TH International Limited

Ladies and gentlemen, welcome to the Teams China's second quarter 2024 earnings conference call. All participants will be in listen-only mode during management's prepared remarks, and then will be a question-and-answer session to follow. Today's conference is being recorded. At this time, I would like to turn the call over to Gemma Bucks, who heads Teams China's investor relations efforts, for prepared remarks and instructions. Please go ahead, Gemma.

Thank you very much, Nadia. Good morning and good evening, everyone, and thank you for joining us on today's call. My name is Gemma Box, Head of Investor Relations at Tim's China, and we're announcing second quarter results earlier. We announced it 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 Lee, our CFO. After the company's prepared remarks, the management team will conduct a question and answer session. You can find the webcast of today's earnings call on our IR site. Now, before we get started, I'd like to remind you that our earnings presentation and investor materials contain forward-looking statements, and they're 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 with 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 issued earlier today. With all that said, I'd like now to turn it over to Yongchen Lu, our CEO and director. Please go ahead, Yongchen.

Thank you, Gemma. Good morning and good evening, everyone. I'm Yongchen Lu, CEO and director of Kim's China. The second quarter of 2024 represents a significant milestone for our company as we achieve a just corporate EBITDA profitable for the first time in our corporate history. This result was driven by an intense focus on our core strength of delivering gas, great value for money products, and our differentiated fresh food offering, coupled with continuous improvements in operational efficiency. This important milestone comes as we deliver our highest ever store EBITDA margin of 10.3%. Our focus on sustainable profitable growth has included greater emphasis on building our franchise network, collaborating closely with our sub-franchises to deliver them compelling unit economics while providing our guests with a consistent experience and driving our bottom-line profits. Despite a 6.6% reduction in revenue from company-owned stores due to our strategic decision to prune underperforming stores since the fourth quarter of 2020, we have sustained to achieve 1.6% growth in system sales. Our efforts are paying off not just in our improving profitability, but in the strength of our sub-franchise's pipeline, which stands at over 3,000 600 applications as of the end of June. As of the June 30th, 2024, our registered Lottie Club members reached 21.4 million, reflecting remarkable 45.4% year-over-year growth. The average number of members per store has now surpassed 23,000, serving as a strong catalyst for our growth. and clearly demonstrated our customers' enthusiastic support for Teams China loyalty programs. The ongoing support from our customers inspires our team to continue delivering the best value for quality products. During the second quarter, we launched several impactful marketing campaigns, including collaborations with the Suzhou Museum and at the mainline, ZifoZifo IP which collectively garnered a combined total exposure of over 45 million across WeChat and the Little Red Book social platform. Continuous product innovation is central to our strategic vision. In Q2 2024, we introduced 25 new beverages and 9 new food products, which contribute approximately 14% of our top-line sales. Then offerings such as the Floral Latte , Buffalo Milk Latte , and the low-fat Real Juice Fruit Americano Series have resonated strongly with customers. We are committed to delivering healthy food options for our guests, with our customers' preference for healthy products in mind, we have also advanced our distinct coffee plus strategy, launching new bagel products like the strawberry yogurt smile bagel, Weixiao Bagel, and the thick yogurt smile bagel, Weixiao Bagel. The total number of bagels sold increased from 4.8 million in Q2 last year to 6 million in Q2 2024. with a percentage of orders that include food rising to 51.9%. To further enhance our strength and leadership in differentiated food products offerings and healthy food options, we completed make-to-order renovations for nearly 300 stores today. With very limited capital expenditure investment, we have witnessed strong incremental food revenue growth already. We are on track to roll out our renovations model to more stores by the end of the year to demonstrate to our customers that at Teams China, our food is freshly prepared on site. Additionally, we secured up to US$50 million in financing in Q2 2024 from our founding shareholders, Cartesian Capital Group and RBI, which underscores the commitment of our founding shareholders to our dynamic business. This year is a pivotal one for us, and fortifying our balance sheet is an important step forward towards ensuring our long-term success in a highly competitive market. This transaction enables us to drive growth in and intensify our focus on our core Tim Hortons brand. Strengthening our core brand remains a key element of our strategy, and in order to provide an even sharper focus on developing the Tim's brand, we agreed with RBI to transfer the Popeyes China business back to them at the end of the second quarter. This transaction allowed us to streamline our operations and focus on our core business areas, while providing us with US dollars 15 million in capital, which will be instrumental in driving further business expansion and optimizing our balance sheet. At this time, I would like to turn over to our CFO, Albert Li, to discuss our second quarter 2024 financial performance in more detail.

