Tims China First Quarter 2026 Earnings Conference Call

Ladies and gentlemen, welcome to Teams China's first quarter 2026 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 is being recorded. At this time, I'd like to turn the call over to Patty Yu, Teams China's public and media relations manager, for prepared remarks and introductions. Please go ahead, Patty.

Hello, everyone, and thank you for joining us on today's call. KH International Limited announces its first quarter to the 26th financial results on it today. A press release as well as a campaign presentation, which contains operational and financial highlights, are now available on the company's IR website at IR.teamchina.com. Today, you will hear from Yongchen Lu, our CEO director, and Albert Lee, our CFO. After the conference prepared remarks, the management team will conduct our questions and answer sessions. You will find 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 invest 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 risk and uncertainties, and our actual results may be materialized from those forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings studies and the risk factors, included in our findings 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 a substitute 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 Yongcheng Liu, our CEO Director. Please go ahead, Yongcheng.

Thank you, Patty. Good morning and good evening, everyone. Thank you for joining us today. As the coffee industry entered a seasonal slowdown during the first quarter, the company proactively optimized its operating system and moderately reduced discount-driven promotions, reallocating resources toward franchise system development and long-term rentability, while certain short-term revenue indicators face pressure, core user quality continued to improve. in line with the company's strategic transition from prioritizing scale growth to prioritizing quality growth. During the first quarter, we continued our strategic adjustments to improve underperforming stores, and we expect to complete this process and resume next new store openings starting from the second quarter of 2026. On SimStor sales growth, we experienced overall a comparable transaction decline of 8.3% and an average comparable six-size decline of 4.8%, which led to an electric 13.2 SimStor sales growth for the system-wide stores in Q1. A decline was partly due to deliverer aggregators backing down subsidies significantly, partly due to understanding our marketing spending and discount control despite the temporary headwind on top line growth and fierce industrial competitions we continue to witness strong performance of our 2024 and 2025 vintage stores most of which will compact and make to order stores. With further optimized store capital expenditures and enhanced store unit economics, our 2024 vintage-year company owned and property stores generate a store contribution margin of nearly 15% in 2025 per year and lower teens in Q1 in 2026, and expected to achieve a payback within 2-3 years. Our 2025 vintage-a-year stores, which are still ramping up now, expect to achieve similar unique analysis too. In the meantime, our company owns and operates stores in Tier 1 cities including Beijing, Shanghai, Guangzhou, and Xinjiang, and in those cities with 10-plus stores, generally over 10% and 7% of contribution margin in outperforming other tiered cities with a lower store density. We will continue adding density in existing cities to achieve higher economy scale. Leveraging sub-franchise partnerships, new stores will open across multiple core cities and emerging markets, including Shanghai, Guangzhou, Shenzhen, Hanzhou, Beijing, Shenzhou, Nantong, etc. in Q1 2026. The company continues to expand across diversified locations, such as transportation hubs, office buildings, commercial complexes, and university campus extras, etc., further enhancing brand penetration and consumer reach. Since we launched our individual franchise business in December 2023, we have received over 10,500 applications, signed up for over 448 stores, and successfully opened nearly 260 stores by the end of March 2026, showcasing continued market confidence in our franchise model. We have witnessed reasonable returns for our franchise stores. For instance, our franchise stores at special channels, including railway stations, hospitals, and highway arrest areas, generate store contribution margin of high teens in 2025, and are expected to achieve a payback period of approximately two years. We will accelerate opening franchise stores on those special channels. During the quarter, the company officially launched its 2026 nationwide franchise load-assurance program to systematically communicate economic models to prospective franchise partners. At the same time, the company introduced upgraded franchise support policies including multi-source support incentives, high-revenue rebates, and opening support packages, further enhancing franchise attractiveness, attracting high-quality partners, and laying a solid foundation for long-term, scalable suspension. In the meantime, our separate franchise business contributes steady cash flows and profitability. Other revenues increased by 7.7% year-over-year, and profits from other revenues achieved at year-on-year growth of 14% in Q1 in 2006. The first quarter marked the traditional seasonal slowdown for the coffee industry. It may intensify market competition. Against its backdrop, the company remains focused on equipping operational quality and efficiency, making progress across art innovation, brand marketing, and loyal member engagement. During the fourth quarter of 2026, the company launched a total of 21 new products across categories, including 15 new beverage products and 6 new food items, centered around seasonal occasions, health-conscious offerings, and localized flavors, with a strong market response. On the beverage side, the cherry series returns with strong consumer recognition, effective rate driving, traffic, and repurchases. The company also introduced limit-time eggs, apple-series beverage, and zero-sugar, zero-fat load series to further adjust the load and health auto-engineering demand. On the front side, the launch of the non-chicken bagel sandwich and the non-bagel further junction localized product innovation among the new launches, the spring apple series delivered a particularly strong performance, achieving the highest repeat purchase rate among all product series. In brand marketing and laurie's monthly engagement, the company focused on Chinese New Year social occasions and the younger consumer segments will diversify crossover collaborations. Partnerships with the popular drama IP, the Vendetta of Pan, Air Canada and Latin Cloud Music enhance brand awareness and member engagement and penetration among younger consumers. In Q1 1996, transacting members under the age of 30 accounted for nearly 50% of the total membership pay. In addition, Luak customer acquisition partnership with CDD, the company's request for added approximately 4 million new members during the quarter, representing nearly 3-4 year-over-year As of March 31, 2026, our largest Laureate Club members exceeded $35.9 million, reflecting a remarkable 42.9% year-over-year growth. The average number of members per store has not surpassed $35,000, serving as a solid foundation for growth and an assessment to our customers' support for an embrace of employer's loan employment program. At this time, I would like to turn it over to our CFO Albert Lee to discuss our first quarter 2026 financial performance in more detail.

