Westlife Foodworld Limited (505533) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Westlife Development Limited Q4 and FY '21 Earnings Conference Call. [Operator Instructions] And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Devanshi Dhruva, Manager, Investor Relations. Thank you, and over to you, Ms. Dhruva.

Thanks, Nirav. Welcome, everyone, and thank you for joining us on Westlife Development Limited earnings conference call for the quarter ended March 31, 2021. 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 on 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 participants, that due to the disruption due to COVID-19, members of the management are joining the call remotely, and there could be some time lag when responding to your query. 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 the 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.

Yes. Thank you, Devanshi. Good evening, everyone. I hope all of you and your families are keeping safe. FY '21 was a challenging but inspiring year, a year that redefined resilience as the world fought an unprecedented pandemic and its economic fallout. For us, it was marked by the commitment and the conviction of our Westlife family that helped us turn this adversity into an inflection point for a new, better, bigger and bolder McDonald's. We used this crisis to consolidate our trends. We leveraged our diversified real estate portfolio, long-term rental deals and less strategic rental renegotiations. Our backward integrated closed food supply chain and the world clock trading processes ensured business continuity in what I can call the most difficult and challenging times for the business. We also did some exemplary work on the cost leadership front. The cost structures we have today are much stronger and resilient to volatility. At the same time, we created new competitive advantages by tapping into our robust technology and process backlog. We launched new products, new channels and helped consumers create and adapt to new ways of consuming us through Drive-thrus and On the Go. Through the year, we navigated 1 million uncertainties and came out stronger with all our 10,000 people with us. We have been seeing our efforts reap great results. As we speak, our brand trust is rising consistently, making us the preferred customer choice in uncertain times. Convenience is performing robustly, aiding incremental revenue growth and omnichannel strategy has come to life in a strong way, making us accessible to customers wherever, whenever and how they prefer. The business recovery has also been phenomenal. The last 2 quarters of the year have helped us recover the losses of the first 2 quarters of FY '21. We entered the year with a strong balance sheet, and despite all challenges... [Technical Difficulty]

Participants, please stay connected, line for the management got disconnected. Ladies and gentlemen, please stay connected while we reach for the management back to the call. Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Sir, you may go ahead.

Yes. A robust revenue recovery in the quarter continued to be driven by our Convenience channels, this aided by smart cost control, bolstered our margins. I am happy to report that with the exclusion of an exceptional cost, our operating EBITDA for the quarter stood at a solid 11%. We closed the quarter with a PAT of INR 21 million and a positive cash flow of INR 322 million. With this, we believe that we are entering the new year with a good momentum and a balance sheet that puts us in strong stead despite the challenges that lie ahead. The start of FY '21 was marked by the onset of the pandemic. The national -- nationwide lockdown that was announced on March 23, 2020 extended well into the first half of the year. During this time, we were guided by our survival strategy, pegged on brand trust, enhancing Convenience, cash conservation and maximizing our supply chain strength for business continuity. We started deploying a revival strategy in the second half of the year as the restriction started easing and customer confidence started to build back. We saw strong and quick recovery across platforms. Our Convenience platforms, namely Delivery, On the Go and Drive-thru, along with the Golden Guarantee promise and customer experience, helped us build back revenues on a sustained basis. As a result, we saw staggering improvements across the business parameters. Our revenues more than doubled in the second half of the year. I am happy to share that strong recovery in H2 FY '21, coupled with cost leadership, helped us wipe away all the losses of the first half. Despite many regulatory headwinds, our sales growth was steady through the year, culminating in more than 106% recovery in this quarter. This was aided by close to 90% recovery in dine-in and accelerated performance of our Convenience channels that clocked a solid 42% growth over last year. In fact, McDelivery reported its highest ever sales in the month of March. Our Drive-Thru channels reported an 81% growth in the quarter, and On the Go grew 3x over the last 3 quarters. We are seeing our out-of-restaurant channels that primarily include Drive-Thru, Delivery, On the Go continue to perform robustly. This gives us great confidence that Convenience is here to stay. And once dine-in recovers completely, we will be pegged for exponential growth. We believe we have pivoted to become a destination that serves customers seamlessly whenever they like, wherever they like and however they like. Our other big win was cost leadership. With great support from our vendors and partners and by maximizing our operational efficiencies, we were able to bring down our fixed cost significantly. This has given us added firepower and helped us strengthen our financial performance further. Moving on to the highlights of this quarter. This quarter reflected a 5% to 7% growth in the IEO category and a shift in the distribution. Western fast food or what we say, the organized sector, has grown by 18% due to customer preference for hygiene and assurance. Within this, we have gained share both in WSS and IEO. This has reflected in the SSG for the quarter at 10% and future potential to capitalize on. Assurance and Convenience remain the key tenets of our strategy. We continue to tap into key occasions to keep the excitement going. Our efforts to promote premium McCafé beverage also showed great results. Convenience continued to outperform through the year. Our unique McDonald's app has been a value-based platform that has consistently helped us build guest counts and engage customers. More and more customers are taking to the app, and we have seen the app download surge and active users increase by over 50% year-on-year. Finally, I am glad to report that after a COVID-induced blip in 2020, we are now back on track with our expansion plans, much in line with our Vision 2022 commitment. This quarter, we have opened a flagship store at the departure terminal of T2 International Airport in Mumbai, while 4 to 6 new stores are under development as we speak. In an effort to ensure safety of our employees and customers, we are also aiding vaccination of our crew. With this, I now hand it over to Pankaj to take us through the financials. Thank you.

