Westlife Foodworld Limited (505533) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Westlife Development Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Devanshi Dhruva from Investor Relations. Thank you, and over to you, ma'am.

Thanks, Neerav. Welcome, everyone, and thank you for joining us on Westlife Development Limited earnings conference call for the quarter ended December 31, 2020. We are joined here today by Mr. Amit Jatia, Vice Chairman; Ms. Smita Jatia, Director; and Mr. Pankaj Roongta, CFO and VP Finance and Accounts for Westlife Development Limited. Please note that our financial results and investor presentation have been mailed across to you, and these are available on our website as well. 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 shall be followed by Smita to take you through the key business initiatives with 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 our participants that given the disruption due to COVID-19, some of the members of this management call will be joining remotely, and there would -- could be some time lag when responding to your queries. I urge you, therefore, to 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 turn the call to Amit to share his views. Thank you, and over to you, Amit.

Thank you, Devanshi. Good evening all, and thank you for joining the call today. At the outset, I wish you all a very happy 2021, and both you and your families are safe and healthy. The year 2020 was unlike any other. It brought with it unprecedented challenges and anxieties. But at Westlife, we have always been guided by the philosophy that in every adversity lies an opportunity. So we took this crisis as an opportunity to test our collective resilience, strength and agility. As a result, we have not just recovered well, but we've also recovered strong with a business that is even more robust and shock resistant. Over the last 25 years, we have mindfully built a strong and more importantly, sustainable business on the back of a solid foundation. This has insulated us against many crisis, such as the one we just faced. We believe that we have been running a marathon, pacing ourselves well and further strengthening our business every step of the way. It is our strong foundation that truly brought forth the key competitive advantages that helps us overcome the crisis and will continue to propel our growth in the new normal. First and foremost, it is our commitment to ensuring exceptional customer experience. Westlife has always taken bold initiatives to meet the ever-evolving consumer needs in a very fast-paced business environment. Be it our experience of the future restaurants or acceleration of omnichannel strategies with the launch of 2 completely new channels, digitally enabled take-out and On the Go within a matter of weeks. We have always been at the forefront of delighting customers. Second is our unique supply chain and our innovative menu offers. We are one of the only QSRs with a strong closed-loop supply chain backward integrated to the farms. Our strong partnerships with our vendors ensure that we offer the best quality ingredients and keep pushing the envelope on menu innovation. A sheer testimony of our supply chain strength is that during the pandemic, when most players were operating on limited menu, we were actually able to launch 2 new products. Third is our real estate portfolio. Our diversified portfolio of real estate, with 20% Drive-Thrus has been phenomenal for our business in the last year. Our foresight to have designated take-away windows to support capacity and scale has also been key to our quick recovery. Our unique revenue-linked real estate deals ensure that we come out of this crisis unscathed. These factors, along with our strong balance sheet and cost leadership enabled us to pivot in the face of this crisis. Today, even at 20% lesser revenue, we are delivering the pre-COVID level of margins. Our new consumer convenience channels are thriving and driving incremental revenue growth even as the situation is normalized. At the same time, SOPs for contactless operations are helping in-store dining build strongly, which is set to further accelerate as regulatory restrictions ease up. With this, we believe we are accelerating fast towards exceeding pre-COVID levels and reclaiming our growth trajectory. I'll now hand it over to Smita to take us through the highlights of our quarter 3 FY '21 results.

