Dpc Dash Ltd

to DPC-Limited Interim 2024 Earnings Conference Call. All participants will be in listen-only mode during management's prepared remarks, and there will be a question and answer session to follow. Today's conference will be recorded. At this time, I would like to turn the call over to Kathy Jung, IR Director of DPC- who will share the process for today's call and provide some important disclosures. Please go ahead ma'am.

thank you operator hello everyone and thank you for joining us on today's call again as a reminder you are all currently on mute we will open up the floor during q a session after management's prepared remarks we will try to answer as many questions as time allows today you will hear from eileen wang executive director and ceo of dpc dash Helen Wu, CFO of DPC Dash, and Michael Xu, Chief Performance Officer, CPO of DPC Dash. Eileen will provide insights into the company's overall performance and share recent developments. Helen will go a bit deeper into first half of 2024 financial results. The management team will address your questions after their remarks. Before we continue, I'd like to remind you that our earnings call and investor materials contain forward-looking statements about our business that may be considered as forward-looking statements under applicable securities laws, which are based on various assumptions and other factors that are beyond the company's control and are subject to risks, future events, and uncertainties. Accordingly, actual results may differ materially and adversely from those anticipated or implied in the forward-looking statements. You can identify these forward-looking statements because they include terminology such as may, will, expect, estimate, believe, going forward, plan, projection, aim, or other similar expressions. Statements that are not historical facts, including but not limited to statements about the company's beliefs, plans, and expectations are forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the Hong Kong Stock Exchange. Also, this call includes discussions of unaudited financial information and certain non-IFRS financial measures. Please refer to our results announcement and interim report to be published in accordance with the rules governing the listing of securities on the Stock Exchange of Hong Kong Limited. which contain a reconciliation of the non-IFRS measures to IFRS measures. All information provided in this earnings call is as of the date of this call. The company, our affiliates, advisors, and representatives undertake no obligation to update any forward-looking statements except as required by law. With that, I will turn the call over to Ms. Eileen Wang, Executive Director and CEO of DPC-DASH. Eileen, please go ahead.