Thank you, Smita. Good evening, ladies and gentlemen. I hope you and your loved ones are keeping safe. We delivered a strong quarter 4 and have entered FY '22 on a much firmer...

Sorry to interrupt you. Sir, your audio is not coming clear. May I request you to speak little louder.

Is it better now?

Yes, sir.

Okay. Thank you, Smita. Good evening, ladies and gentlemen. I hope you and your loved ones are keeping safe. We delivered a strong quarter 4 and have entered FY '22 on a much firmer footing. We have been able to continue the strong quarter 3 momentum in accelerating sales and profits while rationalizing costs. Let me now give you highlights of our key performance indicators. We clocked sales of INR 3,576 million or INR 357.6 crores for the quarter, which is a 6.3% growth on a Y-o-Y basis despite regulatory headwinds, lockdowns, curfews and capacity limitations across the market. We also registered a same-store sales growth of 10.5% for the said quarter. Sales were driven by an almost complete recovery in dine-in and an impressive 142% recovery in our Convenience channels. Convenience has been one of our biggest growth drivers, especially MDS and Drive-thrus. They have grown by 26% and 80%, respectively, over quarter 4 of last year. They helped us not only in creating new occasions for our existing customers, but they have also fostered new ways of consuming the brand and helped us recruit new customers. This acceleration in sales, coupled with cost leadership, has led to a 93 basis point jump in our gross margin that landed at 66.5% for the said quarter. Throughout the last year, we have been restructuring and reducing our operating and fixed cost. As a result, and backed by volume recoveries, the restaurant operating margin touched a 5-year high of 16.4% for the quarter, a whopping 527 basis point growth on a Y-o-Y basis. This is truly representative of all our cost efficiency measures that defines our cost leadership. Fixed cost reduction, layered with judicial control on discretionary expenses, resulted in a significant improvement in our operating EBITDA. It stood at INR 325 million for the quarter, up from INR 196 million same quarter last year, resulting in an operating EBITDA margin of 9.1% for the quarter, a solid 65% growth on a Y-o-Y basis. We also booked onetime costs in Q4 that are pertaining to salary reinstatements and special incentive to our McDonald's family. We are happy we are able to give back to our employees for their hard work. Excluding this onetime cost, our operating EBITDA stands at 11%. We believe we will be able to continue our robust performance in FY '22 once all the channels are operational again. All the above resulted in a net profit of INR 21 million versus a loss of INR 167 million in the same quarter last year. Our cash profits for the quarter stood at INR 322 million. What is important to note is that our cash profits of Q3 and Q4 together have helped us wipe out 100% of the losses of first half of the year. And hence, we delivered cash profits of INR 24 million for the full year on a lower sales base versus last year. Our focus throughout the pandemic has been to maintain our robust liquidity position, contain debt and build a stronger balance sheet. I'm happy to share that we were able to optimize our treasury and working capital arrangements, thereby reducing our net debt significantly. We are almost a net debt-free company end of quarter 4 and have healthy cash and cash equivalents on its balance sheet. As we step surefootedly in FY '22, our priorities continue to be fiscal discipline and flexibility, accelerating our convenience channels and expanding the business. Despite unprecedented challenges, the last year has also shown us some great opportunities. We have clinched some really attractive real estate deals and have a strong pipeline of network expansion projects for the coming year. With that said, I will now hand it back to Amit, who will take you through the outlook for the coming quarter. Thank you.

Thank you very much, Pankaj. Before I go to the outlook, I'll just take a minute to summarize some of my opening comments. Basically, we have seen our efforts reap great results last year. As we speak, our brand trust is rising consistently, making us the preferred customer choice in uncertain times; Convenience is performing robustly, adding incremental revenue growth; and omnichannel strategy has come to life in a strong way, making us accessible to customers wherever, whenever and however they prefer. This is what we were able to achieve last year. The business recovery overall has been phenomenal. The last 2 quarters of the year have helped us recover the losses of the first 2 quarters of FY '21. We entered the year with a strong balance sheet, and despite all challenges, I'm happy to share that we've exited the year with an even strong one. I'm pleased to report robust year-on-year growth across key business parameters, including revenue, margins and profit. In terms of the future and the outlook, of course, uncertainty and volatility are the order of the day and will continue to persist. But we are more confident than ever about our strategy, and we'll continue to invest in brand, technology and growth with a sharp eye on the cost. We believe that we've been able to future proof the business to a large extent. We believe as normalcy returns, we will be amongst the first brands to revise on the back of high brand trust and a strong convenience brand. Further, as we saw in the last quarter of this financial year, as dine-in builds back, coupled with our strong out-of-restaurant channels like McDonald's delivery service, Drive-thru, On the Go and takeaway, we are well poised to deliver strong SSSG. We have cracked the code on being able to do much more with much less. Our new leaner cost structure will help us deliver strong profitability and insulate our balance sheet while navigating challenges of the second wave of COVID. We are back on our expansion plans and will continue to open new stores in strategic locations. We will also invest in new cutting-edge technology solutions to enhance the omnichannel experience of our customers and strengthen our rock-solid foundation. With all arms in our arsenal, we are confident of delivering great value to all our stakeholders. Thank you. And with this, I open up for Q&A.