Thank you, Amit. Good evening to all, and I wish you all a very happy and healthy New Year. I'm elated to share that in quarter 3 FY '21, we chartered robust recovery across all business parameters. With our convenience channel showing consistent growth and dine-in building up fast and strong, our revenues accelerated to 85% to 90% of pre-COVID levels. We also got back on our growth path and opened 3 new restaurants and 3 more McCafés. As I mentioned last quarter, we have reengineered our business to create a new framework what is really -- to create a new framework. What is really great is that we have been able to lower our breakeven point, even as the business has come back to near normalcy. We have also improved our margin significantly on [indiscernible] and cost efficiency. As a result, our operating EBITDA for the quarter jumped to 10.2% from negative 4.9% in quarter 2 FY '21. In fact, for the month of December, we reported an operating EBITDA of 13.1%, which is similar to Y-on-Y basis despite 20% lower sales. I am also proud to share that we have delivered a positive quarter. In fact, cash profit from this quarter has wiped off half the losses we incurred in the first half of FY '21. As seen on Slide 3, we started our -- sorry, as seen on Slide 6, we started our recovery journey in October when our biggest market, Maharashtra finally opened up for dine-in. We saw the momentum build up rapidly through November, buoyed by festive cheer. And in December, despite substantial regulatory restrictions in several of our markets, we saw a phenomenal uptake in sales with revenues coming back to 97% pre-COVID levels. Dine-in in the month recovered 75% to 80%, even with night curfews and the 50% capacity constraint. Even McCafé recovered over 80% vis-à-vis pre-COVID levels. At the same time, sales from convenience channels zoomed to 120% of pre-COVID levels in the month, again, notwithstanding the night curfews in some of our markets. This gives us confidence that once these restrictions are lifted, our business, including dine-in, will bounce back stronger than pre-COVID also. Our sales continue to be driven by higher volumes at our Drive-Thrus that has been our biggest success during these times, and small towns that have shown remarkable resilience. As of today, almost all our highway stores are even doing better than pre-COVID sales, and the trend is similar for our stores in smaller cities, such as Bharuch, Kolhapur, Nellore and Tirupati. In fact, if we exclude restaurants, which are close to colleges and some mall stores where movie theaters are key generators, we are now close to full recovery. As seen on Slide 7, what has been especially heartening is to see that even as our dine-in has come back strong, our convenience channels continue to grow at a healthy rate. During the month of December, McDelivery revenues exceeded pre-COVID levels while our Drive-Thru revenues doubled over pre-COVID period. Our innovative On the Go platform is also seeing healthy growth month-on-month. We believe that our omnichannel strategy is working quite well and that it will continue to play a critical role in driving incremental business post-COVID as well. Moving to Slide 13, assurance, convenience and access continue to be key pillars of our strategy in the quarter. We restored full operations and launched the new stores with the promise of golden guarantees. We also celebrated key occasions such as World Chicken Day and Children's Month to add some extra cheer to the customer sentiments. In the last fortnights of December, we launched an integral campaign, Sprint to Success, to motivate employees and maximize sales. I believe we have been able to leverage our technology backbone quite effectively to build a strong omnichannel presence. With this, we have been able to create more opportunities for people to consumers. Whenever, however and wherever, we now have 3 thriving convenience channels, Delivery and Drive-Thru are beating that pre-COVID levels, while On the Go is building up fast and strong. We are also seeing a very encouraging trend in terms of average check for these platforms that have exceeded pre-COVID levels as well Y-on-Y quarter 3 FY '20 level. On the Go that was launched just about 5 months back is now operational across 255 stores. This unique service is converting all our stores into digital Drive-Thrus and creating completely new use cases for the brand and serving us a strong competitive advantage. Technology is also helping us in dine-in. While contactless ordering and payment is enabling the customers to enjoy safe dining, our unique McDonald's app with compelling offers across menu options is helping us build frequency. The app saw a 20% surge in active users as compared to quarter 3 FY '20, and its contribution to CCs zoomed by 80% as compared to quarter 2 FY '21. This quarter also marked an important milestone in our journey towards being an even more inclusive brand. We launched a special pack, EatQual, for our customers with limited upper limb mobility. I am glad to share that this has been very well received by our customers and people at large. I will now hand it over to Pankaj, who will take you through the key financial highlights of the quarter.

Thank you, Smita. Good evening, ladies and gentlemen. Wishing you all a very happy and healthy New Year. I'm very happy to report that we have delivered a rock-solid quarter 3. We have been able to successfully build on the momentum that we saw in quarter 2 and accelerated sales when Maharashtra opened up in October. At the same time, we continue to rationalize costs on the back of operational efficiency and lowering our breakeven point. I'm happy to share that among all the challenges, we have delivered a positive quarter for PAT with sales almost recovered to pre-COVID levels at the exit of the quarter. As Smita mentioned, our omnichannel focus has been a key pillar of growth and will continue to play a major role in driving incremental business post-COVID as well. Our Drive-Thrus have been one of our biggest areas of strength. Our Drive-Thru sales peaked during the second quarter and remained elevated when compared historically. Our long-term principles of deploying capital remain unchanged as we continue to grow steadily. We are proud [indiscernible] with McCafés during this quarter. We are now also present at the Mumbai airport, and maybe some of you can visit us there in your upcoming trip. We clocked an overall sales of INR 325 crores for this quarter, a strong sequential growth of 55% over quarter 2, and we exited the quarter with 97% sales recovery versus the pre-COVID level that is versus February, despite the capacity constraints and night curfews in many places. Our gross margins improved by 220 basis points on a quarter-on-quarter basis and landed at 65.7%, which is almost back to Y-o-Y level on the back of volume recovery, product and channel optimization and cost leadership. During this past month, our goal has been to restructure and reduce our operating cost both from short-term and long-term perspective. I'm happy to share that we consistently reduced our average fixed costs by 25% to 30% of the pre-COVID levels, which helped us achieve an restaurant operating margin of 15.4% for the said quarter, hoping a great 12% basis jump on a sequential basis. These fixed cost reductions, coupled with judicial control under discretionary expenses resulted in a substantial reduction of [indiscernible]. As a result, our operating EBITDA landed at $331 million or INR 33 crores versus a loss of INR 10 crores in the previous quarter. The company achieved an operating EBITDA of 10.2% for the quarter and 13.1% in December, which is almost similar to December '19 margins, a trend that we are confident of sustaining as we move towards achieving and even exceeding the pre-COVID levels of profitability in the coming quarters. Hence, on an overall basis, our quarter 3 registered a profit of $82 million on profit after tax level versus a INR 27 crores loss in quarter 2. The cash profit for the quarter at INR 35 crores have wiped off 50% of H1 losses of INR 64 crores. Our focus during this month has been to maintain robust liquidity, contain debt and build a stronger balance sheet. And hence, I'm very happy to share that we were able to optimize our treasury and working capital arrangement, thereby exiting the quarter with an almost zero net debt for the company. The company maintains healthy cash reserves at the end of Q3 on its balance sheet. For quarter 4, our priorities continue to be around driving affordability and convenience and increasing trust complemented with strong fiscal leadership. With the business environment getting closer to normalcy, our business performance has also stabilized to a large extent. And with this, utilization levels have crept up. As we exited the quarter, we are getting closer to normalcy across all our markets. We'll continue to strategically deploy our funds to ensure that we continue growing our business and that our stakeholders are duly rewarded. With that said, I will now hand it back to Amit, who will take you through the outlook for the coming quarter.

