TH International Limited

Ladies and gentlemen, welcome to Teams China first quarter 2025 earnings conference call. All participants will be in the listen-only mode during management prepared remarks, and there will be a question and answer session to follow. Today's conference is being recorded. At this time, I'd like to turn the call over to Gemma Bucks, who will head Teams China's investor relations efforts for prepared remarks and introduction. Please go ahead, Gemma.

Thank you very much, Desmond. Hello, everyone, and thank you for joining us on today's call. My name is Linda Watts, Head of Investor Relations, and here to say that TimsChina today announced its first quarter 2025 financial results earlier today. A 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 a question and answer session. You can find the slide presentation and the webcast of today's earnings call on our Investor Relations 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 fact, 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. 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 issued earlier today. With that said, I would now like to turn it over to Yongchen Liu, our CEO and Director. Please go ahead, Yongchen.

Thank you, Gemma. Good morning and good evening, everyone. In Q1, we solidified our differentiated strategic positioning in coffee plus freshly prepared food by launching light and fit lunch box, Qingti Wuchang He Xide, a series of new platform combo products for the lunch day part to boost lunch sales and offer our guests a healthy and tasty lunch option. The product lineups include hot baked bagel sandwiches, energizing lunch wraps, and loaded power bowls, paired with coffee or other beverages, all at an acceptable price point. With Team China's Sibaba 40% off discount card, the light and fit lunchbox combo products Pricing starts from as low as RMB 24, near about 3.5 US dollars, delivering both great value and great nutrition. Our latest low-power bowls products were launched in middle May. They come in a standard 2 plus 8 plus 8 configuration, featuring 18 carefully selected ingredients The 2 stands for two portions of high-quality protein, while the 2-8 represents eight wholesome grains and eight colorful vegetables, creating a nutrient-rich meal designed to meet the needs of business professionals and fitness enthusiasts alike. has been a key strategic focus for Teams in 2025. It aims to reshape consumer perceptions of Teams as a launch destination beyond our traditional strength in breakfast, as I also mentioned before, thereby creating a second high-demand meal day part and driving sustainable revenue growth. It also introduces a fresh take on Western-style healthy lunches in a cafe setting, offering a complete entree plus snack plus coffee meal solution. This is more than just an extension of our product line. It's re-imaging how busy urban consumers eat and exceeding their expectations. We are moving from singular coffee consumption to all-day healthy dining embedding the cafe experience deeply into a health-focused lifestyle. This initiative has been enthusiastically welcomed by the market since its launch, contributing meaningful incremental daily transactions to the post-Harley rebound in sales and helped teams gain traction in the competitive white-collar launch segment, setting a solid foundation for continued momentum in Q2 and beyond. Amidst macroeconomic volatility and intense market competition, our team has demonstrated great resilience and achieved significant profitability improvements. Thanks to our operational efficiencies, supply chain optimizations, and rigorous cost controls, during the quarter, company owned and operated store contribution margin and adjusted corporate EBITDA margin improved by 5.9 percentage points and 6.1 endpoints year-over-year respectively. We regained top-line growth in the first quarter and achieved 3.5% increase in system sales year-over-year. Our sub-franchise and retail businesses also contribute steady cash flows and profitability. Profits from other revenues increased by 34.5% year-over-year. At the same time, we cut losses and adjust corporate EBITDA by nearly half, 5-0%. These achievements are testament to TeamChina's enduring efforts and our strive for further profitable growth. On store development, leveraging sub-franchisee partnerships, we strategically expanded our store footprint into 84 cities, including the city of Fuyang and Nanchang, that we entered in keyword while maintaining capital efficiency delivering absolute convenience for our guests since we launched our individual franchises program in december 2023 we have received over 7 000 applications and successfully converted nearly 200 stores by the end of march showcasing market confidence in our franchise model we have exception attractive and desirable store unit economics for our sub-franchisees with a reasonable two to three year payback period on average. As of March 31st, our largest loyalty club members reached 25.2 million, reflecting a remarkable 25.7% year-over-year growth. The average number of members per store has now surpassed 24,500. serving as a strong catalyst for our future growth. On marketing, to offset the seasonal slowdown caused by the extended Chinese New Year holiday, Teams China implemented a series of strategic initiatives in Q1, including co-branded collaborations and a brand birthday campaign. These efforts were designed to drive traffic, increase increased average transaction value and established new consumption occasions. Ahead of the Lunar New Year in January, teams partnered with Oatly during the breakfast day part to boost sales. The collaboration featured limited-time menu items paired with branded merchandise, enhancing value and helping lift consumers' average spending. In March, teams launched A co-branded campaign with Eagle Brand America adjoins them to reinforce its health-conscious positioning and expand its presence among urban, white-collar professionals, leveraging Eagle Brand's strong appeal within these key demographics. Aligned with the post-Hard Day period, the 61st Tim Hortons Brand World Birthday Anniversary strategically timed to accelerate recovery from the New Year law. During this period, Tim's low-out Chinese version of Double-Double and seasonal comeback of his signature product, Tim's Donuts, we believe that cultivating a stronger emotional connection around the brand birthday will help deepen consumer recognition and loyalty in the long term. At this time, I would like to turn it over to our CFO, Albert Li, to discuss our first quarter financial performance in more detail.