[Operator Instructions] The first question is from the line of Manoj Menon from ICICI Securities.

Trust all are well with you and near and dear. I have 3 questions, Amit. I'll take probably the first one at a time. So when we look at the last 12 months, credit to you and team for managing very efficiently. But how about the next 12 and 24 months? Could we expect a faster than even the 15-odd restaurants, which you open? What I'm just trying to understand is, given a strong balance sheet, given the opportunities possibly in real estate and in the general market, is there a case for a faster expansion in '22 and '23? Of course, assuming that, let's say, there is a steady state situation in a few months' time. That's question number one.

Okay, sure. Basically, the first good news is that, obviously, we've entered wave 2 much stronger than we were even in wave 1. Not only have we learned a lot, but the customers have learned a lot as well. So for example, in wave 1, in the first instance, consumers were even little scared to order delivery and to allow anybody to even come and leave the delivery at their doorstep. While when we entered this particular wave, I think that particular business has remained pretty steady. Even the government, to some extent, has learned and therefore the clarity is slightly better than how it was in wave 1. Now having said that, as you've heard, our cost structures are pretty robust. So to that extent, we are entering pretty strong. Obviously, we put our business plan together for FY '22, and our thought process was very strong and a very sort of high opportunity growth business plan. That's what we sort of intended to do. So for example, we currently have 5 to 6 restaurants underground break at this point in time and we don't intend to stop restaurant growth. We intend to continue with it. I do agree with you that I do believe that real estate is a bit of an advantage for us. Therefore, when people would ask me, why are you not at the airport? You will see that it's a very difficult time. But with a pretty good real estate, long-term deal structure, we've been able to open at the international departure, and even though flights are less, we are doing quite well there. So yes, with a strong balance sheet, our idea is to go ahead faster. We will be opportunistic. We will open in locations that we were earlier finding difficult, and our original plan was between 25 to 30, 35 restaurants was what we were thinking about. Currently, I'm not sure how wave 2 will go. We will not change our plans. We hope to be able to stay with these numbers I've talked about. But if we've lost this quarter, we may have 5 stores here and there. But thematically, we want to go aggressively and build restaurants. This is the time to do that with the kind of balance sheet we have.

Absolutely. The second one is actually on the situation at this point in time. Okay. Let me put it this way. So what we have seen in the past is that the QSR industry probably had a higher linkage to new consumer recruitment with the general well-being, the consumer confidence, and of course, the PHC growth, the GDP growth, et cetera. So I'm just trying to understand, from a plan B point of view, assume for a minute that if there is a distress in the economy, I hope it doesn't really happen and there will be enough interventions like what happened last year. I'm just trying to understand, what's your thought process or anything which you are thinking of improving the value proposition, which you are anyway are as a brand? I'm just trying to understand you prepared us for a plan B, so that the -- it's probably a smooth landing in such a scenario. I'm going strictly by the empirical evidence of the last 10 years of the available data of India QSR industry, where despite the high penetration opportunity, I've noticed that this industry goes through significant volatility versus the opportunity.

Sure. I mean, see, firstly, that is because it takes -- when you are building a country like India, it first takes time to get the supply chain in place, get the ecosystem in place, and really, the growth I have seen come only from 2010 onwards. So effectively, if you ask me, we are still very nascent and we are touching -- even the consumers are still discovering what this is all about. So that is sort of point number one on a broad basis. Now a major thing has happened the way we see it. If you think about QSR as an industry, it is an impulse business. And impulse business is driven by convenience. And this has nothing to do with India, this is how the sector works anywhere in the world. Pre-COVID, even a brand like McDonald's was occasion-led. And we were driven pretty much by occasions where consumers would come and use. What COVID has done, it have pivoted the brand towards convenience. And what we are seeing is when sales -- in-store sales were 0 to when in-store sales went all the way up to 70%, we did not see any dent in the business of convenience, all the 4 channels, which is takeaway, Drive-thru, On the Go and delivery as the in-store business built back up. So broadly, I feel that we've become on an occasion, we are moving towards becoming a convenience brand, which bodes very well for us. Secondly, as you look at the structure of the industry, what has happened is we get -- we do a lot of research, right, from 1995, '96, so we have a lot of empirical data, that eating out frequency in the last quarter went up by about 5%. While Indian fast food was a bit flat, Western fast food grew quite nicely. And we feel that the shift towards organized play is going to continue to happen as we move forward, and all that bodes very well for the kind of business that we are in. So I believe that while we believe in operating in a volatile world, I cannot predict exactly when wave 2 will end and wave 3 will come and so on. But I feel that with the new cost structure, with the new pivot towards convenience, with all the channels now working at full play, we will be amongst the fastest to recover. Broadly, that's the best I can say for now, Manoj.