Thank you, Pankaj. We are entering 2021 with renewed hope and trust, but not without the learning of 2020. As consumer paranoia turns into caution, we believe that in 2021, we are looking at the biggest ever opportunity for the QSR segment to explode and McDonald's to reinforce its market leadership. Assurance, convenience and access will continue to be the key levers of our strategy, of course, with financial prudence giving us the added firepower. One of the most critical takeaways from the pandemic has been that we are capable of doing more with much less. Even with a major cost rationalization program, we were able to innovate and go very well. Going forward, we will continue to invest in cutting-edge technologies that enhance customer experience and convenience. We will simultaneously be taking all redundant costs out of the system on an ongoing basis, ensuring our balance sheet remains robust and future-proof. Starting this year, we will also resume store expansion, much in line with our earlier guidance of adding 25 to 30 stores every year. As another major learning, we will continue to look beyond short-term tactics towards the longer-term views. We will do what is right for the business in the long run rather than take a myopic view of the business as it stands today. We have a broad chest, and we will continue to invest in the business to achieve our long-term vision and create value for all our stakeholders. Thank you. I now sort of open it up for Q&A.

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

I had a clarification -- clarificatory question. While we have seen an improve -- your given the performance versus pre-COVID, how -- could you share how dine-in and Delivery are doing on a Y-o-Y basis? And linked to that is first week for pre-COVID, if we look at the Feb as the benchmark, has that strength even continued as we go forward because seasonally as well Jan, Feb are typically weaker months than December? So just those 2 questions, please, if you could.

Sorry, just a clarification in your first question, when you asked, you asked about Delivery and what other thing?

Dine-in.

Yes. So we also mentioned some statistics in December. And in December, our convenience channels have zoomed up by 125% plus and at the same time, dine-in sequentially has moved up from 75% to about 80%. So as I again mentioned that both are growing sequentially and completely the convenience channels are giving us incremental growth, and the dine-in is not eating up into the convenience channel. So this is pretty much answer to question one. Second, to me, COVID times, I don't know if there's too much seasonality because dine-in is growing month-on-month here as the regulatory restrictions of capacity and curfew are going to come out. So still, we haven't reached 100% of our pre-COVID levels and [indiscernible] terrible sales. So we are not looking at the business at this point seasonally how Jan, Feb, March is going to do. We are quite confident that in this -- in the quarter 4, we will also show sequential growth.

Just to add to Smita's point, I think the vaccine changes consumer confidence quite substantially. I think that also helps us with the sequential growth.

Okay. And sorry, just -- I think, Smita covered some part of it, but the dine -- the Delivery portion or the convenience portion is not getting impacted. Did I hear that correctly, despite the dine-in coming back?

Absolutely. If you can...

Is there a mix difference that is happening in Delivery that old versus third-party apps or no, convenience continues after that also?

I think both are growing steadily. And as you have seen in Slide 7, you can see the trend of both growing very well.

Okay. No, I thought that it is what you speak, so we kind of take it as fair because not Y-o-Y, which is why I thought I kind of reconfirm.

No, no. Also month-on-month, you can see the sequential growth.