Hello, everyone, and thank you for joining us today as we discuss the PC-Limited results for the first half of 2024. As the exclusive master franchisee for Domino's Pizza in mainland China, Hong Kong Special Administrative Region, and Macau Special Administrative Region, we continue to see significant growth opportunities in the underserved Chinese pizza market. Our global franchisor, Domino's Pizza Inc., is one of the world's largest pizza companies, with more than 20,900 stores in over 90 markets around the world as of June 30, 2024. This global strength provides us with a solid foundation as we execute our 4D strategy, development, delicious pizza value, delivery, and digital. Our 4D strategy continues to drive our success in the China pizza market, This is evident in our financial performance for the first half of 2024. Our total revenues reached RMB 2.04 billion, a 48.3% increase year over year. We're proud to report our 28th consecutive quarter of positive same-store sales growth since the third quarter of 2017, when our current management team began its tenure. This consistent performance over seven years underscores the effectiveness of our strategy and the strength of our execution. In the first half of 2024, we achieved a same-store sales growth of 3.6%. This follows a solid 8.8% growth during the first half of 2023 and an overall 8.9% growth for the entire year of 2023. As of June 30, 2024, we operate 914 stores across 33 cities in China, including our Milestone 900 store, which opened in the same month. During the first half of 2024, we added a net of 146 new stores. As of August 20, 2024, we have opened an additional 31 stores, with 29 stores under construction and 21 stores signed, keeping us on track to meet our full-year target of approximately 240 new stores in 2024. At the same time, our profitability metrics have shown significant enhancement. Our store-level operating profit margin increased to 14.5%, up from 13.5% in the same period last year, while our store-level operating profit reached RMB 296.2 million. At the group level, our adjusted EBITDA reached RMB 233.4 million, representing an 83.7% year-over-year increase from 127.0 million in the first half of 2023. Accordingly, our adjusted EBITDA margin rose from 9.2% in the first half of 2023 to 11.4%. Our adjusted net profit for the first half of 2024 was RMB 50.9 million, compared to an adjusted net loss of RMB 17.4 million in the same period of last year. Our net profit turned positive for the first time in terms of both reported and adjusted net profit after tax. Now I'd like to take a more detailed look at our performance during the first half of the year with a particular focus on our 40 strategy. In the first half of 2024, Our revenue grew by 48.3% year-over-year, driven by both same-store sales growth and new-store openings. The average daily sales per store reached RMB 13,515, a 10.1% increase year-over-year. This growth was mainly driven by an increase in the average daily orders per store, which rose to 162 from 140 a year ago. In terms of developments, We have experienced significant growth across all our markets, driven by our deeper penetration in existing cities and our expansion into new ones. We successfully entered eight cities at the end of last year and launched the four additional cities in the first half of 2024. The performance of our new stores has been exceptional, contributing significantly to our overall success. As of July 31, 2024, We proudly hold 28 out of the top 30 positions within Domino's global system in terms of the first 30-day sales. In the new markets we entered, we have continued to expand our presence with more stores and maintain our strong performance. Of the 42 stores we opened in these 12 cities, 18 have already achieved a payback. We expect the average payback period for these stores to be within nine months, reflecting the efficiency of our expansion strategy. On delicious pizza at value, we have continuously innovated our product offerings to better serve our customers' evolving tastes. From the start of this year to the end of July 2024, we introduced three new pizza varieties and two new crust options, such as barbecue pork stuffed crust and coconut and pumpkin double-deckers. Our menu now boasts over 30 pizza varieties and approximately 20 crust options, with pizza sales contributing more than 75% of our total sales. This diverse selection reinforces our position as China's leading pizza brand. During the summer, we expanded our successful durian pizza series with a third offering. This series now includes three durian pizzas at different price points that truly resonate with durian lovers. Just 10 days ago, we launched our new cheese volcano crust, filled with oozing cheddar cheese magma and Oreo crumbs. This unique concept in the pizza industry has already garnered positive feedback and recognition from our customers, further demonstrating our commitment to menu innovation and customer satisfaction. In terms of delivery, while delivery remains a core part of our strategy, We have seen a significant uptick in dining and carry-out services during the first half of 2024, particularly in our newly entered markets. As new consumers try out Domino's Pizza brand and our products in these cities, the high volumes of dining and carry-out orders have led us to voluntarily suspend delivery services temporarily in some stores. We plan to gradually resume delivery services in these locations when the timing is right, which will contribute to our future sales performance. Despite this shift, delivery continues to account for a significant portion of our overall revenue. In Shanghai and Beijing, delivery services still make up 73.1% of total revenue. However, the increase in dine-in and carry-out orders in newly entered markets has resulted in a decrease in the overall percentage of delivery services. from 63.6% in the first half of 2023 to 46.4% in the first half of 2024. This shift in the delivery mix has also contributed a slight decrease in the average sales value per order, which fell from RMB 87.6 in the first half of 2023 to RMB 83.6 in the first half of 2024. Turning to digital, Our digital initiatives continue to drive customer engagement. We have attracted new customers by dynamically engaging them through more online channels. We're continuously enhancing our capability to offer personalized rewards, improving both new customer conversion and existing customer retention. As of today, our loyalty program has surpassed the 20 million members, a significant increase from 10.9 million members a year ago. Moreover, we have been continuously leveraging our digital advantages, supply chain capabilities, and economy of scale to further elevate our operational efficiency at both the store and corporate levels. These ongoing improvements have been instrumental in boosting our store-level operating profit margin and group-level adjusted EBITDA margin. These results illustrate the effectiveness of our 4D strategy in preparing our growth and underscore the resilience and flexibility of our business model. We're steadfast in our commitment to our expansion plans and the continuous enhancement of our operational efficiency. We look forward to delivering sustainable, profitable growth in the Basta Pizza market in China. With that, I'd like to turn the call over to Helen Wu, our CFO to discuss the financial results.