Understood. Understood. And if I maybe, Amit, maybe this is relevant, 3 or 6 months down the lane as well. Anything from the global MDPI system of learnings, consumer behavior, et cetera, which is relevant for India? That's why I said, if it is -- probably, if this is too early a question, I'm happy to discuss this 3 months down the line?

No, I mean, broadly, they keep sharing all the data. They do a lot of research, even including India. So we are seeing a lot about how consumer behavior is. So we have tons of data around that, Manoj, that is the sharing. There's a lot of support, conversations. There are countries that are ahead of the curve, like particularly as seen in Korea, Taiwan. I would have mentioned that last year as well. And fortunately, the system shares all that with us very openly. So we feel that we are able to foresee what is coming a bit better than anybody else. So that's how we are sort of capturing that data and using that to our advantage.

Amit, that's what I'm just trying to get -- it's not a guidance as such. But we're just trying to get -- if you could share some of those learnings, maybe -- may or may not be relevant for India. But anything which could, let's say, for example, change your trajectory materially in the medium-term from the global learning? And I'll come back in the queue.

Yes, we'll come back to that in a bit. I think we -- it's better to have a sort of separate call around all of that because that's too granular. But let's see if we can create some call where we can talk a little bit more about that.

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

Just one particular question from me. If you can share what will be the mix of convenience and dining in Q4? Once that dining is now almost normalized, how is the mix settled from last year? It used to be more like 50, 55 convenience and then dining now. How is that mix officially looking once things normalize?

Sure, Anand. So basically, if I were to look at kind of January as a benchmark, we were almost 100% of pre-COVID sales. So that was good news. In that, our convenience channels were almost 60-ish percent, 55% to 60%, and in-store was about 45 -- 40% to 45%. Roughly, that was the sort of breakup on that. And in stores was still at only about 70% of pre-COVID. That may also give you a bit of color on this.

Okay. So in Jan, you were saying you were 100% of pre-COVID, but the dining was more just at 70% and contributing 40%, 45% overall?

Correct, correct, correct. Absolutely.

Okay. And does this have any margin implications in that sense once convenience goes up? I mean, is this a more profitable channel or a platform versus dining?

See, I'll -- I mean, I think our numbers of the last quarter itself define everything. I think we have reset our business model over the last year. That's what gives us confidence, and we have talked about it through each quarter as we went. Our restaurant operating margin, I think, we are amongst the few companies that actually break out our restaurant operating margin so clearly. And in the last 5 years, this is the highest restaurant operating margin that we've been able to deliver. So I'll go back to my philosophy. As I've said this before, my philosophy is wherever consumer business is happening, we have to make that business model work for us where consumption is happening. And therefore, as the pivot has happened, because globally, as I mentioned to you, we are a convenience brand. As this pivot has been accelerated, we've been able to adapt and adjust our business model to make it work. You might also recognize, right, from day 1, I've always said that it's about partnership with the 3 POS. We don't see them as a threat in any way. We feel that as long as we are able to build a partnership, it becomes very powerful. So we -- I think we have got our business model towards the new reality post-COVID as well.

Got it. It's quite visible in your numbers, noted. And then just last question, as things have normalized, have you seen any changes in the average order volumes? I mean, I would assume earlier it has gone up and now it would have little bit normalized and the number of users would have gone up. I mean, any color you can share on this?

Yes. So what we've seen is that when there is consumption off premise, outside of the restaurant, generally, the average set tends to be higher. So because we are still skewed, and we hope to stay this way in a way, even if in-store builds, we expect same-store sales growth to come, obviously, the average check is a bit higher than in the past. And I think this trend is going to stay. Because some of our strategies moving forward will also play into that. And you will see that evolve over the next 2 to 3 quarters.

Perfect. And this is just last one, if I may squeeze. Any guidance on the store expansion? I mean, you're back to the 25, 30 that you can be looking at.

So the plan was built around 25, 30. As I mentioned earlier, this quarter, obviously, there's no movement. We cannot construct. So we've lost this quarter, although we have 5 to 6 restaurants in ground break. So the intent is to stay within that. Maybe it's 20 to 30, maybe not 25 to 30 as we had hoped. So it will be a few restaurants here and there. But the intent is to get back to the FY '20 growth plans and more.

