TH International Ltd (THCH) 2025 Q1 法說會逐字稿

Ladies and gentlemen, welcome to Tim's 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 Bakx, who will head Tim's China's Investor Relations efforts for preparing marks 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 Gemma Bakx, Head of Investor Relations, and here to say that Tim's China 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 a slide presentation in 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 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. 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 Lu, our CEO and Director. Please go ahead, Yongchen.

Thank you, Gemma. Good morning and good evening, everyone. In Q1, we started by our differentiated strategic positioning in coffee plus freshly prepared food by launching Light & Fit Lunch Box. A series of new platform combo products for the launch data to boost lunch sales and offer our guests a healthy and tasty lunch option.

The lunch box lineups include Hot Baked Bagel Sandwiches, Energizing Lunch Wraps and Loaded Power Bowls pair with a coffee or other beverages or at an acceptable price point. With Tim's China's Super Bowl 40% of discount card, the Light & Fit Lunch Box combo product pricing start from as low as RMB24, nearly about $3.5, delivering both greater value and greater nutrition.

Our latest Loaded Power Bowls products were launched in middle of May. They come in a standard 2 + 8 + 8 configuration featuring 18 carefully selected ingredients in bowl. The 2 stands for two portions of high-quality protein, while the two 8s represent 8 wholesome grains and 8 colorful vegetables, creating a nutrient-rich meal designed to meet the needs of business professionals, and the fitness enthusiasts alike.

The Light Lunch Box product has been a key strategic focus for Tim's in 2025. It aims to reshape consumer perceptions of Tim's as a lunch destination beyond our traditional strength in breakfast, as I also mentioned before. They thereby creating a second high demand meal data 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 the healthy dining, embedding the cafe experience deeply into a health-focused lifestyle. This initiative has been enthusiastically welcomed by the market since the launch, contributing meaningful incremental daily transactions to the post holiday rebound in sales and help Tim's gain traction in the competitive white collar launch segment, setting a solid foundation for continued momentum in Q2 and beyond.

(inaudible) macroeconomic volatility and intense market competition. Our team has demonstrated great resilience and achieved significant profitability improvements. (technical difficulty) efficiencies, supply chain optimization and the 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 percentage points year over year respectively.

We regain top line growth in the first quarter and achieved 3.5% increase in system sales year over year. Our sub franchise and the retail businesses also contribute steady cash flows and the 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, 50%. These achievements are testament to Tim's China enduring efforts and our strive for further profitable growth.

On-store development and leveraging some franchisee partnerships and we strategically expanded our store footprint into 84 cities, including the city of Fuyang and Nanchang and that we entered in Q1 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 franchisee model. We have established attractive and desirable store unit economics for our sub-franchisees with a reasonable two-to-three-year payback period on average.

As of March 31, we -- our 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.

Our marketing to offset the seasonal slowdown caused by the extended Chinese New Year holiday, Tim's China implement a series of strategic initiatives in Q1, including co-branded collaborations and a brand birthday campaign. These efforts are designed to drive traffic, increase -- increased the average transaction value and established new consumption.

Ahead of the lunar New Year in January, Tim's partner with Oatly during the breakfast day part to boost sales and collaboration featured limited time value items pair with branded merchandise, enhancing value and helping lift consumers average spending. In March, Tim's launched a co-branded campaign with the Eagle Brand America (inaudible) to reinforce its health-conscious positioning and urban white-collar professionals loving Eagle Brand's strong appeal within these key demographics.

Aligned with the post (inaudible) period, the 61st Tim Horton's birthday anniversary initiatives was strategically timed to accelerate recovery from the new year now. During the fifth period, Tim's roll out Chinese version of Double Double and seasonal comeback of its signature product, Tim's Donuts. We believe that cultivating a stronger emotional connection around the brand birthday will help deepen consumer recognition in the in the long run -- in the long term.

At this time, I would like to turn over to our CFO, Albert Li, to discuss our first quarter financial performance in more detail.

