Jubilant Foodworks Ltd
NSE:JUBLFOOD
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Jubilant Foodworks Ltd
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Ladies and gentlemen, good day and welcome to Jubilant FoodWorks Q4 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Siddharth Rangnekar from CDR India. Thank you, and over to you, sir.
Thank you and welcome to Jubilant FoodWorks' annual conference call for investors and analysts. We will be joined today by Mr. Hari Bhartia, Co-Chairman of Jubilant FoodWorks; Mr. Pratik Pota, CEO; and Mr. Prakash Bisht, CFO.We propose to commence with perspectives from Mr. Bhartia. Thereafter we shall have Mr. Pota sharing his view on the progress we have made operation-wise, strategic imperatives that lie ahead and the outlook for JFL. He will be followed by Mr. Bisht who will update us on the financial performance. After the opening remarks from the management, the forum will be opened for any queries that you may have.Cautionary note. Certain statements that we will make on today's call could be forward-looking in nature. Actual results may vary significantly from those statements. A detailed note in this regard is available in JFL's Q4 and FY '18 results release and presentation, both of which are available on the company website under the Investors section.I would now like to request Mr. Bhartia to share his perspectives with you. Thank you, and over to you sir.
Thanks, and a very warm welcome to all of you. It has been a good and eventful year. As all of you are aware, we started the year FY '18 on the back of successive quarters of nominal growth. We had also seen the erosion of margins and reduction in operating leverage in the last few years. There were -- we saw huge opportunities to rationalize costs in all our functions. We also felt there was strong need to improve value perception and improve our products. With increasing penetration of smartphones and online ordering, investment in technology was starting to become very critical. As all of you are aware, with this in mind we had reset our strategy in the beginning of FY '18 and allowed it to play out during the year.We are pleased with our overall performance during the FY '18, in both Domino's Pizza and Dunkin' Donuts in line with our strategy. We saw our same-store growth of FY '18 at 13.9% with quarter 4 going up to 26.8%. In FY '19, we've continued to build on the successful initiative started last year. I would like to restate again what we said in the beginning of this year and our strategy going forward.We had been very rigorous and selective about opening of new stores in the year FY '18. With steady growth in volume and sales, we are starting to increase our pace of opening new stores. Market continues to show large potential of opening new stores in existing and new cities. While we increase our store openings, we'll continue to apply strong scientific rigor in selection of our new store location. We will also continue to make good efforts and focus on getting higher sales from existing stores.As we had promised, we will continue to work on getting operating leverage, as all of you are aware that we had company-wide efforts to rationalize cost, the impact of which was visible in FY '18. This impact will continue through FY '19 and we are trying to make this as a continuous effort in our organization. We had also promised that we will bring value back to our customers. As you are aware, we took many initiatives in this direction.Firstly, the introduction of Every Day Value offer on medium-sized pizzas starting at INR 199, aimed mainly at attracting families and group of friends. Secondly, by launching All New Domino's, we gave more and better toppings at same price. Thirdly, we selectively reduced prices of our products in our menu and the new GST regime was implemented with passing all benefits to our customers across the country. We have also continued on this path by launching Every Day Value at INR 99 at the beginning of FY '19 for regular-sized pizzas and small group of 2. This will help us to gain volume and new customers in FY '19.We had also promised to continue and increase investment in technology. We have improved digital experience of ordering on our app and on the web, as more and more customers use smartphones and web for ordering our pizzas. We have continued to invest in improving technology for voice ordering, analytics for our business, store operations and supply chain. In the new year, we will continue to improve our user experience of our app with new releases, and hopefully, learn to apply artificial intelligence and machine learning on our database to serve our customers better.We had also promised to reduce losses in Dunkin'. We did shut down our unprofitable stores and rationalized the cost. Our sales have continued to improve, resulting in reduction of our losses to half in FY '18. We are working hard on the path of achieving breakeven at the last quarter of FY '19.As you are aware, last quarter, we also announced our new joint venture to launch Domino's Pizza in Bangladesh. We see Bangladesh as a strong and growing market for pizzas. Going forward, we want to apply all our learnings from the Indian market to improve our performance in Sri Lanka and for the new launch in Bangladesh. We believe we have an outstanding team of store managers who continue to run our stores efficiently and service our customers timely with great tasting, fresh and hot pizzas. Our new CEO, Pratik Pota, who joined at the beginning of FY '18, took charge and he is providing strong leadership, supported by committed second line and a larger organization to make our store managers successful. We are committed to make our organization adaptive to continuous changes, especially in the new digital era. Both Domino's and Dunkin' are very strong franchises. Domino's is the world's largest pizza company and a leader in technology in food services. We continue to have great partnership and share learnings, which are continuously applied to the Indian market.Lastly, I must add, we are happy to announce 1:1 bonus for our shareholders and increase our dividend to INR 5 per share pre bonus, which amounts to INR 2.5, post bonus. We are committed to realizing full potential of our brands as we step into FY '19. As mentioned before, we will continue to build on our strategic initiatives that we laid out this year and hope to bring several new and exciting measures that will continue to give profitable outcome in FY '19.Over to you Pratik. Thank you very much.