Thank you, Eileen. Hello, everyone. Thank you again for attending the earnings call tonight. To start, I will walk you through our financial highlights for the first half of 2024. Please note that all the numbers we are presenting today are in RMB terms, and all presentation is on a year-over-year basis unless otherwise stated. We delivered a solid financial performance during the first half of 2024. Our robust revenue growth, combined with our ongoing initiatives to improve operational efficiency, has yielded improved profitability at both store and corporate levels. For the first six months of the year, our revenue increased by 48.3% to $2.04 billion from $1.38 billion in the same period of 2023. This growth was primarily driven by an increase in our average daily sales per store and the expansion of our store network during the first half of 2024. Our average daily sales per store grew by 10.1% year-over-year to 13,515 in the first half of this year from 12,275 in the same period of 23. This increase was mainly driven by an increase in the average number of orders per store per day, which increased from 140 to 162. A few notes before we get into the specifics of our costs. First, our raw materials and the consumables cost includes the COGS related to both our stores and the Central Kitchen. Staff compensation expenses encompass, number one, the store-level cash-based salaries, which also includes the labor costs at our Central Kitchen. Number two, corporate-level cash-based salaries. And number three, share-based compensation. The vast majority of rental costs are incurred at the store level, as are a majority of the planning equipment depreciation utility expenses, and advertising and promotion expenses. Meanwhile, the vast majority of amortization of intangible assets is incurred at the corporate level, as is the majority of our other expenses. Please refer to our income statement and financial statement footnote for more context on both store and corporate level cost components. With that, let's look at the costs and the margins at both the store and corporate levels. During the first half of 2024, our strategic initiative resulted in enhanced operational efficiency and increased brand awareness, driving optimization of both store and corporate level economics. Our raw materials and consumables cost for the first six months of 2024 amounted to $557.8 million, representing an increase of 46.6% in line with our revenue growth. we have managed to keep the ratio of a raw materials consumables cost to revenue in a relatively stable range from 27.6% in the first six months of 23 to 27.3% in the same period of 24. Advertising and promotion expenses as a percentage of revenue decreased to 5.4% in the first six months of this year from 5.9% a year ago. This was mainly because our brand marketing activities became more targeted and cost-effective as we strengthened our brand through store network growth and a strong performance in newly entered markets. Store-level cash-based staff compensation expenses as a percentage of revenue increased to 27.4% during the first half of the year from 26.9% a year ago. The increase was primarily attributable to the growth in the number of store-level full-time employees per store. In the first half of 2024, as we accelerated our store openings and opened more new stores in recently entered new cities, we recruited more store-level full-time staff for training in advance in order to better serve our customers and become more familiar with new markets. Our rental or lease-related expenses are reflected in three lines on our income statement. First is the depreciation of right of use assets under IFI 16 accounting rule. Second is the variable lease rental payment, short-term rental, and other related expenses. These two lines aggregate amounts as the percentage of revenue decreased to 9.9% in the first half of 2024 from 10.1% a year ago. The third line is lease liability in finance cost category, recorded under IFRS 16 accounting rule, which the amount as a percentage of revenue decreased from 2% in the first half of 23 to 1.6% in the first half of 24. As a result, the aggregate percentage decrease was 0.6% year over year. The decrease was primarily driven by our robust revenue growth and our enhanced brand recognition, which enabled us to secure more favorable lease terms. The charge rates for depreciation and amortization, utility expenses, and other expenses experienced slight decreases relative to our growing revenue. Meanwhile, the charge rate for store operation and maintenance expenses remained relatively stable as a percentage of revenue. Building on our consistent efforts to drive efficiency, our store-level operating profit achieved a robust growth. In the first half of 2024, our store-level operating profit reached $296.2 million, a 59% year-over-year increase. This improvement is also evident in our store-level operating profit margin, which stood at 14.5% in the first half of 2024 compared to 13.5% in the same period of 2023. This positive trend also extends to the corporate level, notably for the two largest cost items, cash-based staff costs and depreciation and amortization costs. Charge rates relative to total revenue have consistently decreased. This improvement aligns with our continued revenue growth and the unfolding benefits of scale and efficiency. Cash-based compensation expenses for corporate-level staff as a percentage of revenue decreased to 5.5% in the first half of 2024 from 7.4% in the same period of 2023. This was primarily due to our corporate-level staff becoming more experienced and better equipped to support the operation of an expanding network of stores, and also reflects the continued benefits of economies of scale for cost efficiency at the corporate level. Building on our robust revenue growth, effective cost control at the store level, and increasing benefit of scale and efficiency at the corporate level, our group adjusted EBITDA grew to $233.4 million. This represents an 83.7% year-over-year increase. from 127 million in the first half of 23. Our group adjusted EBITDA margin also saw positive growth, rising to 11.4% in the first half of this year, comparing to a 9.2% in the same period of 23. As a result, our adjusted net profit, which reflects our core recurring business, reached 50.9 million, compared to an adjusted net loss of $17.4 million in the first half of 2023. In addition, during our first half of 2024, our reported net profit also reached $10.9 million as compared to a reported net profit of $8.8 million, which is mainly benefited from a non-recurring, non-business operation-related, non-cash fair value gain of approximately $119.3 million on convertible senior ordinary shares. Finally, some updates on liquidity. Our cash position remains strong through the first half of this year. As of June 30, 2024, we held $1.09 billion in cash and cash equivalent, which includes the restricted cash. Additionally, we have an interest-bearing bank loan of $200 million with maturity set for 2025. This concludes my prepared remarks for today's call. Operator, we are now ready to take some questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause for a moment to assemble our roster. And our first question today will come from Lucy Yu of Bank of America Securities. Please go ahead.

