Earnings Call Transcript - THCH Q1 2025

Operator, Operator

Ladies and gentlemen, welcome to Tims China First Quarter 2025 Earnings Conference Call. Today's conference is being recorded. I would like to turn the call over to Gemma Bakx, who heads Tims China's Investor Relations effort, for prepared remarks and introduction. Please go ahead, Gemma.

Gemma Bakx, Head of Investor Relations

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. I'm here to say that Tims 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 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 a slide presentation and 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 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, I would now like to turn it over to Yongchen Lu, our CEO and Director. Please go ahead, Yongchen.

Yongchen Lu, CEO and Director

Thank you, Gemma. Good morning and good evening, everyone. In the first quarter, we strengthened our unique strategic position in Coffee and Freshly Prepared Food by introducing the Light & Fit Lunch Box, a range of new platform combo products aimed at enhancing lunch sales and providing our guests with healthy and delicious lunch options. This product line features hot baked bagel sandwiches, energizing lunch wraps, and loaded power bowls, paired with coffee or other beverages, all at a reasonable price. With Tims China's Chibaobao 40% off discount card, the pricing for the Light & Fit Lunch Box combo products starts at RMB 24, approximately USD 3.5, offering good value and nutritious options. Our newest Loaded Power Bowls, launched in mid-May, include a standard 2 plus 8 plus 8 configuration, featuring 18 carefully selected ingredients in each bowl. The "2" stands for 2 portions of high-quality protein, while the two "8s" represent 8 wholesome grains and 8 colorful vegetables, creating a nutrient-rich meal tailored for business professionals and fitness enthusiasts. The light lunch box product is a key strategic focus for Tims in 2025, aiming to change consumer perceptions of Tims as a lunch destination, thereby establishing a second high-demand meal period and fostering sustainable revenue growth. It offers a novel take on Western-style healthy lunches in a café environment, providing a complete meal solution with an entrée, snack, and coffee. This initiative is not just about expanding our product offerings; it's about rethinking how busy urban consumers dine and exceeding their expectations. We are transitioning from solely coffee consumption to all-day healthy dining, deeply integrating the café experience into a health-oriented lifestyle. These initiatives have received a positive reception since their launch, significantly contributing to daily transactions and strengthening our position in the competitive white-collar lunch market, laying a solid foundation for continued growth in the second quarter and beyond. Despite macroeconomic challenges and intense market competition, our team has shown resilience and made substantial profitability gains through efficiency improvements, supply chain optimizations, and stringent cost controls. During the quarter, our company-owned and operated store contribution margin and adjusted corporate EBITDA margin improved by 5.9 and 6.1 percentage points year-over-year, respectively. We achieved top-line growth in the first quarter with a 3.5% increase in system sales compared to last year. Our sub-franchise and retail businesses also provided consistent cash flows and profitability. Profits from other revenue sources rose by 34.5% year-over-year. Additionally, we cut adjusted corporate EBITDA losses by nearly half. These accomplishments reflect Tims China's enduring efforts and our commitment to further profitable growth. Regarding store development and leveraging sub-franchisee partnerships, we strategically expanded our store footprint into 84 cities, including Fuyang and Nanchang, while ensuring capital efficiency and providing convenience for our guests. Since launching our individual franchisee program in December, we have received over 7,000 applications and successfully converted nearly 200 stores by the end of March, demonstrating market confidence in our franchise model. Our sub-franchisees benefit from attractive store unit economics with an average payback period of 2 to 3 years. By March 31, our registered loyalty club members totaled 25.1 million, marking an impressive year-over-year growth of 25.7%. The average number of members per store has exceeded 24,500, serving as a strong catalyst for future growth. On the marketing front, to counteract the seasonal slowdown from the extended Chinese New Year Holiday, Tims China implemented several strategic initiatives in the first quarter, including co-branded collaborations and a brand birthday campaign. These efforts aimed to drive traffic, increase average transaction value, and create new consumption opportunities. In anticipation of Lunar New Year, Tims partnered with Oatly for the breakfast segment to boost sales through limited-time menu items paired with branded merchandise, enhancing value and encouraging increased consumer spending. In March, Tims launched a co-branded campaign with the Eagle Brand Americano, Ginseng, to emphasize its health-conscious positioning and attract white-collar professionals. Aligned with the post-holiday season, the 61st Tim Hortons brand birthday initiatives were strategically timed to aid recovery after the new year. During this peak period, Tims introduced a Chinese version of Double Double and the seasonal return of its signature Tims Donuts. We believe that fostering a stronger emotional connection with our brand around the birthday celebration will enhance consumer recognition and loyalty in the long run. I would now like to turn it over to our CFO, Albert Li, for a detailed discussion of our first-quarter financial performance.

Albert Li, CFO

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 also contributed to 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 sought-for 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 franchised business and retail business increased by 28.6% year-over-year. The number of our franchised 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, citing the state 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 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. Without 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 equivalents, time deposits and restricted cash stood at RMB 211.4 million, USD 29.1 million, compared to RMB 184.2 million as of December 31, 2024. The change was primarily attributable to the drawdown of additional bank borrowings, partially offset 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 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. I will now turn it over to Yongchen for concluding remarks followed by Q&A.