The next question is from the line of Percy Panthaki from Indiainfoline.

Congrats on a good set of numbers. My question is more on trying to understand the margins going forward once the COVID impact is completely gone. So I understand that your dine-in is around 90% normal, and dine-in is about, let's say, 45% of your total sales. So once that normalizes, your total sales goes up by 500 bps and your EBITDA margin -- or your gross margin is, let's say, 65%. So out of that 5 percentage points, around 3.5 percentage points flows down to the EBITDA level. So is this calculation correct? Or am I missing something? Are there certain discretionary costs which are not yet fully sort of normalized in Q4? And when the COVID impact is completely gone, that will come through and therefore, this INR 3.5 is not totally accretive and it will only be partially accretive? Any kind of sense you can throw on this very rough calculation that I'm making?

No, I mean, I'll try and share it in the way I understand it. Essentially, we -- I don't see shift in dine-in and dine-out anymore to cause any margin impact on us. As I mentioned earlier, I think we've got our business model reasonably set around where the business is today. So that is point number one. Point number two, we have been able to optimize a lot of the cost, and I think a lot of it is here to stay. Important thing is it is about average unit volume, okay? And if you recollect, I said earlier, that with the new business model, even with a slightly lower sale, we'll be able to deliver robust margins, which I think we have in this quarter. So in the future, margin flow-through will continue to come through average unit volume growth. In summary, that continues to stay as it is. And I don't see anything changing because of a shift in the way we are selling to the consumer. Neither do I think that when COVID is fully gone, the business model will change substantially from where it is today. Of course, there are headwinds around inflation and -- as we all know, but I feel that, that's a constant challenge in India. I've been saying this over the last 5 years. And therefore, we are always kind of thinking and being prepared for that. So this is at least how I see it.

I think I didn't express myself very clearly. I was not talking about any shift from dine-in versus convenience or vice versa. What I was saying is that the normalization in your dine-in business, is to the extent of 90%. Now if we say that, that is completely normalized from 90% to 100%, that's about a 10% bump up. And since dine-in is approximately half of our business at an overall sales level, that will be a 5% bump up. And 65% of that is your gross margin flows directly to the bottom line. That is what I was talking about.

Fair enough. I mean, you are..

5%.

So you are asking the same in the same way only. So effectively, what I'm trying to say -- okay, I'll put it this way. That as in-store builds, in-store is currently about 70% pre the second wave. As in-store builds, I expect same-store sales to go up, which is the 5% you talked about. And number two, as in-store builds -- and sorry, as sales build, same-store sales, yes, the flow-through will come to the bottom line, which is what I was saying that as average unit volume goes. So I was just saying it in different ways. So you are absolutely right. That as in-store builds, I do expect same-store sales to grow. And as same-store sales grow, I do expect the margin to flow through to the bottom line.

Okay. So the Q4 costs that I see, which are reported in your Q4 results, they are fully restored costs. There is nothing that you're holding back. I mean, proper reengineering of cost is one side. I mean, obviously, that is permanent. But there is no temporary cost holdback, which is there as part of your Q4 margin. Is that understood?

No. No. No -- yes, you're right. You're right. In fact, we've, in fact, declared a bonus for all the effort our team made. And that is also in the cost, by the way. It's a onetime cost. And if I were to take that away, actually, our operating EBITDA goes to 11%.

[Operator Instructions] The next question is from the line of Amnish Aggarwal from PL India.

Amit, a couple of questions from my side, something which is related to the one which we just answered on the margins being 11% if the onetime bonus is not included. So if I calculate that number of 1.9%, actually then the outflow on account of bonus and employee benefits incremental in 4Q comes out to around INR 68 million. And if I say exclude the INR 68 million from your 4Q numbers, then actually, your -- it means that your numbers actually -- the employee cost have actually declined on a Q-o-Q basis. So is my thinking right or am I missing something on this?

No. The exact calculation, I'll let Pankaj answer that. He would have a better sense. So this includes the reinstatement of some salaries and the bonus. So -- and I think let Pankaj answer that. He might be in a better position to respond. Pankaj, can you please take that?

Yes. So Amnish, there are 2 elements of the employee cost when we look at the P&L. One is on the G&A and second on the operating cost for the crew level. So of course, things are not like-to-like on a quarter-on-quarter compared to last quarter versus this quarter. And as you rightly pointed out, the impact of the onetime cost has been 2%. So if we were not to book that onetime cost, the operating EBITDA goes to 11%. The second thing is that we have been talking about a lot of efficiencies in the operating costs, including the structural cost improvements, operating hours, et cetera, et cetera. So that also has an impact on the overall cost that you see, excluding this line item, why costs are becoming better. And as Amit said, a lot of them are structural in nature. So as we recover the business, as the store operating hours goes back to normal, these savings and optimizations are here to stay.

Okay. So should I presume that if I exclude that onetime bonus and restatement, on a Q-o-Q basis, the payroll and employee benefits, they have actually declined from INR 33 crores to nearly INR 29 crores.

