This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: ladies and gentlemen welcome to teams china fourth quarter elko year 2023 earnings conference call all participants will be in listen only mode during management's prepared remarks and there will be question and answer session to follow today's conference is being recorded at this time i'd like to turn the call over to jemma bax who hits teams china investor relations efforts for prepared remarks and introductions please go ahead jemma
spk04: Good morning, good evening, everyone, and thank you for joining us on today's call. My name is Gemma Box, Investor Relations. TH International Limited announced its fourth quarter and full year 2023 financial results earlier today. The press release, as well as an accompanying presentation, which contains operational and financial highlights, are now available on the company's IR website at ir.timschina.com. Today you will hear from Yongchen Liu, our CEO and Director, and Albert Li, our CFO. After the company's prepared remarks, the management team will conduct its Q&A session. You can find the webcast of today's earnings call on our IR website. Before we get started, I'd like to remind you that our earnings presentation and investor materials contain forward-looking statements which are subject to future events and uncertainties. Statements that are not historical facts, including but not limited to statements, about the company's beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release, and risk factors included in our filings with the SEC. This presentation also includes certain non-GAAP financial measures which we believe can be helpful in evaluating our performance. However, those measures should not be considered substitutes for the comparable GAAP measures. The accompanying reconciliation information related to those non-GAAP and GAAP measures can be found in our earnings press release issues earlier today. With that said, I would now like to turn it over to Yongchen Lu, our CEO and Director. Please go ahead, Yongchen.
spk01: Thank you, Gemma. My name is Yongchen Lu, CEO and Director of Teams China. In 2023, we may progress in a number of the core elements of our strategy. We deliver greater convenience to our guests. by building density in existing cities and entering new cities. We expanded our community and our partnerships, growing our strategic franchising relationships with blue-chip partners like SinoPax EasyJoy. We continue to drive locally relevant innovation, which has always been a strategic focus for us. and we deliver growth in a capital-efficient manner, loading up stores with a more rapid payback period and accelerating our franchising activity. With our systems and infrastructure solidly in place, our focus is now squarely on driving profitability with a view to achieve corporate EBITDA break-even later this year. We just celebrate the significant milestones of our fifth anniversary in China and the 60th anniversary of the Tim Hortons brand. With those celebrations behind us, we redouble our focus on the future, and in particular, driving rapid, profitable, and capital efficient growth. We deliver 29.8% and 55.9% year-over-year top-line growth in Q4 and four-year 2023, respectively, demonstrating robust growth in the first four years following the end of COVID epidemic in China. And notably, the company-owned stores we opened in 2023 are among the most profitable we have ever opened. thanks to our ongoing commitment to innovation, operational efficiencies, and optimized unit economics. As of December 31st, 2023, our registered loyalty club members reached 18.7 million, representing 66.3% year-over-year growth, with the average number of members per store exceeding 20,000. and we just surpassed 20 million registered Lory club members on March 31, 2024. Our store network development strategy continues its streak of success, as evidenced by the impressive sales during the launch of Yichang and Tangshan cities. achieving RMB $88,000 and RMB $46,000 in sales respectively. Leveraging our various store formats, we have forged new partnerships with reputable retailers as our sub-franchisees, such as B-Store in Chinese, Liangping Puts, opening the first Teams Express store in B-Store's shop in Wuhan in December 2023. Building on our substantial long-term investments in branding technology and infrastructure, we have strategically prioritized the expansion of of our franchise business starting in Q4 2023. In the past year, we successfully opened 213 franchise stores with 109 of these opening in the first quarter alone. Looking ahead, we are committed to further strengthening our collaborations with established strategic partners such as SinoPAC's ETHJOY, while actively pursuing other fitting partnerships. For instance, our recent partnership with Shanghai Metro led to the opening of the first seven software-positioned stores in Shanghai Metro stations, as Shanghai has one of the world's largest metro systems. transporting approximately 13 million passengers across the city every day. We anticipate that this partnership will provide greater visibility to the Teams brand and connect us with a larger, diverse customer base. Continuous