Thank you, Yongquan. During the first quarter of 2026, our total revenues and system sales dropped by 14.6% and 14.2% year-over-year respectively, which was primarily due to the closure of certain underperforming company-owned and operated stores, and a decrease in same-store sales growth. Our overall monthly average transacting customers reached 2.69 million during the first quarter of 2026, compared to 2.92 million in the same quarter of 2025. Digital Total orders as a percentage of total orders rose from 86.3% in the first quarter of 2025 to 87.5% in the first quarter of 2026. We continued to enhance our digital capabilities to meet the growing demand for delivery and take-away services. Total number of delivery orders increased by 10.2% year-over-year during the fourth quarter of 2026. We are committed to improving our financial performance by refining store unit economics and boosting operational efficiency at both store and corporate levels, setting the foundation for long-term sustainable growth. Specifically, through refinements in our supply chain capabilities and economies of scale, we managed to reduce Q1 2026 food and packaging costs as a percentage of revenues from company-owned and operating stores by 2.0 percentage points from 30.4% in the first quarter of 2025 to 28.4% in the same quarter of 2026. Durantal and property management fees were R&B $47.2 million, U.S. $6.8 million for the three months ended March 34, 2026, representing a decrease of 16.2% from R&B $56.3 million in the same quarter of 2025, which was in line with the revenue trend, as the number of our company-owned and operated stores decreased from 569 as of March 31st to 2025 to 541 as of March 31st to 2026. Urental and property management fees as a percentage of revenues from company-owned and operated stores increased by 0.7 percentage points from 22.1% in the fourth quarter of 2025 to 22.8% in the same quarter of 2026. Payroll and employee benefit expenses were R&B 44.8 million, US dollar 6.5 million for the three months ended March 31st, 2026, representing a decrease of 10.4% from R&B's $50.0 million in the same quarter of 2025, which was in line with the revenue trend. Pail and employee benefit expenses as a percentage of revenues from company-owned and operated stores increased by 2.0 percentage points from 19.6% in the first quarter of 2025 to 21.6% in the same quarter of 2026. Delivery costs were R&B $27.3 million, U.S. $4.0 million for the three months ended March 31st, 2026, representing an increase of 1.0% from R&B $27.0 million in the same quarter of 2025, which was in line with the 8.9% increase in delivery orders from $4.5 million in the first quarter of 2025 to $4.9 million in the same quarter of 2026, partially offset by a reduction in average delivery costs per order. Delivery costs as a percentage of revenues from company-owned and operated stores increased by 2.6 percentage points to 13.2 percent in the first quarter of 2026, compared to 10.6 percent in the same quarter of 2025, which was primarily due to delivery revenue as a percentage of total revenues from company-owned and operated stores increased from 53.1% in Q1 2025 to 65.1% in Q1 2026. Other operating expenses were RMB 18.2 million, US dollar 2.6 million for the three three months ended March 31st, 2026, representing an increase of 0.9% from RMB 18.0 million in the same quarter of 2025. Other operating expenses as a percentage of revenues from company owned and operated stores increased by 1.7 percentage points to 8.8% in the fourth quarter of 2026, compared to 7.1% in the same quarter of 2025. Benefiting from our cost optimization measures and improved brand influence, our marketing expenses were RMB 9.8 million, US$1.4 million in Q1 2026, representing a decrease of 43.7% from RMB 17.4 million in the same quarter of 2025. Marketing expenses as a percentage of total revenues decreased by 2.0 percentage points from 5.8 percent in the first quarter of 2025 to 3.8 percent in the same quarter of 2026. Our adjusted general and administrative expenses were R&B 43.4 million, US$ 6.3 million in Q1-2026, representing a decrease of 7.9% from RMB 47.2 million in the same quarter of 2025, which was primarily due to a decrease in credit loss of accounts receivables and cost savings from professional and other service fees. Adjusted general and administrative expenses as a percentage of total revenues increased by 1.2 percentage points from 15.7% in the fourth quarter of 2025 to 16.9% in the same quarter of 2026. As a result of the foregoing, adjusted corporate EBITDA margin was negative 11.8% in the fourth quarter of 2026 compared to negative 9.8% in the same quarter of 2025. Turning to liquidity, as of March 31st to 2026, our total cash on cash equivalent time deposes and restricted cash for RMB 111.4 million, US dollars 16.2 million, compared to RMB $129.7 million as of December 31st, 2025. The change was primarily attributable to cash disbursements on business operations, partially off-site by the drawdown of additional bank facilities. We are pleased to enter into a definitive agreement with THRI, our brand owner for the insurance of up to US $55.0 million additional senior secured convertible loans, which underscores the strong commitment of our brand owner and funding shareholder. The proposed financing transaction provides pervictal capital to fund further expansion of our store network nationwide and to fortify our balance sheet. Looking ahead, our near-term priorities would be to deliver sustainable revenue growth, to further enhance supply chain capabilities and expand store-level profitability, to continuously optimize cost structure, to accelerate the expansion of our successful sub-franchising, and to achieve corporate EBITDA break-even. With that, I will now turn it over to Yongcheng for concluding remarks, followed by Q&A.

