. No, that does not -- maybe a small role, maybe. But you see I've been maintaining, even in my past calls that as McCafé sales are growing, as you know, we've been doing a lot of work around product mix. Recently, we had introduced a wheat bun, which consumers really loved, and they were paying a bit more for that. All these things help us with our gross margin. So it's a culmination. You see, it's a building block. It's not 1 event that you can take as a quarter. It's the work that has happened over 5 years that culminates to kind of grow. So that's 1 area where I think we've been able to do a decent job while keeping the value platform.

Ladies and gentlemen, that was our last question. I now hand the conference over to Mr. Amit Jatia for his closing comments.

So I really want to thank you all for joining the call today and for patiently listening to our presentation. If you have any more questions, please do reach out to Devanshi. Thank you, and have a lovely day.

Thank you.