product innovation has always been a strategic focus for us. In 2023, we launched a total of 147 new products, 47 new beverages, and 51 new foods, and nine merchandise items. In Q4 2023, our newly launched jasmine tea coffee series products. In Chinese, , orange flavored cinnamon latte. In Chinese, , and Strawberry Flavor Latte, in Chinese, Bu Zi Na Tie Fa Si Cao Mei, who are among the best sellers. We also collaborate with Sponge Bob, in Chinese, Hai Mian Bao Bao, which generate more than 10 million media exposures on Xiaohongshu and Douyin, gaining significant brand awareness. As an international coffee brand that offers best value for quality products, we continue to implement our unique coffee plus strategy which has been a key differentiator yielding positive outcomes. Following the successful bagel and brew coffee campaign in Q3, we further advance the Wednesday membership day campaign offering discounted combo deals on coffee and bagels to further refine our welcoming combo meals offering. In the first quarter, the percentage of orders that included food lost to 54.7%, increased by almost 8 percentage points from 47.1% in the same quarter of 2022. And something on Popeyes. Our Popeyes business has been demonstrating strong momentum since the record-breaking grand opening of our first flagship store on August 19, 2023. Within 135 days, we successfully launched 10 Popeyes stores in Shanghai. achieving an average pace of one new store every 14 days, a true testament to the value of the infrastructure we built in Tink, and something our team is very excited and proud of. By the end of 2020, our Chinese Popeye's store had sold over 154,700 pieces of various flavors of fried chicken and seafood burgers offering more dining choices during different meal times. In addition, our local innovative R&D team created flavored iced and hot milkshakes, resulting in sales exceeding 52,000 cups, demonstrating the popularity of our beverage category as well. Our private domain channels for Popeyes through the mini program and WeChat ecosystem have successfully attracted over 200,000 dedicated customers who have not only made purchases but refills as well. Looking ahead to the remainder of 2024 and into 2025, the Popeyes team is fully committed to further enhancing our core products and advancing digital marketing initiatives and solidifying our market position through high-quality operational management and optimized profitability. At this point, I would like to turn over to our CFO, Albert Li, to discuss our fourth quarter and full-year 1023 financial performance in more detail. Albert.
spk03: Thank you, Yingquan. During the fourth quarter of 2023, we enhanced our operational efficiency across a number of dimensions. We pared back costs that proved to be redundant at the headquarter level, and we pruned our underperforming stores, which we have decided earlier to give a full year post-COVID to evaluate. These actions allowed us to deliver year-over-year reduction in rental and labor costs as a percentage of revenue from company-owned and operated stores by 6.9 percentage points and 1.3 percentage points respectively. Our marketing expenses and adjusted general and administrative expenses as a percentage of total revenues decreased by 2.1 percentage points and 5.8 percentage points year over year respectively. In 2023, Red Hat sold a total of nearly 60 million cups of beverage and over 21 million of bagel products, representing a year-over-year growth of 71.3% and 129.4% respectively. Our system sales grew by 35.9% year-over-year to RMB $388.5 million in Q4 2023. The growth was primarily driven by an increase in the number of system-wide stores from 17 as of the end of 2022 to 912 as of the end of 2023, and a 7.6% sales growth for company-owned and operated stores in 2023. Overall monthly average transacting customers were 3.1 million during Q4 2023, representing an increase of 55.1% from 1.9 million in the same quarter of last year. Digital orders as a percentage of total orders increased from 81.2% in Q4 2022 to 83.6% in Q4 2023 and will continue to strengthen our digital capabilities to meet the growing demand potential for delivery and take-away services. Turning to the liquidity, as of December 31, 2023, our total cash-on-cash equivalent, time deposit, and short-term investments were RMB 220.8 million compared to RMB 611.5 million as of December 31, 2022. The change was primarily attributable to the settlements with investors who entered into an equity support agreement with us, as well as cash disbursements on the back of the rapid expansion of our business and store network nationwide, offset by an increase in bank borrowings. And to mention, in March 2024, we entered into US$20 million promissory notes financing with Cartesian Capital, our existing shareholder. Going forward, and with profitability being front and center of everything we do, we will continue to enhance our supply chain capabilities and efficiencies. roll out our differentiating made-to-order fresh food preparation model to drive traffic, and accelerate the expansion of our successful sub-franchising. With that, now let me pass it back to Yongcheng for closing remarks. Thanks, Yongcheng.
