TH International Ltd (THCH) 2025 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Tim's China's second quarter 2025 earnings conference call. (Operator Instructions) Today's conference is being recorded. At this time, I would like to turn the call over to Gemma Bakx, who heads Tim's China's investor relations efforts for prepared remarks and introductions. Please go ahead, Gemma.

Hello everyone, and thank you for joining us on today's call. My name is Gemma Bakx, Head of Investor Relations, and since China announced its second quarter 2025 financial results earlier today, the press release, as well as an accompanying presentation, which contained operational and financial highlights, are now available on the company's IR website at ir.timschina.com.

Today, you will hear from Yong Chen 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 a slight presentation in the webcast of today's earnings call on our 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 those forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and risk factors including 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 idirector. Please go ahead, Yongchen.

Thank you, Gemma. Good morning and good evening, everyone. In Q2, we reinforced our differentiated coffee plus freshly prepared food strategy with a successful launch of the [Light] Lunch Box platform, a series of new combo products for the lunch daypart to further drive our top-line growth and enhance store unit economics. The product lineup includes hot-baked bagel sandwiches, energizing lunch wraps, and loaded power bowls, paired with a coffee or other beverage, all at an acceptable price point. As a result, food revenue increased by 8.6% year-over-year, and food revenue contribution as a percentage of sales reached a historical high of 35.2%, an increase of 2.8 percentage points from 32.5% in the second quarter of 2024.

Our system sales continued to grow during the quarter, achieving a 1.4% year-over-year increase. Our sub-franchisee and retail businesses continue to deliver steady cash flow and profitability. Profits from other revenues achieved a year-over-year increase of 110.3%. At the same time, we returned to positive adjusted corporate EBITDA and reduced adjusted net losses by 16.2% during the quarter. These achievements underscore Tim's China's successful disciplined execution and our unwavering commitment to achieving sustainable long-term profitable growth.

On store development, leveraging several franchisee partnerships, we expanded our store footprint into 98 cities, including the city of Zibo in Shandong province, Lishei in Zhejiang province, Luan in Anhui province, and Jincheng in Shaanxi province that we entered in Q2 while maintaining capital efficiency and delivering absolute convenience for our guests. Since we launched our individual franchisee programs in December 2023, we have received over 8,100 applications and successfully converted over 400 stores by the end of the second quarter, showcasing market confidence in our franchisee model.

We have established attractive and desirable store unit economics for sub-franchises with a reasonable two to three-year payback period on average and have a target to open on a gross base around 200 franchise stores in 2025. We are also focused on special channel store development with 18 new store openings in locations such as railway stations, airports, highway rest areas, hospitals, universities, and schools, et cetera. As of June 30, 2025, our registered loyalty club members reached 26.2 million, reflecting a remarkable 22.4% year-over-year growth. The average number of members per store is now close to 26,000, serving as a strong catalyst for our future growth.

On product category and offering in China's highly competitive beverage market, April marked the onset of peak seasonal demand, triggering intensified rivalry among brands aiming to capture market share and drive top-line growth. Therefore, Tim's China executed a focused product-led strategy in Q2, strengthening its position across key consumption occasions and customer segments. We introduced a total of 43 new items during the quarter, 28 beverages, and 15 food products, reflecting our commitment to innovation and menu diversification. This low-cost pipeline supports our dual goals of increasing same-store sales and expanding our consumer base.

On beverage portfolio expansion, to meet growing consumer demand for healthier, lighter beverage options, we launched the Sparkling Cold Brew series, building on the success of our grape variant with additional fruit-inspired flavors. The sparkling texture differentiates the line from our value-tier Americano, while the use of cold brew coffee enhances the perceived quality and attracts black coffee enthusiasts seeking a refreshing upgrade. For our milk coffee drinkers, we reintroduced the Water Buffalo Milk series, leveraging its naturally creamy, lightly sweet profile that resonates well in warmer weather. Positioning alongside our affordable like, pay offers, this creates a compelling product mix that strengthens our appeal across both price-sensitive and premium-seeking customers.

Recognizing rising demand for non-coffee options, particularly among families and younger guests, we expanded into adjacent categories by launching a series of non-coffee beverages, including the ICED CAPP line as well as cold tea, et cetera. This product leverages existing product ingredients and infrastructure, enabling efficient innovation while broadening our afternoon reach. Together, these initiatives have enhanced the depth and balance of our beverage portfolio across price tiers and consumer needs, driving higher basket diversity and category penetration. On Lunch Time growth and data expansion, building on the successful launch of the Light & Fit Lunch Box series in Q1, we expanded the platform in Q2 with two new formats, the Wrap series and the Energy Ball series.

These additions reinforce our positioning in the growing light and healthy VO segments to strengthen our competitive advantage during the lunch daypart. We are confident that the full live meal box lineup not only meets rising demand for nutritious, convenient meals but also serves as a catalyst for traffic growth. Early data indicate a positive spillover effect with increased lunchtime business contributing to higher engagement during the breakfast and even during the daypart. Beyond revenue generation, this initiative enhances brand equity by positioning Tim's as a proven provider of balanced and everyday solutions, not just coffee.