Thank you, Albert. Before we turn to Q&A, I would like to take this opportunity to express my utmost gratitude to our customers, employees, business partners, and shareholders for your continuous support, dedication, and belief during the past seven years. With a heartfelt passion in the Tim Hortons brand, and a strong confidence in the China market. We began our journey from the very first door at the People's Square in Shanghai seven years ago. Together, we have now accepted an overwhelming community as one of China's top coffee brands with over 35 million Loddy Club members, a unique coffee plus fresh prepared healthy food business model offering the best value for quality products as an international coffee brand. Differentiated and comprehensive store formats with overwain stock stores in 1993, most of which are made to order stores with a payback period between 2-3 years, and a unique advantage of offering franchise opportunities as an international coffee brand. Today, China stood as the largest international market in the importance of global systems by a number of sources, and China has moved beyond its start-up and exploration phase, and entered a new stage of high quality growth. Effective from June 15, 2026, I am honored to take on the new role as chairman, while while I'll remain as engaged and committed to the company's long-term success as ever. I'm excited to work with Mr. Zhong Chen, our new CEO, who brings more than 25 years of extensive experience leading major consumer companies in China and across Asia, and with proven records in brand building, consumer insights, business growth, and operational management to drive the next phase of growth for Teams China, and to generate long-term value for our shareholders. I will now turn the call over to Patty for today's Q&A session.

Thank you, Yongcheng. We will turn it over to Q&A and open it up for our register questions. Let's begin with the first question. Operator, please go ahead.