Thank you Mr. Bhartia. Good evening everyone and welcome to our earnings call for Q4 FY '18. As you are aware, we have reported strong all-round performance during the quarter.Overall, revenues grew by 27.3% on the back of a strong 26.5% same-store growth for Domino's Pizza. Our EBITDA for the quarter stood at INR 1,278 million, an increase of 111% over same time last year and at 16.4% of net sales. Profit after tax was INR 681 million at 8.7% of net sales. Further financial highlights would be shared by our CFO, Mr. Prakash Bisht.With respect to our store network, we opened 7 Domino's Pizza restaurants and closed none during the fourth quarter, thereby giving us a restaurant count of 1,134 across 266 cities. In Dunkin' Donuts, we opened 1 new restaurant and closed 8. As a result, the Dunkin' restaurant count was at 37 across 10 cities.Let me also touch briefly on the highlights for the quarter. Our same-store growth in Q4 came on the back of strong growth in orders, especially in delivery. Our [ dial-in ] part for the business also grew healthily and this growth too was driven by orders. The All New Domino's product upgrade launched in Q2 continued to do well for us and drove strong growth in core pizza. Our product satisfaction scores remained high during this entire quarter.The Every Day Value proposition once again performed strongly in Q4 and we extended the EDV to regular pizzas toward the end of the quarter. Our strong focus on driving online sales showed good results, with online sales now contributing to 63% of total delivery sales. This is an area that will be sustained focus and innovations in the period there. The Dunkin' Donuts business saw strong growth in Q4 on the back of growth in donuts and beverages. We achieved our peakest growth of halving the losses in the year and are confident of achieving breakeven as we exit the current financial year.The fourth quarter also witnessed 2 significant milestones. First was a launch of our mega commissary at Greater Noida. This facility will support a large and growing network of stores in the north and advanced agenda of introducing newer products into the market across both brands. Number two, Jubilant FoodWorks Limited announced the formation of a joint venture with Golden Harvest QSR Limited to launch Domino's Pizza in Bangladesh. Under this JV entity, Jubilant Golden Harvest Limited, Jubilant FoodWorks will be the major shareholder with 51% of shareholding, while Golden Harvest QSR Limited, a part of the larger Golden Harvest Group, will own 49% in the joint venture. We believe that the Bangladesh market has great potential and we look forward to entering the market there soon.As we look ahead to the coming quarters, our strategy will remain largely unchanged and will remain in line with the strategy for growth outlined last year. We will continue to focus on driving innovations and product quality, delivering continued value-for-money product, providing the customers with a seamless experience, leveraging technology, and driving efficiencies and controlling costs. To conclude, we are pleased with the performance last quarter and remain confident about driving profitable growth in our business in the future.With that I would request our CFO, Mr. Prakash Bisht to share the financial highlights for the quarter and the full year. Prakash, over to you.
Thank you, Pratik. I shall quickly brief on the financial performance of the company. All financial reporting in discussion has been done in accordance with the standalone Ind-AS financial statements of the company.Operating revenues during Q4 was at INR 7,798 million, up 27.3% year-on-year. This follows same-store growth of 26.5% at our Domino's brand. Total expenditure for Q4 FY '18 stood at INR 6,520 million, up 18.1% over Q4 FY' 17. This was mainly on account of expansion in operations, as well as addition of the new restaurants. EBITDA during the period stood at INR 1,278 million, marking growth of 111% as compared to the same quarter last year. Our EBITDA margin stood at 16.4% during Q4 FY 2018, up from 9.9% last year. Profit after tax was at INR 681 million, delivering gains of 913% year-on-year. Net profit margins were at 8.7% in the period as against 1.1%, last year. Operating revenues during FY '18 were at INR 29,804 million, up 17.1% year-on-year. This follows same-store growth of 13.9% at our Domino's brand.Total expenditure for FY '18 stood at INR 25,341 million, up 10.2% over FY '17. EBITDA during the year stood at INR 4,464 million, marking growth of 81%, as compared to the last year. Our EBITDA margin stood at 15% in FY '18, up from 9% -- 9.7% last year. Profit after tax was at INR 2,064 million, delivering gains of 207% [ year-on-year ]. Net profit margin was at 6.9% in the period, as against 2.6% last year. In FY '18, we did a CapEx of INR 1,067 million towards opening of new restaurants, renovating existing restaurants and our Greater Noida commissary.Mr. Bhartia already informed and I confirm that the board has recommended the dividend of INR 5 per equity share for FY 2018 on the existing share capital of the company. This would mean a cash outflow of INR 329.92 million and a dividend distribution tax of INR 67.82 million will also be paid. The board also recommended issue of bonus shares in the ratio of 1:1. On approval of bonus share, the dividend payout works out to be INR 2.5 per equity share on enhanced share capital after the issue of bonus shares.That concludes my remarks. I would like to hand the call back to the moderator so that the [ interactive ] session can commence.
[Operator Instructions] The first question is from the line of Avi Mehta from IIFL.
Sir, just wanted to understand if you could give any guidance on the likely CapEx in the next year in the store addition over there, what is the likely [indiscernible]. And second question was on the Dunkin' Donuts in particular. You've been going through a very aggressive store closure plan. Now what's the thought over there in terms of next steps, is it all Dunkin' Donuts closures and are we more or less done? And a similar thing for Domino's Pizza [indiscernible].
Avi, I'll answer your question. I'm hoping I've heard it correct, there was some static in the audio. But if I don't answer your question, please chip in and ask a follow-up question. So let me first start by responding to your question on our store opening plan for the coming year. As you're aware, last year our store opening was lower than what we've opened historically and we opened 24 stores. And our focus was on getting the same-store economics right. Having done that, we are recalibrating our store expansion plan and our target for the year is to open 75 stores on Domino's. So that's on the store opening part. On Dunkin', we are pleased with the progress we've made on reducing our losses. We have halved the losses, as we had earlier. We also have seen strong growth come on our core portfolio of donuts and beverages, and based on the learning from last year, we hope to continue to work this year and get to breakeven as we exit this financial year. Within that scope of work, looking at specific stores and seeing if they are profitable or not, these are ongoing work streams, and we will be clinically brutal to close stores. That said, we are seeing the same-store economics improve on Dunkin' as well and we are committed on the journey of getting to breakeven by exit of this year. Your specific question, I think, on CapEx, I'll hand over to Prakash to respond to.
So we expect the CapEx to be in the range of about INR 150 crores next year.
Sir, and the number of stores?
So Avi, I have talked about 75 stores being the…
Okay, sorry, I missed that, yes, sorry. But thanks a lot, sir. And the closures you had done in Domino's that is the only thing that you forgot to touch on.
[indiscernible]
Closure in Domino's, are we more or less done with, that is the only thing that I had -- that was left out, that was the only [indiscernible].
Avi, again, a similar response that I would give on Domino's as well. Looking at store level profitabilities and ongoing effort month-on-month, and it's an ongoing exercise, and we will take calls based on store-level performance. But again [indiscernible] say that given our performance in the last year, I do not expect us to close a large number of Domino's stores.
The next question is from the line of Manoj Menon from Deutsche Bank.
One follow-up on the new store addition, Pratik. Qualitatively speaking, would it be mostly in the existing 260-odd cities or would you be adding newer cities quite aggressively?
So Manoj thank you, and in response to your question, I think it will be a bit of both. And let me go back to my opening remarks when I talked about the strong growth that we are seeing on delivery in existing markets. So in order to service that delivery growth, we would need to open more stores in existing markets as well. We also intend to open new stores in new markets to leverage and to take advantage of our aggressive plans lined up, including EDV. So it will be a bit of both.