Thank you, Yuncheng. In the second quarter of 2024, we achieved positive adjusted corporate EBITDA for the first time. We reached this significant improvement in our financial performance by optimizing our store unit economics, cutting costs at headquarters, and closing underperforming stores. We remain committed to delivering cost-effective, high-quality products to our growing customer base. Our overall monthly average transacting customers reached to 3.1 million in the second quarter of 2024, a 12.1% increase from 2.8 million in the same quarter of 2023. Additionally, digital orders as a percentage of total orders rose from 80.6% in Q2 2023 to 86.5% in Q2 2024. We continue to enhance our digital capabilities to meet the growing demand for delivery and takeaway services. During the second quarter of 2024, we made more significant strides in enhancing our operational efficiency. Through refinements in our supply chain management and economies of scale, we reduced the food and packaging costs as a percentage of revenues from company-owned and operated stores by 3.1 percentage points year over year. We continued to streamline our operations by proing and performing stores and optimizing unit economics. This action led to a year-over-year reduction in rental expenses, labor costs, and other store operating expenses as a percentage of revenue from company-owned and operated stores by 1.5 percentage points, 3.0 percentage points, and 1.3 percentage points, respectively. Benefiting from our cost optimization measures and increased brand recognition, our marketing expenses as a percentage of total revenues decreased by 2.6 percentage points year over year. Additionally, we streamlined our headquarter costs, resulting in a significant reduction in adjusted general and administrative expenses as a percentage of total revenue by 3.4 percentage points year over year. Turning to liquidity, As of June 30, 2024, the company's total cash and cash equivalents, time deposits, and amount due from related parties in relation to the financing from RBI were RMB 253.2 million compared to RMB 219.5 million as of December 31, 2023. The increase was primarily attributable to the financing from our funding shareholders, partially offset by cash disbursements on the back of the expansion of our business and store network nationwide and the repayment of bank borrowings. Looking ahead, our focus remains on executing our strategy to drive profitable and capital-efficient growth. We will continue to strengthen our brand and expand our gas value, great value for money, freshly prepared food offering. We will also work closely with our sub-franchisees to drive traffic and enhance our supply chain efficiencies, improving their store economics, and in turn, driving our bottom line profitability. Now, I will turn the call over to Gemma for today's Q&A session. Thank you, Gemma.

Thank you very much, Albert. Over to you, operator. Do we have questions for our Q&A?

As a reminder, if you wish to ask a question over the phone, please press star 11 on your telephone keypad and wait for a name to be announced. To withdraw a question, please press star 11 again. Alternatively, you can submit your questions via the webcast.

Nadia?

There are no questions at this moment on audio lines.

Okay. Thank you. I have a question here that came in, and it says, congratulations on achieving your first ever adjusted corporate EBITDA profitability. That's a significant milestone. Can you elaborate on how the company can maintain and achieve continuous profitability going forward?

Okay. I'll take at least one question. So, I mean, we successfully achieved a just-copy EBITDA profitability for the first time, as I just mentioned, amidst macroeconomic challenges and intense competition in the Chinese coffee market. So this really inspires us to provide more exceptional, valuable money products for our guests going forward. So moving forward, we are set up first in prioritizing profitable growth as our core strategy. Firstly, we'll be bolstering our revenue through our unique coffee-brush-prepared food strategy, complemented by our target precision marketing initiatives that resonate with our customers very well. Secondly, we have achieved significant benefits from improving operational efficiency, reducing basically all cost elements year-over-year Albert just now mentioned in detail. This confirms to us that a relentless focus on optimizing unit economics is crucial for securing our long-term profitable growth and success. So given the significant brand recognition we have built in the market, partnering with our franchisees make us as well positioned to drive our profitable growth capital-efficiently.

Back to you, Gemma.

Thank you. Thank you so much.

And now we're going to take the next question from Steve Silver from August Research Corporation. Just give us a moment, Steve, and your line is open now. Please ask your question.

Okay. Thank you, operator. My questions are that In the past, Q4 has been the most active quarter for new store ads, and I'm just curious if there's any visibility emerging into the growth outlook for this year's Q4.

Yeah, thank you, Steve, for the question. Yes, no, we're expecting much more openings in Q3, and especially in Q4, as usual. So, yeah, we have... down very well in the individual franchising for the first half. We opened 20 already, and we have signed additional 52 at the end of June, and we are now getting the momentum on the individual franchising, so we're expecting to much more open it in the second half of this year.

Thank you. Thank you. Dear participants, as a reminder, if you wish to ask a question over the phone, please press star 11 on your telephone keypad. Alternatively, you can submit your questions via the webcast.

Nadia, can I ask the next question that came in?

Yes, of course. Please do, Gemma.

The next question that we received is, does your Q2 adjusted story without margin of 10.3% have room to grow further in the coming months, which are typically the busiest of the year, as Steve pointed out, I believe?

Yeah, I mean, we always keep a sharp eye as streaming line operations. you know, refining our supply chain and cutting costs wherever appropriate. So, I mean, we are happy with the margin we have achieved in Q2, and we'll always seek further improvements where we can find.