spk01: Yeah, thank you. Before we turn to Q&A, I would like to take this opportunity to express my heartfelt gratitude to our shareholders, investors, business partners, and team for your continued support and hard work. Together, we have created a strong community of over 20 million Lottie Club members, a unique coffee plus warm food business model, offering the best value for quality products at an international coffee brand, differentiated and comprehensive store formats with 900 plus stores in over 60 cities. and a unique advantage of offering franchise opportunities as an international coffee brand. We just celebrate the significant milestones of our fifth anniversary being in China and the 60th anniversary of the Tim Hortons brand. With these milestones behind us, we look forward to fully being focused on driving profitability with a view to achieve corporate EBITDA break-even later this year and generate long-term sustainable value for our shareholders. Now I will turn the call over to Gemma for today's Q&A session. Gemma?
spk06: For our registered questions. Let's begin with the first question.
spk04: Go ahead, operator.
spk07: Thank you. To ask a question via the telephone, please press star 1-1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. To ask your question via the webcast, please use the Q&A box available on the webcast link. Gemma Overtier.
spk04: We have the following question submitted via our webcast link. How does the company perceive the competition in the Chinese coffee market, especially the price war in recent years? How does the company differentiate itself and compete effectively amongst those peers?
spk01: Thank you for the good question from our friend. Despite the macroeconomic headwind in China, the coffee market growth remains low but due to increased urbanization and disposable income. It is worth noting that the current coffee market in China is still in its early stages of development. Per capita annual consumption still represents extremely low penetration, less than 10 times compared to countries such as the US, Germany and even other Asian countries such as South Korea and Japan. where the per capita annual consumption right now is over 200 cups. So overall, China's coffee industry has been experiencing rapid growth with significant potential for further expansion, indicating that the market is far from reaching saturation. There's definitely a price war going on, which we do not believe is sustainable, though. We do see some market disruptions. However, in the long run, this does not seem to be a profitable way to operate business. Despite a price war leading to strong revenue and the union growth, margins will inevitably get compressed. And this margin pressure will likely lead to financial straits. So no one is likely to be able to maintain this aggressive pricing strategy for much longer. So on the plus side, the price war effectively helps expand the coffee market by making it accessible to a wider audience through low prices and increased availability. This strategy indirectly benefits us as these new consumers initially drawn by lower prices and they eventually seek high quality yet affordable options. As the price war eases, and consumers interested in exploring diverse coffee offerings growth, our well-positioned brand is ready to capture this emerging market segment. Our differentiated product offering at comparing prices with fresh food options is so good that we actually don't really compete directly with those brands, and we take some shares from the market. Given the growth of the market overall, we have a very good spot for ourselves. Again, we have seen that in the last 12 months. We have opened more stores than we had previously, and they are among the most profitable that we have opened to date. So the energy and the profitability are coming at the same time. And there's certainly no sign of stabilization, even despite this price war. Thank you.
spk07: Thank you. Next telephone question comes from the line of Steve Silver from Argus Research Corporation. Please ask your question, Steve.
spk00: Okay. Hello, everybody. And in case the name didn't come through, it's Steve Silver from Argus. So thanks for taking the questions. It's great to see the target for achieving corporate EBITDA break-even this year. First question I have, Tim recently put out a press release mentioning having entered your 60th city in China. I was hoping you could discuss the forward-looking plan in terms of whether new store openings will focus more on entering new cities and markets. or whether it'll be more of increasing penetration into existing markets? Yeah, thank you, Steve, for the great question.
spk01: No, I think we will focus on our priority. We will focus on increasing density in the success cities, but we will also enter into The new cities within the clusters, we have operations already. As you may have heard from me, we have four major clusters in China. The East China cluster, mainly Shanghai, and the cities close to Shanghai. We have presence in the cluster. then we'll enter into more space in that cluster, given the efficiency of supply chain, the logistics, and the marketing, etc. So that's one example. And we have clusters in Beijing, the Beijing cluster, and we have clusters in Guangzhou, Shenzhen, and we have clusters in Chengdu, etc. So I mean, we'll enter... into more lucidity in those classes and leveraging the infrastructure and the system we have during those classes already. Thank you.