Okay, understood. And I'm sorry If I've missed any earlier comment. Just tracking the Every Day, which has given you extremely good results over the last 12 months. Now given that you have the Every Day low prices -- I mean, the Every Day Value at multiple price points, the logical question here is what next? So would you need more products, more variants, or is it just driving this itself would be good enough for some more time?
So Manoj, you're right, our Every Day Value platform has given us strong results last year. It fundamentally resets the way we engage with customers on value, where we offer a mature value-for-money price point right through the year as opposed to occasional discounts. That platform and that promise will continue to work for us this year. And as you're aware, we've expanded that to regular pizzas as well. However, there are multiple other levers of growth that we intend to deploy, which I talked about in my openings remarks. The first one being innovation and product, then technology, which will be a big growth driver as well, and overall improvement in customer experience. So our plans for this year will be predicated on these 4 platforms; innovation, value-for-money, technology and customer experience.
Very clear. Absolutely clear. Understood. Now, just quickly if I may, where are we in terms of the food aggregators? So there's been a consolidation which the food aggregator space has seen, which to some extent, and correct me if I'm wrong, would have been a tailwind for leading operators like Domino's, who anyway, probably [ in India ] is one of the largest delivery platform, any which way. Now how do I think about it because -- is this working in your favor? If you could just help us understand this journey. And how does the medium term looks at this point on the aggregator? From being competition, you probably co-opted them in the last 12 months. How should we think about this?
So Manoj, our view on aggregators is simple and straightforward. We believe aggregators play a very important role in growing the delivery market and increasing and providing choice for customers. As India's largest delivery experts, we believe that, that tailwind is going to be to our advantage. You may not be aware, but our partnership with aggregators is such that we control the customer and we deliver to the customer. And therefore, we continue to own the customer and own the customer experience, most importantly. So that's the first part. The second part is, even as aggregators grow, we have to invest in growing our own digital and online platform and improve the quality of our assets and our customer experience. So it will have to be necessarily a twin effort and which is what we are engaged in doing.
[Operator Instructions] The next question is from the line of [ Sonal Gandhi ] from UBS Securities.
[Technical Difficulty]
I'm sorry to interrupt [ Ms. Gandhi ], sorry, but can you speak a bit loud, your voice is a bit feeble?
Is it okay now?
Yes, much better, please go ahead.
Yes. So my question was on staff cost because we've been talking about enhancing consumer experience, but if I see, our staff cost is actually down by this quarter. So how are we looking at [indiscernible] number of employees or is it because of the Noida commissary that [indiscernible] probably the employees were out. Would you like to explain this?
I'm sorry your voice was not very clear. Am I to infer that your question was about employee costs?
Yes.
So is the question specific to the employee cost for the quarter?
Yes.
Okay. So just as you would have observed, our employee cost for the year is about INR 604 crores, which works out to be about INR 151 crores per quarter. On an quarter-on-quarter booking basis, there are certain estimation and true-ups. So this quarter cost has, again, true-ups. So we believe that the correct way to see it as an average of the YTD cost.
Okay. Secondly, sir, I have a question on growth in your stores -- I mean growth in -- SSG in stores and delivery. Like you've been commenting that delivery is making very good growth. So how is the growth in stores?
Okay. So [ Sonal ], again I'll answer and in case I haven't responded, please follow up. So yes, we saw strong -- as I mentioned in my opening remarks, we saw strong growth in deliveries driven by order growth. But we also saw robust growth in dining in our stores as well. So it was a combination of growth delivered both by our dining and our walk-in business and also delivery. And both of this was underpinned by order growth.
All clear, sir. Is that on delivery only?
We had in delivery only. The growth is in both, both delivery and dining.
Yes, the growth came in both delivery and in dining, and in both cases the growth was driven by delivery -- by order growth, in both delivery and in dining.
Okay. A [indiscernible] question, it's more like where is the maximum delta coming from? Can you say that it is almost equal, dining as well as delivery?
Yes. So, [ Sonal ], we do not give -- as you are aware, we don't give specific numbers between delivery and dining. It would be fair to say that both parts of the business gave us growth and we had strong growth. Within that delivery growth was higher and was -- we had higher buyers on delivery as compared to dining.
The next question is from the line of Pritesh Chheda from Lucky Investment Managers.
Yes, sir, my question is on the ability to continue to grow SSG on the same store. So is there a matrix where you'll guys track in terms of utilization of a certain store and post which you need to split the store and setup. Now I'm asking you specifically this question, because if you see for Domino's for the last 13, 14 years of your history, before the IPO you guys were having a peculiar -- had a situation where post the IPO, the store utilization went up, then you had to split the store, create new stores and then again you are in a situation where the store utilization is going up and hence we see the SSG growth. So any matrix in terms of the incremental possibility of utilization on your existing stores? That's question one. And my question two is, in the revised 2.0 business model that we see for you, last time when we saw the model, the margins went up to about 19%, 19.5% and then it started its downtrend when you started splitting the store. So in the revised 2.0 version, what's the margins which you look at, at a higher end in terms of the existing store network?
Pritesh, thank you for the question. Let me respond to your first question. As I mentioned earlier, looking at store level growth and store level load is an ongoing activity and exercise. And especially when we see a robust growth like this, there would be some stores that we need to split and create another avenue for delivery and for servicing the customer growth. And that, of course, like I said, is a store-by-store activity. The [ fourth ] quarter for us, as you imagine, is to service the incremental load from [indiscernible] such an existing store. And only in cases where we believe that they cannot be done is a discussion on split stores. And in some cases that would be called upon, given the strong growth that we have seen in delivery.
But our experience has been that whenever we have -- in fact, whenever we have split stores, both the stores have grown and both the stores have grown to the same levels.
But sir, the margin number reflects something else. So even if you believe that the stores -- so the cost factor would be -- so margins number have behaved really differently when that phase had happened.
No, as you see that we are already getting the operating leverage from our existing operations, you will see that we clarify the margins are improving.
Yes, that's for the last 4, 5 quarters, but I'm --
Yes, so we can assure you going forward, we are focused on costs, we are focused on operating costs, et cetera. So we hope to get continuing operating leverage from the performance, overall.
Okay. So in your Version 2.0, as I was referring to my second question, margins last time we saw at about 19%, on the higher side. Version 2.0 is a different margin profile?
We cannot comment on the future margin profiles and we don't --
Direction?