Okay. Perfect. The second question was on the product -- on the margin front. I mean, you have kind of very commendable performance over here. This gross margin, if I look at it, it has happened despite the mix in particular share of McCafé and high-value products being below pre-COVID levels. Is that understanding correct? And if it is, would it be fair to say that as scale kind of comes in, because historically, we have seen scale also helps us deliver or drive some bit of gross margin expansion, so would that be a fair expectation to also building gross margin in addition to the operating leverage gains that would naturally accrue as we move closer and closer to normalization?

Absolutely. So one is the operating leverage, which is linked to your product mix. Pre-COVID, our growth in McCafé sales added to the gross margins as well as our promotions and product interventions. So that's definitely going to continue, and we are very happy to say that even with lower sales, we are pretty much back to our pre-COVID gross margins. And as scale increases, of course, gross margins will increase.

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

A few questions. The first was just trying to check this incidence of bird flu, did that impact our operations in any manner in recent weeks?

Sorry, we didn't get the question.

Bird flu.

Bird flu, yes.

Okay. Yes. So my question was, there are reports of bird flu, so did that affect your operations in any manner over the last few weeks?

Oh, that's the only question. Sorry, I've heard...

No, no, no. There are other questions as well. If you could take this up, and then I can ask the next question.

We are just monitoring it. Currently, we've not seen any appreciable impact of bird flu. But I think in the coming weeks, depending on its intensity, we will be knowing more. But even moving forward, even last time when it had come, customers do substitute and therefore, it's not a major impact or a major derailer, which we will see, which could come with month-on-month growth of our business.

As you know, we have a very strong fish platform as well. And consumers normally switch from chicken to fish or to sometimes vegetarian as well.

Sure. That's helpful. My second question was on your revenue mix. If you could just help us understand how the revenue mix stood between convenience and dine-in prior to COVID, where we have reached in journey today, and now with all the push on technology from your side and then obviously, the changed consumer behavior, how do you see this share settling down? And within this, this new platform of On the Go, how meaningful this could be? Any color compared to whatever your experience, I know it's for very few months so far, but in some of the stores where you have seen a good pickup on -- for this particular format, if you could give some color?

Just to give you a little context. Globally, McDonald's has always been a convenience brand and it has always led to the growth. And if you see in U.S., 70% of the business of McDonald's comes through Drive-Thru. Now in India, pre-COVID, obviously, there was a healthy mix between dine-in and convenience channels because we were still an occasion-led brand. Now what's happening, during COVID, and we really don't know where it's going to settle, use cases are changing. What do I mean by use cases? And I'll give you an example, taking your On the Go comment, is that when people are straggling from point A to point B, they are okay just picking up a cup of coffee or picking up a snack, which has given a new use case for the On the Go channel. So all I can say is it's very early to say where the convenience channels are going to settle down. But the only thing I can definitely say, it's not going to completely substitute dine-in. The occasion -- the celebration occasion or the dine-in occasion will always be here to stay at least in India for the next couple of years and there'll always be a healthy mix between the two.

Just to add to Smita's point, Latika, I feel that the convenience channel are here to stay because the consumer has tasted convenience. And because it is convenient, they will continue to use the channel. So if I'm going to look at our dine-in sales in similar restaurants in September, and as the dine-in sales have increased, we see no sort of reduction in the convenience channel sales. So I feel that as things stabilize, the dine-in business will at least be back between 90% to, in my view, even 100%, right? And the convenience channels are going to stay. So I feel we are going to get decent same-store sales growth because of this reason as well.

Sure. This is very useful, Amit. Just last bit, I wanted to check, you operate across multiple cities, do you maintain the price parity on your portfolio and I mean like the end consumer price between your own app versus the aggregators? Or are there more benefits or promotions or discounts, which are available on McDelivery app?

So we maintain what is called demand-based pricing. And even in the city of Mumbai, prices might not be the same. So it's all done with a lot of consumer data. And depending on the market we are in, it depends on whether we want to grow that market. So typically, when we enter a new city, you take from smaller city, particularly, the purchasing power parity is quite different from Mumbai. And therefore, you just can't...

No, no, Amit. Amit, that I understand. I was just checking on for specific pin code or a particular area, catchment area. Is the pricing on your own app and on the aggregator app, like Swiggy or Zomato, is this same, the end consumer?

Yes, it is.

Okay. So there are no extra promotions, which consumers can get on your own app?

Yes, that is -- the offers are different.

The offers will be different on our app and the offers are different on the Swiggy or a Zomato app because those are offers which Swiggy and Zomato also give to push their own business over and above our offers. So you may see a better offer on a Swiggy or you may also see a better offer on our app depending on what the customer wants.