Yongchen Lu, CEO and Director

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 to our guests, team members, business partners, shareholders and everyone supporting our endeavors and 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 Fresh Prepared Food business model, offering the best value for quality products, a unique advantage of offering franchise opportunities as an international coffee brand and refined store unit economics with payback period within 2 to 3 years. With these milestones behind us, we are steadfast in our commitment to sustainable profitable growth and generating long-term value for our shareholders. I will now turn the call over to Gemma for today's Q&A session.

Gemma Bakx, Head of Investor Relations

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

Operator, Operator

Our first question comes from Steve Silver from Argus Research Corporation.

Steven Silver, Analyst

Given that there were just a few net store openings in Q1, curious as to what your current thoughts are on the outlook for new store count for the full year as well as the pace at which the company plans to work through the significantly growing number of franchise applications?

Yongchen Lu, CEO and Director

Thank you, Steve, for your question. As you know, the first quarter is typically the slowest for our company and the industry as a whole. During this time, we continue to strategically close certain underperforming stores, including both company-owned and franchisee locations. We also launched our made-to-order model last year, which has been very successful in China. In this quarter, we closed a total of 18 stores, 10 of which were not made-to-order; these were small express stores that couldn't offer made-to-order options. We intentionally shut them down. However, we opened 20 made-to-order stores in the first quarter, and we expect this growth to accelerate in the second quarter and particularly in the second half of the year, as is typical. Our goal remains to open around 200 made-to-order stores this year.

Steven Silver, Analyst

Great. 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 Tims business?

Yongchen Lu, CEO and Director

Yes, the government is taking some action, but not on a large scale yet. Following the Chinese New Year, consumer sentiment hasn't improved significantly despite the launch of DeepSeek, the AI platform. The overall economy still seems to be struggling, and the government is considering what policies could effectively address the situation in China. We are waiting to see what policies will be introduced and how they will impact consumption.

Steven Silver, Analyst

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 just how you think about right now competing in a more intense value competition given the market?

Yongchen Lu, CEO and Director

Yes. I mean, I think the market has become actually more rational, especially on the coffee side. I mean, last year or the year before, the competition was really driven by the two companies, Luckin and Cotti. And as you know, both companies have been founded by the same person, and so they are so similar. They are really competing on a price point. So for us, we're not intent on getting into a pricing war. We try to differentiate our play. That's why we really focus on our differentiation point, the coffee plus fresh prepared food combos. And from last year, we converted most of the stores into made-to-order, further 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 for the lunch daypart, which has been successful so far. So we try to differentiate our place, and we try to make our combos really competitive. So for breakfast items, one coffee plus one bagel priced at RMB 19.99, USD 3. For lunch, we price around RMB 30 with Chibaobao 40%. The lowest can be RMB 34, nearly about USD 3.5. So the combo itself is very competitive in China, and we have seen continuous momentum on the combo growth here in China.

Operator, Operator

I'll hand it back to Gemma for web questions at this time.

Yongchen Lu, CEO and Director

Hi, Gemma, is there any questions from the web?

Gemma Bakx, Head of Investor Relations

My apologies, that was on 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?

Yongchen Lu, CEO and Director

Sure. Yes, 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 reflect the short-term uncertainties in China's economic and consumption sentiment and the intense industrial competition, as I mentioned earlier, it's really between Luckin and Cotti, which has drawn the whole industry into a pricing war a bit. But in the mid to long term, with increasing customer demand in coffee consumption from both expanding coffee population penetration rate in the rising frequencies, we see significant room for growth in the coffee sector. We have seen an improving trend in the same-store sales growth since October 2024, and our strategic goal remains unchanged to achieve 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 on a store level have 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 sales growth. And as I mentioned again and 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 the Light & Fit Lunch Box series of products has been really welcomed by the market, achieving an average of 20-plus incremental daily transactions per store setting a very good foundation for continued growth in Q2 and beyond. Back to you, Gemma. Any more questions?

Operator, Operator

Tims China is not exclusively targeting the coffee market; we are experiencing strong and increasing demand for our fresh prepared healthy food products. For instance, our recent introduction of the Light & Fit Lunch Box series has been well received, generating an average of over 20 additional daily transactions per store, which sets a solid foundation for ongoing growth in Q2 and the future. Gemma, do you have any more questions?

Gemma Bakx, Head of Investor Relations

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

Operator, Operator

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

Yongchen Lu, CEO and Director

Yes. Thank you, everyone, for taking your time and listening to this webcast. We have promised to deliver positive same-store sales for the year, and we'll continue to improve our profitability quarter-over-quarter. Thank you. We'll talk to you again in the next quarter. Thank you.

Gemma Bakx, Head of Investor Relations

Thank you all very much.

Operator, Operator

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