We don't comment on the future margin profile.
Deduction?
No, I mean, margin depends on so many issues, so that is why we are not commenting on it because we continue to provide value to our customers. So we always keep a balance between volume and margin. So that is why we are not commenting. There is no perfect answer for this. And we can't comment on that on the future. The idea is to drive volume, the idea is to drive store numbers and that is where our efforts will be. And that is where we get operating leverage.
What is the negative EBITDA contribution of Dunkin's in FY '18?
So the negative -- in Q4 FY '18, Pritesh, Dunkin's drag on overall EBITDA was 105 basis points.
In FY '18?
FY '18, I'll just tell you. It was 118 basis points. And Pritesh, just to add to that as you look forward, be aware that this was more than half of what was in the preceding year. In FY '17, the Dunkin' drag was 241 basis points, which came down to 118 basis points.
The next question is from the line of Arnab Mitra from Credit Suisse.
First question is on the fact that this industry, in the slowdown phase, one of the big problems was new customer additions were not happening. So why did you -- you did say that a lot of the growth is order-driven. Any comments on -- are you seeing new customer acquisitions starting or is it more of existing guys on your database buying more? And in that context also this INR 99 Every Day Value, while you're aiming it at new customer acquisition, are you seeing any kind of risk of downtrading from regular pizzas into this lower price point, and how do you kind of think of that risk?
Thank you, Arnab. On your first part of the question, our growth in the last quarter came on account of both new customers being added at a faster rate, as also an increase in frequency of our existing customers. You may recall our remarks for the preceding quarter as well that you need a similar observation. So we are pleased to see that trend continue of both new customers and existing customer frequency going up. On Every Day Value of INR 99, we are aware and we should remember that we are in a category that has low penetration and as market leader, it is our role to expand the size of the category and to increase penetration and grow frequency. And we believe that our EDV INR 99 proposition will do that, and overall advantage of expanding the category and growing frequency will -- what will [indiscernible].
Right. And in terms of downtrading risk, are you seeing -- because it's now been about 1.5 month since the offer has been there. Are you seeing that as a risk playing out anywhere or it's more of new customer acquisition that's being driven by this?
Arnab, I wouldn't like to make comment on this current quarter and how we're doing, but I would like to say that before we rolled out EDV INR 99 nationally, we had done a pilot in Tamil Nadu and our analysis showed that between new customer acquisition, growth in frequency, versus some downgrades from existing larger pizzas, the numbers stacked up and this is why we [ put the old publication ] in nationals.
That's very helpful. And just last question on employee cost. I mean, this quarter we have seen a flat Y-o-Y employee cost and actually if you go back 8, 10 quarters, your employee cost has been in that INR 140 crore, INR 150 crore range. So with such high SSG, obviously, you need more delivery people. How are you managing to keep the employee cost flat? There will also be some wage increases. And therefore should we anticipate these costs starting to go up now from here on?
So Arnab, as delivery increases and as we need to deploy more manpower to service this delivery order, there will be some cost pressure coming on account of manpower. That's number one. Number two, of course, as you're aware, there will be minimum wages pressure across, in addition to the normal wage inflation. We have to [ tone up ] ourselves to deal with these inflationary pressures by bringing more efficiency, bringing more variabilization in the manpower and ensuring that we have more operating leverage off of fixed manpower costs. So that's our intent.
Right. So just, whatever initiatives you've taken to cut cost here, is the bulk of that in -- those initiatives already played out in FY '18 in terms of efficiency of manpower, or would you say there's more to happen, or you've done some pilots and the full rollouts are yet to kind of happen in FY '19?
So Arnab, looking at productivities and cost optimization is an ongoing activity. Including -- we try to say that we continue to deal with real inflationary pressure. So both of them are real ongoing activity and it is our attempt to minimize and mitigate the impact of inflation to continue profitability at activities.
The next question is from the line of Latika Chopra from JP Morgan.
My first question was on your Everyday Value offer. It's almost close to a year that you have seen this at INR 199. Could you comment on how that has influenced your gross margin profile and also does it in any way constrain your pricing power?
Latika, the EDV with INR 199 proposition has been transformational for our business. It has done 2 things. First of all, it has allowed us to move away from the beast, buy 1 get 1 discount to a much more sustainable proposition. That's number one. Number two, it has helped us to drive frequency by moving our customers away from specific consumption deals to a spontaneous consumption. So it has improved our margin profile while driving same-store growth and while driving overall core pizza growth. So I would say that will be the overall observation on EDV INR 199.
And would the INR 99 EDV offer, would that be margin dilutive, or you think the leverage benefits will be enough to ensure the margin profile is not affected?
Latika, we believe that EDV INR 99 is going to actually take the EDV proposition to entirely new set of customers with smaller group sizes of 2 and people who as a result of being left out of the EDV proposition. And just the same way EDV INR 199 works for us on medium pizzas, where it was both growth driving and margin accretive, we believe EDV INR 99 would be no different.
Sure. And second, we heard a lot of focus on technology. Any specific initiatives you have in mind for FY '19 here and would that also contribute towards the saving on the cost front for you?
So, Latika, Mr. Bhartia did speak about some of them in his opening remarks, but let me just recap and talk about some of the big themes that we are working on with respect to technology in the year ahead. The first one is, we are looking at a significantly improved quality of our digital asset, our app, our website, PWA et cetera. And again, that's something that will start playing out in the months ahead. Number one. Number two, looking at very clear database customer segmentation and a very evolved CRM program based on that, using machine learning to give very specific and personalized recommendations, using AI in our business, looking at analytics to drive far more informed and higher quality decision making and also looking at eventually the platform of loyalty on top of our platform.
So, have found these initiatives already led to cost savings for you over the last year or so?
So Latika, as online contribution has increased, we've looked at effort of mitigating costs of order-taking manpower in our stores and that will continue to be an ongoing effort. And as online contribution increases, we will see the productivity in manpower. That already has been part of our activity even last year.
Next question is from the line of Abhishek Ranganathan from Ambit Capital.
A couple of questions here. One is on the gross margin which you have seen in this quarter. We've seen some decline there. Is this a new normal run rate we look at because of the changed product mix and add to that possibly the EDV INR 99?
So the gross margin decline that you have seen in this quarter, so fundamentally between the last quarter and this quarter the differentiation is on account of GST. So some impact of GST which was there in the last quarter only for 15 days, has wound out for the full quarter in this quarter. Whereas, we have also done certain cost initiatives, which has partly offset this.