Hi. My main question is on the that in the first half, you are still delivering positive , but given that in July and August, we have seen the retail sales trend being quite weak. So could you please give some update on the recent sales trend? And secondly, is that how should we think about the rest of the year, i.e., going into the second half of 24? What's our current guidance on the revenue as well as profitability for the second half? Thank you.

Hey, Lucy. Thank you. This is Helen. I'm going to actually address your question. Starting from July, actually July, we still see a positive same-store sales for our business. And August, we haven't ended yet, but we do expect to deliver a positive same-store sales growth for Q3 and for Q4 of this year as well. So I think that addresses your question about the outlook for the second half as well.

And what is your... Yeah, just to follow up that in the first half, actually, your revenue growth was a bit higher than expected. And I saw not just because of the same stock, but also the stock expansion in the first half was a bit higher than expected as well. So should we think that for the rest of 2024, should we still be expecting similar kind of revenue growth?

Um...

It's probably going to still be in similar range year over year.

Ernesto, how about the probability in the second half?

I think... Let me put it this way. We actually have always adopted a very conservative tone in terms of the outlook. So we still want to exercise this prudence. So let's assume that actually the second half in terms of probability will be similar to the first half.

Understood. Thank you so much.

Our next question today will come from Lisa Liao of Jefferies. Please go ahead.

Hi, management team. Thanks for taking my question. This is Lisa Liao from Jefferies, and congratulations for the continuously outstanding results, especially under a very challenging environment for most of China's consumer companies. So my question is, actually, I saw our 10% growth in average daily sales per store. This is mainly driven by nearly 16% of the order growth. while the average sales value actually was down 5%. So besides the influence of the delivery mix change you mentioned, have we seen any pricing pressure from intensified competition or price war from restaurant peers? And how do we expect this pressure to continue? And what is our view on the future trend of this average value? Thank you so much.

Thank you. This is Helen again. I'm going to address this question. I think for the first half, as we mentioned in our announcement, the contribution from new growth market from revenue side is actually more than 50%. And also we mentioned that actually the revenue, the growth in the new growth market has been the main driver for our overall growth. already and then for but we also consider that actually if you look at you know our it wasn't mentioned actually because in the new gross market the dying portion the carry out portion is actually higher than the delivery right and then also going forward as we open more new stores in the new gross market and we're expanding to the new markets customers always come to try our product first and they start with dying and carry out And then, so I think this kind of trend will probably continue as, you know, as we, every year we're adding more new stores and a lot of them or a larger portion of that will be actually allocated to the new gross market or new cities because, you know, as you can see that from a lot of the social posts, so many customers are asking us to open new stores. And we also want to actually, you know, given the white space that we actually want to, bring our product, make it more available to the customers, to the customers in China, overall or nationwide. So this actually, this is how we look at it, the revenue contribution from the new growth market going forward. And then in terms of the promotions or price or pressures, et cetera, I think, you know, from our brands, the... Let me put it this way. The perception or the mind share that we have built with our customers has always been we have tasty pizza product, and we have very innovative menu, and also we have been always offering value options on our menu, and we have our regular promotions of Crazy Wednesday, Tuesday, and also the Mega Week, etc., So we haven't done any excessive promotions like a lot of our competitors who have been doing that. And then, so as to your question, whether this trend or this kind of trend will come, so we don't have that trend yet in the first half.

Thank you so much.

Our next question today will come from C.G. Lin of CICC. Please go ahead.

Thank you, Madison.

Congratulations on the strong and resilient growth. So I have two questions. First is about our product and pricing strategy. So given such weak environment and fear of competition. And my second question, I want to ask a bit about the central kitchens. So what is the current level of automation and are there plans to invest more in technology in the future? For that, what is our guidance on CAPAC? Thank you.