Thank you, Yongchen. 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 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 operated 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 the 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 equivalent time deposits and restricted cash RMB211.4 million, $29.1 million, compared to RMB184.2 million as of December 31, 2024. The change was primarily attributable to the drawdown of additional bank borrowings, partially offside 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 posed to further enhance our operational efficiencies, such as supply chain optimizations and rigorous cost controls to roll out our refrigerating made 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 over to Yongchen 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 for -- to our guests, team members, business partners, shareholders, and everyone supporting our endeavors and the 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 valuable quality products, a unique advantage of offering franchise opportunities as an international coffee brand and refined store economics with payback period within two to three years.

With these milestones behind us, we have started first in our commitment to sustainable, profitable growth and to generating long-term value for our shareholders. I will now turn the call over to Gemma for today's Q&A session.

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

(Operator Instructions)

Steve Silver, Argus Research Corporation.

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 a 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. As you know, Q1 usually is kind of the lowest quarter for the company, usually for the industry as we all know. And also, we continue to strategically prune certain unperforming stores both company owned and franchise 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 them, 10, not make -- made to order stores are those very express stores very small, not -- cannot offer the made to order to our guests.

Intentionally, we close those stores, and we actually open two made to order stores in Q1 and this will accelerate in the second quarter and in the -- especially in the second half as usual, how 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 made to other 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 Tim's business.

I mean, yeah -- I mean, the government is doing something but not in larger scale yet. And after the Chinese New Year, the consumers' (inaudible) didn't improve a lot, not given the launch of DeepSeek, as you know, the AI platform. And also, some (technical difficulty) in China, so the sentiment of consumers didn't improve.

But the economy remains okay, a bit struggling, so I mean, the government is still contemplating what policy can be very effective in China. So we are still wait to see the project to come out and to see the effect on the consumer -- 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 how you think about right now competing in a more intense value competition, given the market.

Yeah, I mean, I think the market has become actually more rational, especially on the coffee side. I mean, the last year or the year before, the competition was really driven by the two companies that lacking the quality. And 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 know, we, not intentionally, get into the pricing war. We try to differentiate our play. That's why you know we really know, focus on our differentiation point, the coffee plus freshly prepared food combos. And from last year, we converted most of stores into made to order further, not differentiating our food offerings, and we are very strong in breakfast, as we all know. And this year, we launched the Light & Fit Lunch Box, post the launch data, which has been successful so far.

So we try to differentiate our players, and we try to make our combos really competitive. So for breakfast item, one coffee plus one bagel price at RMB19.99, less than $3. For the lunch, we price around RMB30 with the (inaudible) 40%. The lowest can be RMB24, nearly about $3.5. So the combo itself is very competitive in in China, and we can -- we have seen continuous momentum on the combo growth here in China.

Great. Thank you for taking all the questions.

Thank you, Steve.

(Operator Instructions)

I'll hand it back to Gemma for our 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 metrics 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 industry competition. As I mentioned earlier, it's really not between lacking and calling, but which really draw the whole industry into the pricing order.

But in the mid to long term, with increasing customer demanding coffee consumption from both expanding coffee population penetration rate in the rising frequencies (technical difficulty) significant room for the growth in coffee sector. We have seen an improving trend in the same store sales growth since October 2024. And our strategic goal remains unchanged and to achieve a 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 comparable transactions put on a store level has regained growth since April, and we have seen part of same store sales in recent weeks. So that's why we are very optimistic about our second half same store sale growth -- sales growth.

And as I mentioned, again, Tims 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 Light & Fit Lunch Box series products have been really welcomed by the market, achieving an average of 20 plus incremental daily transactions per store, setting a very good foundation for continued to grow in Q2 and beyond.

Back to you, Gemma. Any more questions?

(Operator Instructions)

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

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

Yeah. Thank you, everyone, for taking your time and listening this webcast. Now, we have no comment to deliver positive same store sales for the year, and we'll continue to improve our profitability quarter over quarter. Thank you. We -- 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.