I am referring to year-on-year actually sir.
Sorry. Can you…
Y-o-Y -- I'm checking on Y-o-Y. The [ 240 ] basis points decline Y-o-Y, I'm referring to that.
So you are talking about the food cost?
Yes, the gross margin.
Yes, why the food cost contribution has gone up is, primarily, as Pratik had also explained that we launched our new improved Domino's this year, so which has far more toppings, and in terms of the overall cost of that pizza is higher. So the impact of that pizza is sitting in the food cost. The other impact is on account of the GST which has come in. So these 2 factors has contributed towards increase in the food cost. But at the same time, we had done many initiatives, like our cost saving initiative, which has further brought down the costs.
So, is it a normal -- new normal for us, is it the run rate which we can expect to clock now?
By and large, this is the…
Pratik, second question I have here is on fulfillment, particularly, because as I think someone asked about this fulfillment, and so an extension to that is that with more of low orders, say, something like an EDV INR 99, on an absolute basis the fulfillment cost doesn't change. So are we looking at any different means of fulfilling this order, outsourcing, or we are happy to do this as long as the volume plays out?
So Abhishek, we've -- our math shows that the orders that we are getting are not margin dilutive and it's very important that we control the customer experience of delivery, which is a key differentiate for Domino's. So, therefore, we intend to deliver by ourselves and control the end-to-end customer experience.
So you're saying your orders which you are getting are not margin dilutive, vis-a-vis, let's say a EDV INR 199 or a normal medium pizza, is that the benchmark you're saying of not dilutive or [indiscernible]?
Abhishek, I'm talking in the context of Q4.
No, no, I am referring to EDV INR 99 going ahead, is that EDV INR 99 would have -- as a percentage the fulfillment cost would be higher, simply because the value is lower?
Yes, that Abishek -- all that I would like to reiterate is that we believe that owning the customer experience from order taking to delivery is a very, very important part of our proposition and our determination and we intend only that entire piece.
Sure. And one last question is, what is the number of employees? I mean, the presentation doesn't carry, or where did we close the year in number of employees?
So, our closing employees count was at 27,539.
You are at 27,539.
Next question is from the line of Pulkit Singhal from Motilal Oswal Asset Management.
Just wanted to check what is the store level inflation that you see, absence of any kind of cost cutting measures that you take?
Can you actually elaborate exactly what is the question, because we just do not actually understand what is that you're trying to ask?
So, I'm seeing at the store level, so when I look at your cost, I mean raw material is 25% of sales, employees 20%, other operating expense 29% and rental is 11%. If I broadly look at the store level, what is the kind of inflation that you see in costs?
So there are various inflationary pressures that we see in our store cost line. Let me update with 2 or 3 examples. The first one I've talked earlier about manpower costs. There are normal rate inflation that happens, plus minimum wage pressures in some states. Plus as we have a higher risk of delivery, we need to deploy more manpower. That's one. In our food and in packaging, there are inflationary pressures. There are inflationary pressures in rent, where the contractual -- contracted base rent increases. But these are the normal inflationary pressure that's been [ managed ] in operating business. [indiscernible] other inflationary pressure that we've seen. However, it is our endeavor constantly -- we talked about is one of our big themes for this year and indeed for last year. If you have very clear work streams in that mitigating inflationary pressure. So for example, in the area of rent, while there are contracted rent increases, there's an ongoing effort to reduce and renegotiate rent with existing landlords, to try and mitigate some of those inflationary pressures. [ So returning ] on manpower, I talked about efficiency drive that we are undertaking, including building more of regular manpower, included already in our forecasting and leveraging our fixed manpower a lot better. As part of [indiscernible] goals and food goals, we look at expanding our [indiscernible] of vendors that we partner and buy from and source from and therefore to get competition going, to make sure we get more competitive rates for [indiscernible]. So there are a number of inflationary pressures as you can imagine, but there are equally strong number of [ contributing ] initiatives that we have undertaken as management to make sure we mitigate the impact of these inflationary pressures.
So would it be fair to say that on an average this is broadly 5% to 6% inflation and it's the management's effort to try to bring it below that at the store level?
I wouldn't like to give a specific number, because it's very broad, but I would repeat my comments, what I said earlier.
Alright. The store expansion plans seems to have now kind of gone back to the 75 and now hopefully ahead. I mean what is the potential size of market that you see?
So again, in the opening remarks, Mr. Bhartia talked about the fact that we see a strong potential for Domino's Pizza in the country. And we believe very strongly that there is a large market out there, which we need to leverage and tap into. And as a step towards that we're opening 75 stores this year. But [ if there is ] a potential, it is far [indiscernible].
One last question. So the EBITDA margins are now at 16%, 17% levels, which are fairly healthy and probably closer to the peak that you've achieved in the past. How does management look at this from a 3- to 5-year perspective? I mean, would you say that you would -- over the period of time, want to reinvest any extra margins that you earn because of your own efforts on costs et cetera, to kind of push the penetration curve and concentrate the EDV INR 99 offer or trying to recruit more consumers, is that what the effort will be this time?
Yes, you're absolutely right. So we keep that balance always, between continue to get loyalty of our customers, bringing them value, increasing same store growth, volume. So there is always that fine balance we have to keep. So you are absolutely right. So this is an ongoing exercise that we continue to look at and we have become more and more careful on this. As I said in the opening remarks also that we made a promise to bring value back to the customer. And we will continue to see that customers get good value from us. And we are starting to see good results in terms of volume growth, in terms of stores operation, everything. As Pratik explained on cost side, we continue to work to increase margin, so that we can give more value to the customer. And so that effort will continue. The idea is to grow, as Pratik said, the potential is to open more stores. So --
I was just checking if this is the kind of margin cap in mind that you would have, that you don't want to go beyond and would like to reinvest in the business or trying -- open stores --
I'm not committing on the cap, but I'm saying that this is a fine balance that we keep all the time so that we continue to grow. The idea is growth, because there's a large potential in the market. And as we grow, our eyes are also -- how to get an operating leverage.
Next question is from the line of Vivek Maheshwari from CLSA.
First on price hike for FY '19, given last year was more about cost and there has been a lull on the price hikes. What are your thoughts for F '19 on the same?