Yes. So part of them are also contributed because of the regulatory restrictions in terms of operating hours, et cetera. But a lot of it is the structural cost improvements that we have been working on. They are not like-for-like comparison like that.

Understood. Understood. And sir, my second question is that it's on McCafé, basically. So can you throw some light on how many stores now we have, say, under McCafé now? How are we trending on that in terms of the throughput and the contribution from McCafé as we close this year?

Yes. I mean, McCafé has been building quite well and sales are coming. Obviously, it's not yet where it was pre-COVID, but it's been building quite well. We have about 200 restaurants plus that have McCafé.

Okay. Because the last number in Q3 was 227. So right now based on that...

It will be -- it's not lower than that, for sure.

Okay. And how much it would have contributed to sales for us in the current year? Has there been any dip now because of these lockdowns and low dining?

So we don't share the breakup. But yes, in the early days, there was a dip in McCafé sales from pre-COVID times. And quarter-on-quarter, it's been growing quite well. It is still not where it needs to be because McCafé has a lot of play around in-store as well. So we don't share the breakup. But the good news is that quarter-on-quarter, we are saying McCafé built quite well. Also, we've added some good elements around delivery of McCafé in terms of hot coffee and things like that. So that channel is also building up quite well. In fact, in many of the 3 POS, we are listing McCafé separately as well. So it shows up when you do search on coffee.

Okay. So in this context, would it be fair to presume that given usually the McCafé business has got higher gross margin that once the recovery fully sets in, in terms of dining over a period of time, then it could provide a good delta to our gross margins?

It should, but I also keep inflation a bit in play. So those are sort of our things in our hand that can allow us to offset some of those inflationary costs. I think for our business, I feel we are on a very strong trajectory with gross margin. So I'm not sort of -- we are not pushing it as a business. But yes, if McCafé builds logically, you should get more gross margin. However, like I mentioned to you, there's also a lot of headline -- headwinds on inflation. So we are hoping that, that extra little thing can cover that up.

Yes, yes. And Amit you in your remarks, you have stated that you are getting very good real estate deals, and you are now on a very firm expansion path. So can you give us some idea that where would be, say, the rental and other payments you made for the real estate deals now vis-à-vis which you were doing in the pre-COVID time.

See, I mean, it's hard to say. But to give you an example, we were, more importantly, able to open in the international departures because we are very particular about the contracts we signed. And finally, we believe that the restaurant should be able to make money. So -- and a good example is that, for last 5, 7 years, we've been trying to get into the airport, but we never found the deal structures to be appropriate enough for at least us to sign. However, we've been able to enter. And I think even at -- even with 5 or 6 flights that are currently running, we are able to do decent sales, and we are able to at least breakeven. So this is -- there are difficult areas like a BKC. We already have a restaurant. But at least those areas, the kind of offers that are coming to us are sensible. I wouldn't say that they are cheap by any standards, but at least they are something that one can negotiate and talk. I can't give you a percentage because each deal, each location matters and finally, it depends on the sales we can do in that location. So BKC is -- today's reasonable BKC is still unreasonable from rest of India, for example. So I hope you are able to see what I'm saying, that there is reasonability for the area that we are going into. And we are able to conclude these deals that we would have earlier not been able to do.

Yes. Absolutely. And Amit, the final one from my side. Can you -- I know it's very tough time, a lot of uncertainties, but any color on how you can say April is trending or how the first 2, 3 weeks of April were, if you can throw some light on that?

I mean, that would be a bit of a forward-looking statement, but what I can say is that I think definitely better than last year. There's no doubt about that. And at least delivery is running, and there were no disruptions in delivery other than some curfews impacting some restaurants. But in-store is completely shut right now across our territory. So it's definitely not where we want to be, but it's definitely not what it was last year. So it is somewhere in the middle, but demand from delivery is pretty good from that point of view.

The next question is from the line of Nihal Jham from Edelweiss Securities Limited.

Amit, maybe this was asked earlier, but just wanted to clarify. As I understand between your convenience and your dine-in channel, you've always maintained that margins are similar. But I would understand that at least on the gross margin side, the dine-in channel would be higher considering the commissions and some of the other assets. So is that a right assumption? And why I ask this is that despite such a strong share of Convenience that you mentioned about in Q2, we have actually seen an improvement in our gross margin particularly. So if you could just highlight a little bit more on that.

See, the gross margin improvements may not necessarily be because of shifts in that area. It could be because of the work we've done on raw cost. Again, if you look at our last earnings call and the call before that, we had mentioned that we are getting -- working with our suppliers to get into their costs and their supply chain. And some of the work has yielded results. And there is more work continuing in that area. But currently, if I'm not mistaken, the gross margins around both, the way at least we look at gross margins is quite all right. We look at commissions separately. We don't take commissions as a reduction in gross margin. And on that front, I think we are pretty even on the in-store and the -- and delivery. Pankaj can confirm that, actually. But to my mind, it is quite even.