Thank you. To ask a question via the telephone, please press star 11 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 11 again. To ask your question via the webcast, please type it into the Q&A box and click Submit. We will now take our first phone question, and the question comes from the line of Steve Silver of Argus Research Corporation. Please ask your question, Steve. Your line is open.

Thanks, Operator, and thanks for taking my questions So, same-store sales growth has been under pressure during Q1, both on comparable transactions as well as average comparable ticket sizes. So, considering the aggressive delivery aggregator subsidies since Q2 of last year, can you just discuss your current thinking on the same-store sales growth that you see for the rest of 2026?

Yeah, no, that's a good question, Steve. Actually, we have seen same-store sales recovering very well recently, especially for the past few weeks after we launched several great marketing campaigns. So, I believe we will have better same-store sales in the second quarter, and we expect much better for the rest of the year. Great.

And so you've also cited 2024 and 2025 store trends for strong performance and maybe mid-team store contribution margins. More recently, you've talked about the special channel stores generating high-team store contribution margins. So can you just talk about your expectations on store margin profiles moving forward?

Okay, Steve, I think I will take this question. Okay, so on the overall, I think profitability level for our company-owned stores, we would expect that the margin profile can be improved gradually and can be improved further from the existing level. I think firstly, as Yung-Cheng has mentioned, so in terms of the recovery on same-store sales, and also we have seen a very positive trend on the same-store sales in the second quarter. So with the improvement on the same-store sales, definitely we are expecting higher revenues at the store level. And I think accordingly in terms of the store labor costs, rental, and other operating costs, the percentage of revenue will naturally go down, right? So that's the first point. I think secondly, we are in the process of, I think, wrapping up in terms of pooling our underperforming stores, which we expect it can be mostly completed within the year. So definitely we are expecting a higher percentage of higher margin stores, I think including those 2025, 2024 and the later vintage year stores and also those special channel stores. So the higher margin stores will take a higher percentage of revenues on that. And I think certainly I want to highlight some gross margins. So as you can see, during the first quarter of 2026, even, you know, our top line is under pressure, we still improve our gross margin by 2.0 percentage points. So I think, you know, based on those initiatives of supply chain optimization efforts, economy of scale, launching higher margin products, and also in terms of optimizing the recipe for existing core products, I think that will all help us to continue to improve our gross Yeah, I just want to add a point here.

I mean, our major problem for the early vintage stores are with the rent, because we open a lot of larger format stores for brand building, so we can see the rent percentage of sales and are very high for early vintage stores. But if you look at the original vintage stores like 2024, 2025, and even other stores we opened this year in Contour96, the rents are very reasonable, and they have a team's store level contribution margin. And I believe with the new CEO, Zhang Chang, with his strong background in sales marketing, under his leadership, I believe that the sales will improve further, that will also contribute an even higher store to contribute margin in the future. Thank you.

Great, that's helpful. And one more, if I may, could you talk a little bit about the current competitive landscape? You guys have talked about quite a bit about the competition on the coffee side, but more recently it looks like some of the tea players in China have entered into the coffee business with some lower-priced offerings. I'm just curious as to whether you think that will have any impact on your business strategy.

Yeah, I mean, yeah, I mean, yeah, the tea players have been more aggressive in entering into the coffee sector than before and price very low. And that's exactly, you know, I want to highlight our differentiation point. We are not only a coffee player, we offer coffee plus fresh prepared food. That's very different from our pure coffee brand player and also the milk tea player. I mean, that's where I know we are very strong and very different. So that's why we are so much believing our differential model for the future.

Great. Thank you so much for that. and best of luck continuing to stabilize and return to top-line growth.

Thank you.

Thank you, Steve.

Thank you for your question. As a reminder, to ask a question via the telephone, please press star 11 on your telephone keyboard. To ask your question via the webcast, please type into the Q&A box and click Submit. Once again, that's star 11 for questions from the telephone line. And to type your questions in the Q&A box via the webcast and click submit.

Operator, I don't see any question come up.

Yes, with that now thank you so much for your time and let's discuss more next quarter. Thank you.

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