Thank you, Yongchun. We continued to demonstrate our capabilities to further improving our financial performance by refining store unit economics and driving efficiencies at both store and corporate levels. Our sub-franchisee and retail business also contributed steady cash flows and profitability During the quarter, we further improved our company-owned and operated store contribution margin and adjusted the corporate EBITDA margin by 5.9 percentage points and 6.1 percentage points, respectively. We remain focused on delivering high-value for quality, healthy products and thoughtful services to our ever-growing customer base. Our overall monthly average transacting customers reached $2.92 million in Q1 2025, a 4.3% increase from $2.80 million in the same quarter of 2024. Additionally, digital orders as a percentage of total orders rose from 85.4% in Q1 2024 to 86.3% in Q1 2025. we continue to enhance our digital capabilities to meet the growing demand for delivery and takeaway services. In Q1, our company-owned and operated store revenue dropped by 14.0% year-over-year, which was primarily due to the closure of certain underperforming stores and a 6.5% decrease in same-store sales growth. In the meantime, revenue from our franchise business and retail business increased by 28.6% year-over-year. The number of our franchise stores increased from 302 as of March 31, 2024 to 455 as of March 31, 2025. Our system sales increased by 3.5% year-over-year. We also made significant progress in boosting operational efficiency in Q1, setting the stage for our long-term sustainable growth. Through refinements in our supply chain capabilities and the economy of scale, we reduced the food and packaging costs as a percentage of revenues from company-owned and operated stores by 4.3 percentage points year over year. Food and packaging costs accounted for 30.4% of our company-owned and operating store revenues during the quarter. We continued to streamline our operations by pruning underperforming stores, refining staffing arrangement, and optimizing store managerial efficiency. These actions led to a year-over-year reduction in labor costs and other store operating expenses as a percentage of revenue from company-owned and operated stores by 2.4 percentage points and 1.1 percentage points year over year, respectively. Benefiting from our cost optimization measures and increased brand recognition, our marketing expenses as a percentage of total revenues decreased by 0.1 percentage points year over year. Our general and administrative expenses decreased by 4.9% year over year, which was primarily due to a reduction of our headquarter headcount and other cost optimization measures. With all the above positive effects, we have been able to improve adjusted corporate EBITDA margin by 6.1 percentage points in Q1. Turning to liquidity, as of March 31, 2025, our total cash and cash equivalents, time deposits, and restricted cash amounted to $211.4 million, US dollar $29.1 million, compared to RMB $184.2 million as of December 31, 2024. The change was primarily attributable to the drawdown of additional bank borrowings partially offset by cash disbursements on the back of the expansion of our business and store network nationwide. Moving into the second quarter of 2025, with profitable growth always being front and center of everything we do, we are proposed to further enhance our operational efficiencies, such as supply chain optimizations and rigorous cost controls. to roll out our differentiating mate to order fresh and healthy food preparation model to drive traffic, to optimize the overall store unit economics, and to accelerate the expansion of our successful sub-franchising. I will now turn it over to Yongcheng for concluding remarks, followed by Q&A.

Thank you, Albert. Our first quarter performance reflects continuous improvements. and the resilience in our business and execution, as well as challenges and opportunities in this industry in China. We extend our sincere gratitude to our guests, team members, business partners, shareholders, and everyone supporting our endeavors and journey. Together, we have built over 1,000 stores in 84 cities, a robust community of over 25 million loyalty club members, a unique coffee plus freshly prepared food business model offering the best value for quality products, a unique advantage of offering franchise opportunities as an international coffee brand, and a refined store unit economics with a payback period within two to three years. With these milestones behind us, we have started first in our commitment to sustainable, profitable growth and generating long-term value for our shareholders. I will now turn the call over to Gemma for today's Q&A session. Gemma.

Thank you very much, Yongchen. We will turn it over to Q&A and open it up for our registered questions. Let's begin with the first question. Go ahead, Desmond.

Thank you. As a reminder, if you'd like to ask questions on the phone, please press star 11 and wait for a name to be announced. If you'd like to cancel your request, you can also press star 11 again. One moment for the first question. Our first question comes from the line of Steve Silver from Argus Research Corporation. Please go ahead.