Okay. Okay. So it's fairly dynamic that way. All right. Okay.

The next question is from the line of Percy Panthaki from IIFL Securities.

Congrats on a good delivery on the margin in these difficult times. My question is on the margins only. And you mentioned that for the month of December, you have come to about 13% kind of EBITDA margin despite sales being low by 20% Y-o-Y. So just wanted to understand one thing. Because of COVID, there are certain cost savings which are going on, be it your travel costs or be it certain rental concessions, et cetera. Of course, some part of these cost savings may be permanent in nature, but some part of it is definitely temporary. So could you give an idea, if I remove this temporary part of cost savings as in if I add it back to your overall cost on a hypothetical basis, then what would the margin come to?

So yes. So in a way we [indiscernible] as we relooked at the new cost basis and started correcting the cost structurally, some part of it was definitely tactical, which kind of has come back in Q3 with higher volumes. An example being utilities or some other operating items. But on a long-term basis, we are seeing that the cost discipline in the commercial structures that we have created is going to give a long optimization of about 20% to 25% on pre-COVID levels. So there is an element of tactical increase that has come back, but a large part of it is here to stay.

So basically you are saying this 13.3 -- 13.1% or whatever that margin you have clocked in December, that margin doesn't have any cost savings which are temporary in nature?

Yes. So I would add to what Pankaj is saying, Amit has always maintained that our Vision 2022 is to be able to get to -- mid- to high-teen operating EBITDA. So I think we are still on that journey. And this year obviously has been a blip where we've actually been able to structurally change a lot and this is not going to take away from our margins going back to pre-COVID levels and improving on top of that.

Yes.

Okay. So the reason I'm spending a little more time on this is, if with a 20% lower sales growth, you are doing a 13% margin. And in this 13% margin, all the cost savings which you have done are sustainable and permanent in nature. Then once this minus 20% goes to a plus 5% or a plus 10%, then the margins could sort of be much higher than this 13% number. So is that interpretation correct?

Yes. Very correct. So what we are seeing is that on the volumes coming back on -- back to pre-COVID levels are even higher, the cost optimization that we are driving will lead to higher margins.

Okay. Understood. So could you give a little more granularity on what these cost optimizations are? I mean, the ones which are permanent in nature and will not come back even after lifestyles normalize, COVID impact is completely gone, et cetera. The permanent cost savings, can you give some examples or some granularity of what you have done on that?

Yes. So I can give you some key pointers there starting from supply chain where we have relooked at our cost structures, not only internally, but also challenging the cost structures of the suppliers because we have -- with most of our suppliers, we have an open book model. We have relooked at our distribution costs but also the cost of operating the store. We have relooked at our all fixed cost structures, not only at the store level but at a head office level. And therefore, the cost optimization is not limited to any particular line item in P&L. It starts from FPD, which is our food, paper and distribution, right till the fixed cost at a head office level. So the cost optimization across the P&L line, such that when we are back to recovery, our tactical stuff will come back but a lot of it will stay back.

Okay. And one small question. Do you see any risk on gross margin from food inflation?

So there are bits and parts that we are keeping, for example, on oil prices, et cetera, temporary disruption in chicken prices. But since we are a forward-looking company and the supplier relationship is great, we always plan [indiscernible] and demand coming from a medium to long-term perspective. So at this point in time, we do not see a lot of the cost inflation hitting our financials in the next quarters.

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

Just a couple of questions. Firstly, on the gross margin again, I mean, despite the lower scale and lower contribution of McCafé, you're already back to your pre-COVID gross margin. So is there an element of much superior mix here? Or have you tweaked any pricing, especially in terms of your combos or offers or reduce some discounts or all which is driving this?

No. See, to give you a perspective, historically also, Westlife has increased gross margin about 100, 150 basis points year-on-year. So therefore, in pandemic, what we have done is really an incremental to the efforts that we always do year-on-year basis because the principle, the design principle of higher profitability is increasing sales, while showing out 100, 200 basis points on the cost from the P&L. Now when you talk about gross margin improvement, it is volume recovery, it is product mix, channel mix, but also cost optimization. So we never say that we have reached to a maturity or that there is no potential to increase gross margin further. So even going forward in further quarters and for FY '22-'23 vision statement, the gross margin will continue to improve as we move forward.

Okay, got it. But there is no reduction in sort of promotions or discounts or so or any price hikes, which is driving this?

No, I think, as you always know that we've never worked on discounting and deals. It's always value pricing. So our value offers have always been there, and they have come back after our dine-in has come in all on MDS value offers, which are there. So they will continue, and we will keep on optimizing that. If you remember for our gross margin, it's 3 levers: raw cost, the product mix, and third is the pricing. And these are levers which we'll continuously use to be able to grow gross margin.