And with the, no, sorry, back to Gemma.

Nadia, are there any more questions?

Then I'll ask the next one that came in, which is, in the context of our competitors exhibiting signs of growth weakness recently, how do teams analyze and interpret the competitive landscape in the Chinese coffee market as it stands today?

OK, I'll take that one. So I mean, in the second quarter of 2024, the Chinese coffee market continues to face the huge challenge with notable players like Lucky and Starbucks in China experiencing a decline in the same store sales by 28% and 14% respectively as they released in their last quarter earnings. And we believe our distinctive coffee plus fresh prepared food strategy sets us apart and does well amongst the intense competition as we have done. Even as China navigates the trend of reducing consumption and trading down, there continues to be a strong and enduring pursuit of convenient and healthy food options among consumers. So our great value for money coffee plus bagels combination is well positioned to cater to this trend. And to accelerate this challenge, we have completed make-to-order renovations in near 300 stores to date. which has shown a great growth in food sales. And we are on track to further lower these renovations model to most of our stores by the end of the year. And with very limited capital expenditure investment, we anticipate these strategic enhancements will significantly drive incremental growth in our food revenues.

Back to you.

Thank you very much. Nadia, is it okay if I ask the next one?

Yes, please follow.

All right. Regarding the ongoing price war as it's described, where do things stand with regards to that price war as it's ongoing? Are there any signs in your view? Is there anything that you're seeing that the battle is cooling off or losing steam?

I mean, we have possible, you know, being as bewildered as the next person about how long some of our competitors have been going at it. I believe some can last longer, some cannot go on forever. That said, no, we cannot expect it to last this long.

And as a follow-up that I'm receiving here, where does China position itself in the ongoing price war? Where does it see itself? Where do you see yourself?

I mean, while it obviously has an effect on us, but we do not really proactively participate in the pricing war. I mean, we are not in the premium category. Our brand is valued for money. So rather than lowering our coffee price, we have been promoting our combos, coffee plus bagel, coffee plus fresh prepared food at a very attractive price. So we'll continue doing that strategy and differentiate us from other coffee producers. And also, we are launching value lines, both in coffee and food, to adapt to the market right now.

Thank you, Gemma. And now we're going to take the question from audio lines. Just give us a moment. And the question comes from Steve Silva from Argus Research Corporation. Your line is open. Please ask your question.

Thanks for taking this follow-up. With the recent capital infusions and the achievement of corporate EBITDA positivity in this quarter, I'm curious what the company sees as its primary need for capital moving forward, given that the sub-franchise model is capital light by nature.

Okay, I will take this one. Thank you, Steve. Okay, so as Yongcheng has mentioned, to further strengthen our leadership in the Coffee Plus strategy, so we will be making additional investment in terms of to implement the made-to-order renovations. So the MTO renovation will enable our customers actually to see the fresh food ingredients and also our freshly food preparation process to be more visualized to them. So we believe this will offer expanded revenue opportunities for us. And with this MTO renovation, we can also ensure that most of our stores can offer actually standard menu among all our store formats and we also believe that like the return on such MPO stores will be very good and secondly we also plan to enlarge our spending on like more actually marketing initiatives or efforts to actually to address like new markets from multiple channels. So we will definitely invest, certainly, in marketing. And we will also invest in R&D to offer more attractive and also good value for money products, like more value line products to our customers. And lastly, I want to mention, in terms of how we want to use the capital more efficiently, We do also have plan to open like certain like new company owned and operated stores like on the I want to mention that you know actually on the back of the Reusage of certain coffee machines future equipment and furnitures from those like store closures We think actually the additional incremental capex will be quite limited. So to address your question, I think that would be the plan for us, like how we want to deploy the recent capital injections from our shareholders. Thank you, Steve.

Thank you for the additional color. I appreciate it.

Thank you. The speakers don't have further questions, so move your lines.

All right.

I have one more here, if I may. And the question is, do you expect the store account to go up this year, or will you continue to focus also on pruning more underperforming store and also on store renovations? The second part of the question is, do you foresee, now that you've demonstrated success in expanding your capital-efficient sub-franchise franchise model, do you foresee any further changes in store concepts for TIMS?

Yes, we do expect the store count to go up in the second half, especially in Q4, as I just mentioned to Steve's questions. As our individual franchises are ramping up quickly, for the first half of this year, we focus more on pruning underperforming stores. And right now we have achieved the positive corporate EBITDA, and also we have opened very successfully in individual franchising, so we are ramping up to open more in the second half.

Back to you, Gemma.

Dear participants, thank you for all your questions for today. There were no further questions, and I would like now to hand over the conference to Gemma for any closing remarks.

Thank you all very much. I have no further questions here either. Thank you very much for sharing our good news with us today, and we look forward to speaking with you very, very soon. Thank you very much.

Thank you, everyone. Thank you, everyone.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.