Thank you. I'll address the question on product pricing strategy. And Michael, you want to address the question on the essential kitchen. Yes. So on product and pricing, so first I'll start with the 4D strategies, right? So the 4D represents development, delicious pizza value, delivery, and digital. So in terms of the second D, so the delicious pizza value, so first, we believe we're actually the pizza category leader. So that's why we want to have a high number of SKUs in terms of pizza and also crust options. Like I mentioned before, currently we have more than 30 kinds of pizzas, And then we have close to 20 kinds of cross options. Second, on the product pricing strategy, you probably hear me say this every single time. So our enterprise starts at 39 RMB. And every Tuesday and Wednesday, like Helen mentioned, we'll have the crazy Tuesday and Wednesday 30% off. So 39 times the 70% is actually close to 28 RMB. Typically, the group size is actually two to three people. So per person is actually really valuable. It's close to 14 RMB. And then besides that, we also have options to help on the ASP. So for example, we'll offer options on stuffed crusts. We'll offer options on double-deckers. We'll also offer more indulgent series of pizzas. And that way, we have a balanced sort of strategy between the enterprise, and also SKUs that will help trade up the consumers. With that, I'll pass that to Michael for Central Kitchen.

Thank you, Annie. This is Michael. I will answer the question on Central Kitchen. We've already introduced some auto machines in Central Kitchen, including auto mixer, auto divider, auto rounder, and the tray cleaning and drying lamp. Besides the ERP system, we also implemented some systems including WMS, the warehouse management system, OMS, the ordering management system, and the TMS, the transportation management system. And we plan to invest more new auto machines in our new central kitchen, like auto feeding system, spiral cooling tower, to continuously improve the production efficiency. Thank you.

Thank you so much.

Our next question today will come from Yeru Wong of CITIC Securities. Please go ahead.

Hi, Management Team. Thanks for the question and opportunity and congratulations on the company's great performance during the first half year. My question is about the store opening plan and the pattern of it. As we can see that in the first half year, the number of new stores opening in Beijing and Shanghai area has decreased on a year-on-year basis, while that in the new growth market has actually increased. So I'm wondering if the future store opening will be more focused on the new growth market and the expansion space for Beijing and Shanghai area may be kind of limited. And also, there were 146 new stores opening in the first half year, and the previous full-year target was around 240. So will there be any adjustment to the store opening target for this year and maybe in the future? Thanks for your answer.

Thank you for the question. So I will answer the question on development. So you said that in Beijing and Shanghai, the new opening number is actually slowing down. But we are actually having more than 180 stores in each of Shanghai and Beijing. So naturally, the opening focus wouldn't be in Shanghai and Beijing. That said, going forward, we will continue to look for sort of selective opportunities in Shanghai and Beijing to see where's the limit. And then in terms of the new markets, you remember that we only have stores in 33 cities. And China has more than hundreds of cities. So we have plenty of opportunities to open stores in new markets. Plus, these days, we hear consumers in those markets, they share their voice that they really want our business to go there. And that's why you see when we open the markets in this newly entered market, we've got very outstanding performance. So with that, we'll try to open more stores in these markets and then offer our delicious pizza to more customers. And in terms of the opening for this year, So, so far, given all the sites that we opened, we put under construction, we signed a contract and approved the package. We're actually very much on track for the full year target of 240. With that, we will also start to prepare for next year's opening. As we mentioned before, for the next two years, the opening target will be adjusted up to between 300 and 350. Thank you.

Our next question today will come from Huyi Li of Minsheng Securities. Please go ahead.

Hello, Elaine, Helen, Michael, and Kelsey. This is Huyi Li from Minsheng Securities, and I have one question that might be similar with the question at the previous place, but you know many of our new stores didn't have time for delivery, so average price is lower than the last years. And if we take out all these factors, are we seeing pressures on average price? Are we seeing consumer spending is more cautious in all stores? Can you share more details? Thank you.

Thank you for the question. I'll take this question. So I'll give you one example, right? So we actually always believe that value for money does not equal low price. If you offer really tasty food, if you offer really innovative products, our customers are still willing to pay for that. So, for example, in the summertime, we actually launched the third option within the durian series. It's called Maosan King Durian. And then the ticket is actually 88 RMB. But still, we actually see very good sort of feedback and strike rate on this product. And then at the same time, about 10 days ago, we launched a new crust called Volcano Crust. So, you know, it's sort of a bowl full of the oozing cheese, and then our customers can actually dip our cheesy pizza into this cheese. So this is very innovative. And then we actually get, you know, great feedback, despite the fact that we charge people with 17 RMB for that. So I do think that if the food is really tasty, and then if the food is actually very innovative, people are willing to spend money on that.

Thank you very much.

As there are no further questions, this will conclude our question and answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you so much for coming to our call. We look forward to continue the conversation with you guys. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.