Perfect. Perfect. That's helpful. And secondly, on the costs, again, especially manpower, we have still seen a 30-odd percent reduction Y-o-Y, and you are sort of back to 80%, 85% recovery. I mean, so -- I mean, is there any permanent reductions you've done in the number of manpower or any efficiencies here? So -- I mean, is this kind of run rate is sustainable even when you go back to 100% plus?

Absolutely. I think it comes back from the previous question on cost optimization of how much of it is tactical and how much of it is long term. And what we commented is that there are a lot of efficiencies and cost optimization that we have added to the store operations, right? Such that like quarter 3, quarter 4, when we are 100% operational, how can we make more profit or similar profit compared to pre-COVID levels, and there is a lot of efficiency measures that we are adding on store operations. So you are right, it is around utilities, it is around true labor, it is around all the key levers of store profits.

Okay. Got it. And does your revenue mix also drive this manpower reduction as in more convenience, less of timing currently? I mean, is that also might even driving this sort of reduced manpower?

Yes. So see, Anand, even such is dynamic, it's all about volumes, right? So when the volumes are increasing and the cost is optimizing, it leads to high profitability. So we are not saying that the change in the channel mix will lead to a lower or higher manpower requirements. Change in channel mix leads to volume recovery, leads to better profitability because of better efficiencies at the store level.

Okay. And last one...

So channel mix will not lead to labor reduction.

Okay. Okay. Got it. And just lastly, you've been indicating that on a net debt basis at Q3 end, you've become sort of neutral to positive.

Sorry, what was the question?

Net debt...

Net debt level in Q3 end, it sort of become neutral to positive now?

Yes. It has become -- so the net debt has become neutral at the exit of Q3 with the measures of working capital optimization and treasury performance. So that's something we could achieve coming from there. We entered this year and through there we are exiting quarter 3, and we are hopeful to be at that -- those kind of levels even for quarter 4.

Okay. And Amit, would you like to revise your vision '22-'23 guidance? I mean, margins, you're already back to 13%. Your gross margin should recover. You have 20% cost reduction. I mean you should perhaps be able to achieve that goal.

Yes, I've never -- won't revise it down, and I won't revise it off, but we'll hopefully beat it if everything goes well because we never know when things go wrong in this difficult world. So we don't like to revise it down, we don't like to revise it up, but we'll be delighted if we can beat it. So that is how we see.

And next year, you'll also have the...

Sorry to interrupt you, sir. I request you to come back in the question queue for a follow-up question. The next question is from the line of Nihal Jham from Edelweiss.

Sir, a couple of questions from my side.

Excuse me, can you just talk a little loudly? We're not able to hear.

Am I audible now?

Yes.

Yes. Better.

Sure. On the Go the recovery part, I think on a yearly basis, we've reached an 80% kind of recovery by December at this point. I just wanted to get a sense that to come back to, say, 100% of last year and maybe higher on pre-COVID levels, is it that it's contingent on the multiplexes mainly opening up and the footfalls in malls coming back to normal? Would that be the incremental driver as per you?

No, it's not. I don't think it's only one. I'll tell you, for example, in Mumbai, trains are still not running. So our transit stores definitely are not where they need to be. So multiplexes are an important aspect, colleges is the second and the third will be transits. So if these 3 things come back together, I think we'll pretty much be there.

Sure, Amit sir. Amit mentioned that I think 20% of our stores are Drive-Thru. Just a sense that approximately what portion is located in malls?

So that we don't -- we normally don't even share how many Drive-Thrus, but currently, well, it was convenience, so we did. But -- see we don't share, but I can tell you that we have a very strongly diversified portfolio. As you can see in Mumbai and other markets, we have very strong high-street presence. We have very good highway presence, and we are pretty much present there in malls as well. So I feel it's a pretty balanced portfolio.

Absolutely. Pankaj, just on the cost part, you did detail in terms of the various initiatives that you plan to take. If I look at our cost breakup for, say, FY '20, if I exclude our marketing and royalty, on an average, I think, including the rent, we had cost of around INR 750 crores. So are we saying that structurally, we've taken away INR 150 crores of cost via the various initiatives? Would that be the right number to put approximately for the savings we are targeting?

See, difficult to put and substantiate that number because it's a very different year. It's not like-for-like that we can compare this year versus last year, right? But all I can say is that on percentage basis and driven by our cost initiatives, our profitability at a reduced level even for this year will be equal or better than last year. And also for -- going forward for the future years, it should be going in a north direction. It is linked to both cost optimization and better efficiency.