spk00: If it's helpful, thank you. So one more. I'm sorry, can I ask one more? Yeah, go on. Yeah. Okay, great. Yeah, so I had also one question about the loyalty program having now surpassed 20 million users earlier this year and showing very solid growth. I was just hoping you could provide a little context around that in terms of maybe any percentage of active users among the registered base and just maybe any context how that compares across the industry. Thank you so much.
spk01: yeah i mean that question i i'll i'll briefly i mean as you know albert mentioned we have three million you know monthly average interacting customers so okay you know calculate you know the the active rate there and also i would like to uh emphasize the repeat purchase rate i mean now we will measure okay the people the consumers come to our stores uh more than uh two times or twice or more than twice two times The pre-purchase rate is around 40%, which is, I think, above average for the investor.
spk00: Great. Thank you so much for taking the questions. Thank you, Steve.
spk07: Thank you, Steve. For our next question, Gemma, over to you.
spk04: Thank you, Operator. We had another question coming in via our webcast link, and it is, how do you most differentiate yourself from your competition in terms of price,
spk01: terms of product offering and in terms of day parts as well yeah i mean food is the most differentiated part for us compared with other coffee brands in china especially in our standard stores where we offer made to order fresh food And we offer combo meals at a very compelling price. For example, for breakfast combos of one cup of coffee plus one bagel, we price at only RMB 19.9, which means less than $3 for the breakfast combo. And for lunch combos, One cup of coffee plus one bagel sandwich, starting from RMB 26.9, which is like less than $4. So as I mentioned earlier, in the fourth quarter, the percentage of orders that include food rose to 54.7%. More than half of orders come with food, increased by almost 80 percentage points. from 47.1% in the same quarter of 2022. So despite the price war going on last year, our same-store sales continue to grow in 2023, given our differentiation strategy.
spk02: Thank you.
spk05: Thank you. Please go ahead, Gemma.
spk06: Thank you, Operator.
spk04: Our next question from our webcast link is what is your expectation on the same store sales growth for 2024 and how does the company perceive the margin outlook going forward?
spk03: Okay, sure. I will take this question. Thank you, Gemma. So as you mentioned, the Chinese coffee market is actually showing strong growth potentials. So we believe in terms of the per capita annual consumption will rise quite significantly over years. Okay, and then so we have recently noticed a strong recovery in terms of ticket sales as some of the intense I mean and even though some of the intense competition is being I think is beginning to one so with the price war Siding so and as consumers seeking a broader exploration of coffee auctions we believe our brand actually is well positioned and as you have noted in the press release we just made our 2023 same store sales was 7.6% for the whole year for 2023 and I think we are also expecting like single digit or even high single digit same store sales growth for this year And then, so with that said, I think our positioning as we seat draws in a lot of new customers. And we are also seeing, like many of our existing customers, actually increasing their coffee consumption. And our coffee plus warm food. business model actually will still be expected to significantly differentiate us and contribute to our same-store sales growth in the future. Thank you, Gemma.
spk07: Thank you. As a reminder, to ask a question via the telephone, please press star 11 on your telephone keypad. To ask your question via the webcast, please use the Q&A box available on the webcast link. For the next question, over to you, Gemma.
spk04: thank you um the next submitted question from our webcast is what can we expect from popeyes in the rest of 2024 how's the rollout going how is fried chicken different from the chinese coffee market and can popeyes benefit from tim's china's built community and network uh yeah i mean i'll take that question so china
spk01: As we all know, it's an extremely large chicken market and Chinese consumers really like chicken, fried chicken, etc. Such a large market can certainly accommodate another great Western fried chicken brand like Popeyes, in addition to KFC, which has over 10,000 stores already in China and being extremely successful in China. By offering great space for vibrant, young, and energetic store environments, as well as casual table service, Popeyes has been well accepted by consumers in Shanghai. And you can see that in sales and in our traffic. And we'll continue to build the brand and open stores as planned. There are a lot of synergies between Teams and Popeyes. Most of the system and infrastructure Tim has built over the past five years can be used for Popeyes, like the digital systems, store network planning capabilities, supply chain capabilities, as well as the members and communities. That is why we were able to launch Popeyes in just about five months instead of a typical one-year new market entry process and achieved was like breaking first day transaction numbers. And as I mentioned, we have over 20 million Lory Club members and teams. And we look forward to introducing our more than 20 million Lory Club members to Popeyes. And to have that in-field network, to be able to reach out to them and bring them to our new brand, that is a very powerful tool. Thank you.