Vivek, let me just wind the clock back to last year. I just want to remind that when input credits was withdrawn on November 15, we did not pass on the full impact of that to customer through price increase. We only took out partial price increase and absorbed the rest in our margins. Going forward, we will, as Mr. Bhartia said earlier, our attempt to provide the customer with continued value for money and that will remain our number one priority. However, as the year pans out and as inflation becomes more evident and we see numbers playing out, we'll take a call through the year on pricing, but our first priority is to drive growth, to giving customer value for money.
Okay. And you mentioned about minimum wages, and Wage Code 2017, if that were to be implemented, there can be a big headwind on the employee cost front then.
Yes. And of course, as I said also in the [ mid-term ] remarks, our attempt is going to be to mitigate the impact of that through using better initiatives that I talked about. But yes, we are aware of that. We are aware of the fact that we should be constantly looking at driving efficiency in our business model to mitigate the impact of some of those inflationary pressures.
Okay, sure. Secondly, I have an observation that while every quarter you have been talking about innovations, FY '18 was more about Everyday Value and product upgrade. There haven't been any launch, I think, with the exception of chicken range. Is that a fair observation and does that mean that the launch activity should pick up as we head into FY '19 now?
But our All New Domino's was a major innovation. If we talk about innovation, it was a product upgrade, toppings upgrade. So we don't treat innovation only as a new product introduction. I think we upgrade that we have made in all our products, I would consider were the major innovation for us last year.
And 2 small numbers, if I may. One is on other income, why is there a sharp increase from a quarterly run rate of, let's say, INR 3 crore to more like INR 12.5 crore, INR 13 crores? Is there any one-off over here?
Yes, there is a one-off in this item. So to the tune of about INR 5 crores to INR 6 crores one-off item is sitting in other income for this quarter.
And on the balance sheet, there is some loan of -- it's a small number again, but just curious, loan of INR 16.9 crores, which comes on the asset side. Could you elaborate what exactly is this?
This is a transaction between the Employee Welfare Trust and the company.
Okay. It's between Employee Trust, not to any group company or --
No, it's not to any group company. So it gets knocked off in the consolidated.
Sorry, it gets?
It gets knocked off in the consolidated accounts. When you will see the line item in the consolidated accounts, it's not there.
Next question is from the line of Amit Sachdeva from HSBC.
So I got dropped off couple of times as well, so pardon me if it is a repeat. But, Pratik I wanted to -- if you could elaborate a bit on Bangladesh opportunity. And two questions here, how do you see the market in next 5 years and what's the plan could look like, how we should think about this? And secondly, how this will be actually accounted in your financials? Would it be like a JV, like a associate or would you do your proportionate consolidation, how we think of it from accounting point of view as well?
So Amit, Bangladesh is a very exciting market and we have a lot of confidence about the potential of our business there. Bangladesh as an economy, as you are aware, is poised at a point where the economy is growing, the discretionary incomes are growing, the lifestyle of people is changing, there's better urbanization. Technology is playing a much more important role in the country. So all of these are tailwinds that are right for our industry, and we intend to participate in that growing economy via an entry. We are very pleased to have a joint venture partner in Golden Harvest. They are a reputed group with deep and long-term understanding of the market in that country, and we believe that our partnership will help us exploit this opportunity going ahead. We are in the process of drawing up concrete plans for entering the market with impact, and you can be sure Mr. Bhartia talked about in his opening remarks as well, we are drawing on the leanings from the India market and also Sri Lanka as we [ draft our entry ] into Bangladesh.
So we have 51% in the joint venture, so when it becomes operational, the accounts will be consolidated.
So like a full revenue and cost, all consolidated. Fully consolidated or --?
No. I think the new accounting standard which has come in, for joint venture accounting, is generally done on the equity basis. It is not a line-by-line, it will be done on the equity basis.
So like an associate, like just net income?
Yes.
I thought there was an option you could choose both, but let me just come back later.
No, earlier it was an option. I think going forward it has to be on the equity basis.
Okay. And do you know that -- what is the 5-year kind of outlook you have like, we have 200 stores or 300 stores. Do you have some sort of vision that how one should think about this real option?
At this moment, we are finalizing our plan. I think it will be incorrect to give a number of stores for the next 5 years right now.
Okay. Sir, very quickly my second question is on a new format in India. So we have been talking about in the past as well and obviously, the Dunkin's -- and Dunkin' is obviously being reshaped and Domino's is on the right economics curve and going from there. Do you now see or envisage a possibility of a new own brand, which could now ride on this success or it is still a far-fetched sort of thinking?
No. As you are aware, firstly, our greater focus is continuing to be on Domino's, because we see a very large potential. As Pratik also mentioned, we are increasing the number of store opening, but the potential is bigger, much bigger. Secondly, to stabilize Dunkin' by the end of this year. That means we have said, we want to break even by the end of this year and then start growing Dunkin' hopefully in the future years. Thirdly, we continue to experiment in the market. It's not in the market ourselves on, what are the other foods that we could look at. So when there is a concrete plan, we will definitely come back and talk to you. We are taking the market learnings, we are understanding the consumer as to what other kind of food they would look at. So that learning we are continuing to absorb. So, if you ask me today, I don't think we can promise you anything that -- on our current brand right now.
Next question is from the line of Aditya Soman from Goldman Sachs. It seems that we've lost the line to Mr. Aditya Soman. We will move to the next question, which is from the line of Kaustubh Pawaskar from Sharekhan.
Most of my questions have been answered. So just one question which has been repetitive and asked on the margin expansion. So this year, we have seen about 500 bps kind of improvement in operating margins. I don't want any guidance or expectations from your end. But what do you think would be the key drivers going ahead, if you want to see any substantial improvement in the margins, according to you what would be your key drivers over the next 1 to 2 years?
So one of that key driver, as Shyam mentioned is operating leverage; that will be the key driver, growth -- because this growth and continuous work on efficiency, I think -- and not taking customer for granted will keep us in good shape.
Right sir. And sir, if you can give -- what was your advertisement and sales promotion expenditure for 2018, if you could just give the number?
So, Kaustubh, we don't share our advertising and marketing expenditures, we haven't given that breakout. But just without [ calling out ] numbers, I just want to underline the fact that given our strong belief in the potential of brand Domino's, we will be investing in strengthening the equity of the brands and our [ IPL ] investment that you are seeing is a step in that direction. So we are absolutely committed to building the brands in this company and [indiscernible].