Sure. Okay. Amit, just last question from my side. I think in the last call, you mentioned and I think this was driven by what even Zomato had said that approximately 25% to 30% of restaurants are currently closed, that was in November. But just a sense, currently, is it that you think the same number is not operational or that number has significantly reduced?

I mean it's a gut feeling because there are so many unorganized restaurants, that is hard to say. I think what I'm reading and hearing and what I'm seeing on the ground, I would put it at about 25% to 30% of restaurants either not operating at all or suboptimally there. So that is my take, but it's a rough number to guide you.

The next question is from the line of Sabyasachi from Centrum Broking Limited.

Sabyasachi from Centrum PMS. I have a question regarding your closure. You closed down around 10 stores this quarter. Last quarter also, you had closure of 9 stores. So how many store closures are we looking forward? Are you planning any further store closures?

None. So Sabya, none for quarter 4 and going forward. This quarter has been 10 and last quarter was 9. And this was part of our network optimization exercise more than anything else. So going forward, there are no closures that we are seeing.

Do you said closures or relocations? Because...

No, these have been closures, but we may reenter some markets as we get better deals in some of these markets.

Okay. Okay. And secondly, on the store expansion. So you opened 3 stores in Q3. So going ahead, I mean, do we still stick to that 25 to 30 stores or will we be aggressive going ahead?

That's what I said in my outlook that we intend to get back to the 25 to 30 openings from FY '22.

[Operator Instructions] The next question is from the line of Mayur from Ohm Portfolio.

Hello?

Yes.

Go ahead, you're audible.

Yes. I just want to continue from the previous gentleman's question, why are we still looking at only 25, 30 stores? Are you -- being optimistic, we've seen through COVID more or less and we are back to pre-COVID levels, probably quarter 4, we'll beat it. Why are we still looking at 25 or 30 stores expansion only? I mean, why would we speed up and do more expansion? We have had competition talking about double the number or more than that?

Well, we've been around for 25 years, and we've seen the absorption of the market. Our philosophy, as I've maintained for the last 10 years since we've been listed, that there has to be a sustainable level of growth. We have seen enough brands, competitors, who talk of becoming $1 billion business and let's say, in 2014, if they had 100 stores. In 2018, they had 60. So my point is that from our point of view, our real estate diversified portfolio, the deal structure of 20 years, 5-year rent increases, the quality of the real estate is all extremely important to us. Secondly, the absorption in the Indian market with only 12 frequency of eating out even in a city like Mumbai, does not justify that. And we don't want to stretch our network into sort of a restaurant in the middle of nowhere just to meet numbers. I think, as you heard when I talked about my comments in the beginning, sustainable growth is what is important. And we've learned with our experience that we have found that at every point in time over a 5-year horizon, we are ahead of most of our competitors. Secondly, you've got to look at us as we operate in West and South, okay? And when you look at us in West and South, we have like take Mumbai, if in Mumbai I have 100 restaurants, my closest competitors can have 25 to 30 restaurants. And this is where -- these are competitors who've been around for a long time. So I think it's a much longer question. I think it's more a one-on-one that we can separately explain to you our philosophy. Another point is that we have every single restaurant that we've opened, we do something called a trading area survey. And we know precisely in detail, when we build a new restaurant, as to what the impact on existing restaurants, and we are able to predict our sales with quite accuracy. And we know the impact of opening in the wrong location as well. So like I said it's a longer conversation. And in our view, until the per capita income does not change, until GDP growth in India does not change, we feel this is the sustainable level at this point in time, INR 5 crores here and there.

Okay. Great. Sir, just one more...

I request you to come back in the question queue for a follow-up question. The next question is from the line of Manish Poddar from Nippon India Mutual Fund.

Yes. Manish from Nippon AIF. So just wanted to understand one thing. On the Go the CapEx part, so let's say, the new stores which you opened, is the construct or let's say, the CapEx per store relatively different now?

Sorry, the CapEx per store, it's the same $25 million to $30 million.

Yes. The average CapEx per store is between $25 million to $35 million, yes.

And this is what we intend to go, let's say, for the new stores, which we rolled out. This is the same number or, let's say, the size of stores will remain largely similar?

Absolutely. We believe so, as I maintained earlier, 25, 27 [indiscernible] 3,000 and the investment varies from $25 million to $35 million depending on EOTF, McCafé and things like that.

The next question is from the line of Siddharth Bhattacharya from Anvil Wealth.

A couple of them, actually. I just wanted to understand how do you measure capacity and capacity utilization at a store level?

So we are -- I mean, I've said this before that our kitchens are designed for very large capacity. So there could be a restaurant doing INR 15 crores a year, and it could be a restaurant doing INR 3 crores a year. And essentially, that does not change the kitchen layout much. In terms of seating, we typically like 80 to 100 -- I mean, 80 to 100 because of all the channels we have...

