TH International Ltd Q3 FY2025 Earnings Call

Thank you, Desmond, and hello, everyone. Thank you for joining us on today's call. My name is Gemma Bakx, Head of Investor Relations for Tims China, and Tims announced its third quarter 2025 financial results 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 Lu, 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 IR 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 these forward-looking statements. 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 Q3, we achieved positive net new store openings and maintained strong momentum in system sales, featuring a 12.8% year-over-year growth. The launch of our successful Light & Fit Lunch Box platform products in Q2 further strengthened our Coffee Plus Freshly Prepared Food strategy, resulting in a 3.3% same-store sales growth for company-owned and operated stores. Consequently, food revenues rose by 24.2% year-over-year, with food revenue contributing 36.5% of sales—our highest percentage yet, up from 31.5% in the same quarter last year. We also gained from the promotional offers by delivery aggregators, leading to a 23.1% year-over-year increase in delivery revenues. Simultaneously, our sub-franchisee and retail business consistently contributed to cash flow and profitability, with other revenues increasing by 58.2% year-over-year for the quarter. For the first nine months of 2025, our adjusted contribution margin for company-owned and operated stores remained steady at 8.1%, the same as the previous year. We continued to reduce our adjusted corporate EBITDA and adjusted net loss by 10.4% and 11.5%, respectively. These results showcase the resilience and discipline of our team in execution. In terms of store development, we have expanded our store presence to 91 cities, including Yanji in Jilin Province, Yangzhou in Jiangsu Province, and Wuhu in Anhui Province during Q3, while ensuring capital efficiency and delivering convenience for our guests. Since launching our individual franchise program in December 2023, we've received over 8,400 applications and converted over 300 stores by the end of September, demonstrating strong market confidence in our franchise model. Our sub-franchisees enjoy attractive unit economics, with an average payback period of 2 to 3 years. We are also pursuing strategic channel development, operating 64 stores in high-traffic areas such as train stations, airports, rest areas, hospitals, universities, and schools by the end of September. As of that time, our registered loyalty club members reached 27.9 million, marking a 22.3% year-over-year growth, with an average of over 27,000 members per store, which serves as a strong catalyst for future growth. Q3 is a peak season for China's beverage market, with this summer seeing record high temperatures that drove fresh beverage demand, despite increased price sensitivity. Additionally, the coffee sector faced intensified competition from the growing tea beverage categories, as leading tea brands began entering the coffee market, escalating competition. Our strategic initiatives, including a celebrity partnership during the Bagel Festival and a refined summer beverage portfolio with targeted lunchtime operations, resulted in positive same-store sales growth in Q3. We collaborated with Lars Huang, a notable Gen Z celebrity, to enhance brand visibility and engagement. This partnership was integrated with appealing product offerings to convert interest into purchases, supported by targeted promotions to encourage repeat visits. This comprehensive marketing strategy yielded impressive results. July became our highest sales month of the year, and the September Bagel Festival drove double-digit same-store sales growth, significantly outperforming the broader market. Building on our Cold Blue platform launched in Q2, we initiated several monthly innovations throughout Q3, refreshing product offerings. This approach was strategic, as we balanced a portfolio of trending coffee and non-coffee products to capture shares in the summer beverage market, especially among younger consumers aligned with our target audience. We expect increased competition from key brands and are responding by reinforcing our coffee leadership with premium products like Cold Blue and Water Buffalo Milk while introducing non-coffee products to attract tea drinkers. This dual strategy has resonated well with our target demographic, contributing significantly to beverage sales growth. After six months of focused product development, we adjusted our food strategy in Q3 to combat seasonal softness by launching six new SKUs featuring chilled and fresh options. To sustain momentum from our launch expansion, we also added seasonal cold food items catering to consumer preferences during hot weather. Additionally, we enhanced our afternoon tea options with chilled cake varieties and Smile Bagel products. The Smile Bagel series further solidifies our leadership in the bagel category and strengthens our competitive edge. These initiatives have helped establish Tims as the preferred lunch destination in consumers’ minds. Thanks to our efforts over the last three quarters, more than half of all orders now include food, contributing over one-third of total revenues. I would now like to turn it over to our CFO, Albert Li, to discuss our third-quarter financial performance in more detail.