Next question is from Aditya Soman from Goldman Sachs.
I also got dropped off a couple of times, so bear with me if these are repetitions. But can you actually tell us what the CapEx in FY '18, the actual CapEx was and what the guidance for FY '19 is?
FY '18 CapEx was INR 106 crores, whereas the next year's expectation is in the range of INR 150 crores.
And this is for -- next year is for 75 stores, right, so that seems actually quite high. So would there be another commissary or this is the technology investments that you've mentioned earlier?
So, it's the combination of everything. So obviously one part is the new stores, but in addition to new stores, we also do re-imaging of the existing stores. There is also maintenance and then there is a new app development. So it's a combination of everything, it's not only the new stores.
Understand And what was the total cash generated in this year, so the free cash flow, if you were to say cash flow from operations?
So the cash generated was about [ INR 266 crores ], which is reflecting in the increase in the cash flow, the balance sheet. If you will see that it has gone up in the balance sheet.
And I think this was asked briefly, but in terms of a follow-up, so next year clearly again you will have -- probably have surplus cash flow. So would that mean that you'd just look to raise dividend or you are still evaluating new business opportunities?
No comment on this right now. We've just increased the dividend, so we cannot comment on this right now.
The next question is from the line of Amit Sinha from Macquarie.
Clearly, in the last few quarters, there have been several structural interventions and that has led to significant step-up in the SSG. And even if I look at a 2 years kind of a CAGR number for this quarter or the yearly number, this looks like a clear step-up. So my question is, how should we look at the sustainability of SSG, I mean is a 10% number, which is basically a CAGR of 2 years CAGR and -- or the entire year SSG is a more sustainable number to look at? I mean any comment -- so just wanted to understand the gone-by quarter. I'm not asking for any future guidance et cetera.
So Amit, in essence, you were but [indiscernible] nevertheless. So you're right, we've had -- our performance in the last quarter has been strong and you've seen [ our order ] performance. Our focus remains on driving profitable growth in the periods ahead. We are looking at those 4 strategic pillars that we've talked about, whether it's product and innovation, value-for-money, technology and customer experience and bringing up very sharp focus on driving efficiencies and productivity, but that will be in our focus. Now, what [ are we talking to ] in terms of same-store growth in the future and what [ are we talking to ] in terms of operating margins, that remains to be seen. But it's again sure that we are focused on the basics that drive the business and that has worked for us in the last year.
Sure sir. Just a follow-up. I mean, we have seen significant correction in the retail prices after the GST tax cut and that has followed in our SSG number as well. So my question is, we are not looking at any one-off kind of quarters, right, these are pure sustainable numbers in terms of the volumes and in terms of the SSG, right?
That's right Amit. The [indiscernible] that you see, the results that you see are of an operating business, an ongoing business. There was one exceptional one-off item, which Prakash called out in the other income. This is impacting the PAT. But at the EBITDA level, this is a little bit equal.
Next question is from the line the Aditya Joshi from Anand Rathi.
Sir, my question is pertaining to be new NSV mechanism that will be coming into force. Will there be any impact on raw material cost and ultimately on the gross margins?
Aditya, the new NSV mechanism will have a very, very marginal impact on our costs and we have increased a countervailing work stream to mitigate the impact of that.
Okay sir, got it. Sir, my next question is pertaining to the small town project that we initiated few months back with [indiscernible] INR 49. How many stores do we have under that project and when we'll be rolling out that in all small town stores on pan-India?
Aditya, we have this in all small towns throughout India already, all our targeted small town stores. And as we mentioned, this was using a super value menu price at INR 49, drives both new customers and drives existing customer frequency. This has worked really well for us and we intend to continue it this year as well.
So sir, we will be rolling out in all store basis?
In all small town stores, absolutely yes. It already is in play in the targeted small town stores. [indiscernible] by design of pricing that is meant for small towns and we already are in play in all the [ tier 4 ] towns where we intend to be.
Sir my last question is pertaining to the set of data that we used to publish. Sir, we used to give data state-wise Domino's store. Sir will that be -- will not be given that data out going ahead, because since last 2 presentations we have not been giving that data?
So Aditya, yes you're right, your impression is correct. We will not be publishing the state-wise detailed data, because we believe that it's [ competitive ] information and we would not like to put it out in the public domain.
Next question is from the line of Vishal Gutka from PhillipCapital.
I had one question on the ad expense. So now this year you're going to sponsor IPL and you're sponsoring one of teams in IPL because you're spending heavily on the [ 2 ] indigenous platform. So annually you have been spending around 4%, 5% to 6% of sales on ad. So will it remain in this [ throughout ] for FY '19 or you're likely to do some increase?
Vishal, yes, you're right, we have made an investment in IPL. We believe that is the right thing for us to build the brand. IPL is a platform, it's prime time and it helps us both build sales and drive consumption. So in that sense, it is a right thing for us to do. We will make choices as well and we will make sure that the overall marketing spend for the business works, given our overall [indiscernible].
Next question is from the line of Niraj Mansingka from Goldman Sachs.
Just wanted to check upon this rent expenses. Was this the one-off in the rent for closures of stores?
Rent expenses, the only increase is on account of GST impact. Otherwise, there is no significant increase on account of closure of stores.
[indiscernible] 45 days in the preceding quarter, which went away for this quarter. So that's a full quarter impact of the GST input credit. And plus there are some usual contracted inflation increases in rent, which play out. So combination of the 2 of them, but predominantly the former.
Okay. Can you give guidance on -- general guidance on how you see the rent inflation over a period of time?
Guidance on rent inflation.
On rent inflation. No, so we haven't given the guidance Niraj, but again, I just want to quantify the question by saying, or respond to it by saying that even as there is inflation happening on rent, we continue to have those work streams going on to, in fact, mitigating the impact of those.
Okay, just to push it slightly more, I think you have, you have all renegotiated contracts on the rental side. So what is the generic inflation on the contracts that you have signed in the recent last maybe 6 months or so?
Again, Niraj, [indiscernible] want to share in the public domain, because we believe it's something that would be, I guess, sharing too much. We are a competitive space and there is competition for real estate as well . So we don't want to go out and share these numbers. But even we show that we drive [ hard money ] and like I said, whatever rent increases are there in the contract, we have parallel work streams in that driving productivities as well.
Next question is from the line of Nishit Rathi from CWC.