Hello? Sorry, sir, you're not very audible. Hello?

Yes. So what I -- so I talked about kitchen capacity, which has the capacity to do between any -- the same kitchen can do INR 15 crores, and it could do INR 3 crores to INR 4 crores. So we don't think capacity is a constraint as of today. Similarly, in the dining area... Sorry, hello?

Yes, yes, yes.

Yes. Secondly, in the dining area, as I said, typically, we like 80 to 100 seats. And because of all the convenience channels, again as restaurants with the same size to do INR 10 crores to INR 15 crores versus INR 3 crores to INR 4 crores. So we don't think that there is a definite capacity. Like a store of 1,100 in a food court would also do INR 12 crores, INR 15 crores, average value. So that is what a McDonald's design is.

Okay. So certainly, we are nowhere near more peak capacity utilization in most of your stores, right?

It depends again. So yes, so what we do is we keep debottlenecking. And like I said, there are stores we have that do INR 15 crores and more. And all it needs sometimes is a balancing equipment, like maybe it needs 2 coffee machines if the coffee demand is very high. So it is very minor. It's not a big deal.

Okay. Okay. Got that. My second point is on your raw material sourcing. So -- see, some of the benefits that you get from time to time are actually based on the raw material prices and some of them are based on your sourcing capabilities, which are longer term in nature. So in terms of your sourcing capabilities, what kind of benefits have you witnessed during COVID and going forward, if you can guide in terms of that?

So we said that in India, we have created a supply chain that's backward integrated to farms. So this is working with our suppliers. These are all long-term contracts. And as Pankaj mentioned earlier, many of them are open book. And what I mean -- what we mean by open book is that we are able to see the entire cost structure and we are able to work with them. So as Pankaj mentioned, we went into the cost structure of the supplier in a lot more detail and bring efficiency at our end, but we were able to work with the supplier to bring efficiencies there. That is how we got the gross margin to where it is. But this process is ongoing. While I cannot give you a rupee number or a percentage number, but we do expect gains to continue over the next 1 to 2 years.

The next question is from the line of Devanshu Bansal from Emkay Global Financial Services.

Sir, I have 2 questions. Number one, Delivery on a Y-o-Y basis has recovered to only 90% Y-o-Y. So what is leading to a slightly slower recovery in this channel? And if you can just highlight what has been the trend through the quarter?

I don't think we mentioned the Delivery alone anywhere has recovered to only 90%. We've mentioned that our convenience channels and in convenience channels with the culmination of Delivery, On the Go, Drive-Thrus and take-away, and that has grown to 127% of pre-COVID levels. If you take Drive-Thrus, our Drive-Thrus have grown 200% Y-on-Y. Even our Delivery has surpassed [indiscernible] growth. So while we don't give break up...

Actually, I was looking at your presentation itself, where you mentioned that December '20 sales recovered to 110% of pre-COVID levels for Delivery and 90% Y-o-Y recovery.

So Y-o-Y is...

December to December, and in that in October, when I take the full quarter, the convenience channels have grown 127% of pre-COVID levels, which is [indiscernible].

Okay.

So I would say -- I mean, I would say, Delivery has come up pretty much as per our old pre-COVID levels. And in fact, if I take all the convenience channels, they have surpassed pre-COVID levels.

And pre-COVID is temporary.

And our whole narrative is that it's not only about Delivery, it is about convenience channels. And McDonald's have always been a convenience brand with our Drive-Thru portfolio with all the other business. These are all businesses which used to exist even pre-COVID levels. And with COVID, these channels all have grown and new channels like On the Go have come into play.

Right. Just lastly, if you could highlight what are the key initiatives that we are taking to increase traction on our own app versus the third-party aggregators?

So see, there are multiple levers which we are using, whether it's SEO, SEM, CRM. So I can't say one, but there is a healthy growth of our own channels. Because I think our brands, which the consumer trust, these are brands which are being used. And whenever the consumer is searching for brands or a burger brand, definitely, McDonald's comes on top. And as a result, we have seen a very healthy growth of our own channels during the COVID times. And Swiggy and Zomato, obviously, to their own efforts are also growing, which is giving us organic growth on their channels also.

Ladies and gentlemen, due to time constraint, that will be the last question for today. I would now like to hand the conference over to Mr. Amit Jatia for closing comments.

Yes. Thank you very much. I really appreciate everybody joining the call today. If you have any more questions, please reach out to Devanshi in Investor Relations. Thank you. Have a good weekend. Bye.

Thank you very much. On behalf of Westlife Development Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.