Thank you, Yongchen. 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 3.85 million in Q3 2025, a 16.7% increase from 3.3 million in the same quarter of 2024. Additionally, digital orders as a percentage of total orders rose from 86.6% in Q3 2024 to an all-time high of 91.0% in Q3 2025. We continue to enhance our digital capabilities to meet the growing demand from delivery and takeaway services. In Q3, our company-owned and operated store revenues dropped by 5.5% year-over-year, which was primarily due to the planned closure of certain underperforming stores, partially offset by a 3.3% increase in same-store sales growth for company-owned and operated stores. We have also achieved positive transaction growth in Q3, driven by strong momentum from food orders and delivery orders. In the meantime, revenues from our franchised business and retail business increased by 25.0% year-over-year. The number of our franchised stores increased from 382 as of September 30, 2024, to 479 as of September 30, 2025. Accordingly, our system sales increased by 12.8% year-over-year. Moving to cost and expenses for company-owned and operated stores since we offered higher discounts during the quarter, especially to others through those delivery platforms, food and packaging costs as a percentage of revenues from company-owned and operated stores increased by 1.6 percentage points year-over-year. Food and packaging costs accounted for 30.6% of our company-owned and operated store revenues during the quarter, and we maintained relatively stable labor costs, rental and property management fees, and other store operating expenses as a percentage of revenues from company-owned and operated stores in Q3. Delivery costs as a percentage of revenues from company-owned and operated stores increased by 2.9 percentage points to 13.2% in the third quarter of 2025 compared to 10.3% 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 from company-owned and operated stores increased by 20.9% year-over-year. Benefiting from our improved brand influence, marketing expenses as a percentage of total revenues accounted for approximately 4.4% during the quarter, representing a 0.7 percentage point decrease from 5.1% in the same quarter of 2024. Adjusted general and administrative expenses increased by 23.2% year-over-year, which was primarily due to an increase in outside service fees related to audit, IT and business travel, an increase in credit loss of accounts receivable, partially offset by a decrease in headquarter staff compensation costs and a decrease in depreciation and amortization. Adjusted general and administrative expenses as a percentage of total revenues increased from 10.7% in the third quarter of 2024 to 13.2% in the same quarter of 2025. As a result of the foregoing, adjusted corporate EBITDA margin was negative 4.2% in the third quarter of 2025 compared to positive 0.6% in the same quarter of 2024. Turning to liquidity. As of September 30, 2025, our total cash and cash equivalents, time deposits and restricted cash were RMB 159.3 million compared to RMB 184.2 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 posed to further enhance our operational efficiencies such as supply chain capabilities and optimizations and rigorous cost controls to roll over our differentiating make-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 Yongchen for concluding remarks followed by Q&A.

Yes. Thank you, Albert. Our third quarter performance reflects continuous improvement and the resiliency in 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 91 cities, a robust community of nearly 28 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 in China, and refined store unit economics with attractive payback periods within 2 to 3 years on average. With these milestones, we are steadfast in our commitment to sustainable profit growth and to generating long-term value for our shareholders. We're excited to announce the successful issuance of approximately USD 89.9 million senior secured convertible notes due September 2029. The restructuring of our unsecured convertible notes due 2027 and the repurchase of all outstanding amounts due under our variable rate convertible senior notes due 2026. These strategic transactions enable us to focus on the development of our overall store network and the core Tim Hortons brand nationwide. I will now turn to 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 registered questions. Let's begin with the first question. Go ahead, operator.

Our first question comes from the phone line of Steve Silver from Argus Research Corporation.

Congratulations on the system and same-store sales growth. With the closing of the new convertible notes transaction in Q3, I was hoping you could provide just the company's latest thinking on its liquidity status and its long-term financing plan.

Thank you, Steve, for your question. I will address this. With the successful issuance of the USD 89.9 million 2025 senior secured convertible notes, we used a portion of the proceeds to fully repurchase the remaining amount of our 2021 variable notes due 2026. Additionally, we have extended the due date of our 2024 unsecured convertible notes from 2027 to September 2029. Following these transactions, our company does not have any near-term offshore liabilities, allowing us to focus more on our daily operations. We believe this financing will significantly reduce our onshore leverage ratio, enabling us to gain better access to onshore bank facilities for expansion and renewal from PRC commercial banks. Furthermore, to take advantage of the lower rents in the current market, we are actively seeking additional alternative debt or equity financing to support the development of our company-owned and operated store network. Lastly, with the further improvement of our store and corporate margins, we expect to generate positive operating cash inflows, making us increasingly self-sustainable to support the long-term growth of our business. I hope this answers your question, Steve.

Yes, that was helpful. So in Q3 specifically, it looks like there was some pressure on the store contribution margins. It sounds like gross margin and delivery costs were impacted a bit. Do you expect that trend to continue over the near term? And maybe what are the company's thoughts about the margin profile moving forward?

Okay. Yes, Steve, I will take this one. Thank you for your question. Yes, the lower store contribution margin in Q3 was mostly because of higher delivery revenue mix led by the delivery war in China. Those platforms gave aggressive subsidies trying to take market share from the competitors. We would think this would be a temporary play in our view. So in the first 9 months of 2024 and 2025, our company-owned store contribution margins were consistent at 8.1%. We aim to further expand that to mid- to high teens by enhancing gross margins and driving same-store sales and also the network optimization. Essentially, we continue to close some high rent loss-making stores and we open high-quality new stores. So we plan to further improve our gross margins through supply chain optimization, increased pricing on delivery platforms, high-margin new product launches and optimizing the recipe of existing core products. By doing so, we expect to achieve double-digit store level margin next year.

Great. And one last one, if I may. The company has discussed focusing on strategic special channel stores under the franchise model. Curious if there's any information about the performance of some of these stores.

Yes, sure. As of the end of September 2025, we have over 60 stores in those special channels, including high-speed road stations, airports, highway rest areas, hospitals, etc. Those stores at the special channels performed very, very well, generating store contribution margin of mid and even high teens EBITDA margin and the payback period is around 2 years. We have gained a lot of interest from the franchise opportunities in these special channels. In China, there are tens of thousands of such special channel locations. We have seen great momentum in these channels, and we're expecting to open many more next year.

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

Yes. Thank you so much for your time. And we are very glad we returned the growth in system sales and also, more importantly, in the same-store sales. So we're expecting another progress towards the end of the year and much better next year. Thank you.

Thank you.

Thank you all very much.

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