Just a question on the gross margin. So we took some price hike for taking the impact of GST, right, during the middle of last quarter. So after taking that price hike, I would have assumed that gross margins would have improved quarter-on-quarter. So just trying to understand what will be happening out there for my understanding?
So Nishit, first of all, to clarify you that though we took a price increase in the last quarter, we did not pass on the entire input cost to customers. So we partly did it, so therefore you see the impact in terms of impact of input credit. So we did not pass on the entire cost escalation to the customers through price increase.
Okay. So the question is, was there some tax sitting in raw material, which had input tax credit, which was not being able to absorb in the raw material line item, because I thought that was more in other expenses and rentals?
So pre this 15th November, we were getting the input credit for all the raw material purchases. So post 15th November, the input credit is not available to us anymore. This cost line item has gone up, partly it has been passed out to the customer through a price increase, partly we have absorbed.
And my understanding is correct right, that even after the [ INR 99 ], you are going to broadly maintain the similar kind of a run rate for this in the gross margin line item?
In terms of food cost, yes.
The next question is from the line of Prasad Deshmukh from Bank of America.
This is about the new store opening that you have talked about. The 75 stores, these will be similar to what you have been opening till now or is there an angle to it, like some of them will be delivery centers and so on?
Prasad, we are looking at all formats and including format innovation. So we [ are open to ] stores which are more conventional than we opened in the past, which are in the high street or food court or mall stores or indeed innovated format, which would work for us, given the [indiscernible] of that market. But, we are open to all possible concepts, including the one that you mentioned.
Next question is from the line of [ Raj Mohan ], an Individual Investor.
In the context of our transformation through re-strategizing offer and cost rationalization, are we objectivity seeing the breakevens in new rigorously selected stores happening much quicker? In this context of[Audio Gap]FY'18, are we more certain of the 75 store openings mentioned earlier? Though last year we ended up with 24, although the initial plan was 40, [ 50 ] --
Yes, [ Ra ]j, let me respond to the first question -- the first part of your question rather. Our -- quality of new stores that we've opened in the last 12 months, in terms of their performance, has been significantly better than what was there in the past. So our new approach of using more rigor, more analytics, and sharper bench-marking while arriving at a new store operation and a new store format, has evolved for us in the last 1 year. That was your first question. As far as your second question is concerned, yes, we are fairly confident about our store projection of 75 and we believe we should get that this year.
My final question was with respect to Domino's U.S., who in the earnings call mentioned about their new delivery innovation, i.e., hotspot strategy, wherein they would deliver in places like beaches, parks, et cetera. Do you broadly think India is also in a great situation to adopt this to further enhance delivery with its swarming people in public places?
So, [ Raj ], I would say that the innovation that Domino's in the U.S. has announced, I think it's fantastic. It's a [ thing that can ] target new occasions and new locations for delivery and there is, I'm sure, learning you can derive from this, and you can be sure we're looking at it very actively. That said, the one channel that we do have in India, which I just want to sort of place on the table once again is railways, where we serve -- we deliver to 206 railway stations across the country. And we believe this could be [ mentioned also ] for us also in the future. And given that the rail traffic that we have in this country, we [indiscernible].
The next question is from the line of Anupam Agarwal from Lucky Investment Managers.
Just wanted to understand, has the company done any analysis that -- to -- what has been the average ticket price, pre Everyday Value offer and post Everyday Value offer for the last 3 years?
So, Anupam, of course, we have done the analysis and we look at these numbers day in and day out, but we wouldn't like to share these numbers. As you can imagine, we are in a competitive industry and wouldn't like to talk about these numbers in detail [indiscernible] sorry, please go ahead.
Yes, I obviously understand the ticket price must have fallen due to the Everyday Value offer. Has the fall been significant to the previous levels?
If I answer your question, I'm answering your question. So without going to details Anupam, you can be sure that we look at -- Everyday Value is a promotion that has worked for us to drive both growth and profitability. And there's [ a chance through ] combination of growing transactions and growing transaction and ticket price. And that's something we intend to continue in the future as well.
Second question. Is there any possibility for the company to look at basically giving reward point -- for every order, you get a reward point as to which I can redeem in a later stage. So I'll try to keep the customer loyalty in place, to retain the customers.
These are the kind of things that we keep evaluating and when the time is right we intend -- we'll roll it out. But yes, it will [indiscernible] look at going forward.
Okay. And the third question, if I can slip in, has the company basically added another management post the previous quarter, addition of our new CFO. Is the company looking out -- looking also adding another management to basically, in detail, oversee the entire operation?
Sorry, can you say it again, please? I didn't get the question, please.
The management depth, basically after the previous quarter, addition of a new CFO. Has the company thought of adding another management or another senior level manager to oversee the operations?
So, Anupam, looking at the leadership team and ensuring that we have the right set of capability and the right set of talent to lead the organization is an ongoing activity. We believe right now, we have the right structure for taking us into 2019 and beyond. And of course, this is something that we keep revisiting dynamically. As and when we believe that we need to infuse [indiscernible] more capabilities and more talent, we will do so.
The next question is a follow-up from the line of Latika Chopra from JP Morgan.
Just one question, we understand your same-store sales comps have been pretty healthy owing to your own initiative, but any sense on the general landscape in the QSR or restaurant industry from demand side?
Latika, yes, we believe that a large part of the in-store [ restaurant food ] initiative that we rolled out last year, but we are seeing some pickup in momentum, especially in the dining side. We saw some pickup in Q4, as the impact of the lower GST started playing out. It's early days, yes, but I would say that, yes, we did see some momentum.
Right. And you also mentioned delivery has been doing better. Has that been also on account of more push by food aggregators in the space, are you seeing more sales, more orders coming through their platform for yourself?
Latika, the good part is that, even as aggregators have grown, our own organic growth has been [ as such ]. So there is no disproportionate queue that we are seeing from aggregators vis-a-vis our own platform.
Thank you. Ladies and gentlemen, I now hand the conference over to the management for closing comments. Over to you.
Thank you, everyone, for joining the Q4 earnings call. In summary, I just want to restate what we said in the beginning. We are happy with the performance that we delivered last quarter and are extremely confident and optimistic about the prospects in the future. And we will continue to deliver profitable growth. Thank you.
Thank you very much members of management. Ladies and gentlemen, on behalf of Jubilant FoodWorks Limited that concludes today's conference call. Thank you for joining us. And you may now disconnect your lines.