spk07: Thank you. Gemma, you may continue with the web questions.
spk04: Thank you. What is your current thinking on the state of the balance sheet, given that most of the infrastructure is built out and the business model is shifting to franchises?
spk03: Okay, sure. I will take this one. Okay, so as Yongchun has mentioned, I think actually to achieve operating cash flow self-sufficient and becoming a corporate EBITDA group even is one of the top priorities for the whole company in 2024. So with that, we actually are expecting our overall in terms of operating cash flow status will actually improve quite significantly this year. And in the meantime, as we are also focusing more and more on the sub-franchising business model, We believe in terms of the profitability, in terms of the cash flows that can be brought by the sub-franchising business will actually add quite significant value and contribute to the overall, to actually in terms of the cash balance and also to help us reduce the overall leverage ratio quite significantly. So I think in terms of the balance sheet, we are expecting our overall leverage ratio can be actually declined going forward. And in the meantime, we are also actually considering actually in terms of financing like solutions in the meantime such as actually we still keep a very good balance in terms of the overall bank facilities and I think as a public company we are still open to and we still have a lot of access to potential financing Yeah, so actually we are quite confident that our overall actually balance sheet status can improve over time in 2024. Thank you.
spk05: Thank you. Thank you. For our next question, Gemma, over to you.
spk04: We have a question come in from Oliver Mihaljevic, and it is a follow-up question on the balance sheet. How will you bring it into a sustainable position at year-end 2023? Current liabilities were nearly $200 million, while current assets were only $65 million. Net operating cash flow was still negative. The recent $20 million issuance of promissory moats at a certain interest rate seems like a stopgap measure. Have you had conversations with the major shareholders and can you update us on what their views are and what your current plans are?
spk01: Thank you. As Albert mentioned, we expect to achieve corporate EBITDA break-even very soon. And also we have shifted to a capital efficient manner of opening stores by being a franchisee. So, I mean, we actually will generate an operating cash flow very soon, and also, you know, we'll leverage the franchisee store to open that network. And we expect to open around 500 franchisee stores this year by, you know, building the strategic partnerships we have, such as Thunder Package Enjoy, and also we just opened two the individual unit franchisees and we have received more than 2,500 applications from the market. So we are confident we can improve our cash balance sheet very soon by operating cash flow and SLI opening strategy which will bring us cash and profitability. And of course, as Albert mentioned, our major shareholder has given us a $20 million profit note, which has further enhanced our partnership. Thank you.
spk07: Thank you. Over to Gemma for our next question.
spk04: Thank you. We have a question from Brian Jones from RBC. So for Popeyes, I believe you have implemented the new kitchen and supply chain for your locations. And can you speak to how fast your locations can serve clients versus global system averages? Can you talk to the productivity that you're seeing at the 10 stores that you own? Thank you.
spk01: I think right now the Popeyes have used a table service system so actually our guests can come into the stores and sit down first and just use their mobile phone to scan the QR code to place the order at a table. then our staff will bring, will make the food and bring the food to the table. So, I mean, which is very casual, you know, and our consumers really like that kind of service. So, I mean, I think we, our service speed is good and our food is good and service is good. So, that's why, you know, our The brand of Popeyes has been well accepted in Shanghai, the most compatible market, and we expect to continue to use that system and continue to open stores as brand. Thank you.
spk07: Thank you. We are coming to the end of this conference call. Gemma, over to you.
spk04: Thank you, operator, and thank you, Yongchen and Albert. This concludes today's earnings conference call. We thank you all for your participation, for your dialing in, for your questions, and for your interest in TIMSS. We look forward to reconnecting with you again in the very, very near future. Thank you so much.
spk01: Thank you. Thank you for your time. Thank you.
spk07: Thank you. That concludes our call today. You may now disconnect.
Disclaimer