Thank you, operator, and thanks for taking my questions. Given that there were just a few net store openings in Q1, I'm curious as to what your current thoughts are on the outlook for new store account for the full year. as well as the pace at which the company plans to work through the significantly growing number of franchise applications.

Thank you, Steve, for your question. Yeah, and as you know, Q1 usually is kind of the slowest quarter for the company, usually for the industry, as we all know. And also, we continue to strategically improve certain underperforming stores, both company-owned and franchisee stores, during the first quarter. And also, as you know, we launched the made-to-order model from last year, which has been proving very successful in China right now. In quarter, actually, we closed 10. In total, we closed 18, but among those 10, not make-to-order stores, those very express stores, very small, cannot offer the make-to-order to our guests. So intentionally, we closed those stores. And we actually opened plenty of make-to-order stores in Q1. And this will accelerate in the second quarter, and especially in the second half, as usual. Most of the stores will be open in the second half, especially in Q4, as usual. So we continue to aim to open around 200 mid-to-order stores this year.

Great. Thank you. And there's been quite a lot of activity announced from the Chinese government related to stimulus aimed at spurring consumer activity. I'm curious as to your thoughts about the current state of the Chinese consumer and how you're viewing that as it relates to the Thames business.

I mean, the government is doing something, but not in large scale yet. And after Chinese New Year, the consumers' morale did improve a lot, given the launch of DeepSeek, as you know, the AI platform, and also in China. So the sentiment of consumers did improve. But the economy remains a bit struggling, so the government is still contemplating what policy can be very effective in China. So we are still waiting to see the project come out and to see the effect on the consumption side.

Great. And one last one, if I may. As you think about the competition and the continued growth in the overall market in China, I'm curious as to just how you think about right now competing in a more intense value competition given the market.

I think the market has become actually more rational, especially on the coffee side. last year or the year before, the competition was really driven by the two companies, Lucky and Kodi. So as you know, both companies have been founded by the same person. And so they are so similar, so they are really competing on the price point. So I mean, for us, we We're not intentionally getting to the pricing wall. We try to differentiate our players. That's why we really focus on our differentiation point, the coffee plus prepared food combos. And from last year, we converted most of the stores into mixed-order, further differentiating our food offerings. And we are very strong in breakfast, as we all know. And this year, we launched the light and fit lunchbox to boost the lunch day plan, which has been successful so far. So we try to differentiate our players, and we try to make our combos very competitive. So for breakfast items, One coffee plus one bagel, priced at 19.99 RMB, less than $3. For the lunch, we price around 30, with a 2.40%. The lowest can be 24, nearly about $3.5. So the combo itself is very competitive in China. And we have seen continuous momentum on the combo growth here in China.

Great. Thank you for taking all the questions. Thank you, Steve.

Thank you for the questions. If you'd like to ask questions on the phone, please press star 11 and wait for a name to be announced. I'll hand it back to Gemma for a web question.

Hi, Gemma. Is there any questions from the web?

My apologies. That was a mute. Could you please give us an update, is what John Norwood is asking, on same-store sales and margin trends since the end of March?

Sure, yeah, I mean, same-store sales is a very important operating matrix that we closely monitor. I mean, the fluctuations in the same-store sales growth over the past year now reflect the short-term uncertainties in China's economic and consumption sentiment, and the intense industrial competition, as I mentioned earlier, is really now between liking and calling. which really draw the whole industry into the pricing orbit. But in the mid to long term, with increasing customer demand in coffee consumption from both expanding coffee population penetration rate in the rising frequencies, they've been significant room for the growth in coffee sector. We have seen and improving trend in the same-store sales growth since October 2024. And our strategic goal remains unchanged to achieve positive same-store sales growth in 2025, especially in the second half of the year. We have seen strong momentum here right now. Another improvement we have seen is that the compatible transactions on a store level have new gain growth. since April. And we have seen past same-store sales in recent weeks. So that's why we are very optimistic about our second half same-store sales growth. And as I mentioned again and again, Teams China is not solely focused on the coffee market. We continue to see strong and growing demand for our fresh, prepared, healthy food products. For example, Our latest launch of the Light Fit Launch Box series products have been very welcomed by the market, achieving an average of 20-plus incremental daily transactions per store, setting a very good foundation for continuing to grow in Q2 and beyond. Back to you, Gemma. Any more questions?

Once again, if you'd like to ask questions on the phone, please dial star 11.

It seems that we have no more questions. Is that right, Desmond?

That is correct. So with that, that concludes today's question and answer session. I would like to hand the call back to Yongchun for closing remarks.

Yeah, thank you, everyone, for taking your time and listening to this webcast. We have comments to deliver positive single-store sales for the year, and we'll continue to improve our profitability quarter over quarter. Thank you. We'll talk to you again in the next quarter.

Thank you.

Thank you all very much.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your line.

Thank you. Bye. Thank you.