In July, we announced the appointment of an immensely popular and multi-talented singer-songwriter and influencer, Lars Wong, as our official brand ambassador for the year. Last, we launched a dynamic series of collaborations aimed at expanding the reach of the Tim's China brand and introducing its flavorful, healthy, and light products to ever-growing audiences, especially among Gen Z consumers. These efforts are designed to drive traffic, increase average transaction value, and establish new consumption occasions. At this time, I would like to turn it over to our CFO, Albert Li, to discuss our second quarter 2025 financial performance in more detail.

Thank you, Yongchen. We continued to demonstrate our capabilities to further improve our financial performance by refining store unit economics and driving efficiencies at both store and corporate levels. Our sub-franchisee and retail business contributed steady cash flows and profitability. In the first hald of 2025, we further improved our company-owned and operated store contribution margin and adjusted corporate EBITDA margin by 2.7 and 2.8 percentage points year-over-year, 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 3.59 million in Q2 2025, a 14.3% increase from 3.14 million in the same quarter of 2024.

Additionally, digital orders as a percentage of total orders rose from 86.5% in Q2 2024 to all-time high of 90.4% in Q2 2025. We continue to enhance our digital capabilities to meet the growing demand for delivery and takeaway services. In Q2, our company-owned and operated store revenues dropped by 12.5% year-over-year, which was primarily due to the planned closure of certain underperforming stores and a 3.6% decrease in same-store sales growth. We have seen positive same-store transaction growth since April, and our same-store transaction growth was positive 3.4% in Q2. In the meantime, revenues from our franchised business and retail business increased by 50.7% year-over-year.

The number of our franchised stores increased from 333 as of June 30, 2024 to 449 as of June 30, 2025. Our system sales increased by 1.4% year-over-year. We also made significant progress in boosting operational efficiency in Q2, setting the stage for our long-term sustainable growth. Through refinements in our supply chain capabilities and economies of scale, we reduced the food and packaging costs as a percentage of revenues from company-owned and operated stores by 0.8 percentage points year-over-year.

Food and packaging costs accounted for 30.1% of our company-owned and operated store revenues during the quarter. We continued to streamline our operations by pruning underperforming stores, refining staffing arrangements, 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 revenues from company-owned and operated stores by 1.0 and 0.4 percentage points year-over-year, respectively. Rental and property management fees as a percentage of revenues from company-owned and operated stores increased by 0.9 percentage points from 19.3% in the second quarter of 2024 to 20.2% in the same quarter of 2025, which was primarily due to a 3.6% decrease in same-store sales volume growth for company-owned and operated stores in the second quarter of 2025.

Delivery costs as a percentage of revenues from company-owned and operated stores increased by 1.8 percentage points to 11.8% in the second quarter of 2025 compared to 10% in the same quarter of 2024, which was primarily due to the higher delivery revenue mix as a percentage of total revenues from company-owned and operated stores. The number of delivery orders for company-owned and operated stores increased by 10.2% year-over-year. We made more efforts to promote our newly launched Light and Fit Lunchbox series products. Our marketing expenses as a percentage of total revenues accounted for approximately 4.0% during the quarter, an increase of 0.5 percentage points year-over-year.

Our general and administrative expenses decreased by 5.2% year-over-year, which was primarily due to our cost optimization measures at the headquarter level. General and administrative expenses as a percentage of total revenues remained relatively stable at 10.8% in the second quarter of both 2024 and 2025. As a result of the foregoing effects, we have been able to achieve positive adjusted corporate EBITDA again during the quarter as we achieved earlier in the second and third quarters of 2024. Turning to liquidity. As of June 30, 2025, our total cash and cash equivalents, time deposits, and restricted cash were [RMB178.8 billion] compared to RMB184.2 million as of December 31, 2024.

The change was primarily attributable to cash disbursements on the back of the expansion of our business, partially offset by the drawdown of additional bank borrowings. Looking ahead, with profitable growth always being front and center of everything we do, we are poised to further enhance our operational efficiencies such as supply chain optimizations and rigorous cost controls to roll out our differentiating 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. And I will now turn it over to Yongchen for concluding remarks followed by Q&A.

Yeah. Thank you, Albert. Our second quarter performance reflects continuous improvements and the resiliency of our business and execution as well as both challenges and opportunities in this industry. We extend our heartfelt 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 90 cities, and a robust community of now over 26 million loyal club members, a unique coffee plus fresh prepared food business model offering the best value for quality products, a unique advantage of offering franchise opportunities as an international [competitior] in China, and refined store unit economics with a check payback period within two to three years.

With these milestones, we are steadfast in our commitment to sustainable profit 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. Yes. Thank you, Yongchen. We will turn it over to Q&A now and open it up for our registered questions. Let's begin with the first one. Go ahead, operator.

(Operator Instructions) Steve Silver, Argus Research Corporation.