Yes. There's not a significant difference between the 2.

Sure. And just related to that, I do notice that you launched a recent range of premium menu burgers. Does that also add anything to improve the gross margins? Or is it currently a decent proportion of the sale? And just some comments around that.

The gourmet burgers which we have added just now is just on test. So it's just in about 5 restaurants in the Western, 5 restaurants in the South. We are seeing good results of it. So in the future, definitely, it will help us on gross margins, but currently, it's a real low contribution to the system.

And the plan is obviously to keep some of the SKUs, not all the SKUs would end up being a part of our menu in the future.

Absolutely. So that's why the test and we are figuring out what's consumer preference. And then soon, once the new normal sets in, we will be launching them.

That's helpful, Smita. Just one last question from my side, Amit. You mentioned about getting back to your store additions of between 20 to 30. Now traditionally, McDonald's has had one of the larger store compared to some of the other players. So incrementally, looking when you were speaking so much of the Convenience channel, is there a thought of maybe stores which are smaller in size or probably not in high street? Just your thought about incrementally, where could most of your stores come up?

So firstly, we've had a lot of internal debate around the size of the store and at least in our case, the jury is still out there. We are not jumping into smaller stores. That's the easiest thing to do in the world. But there is tremendous discussion around what that would mean and all. So I maintain that currently, we will continue with the current format of stores. In terms of openings, it will continue to be a mix of the kind of cities -- key cities, the 6 key cities. But we are also -- while I do strongly believe that we have a lot of small cities as well where we do very well. But I do believe that there is some momentum that is coming a bit more in the cities as well and that could be a good way for us to accelerate our openings as well. So that is something that we are thinking and looking at as also. So I don't know if it answers both your questions.

To an extent it does. Maybe later on, I'll get into discussion with you and I'll move back into queue.

[Operator Instructions] The next question is from the line of Ashit Desai from Emkay Global Financial Service.

Amit, so I'm still not clear on the math behind the one-off salary incentives and bonuses. So I think Pankaj mentioned some split between employee costs and G&A. Two things we here, one is, I mean, salary raises and bonuses are our annual feature. So one, why are we calling this a one-off? And if the rate of increases are much higher, which you may call it a one-off, what would be the normal run rate for employee costs? And I see even HO costs going up from INR 17 crores, INR 18 crores to INR 26 crores. So what should be a quarterly run rate to look at on both these line items?

So Pankaj, you'll take that.

Yes. So then on the math of why we are calling it one time, I think Amit already said it. Because in the last 9 months, what we have been saying on our previous earnings calls, quarter 4 is the quarter where we have reinstated the salaries and we announced a special bonus for the hard work done by our employees in this year of pandemic. So that's why we are calling it a onetime cost, right? And hence, it was not booked every month in the last 12 months. It was booked -- it was a cost that was booked on Q4, right? So -- and about your second question. So the cost is coming in 2 lines. One is on the labor front at the crew level, which is in the stores and the second one is G&A. I was talking about the combined effect. So things are not like-for-like. Because of the difference in number of stores operating hours, the cost rationalization, there is an impact coming a bit from all the efforts that we spoke about. So it's not a straight calculation that one can do to arrive at those numbers.

Yes. So one is before restaurant operating margin, that's at the restaurant level. And we break out our corporate overhead very clearly, which is the G&A line item, which is what Pankaj is referring to, a combination of both.

Okay. So if you got to look at G&A, which has moved up from INR 17 crores, INR 18 crores to INR 26 crores, this INR 26 crores would be the run rate to take for quarters ahead? Or it should be lower?

No, it will be lower. That's what Pankaj is saying because the entire impact of the bonus has been hit into this quarter, which is normally not the case, which is normally split across every single month of the year. So given the work and the results that we got and particularly the cost reduction and the ROM growth, we wanted to -- it's been a pretty tough year, and we wanted to ensure that all the people at least got their bonuses. So it's a single hit in that one -- in this 1 quarter. That's what Pankaj is referring to.

Okay. I'm sorry to drill deeper on this, but so 11% margin is, if you were to split this entire increase over fourth quarter? It's not entirely removing that part in the fourth quarter?

No.

Yes. That's right. Got it. Got it. And lastly, any pricing actions that you have taken in April, May, and also your comments on input inflation if any?

Sure. So price increase we've not taken. Nothing especially in April, May, absolutely nothing. In terms of inflation, I do worry about it. Obviously, we can all see and read where things are, supply chains are a little bit not intact. Not that we've seen anything at this point in time, but I'll be honest it's a worry on my head right now. And the good news is that we are aware that something like this could happen. And again, if you refer to all my calls over the last 5, 7 years, I've always said that we will not do knee-jerk reactions. If suppose some cost comes out of nowhere, we will evaluate where that cost is going, and we will fix that over a quarter or 2. So I think, therefore, some effort in terms of further reduction of raw cost, and hopefully, some come back through McCafé, these are couple of our initiatives that will help us offset some of those costs. So yes, inflation is a big of a worry moving forward.

Okay. And we haven't taken any pricing actions as of now?

No.

The next question is from the line of Chinmay Gandre from Bharti Axa Life Insurance.

Sir, my question is on the rental front. Last year, we did get some benefit because of the decisions that we did in the initial part of the year. How much of the benefit would be recurring in FY '22? Or largely the benefit was for FY '21 itself?

Pankaj, can you take that?

Yes. So the rent negotiations that we have done is, again, on a full year basis. However, they were front-loaded, as we had shared that in our previous earnings comments. But because we structured the rent negotiation over a period of time, so every quarter, we booked rebates and the negotiated amounts. And such that quarter 4 is also being booked for a rent concession. Now as we move forward, and we have been sharing also previously by Amit, we are working on the network optimization, right? So there are opportunities that we are figuring out on the real estate deals, which are available for rental negotiations or relocations or what long-term restructuring we can do. And that is one of the best real estate competitive advantage that we carry because our deals are of longer term, the inflation only comes after 5 years, so that we are able to drive this optimization also in the years to come, maybe in a different way. But these cost optimizations are here to stay as much as our intent is.

But the negotiations per se were -- or the rebates were primary for FY '21, right? I mean and the impact would have been kind of decreasing every quarter-by-quarter because the rebates you would have booked would have kind of reduced, right?

Yes. So the negotiations were differently done for segment of stores, depending on the strategy that we adopted for the cluster of stores. Some rebates were negotiated for 12 months and then every quarter the phasing was done. Some were front-loaded because of cash perspective. So it was not a state negotiation that you do in a set of 300 stores. But what we ensured is that it is not a onetime activity, and the benefit of it comes in every quarter.

Yes. But so for FY '22 also, we have kind of started negotiating for the quarter? Or how is that -- and how is it -- what was the total savings you should quantify in FY '21 on rebates?

That breakup we won't share. But Pankaj can answer the other question.

Yes. So breakup of the rebates we don't share Chinmay. But on the second part, which is what are we doing about FY '22 and beyond, as I said, network optimization is a continuous exercise for us in the development cycle. So we not only work on the new sites, creating a funnel of stores, deciding the next locations and the formats. It is also in the space of cost optimization of what stores are giving us opportunity for cost negotiation or for relocations or for rental deals. So this is not something that we will do because '21 has rebates, this is kind of a continuous cycle for us.

So we will go back to landlord and talk about FY '22 to the best of our ability, basically. And malls also, as I've maintained before, we have revenue share. So given that revenues are 0, that does help us a little bit.

The next question is from the line of Gaurav Jogani from Axis Capital Limited.

My question is with regards to the increase in the payables. So there is a sharp increase in the payables, both in terms of absolute amount and also in the number of days. So is this a trend that is expected to stay ahead?

Pankaj?

Yes. So on the payables, yes, when we started from Q1 to where we are, there has been working capital optimization with all our partners and vendors. So we started the quarter 1 with a higher cycle then brought it down as the cash cycles were getting normalized. Going forward, we will be intending to come back to a normal cycle of payments. However, if the industry offers a renegotiation on payment terms, we are also working on that ground. With the balance sheet strength that we have closed the year with, going forward, we will try to be within the range of credit terms that we operate with our suppliers, but finding the optimized way of working capital as well.

Yes. So because the reason I asked is, it's almost double if you see in terms of number of days. So it was like 30, 31-odd days earlier and now 70. So what kind of number can we build going ahead, considering it's coming down back to the normal levels of negotiations as we are feeling they are going to be?

Yes. So a lot of it depends on the volumes as well. So if you take -- I think FY '21 will not be the right reference. If you take FY '20 reference, that is the kind of levels of table that we would build for our business on the credit terms.

Sure. So would it have an impact on the cash flow level? Because I see a lot of this has contributed to your networking especially this particular year. So is there supposed to have some impact little bit going forward?

No, I think it's the other way around. So depending on our cash cycle getting normalized, that is how we structure our working capital payouts. So it is not the other way around where you are saying it will have an impact on cash. So as we are moving forward, depending on the business normalcy and the cash cycles, then we never shared with our vendors and suppliers to be able to fulfill the obligation that are mutually decided.

Okay. Sure. And sir, just one last quick one. The CapEx guidance, considering that we are looking to open 25, 30-odd stores this year, but also the fact that we have been able to get some good deals. So like what kind of CapEx we can look forward for FY '22 or '23?

So our average CapEx, if you have seen in the previous figures, it has been around 100 to 150 stores. Now on this year guidance of 20 to 30 stores, depending on how the situation is, you could expect around INR 100 crores of CapEx for this year as well.

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

Yes. Thank you very much. I really appreciate everybody joining the call today and taking the time to discuss Westlife's results with us. Wish you a very good evening and do take care and stay safe. Thank you. 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.