Thank you, operator, and thank you for taking my questions. I was hoping you could provide your current thinking on the rate at which you can review the growing number of sub-franchise applications to accelerate the rate of new store growth and ultimately return to net store growth?

Yeah. I mean, I want to clarify, okay. I mean, for the Q2, we continue to improve underperforming company-owned stores as well as franchised stores, especially those non-MTO stores, those Express stores. Among the 49 closures in Q2, 41 were such non-MTO Express stores. So if we exclude these stores, actually, we had 31 net openings of MTO stores. So, I mean, based on the pipeline we have so far, our target is still to open around 200 new MTO stores in 2025 on a gross basis. And we'll open the majority at the sub-franchisee stores, and we'll continue to improve underperforming stores over the year to improve profitability.

So I mean, last year, this year, we'll continue to close non-performing stores and aim at improving profitability. And we expect, okay, now we'll have over 100 net openings this year, and we expect, okay, 200 to 300 new openings every year in the next few years.

Okay. Thank you. So it looks like the company continues to make good progress in managing its costs, although marketing expenses did go up as a percentage of revenues in Q2. Curious as to your thoughts on how sustainable that trend would be? And what impact it would have on the business same-store sales growth and its margins?

Yeah. I mean, our same-store sales have been recovering well. And we expect we will have positive same-store sales in the third quarter and in the second half of the year. And now the market spends in the second quarter, some part of the third quarter was to support the Lunch Box campaign. I mean, Lunch Box is a big campaign this year and which has been improving which has been working so far. As we can see, the food contribution has been continuing now to grow, and we have reached the historical high of the contribution in the second quarter. And we expect, okay, that will continue.

Great. And one last one for me, just a big-picture question. Just in terms of how Tim's China is balancing the need to invest in order to grow revenues while at the same time being conservative with operating capital, really just your current thinking about your capital needs in order for Tim's to take the next steps towards sustainable profitable growth?

Okay. Sure, Steve. I think let me address this question. So as we just mentioned during the earnings call, we returned to positive adjusted corporate EBITDA this quarter as we did in the second and third quarter of last year. So we believe we are very close to full-year adjusted corporate EBITDA breakeven as of this moment. So -- which means, you know, we are very close to, you know, realizing or achieving operating cash flows self-sufficient. So in terms of that, I think we are not, like, actually putting cash on at the operating level.

So in the meantime, you know, if we could secure additional capital. Actually, we continue working very hard on that, I think, in terms of securing, like, more bank loans onshore. And also, you know, we are also working on, like, certain financing plans for the company to bring more capital to the company and to the business. So if we could, like, actually secure more additional financing capital, we would consider opening more profitable company-owned and operated stores in the meantime. So honestly speaking, we want to achieve a very good balance between opening more company-owned stores and also in terms of balancing our overall financial position. So hopefully, I can address your question here.

Yeah. That was helpful. Thank you very much.

Thank you, Steve.

Thank you. I will now hand back to Gemma to read the questions coming through via the webcast.

Yes. Thank you, Sarah. We received a couple of questions online. You already commented on same-store sales trends. Is there anything additional you can say about those trends thus far? And also, in particular, your outlook for the remainder of the year that you haven't addressed when you spoke with this earlier?

Yeah. We talked about the same stores already. I mean, we will improve quarter by quarter. And in the second quarter, the same-store sales decreased, what has been now to only 3.6%. And we have seen a very positive trend in latest EBITDA margins. And again, we expect, okay, we'll achieve positive same-store sales in Q3 and in the second half of this year.

Okay. And could you provide an update on the refinancing of the convertible debt?

Yeah. We are in good progress right now, and we will disclose when it's running.

Okay. Another question we received online is how can we better monetize the team's loyalty members, which is 26 million by now. The question is about the theoretical spend of $1 per member per week and what that would generate in annual sales. What is realistic in this regard? And how could this be better monetized?

Yeah. It's a great question, but it's also a very challenging question. No. I mean, we kind of have a gold mine. We need to dig and derive the value from the memberships. So we have the mine there, and we need to design a good product and campaign and attract those members to spend more in our stores. I mean, that's something that we are working on every day.

Okay. The last question I have online is do you expect your liquidity position to improve going forward?

Yeah. I think as, you know, what I have explained to Steve's last question. So actually, we are actually approaching operating cash flow self-sufficient. So we do not expect to burn cash. And in the meantime, we are working very hard to bring in new capital to the company. So as of this moment, I think, we are very confident that we can actually -- we are in a good liquidity position for now.

Sarah, those were the questions I have that came in online.

(Operator Instructions) There are no further questions at this time. So with that, that concludes today's question-and-answer session. I would like to hand the call back to Yongchen for closing remarks.

Thank you always for your time and attention. And as mentioned earlier, we are optimistic about the second half of the year. We are at a turning point of, you know, parts of same-store sales and parts of corporate EBITDA. So we'll see you again in Q3 and report back the good news. Thank you.

Thank you. Thank you all very much.

Thank you. Bye-bye.

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