Earnings Call Transcript - THCH Q1 2024

Operator, Operator

Ladies and gentlemen, welcome to Tims China's First Quarter 2024 Earnings Conference Call. All participants will be in a 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 would like to turn the call over to Gemma Bakx, who heads Tims China's Investor Relations efforts, for prepared remarks and introductions. Please go ahead, Gemma.

Gemma Bakx, Head of Investor Relations

Thank you very much. Good morning and good evening, everyone, and thank you for joining us on today's call. My name is Gemma Bakx, Head of Investor Relations at TH International, and we announced our first quarter financial results for 2024 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 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 included in our filings with the SEC. This presentation also includes 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 these non-GAAP and GAAP measures can be found in our earnings press release issued earlier today. With all that said, I'd like now to turn it over to Yongchen Lu, our CEO and Director. Over to you, Yongchen.

Yongchen Lu, CEO and Director

Thank you, Gemma. My name is Yongchen Lu, CEO and Director of Tims China. During the first quarter of 2024, which is historically the weakest quarter in terms of seasonality, we delivered 7.1% year-over-year growth in system sales and our seventh consecutive quarter of positive adjusted EBITDA. We achieved these results despite a challenging industrial landscape of intense price competition and significant macro headwinds. This quarter, driving profitability and improving operating cash flow remains a top priority for us and will continue to be so going forward. Our team has been focusing on strategic initiatives that bolster our bottom line while supporting profitable growth. With a strong focus on operational efficiencies and targeted marketing efforts, we are confident that our dedication to enhancing profitability will yield positive results, with the goal of achieving our first quarterly adjusted corporate EBITDA breakeven this year. We participated in strategic growth pruning underperforming stores in Q1 2024, aligning with our previously outlined strategic initiatives. On March 31, 2024, we reached a significant milestone, surpassing 20 million registered loyalty club members, representing 63.6% year-over-year growth. The average number of members per store exceeds 22,000, serving both as a catalyst for growth and a testament to the customer support of Tims China's loyalty programs. The support from our customers has been an inspiration for our team, continually spurring us to elevate our commitment to deliver top-tier products and exceptional services. We continue to deliver growth in a capital-efficient manner, and we remain committed to offering absolute convenience for our guests. Our strategic partnership with sub-franchisees is underpinning the expansion of our store network, including our density in existing cities for quicker services and broadening our outreach into new cities to welcome new customers. New cities we entered during the first quarter include Huizhou and Huzhou. Starting February 26, 2024, we launched a campaign nationwide to celebrate the significant milestones of our 5th anniversary in China and the 60th anniversary of the Tim Hortons brand with a theme of 60 years of freshness and deliciousness. As part of this campaign, we introduced a new series of core products called Tims China Double Double, which enhances the original Double Double blue coffee with rich milk and more flavors. Additionally, three flavors of donuts were reintroduced: chocolate, strawberry, and rainbow. Throughout the campaign, over 116 media agencies covered the history and legacy of Tim Hortons, resulting in over 20 million media exposures. The #doubledouble reached over 14 million views on Douyin, while the live broadcast on Douyin attracted over six million viewers during the campaign period. Continuous product innovation remains a cornerstone of our strategic vision. We launched 14 new beverages and 18 new food products during the first quarter of 2024. New products, including Cherry Americano and croissant series, have been particularly successful, with over 1.7 million units sold between them. Recognizing the popularity of our smile bagels, we have expanded the platform with enticing new flavors this quarter, including low-sugar, dark chocolate, and low-calorie, offering a taste of innovation while maintaining the quality and appeal that our customers cherish. In Q1 2024, our collaborations with Tangle Angel and Dove Chocolate have also achieved significant success, reaching over 10 million media exposures on Douyin and Little Red Book during the campaign period. As a leading international coffee brand renowned for delivering exceptional value for money and high-quality products, we focus on advancing our distinctive coffee-plus strategy. During the first quarter of 2024, we initiated the Bagel Tuntun Card campaign. This promotional offer allowed customers to enjoy a delicious Tims bagel for just RMB9.9, a move designed to boost food orders and attract a fresh wave of patrons to experience our offerings. In the first quarter of 2024, the percentage of orders that included food rose to 52.7%, an increase of over 8 percentage points from 44.2% in the same quarter of 2023. Lastly, our Popeyes brand continued to grow. So far, we have launched 14 Popeyes restaurants in Shanghai and are actively fine-tuning our menu, including expanding our product offerings beyond our core fried chicken products. Our 14 restaurants will serve as a solid base for further growth in Shanghai and beyond. At this time, I would like to turn it over to our CFO, Albert Li, to discuss our first quarter 2024 financial performance in more detail. Albert?

Albert Li, CFO

Thank you, Yongchen. During the first quarter of 2024, facing intense industry competition and macroeconomic headwinds, we remained steadfast in our commitment to deliver exceptional value for money and high-quality products to an expanding customer base and to enhancing our operational efficiency. In the first quarter of 2024, our system sales grew by 7.1% year-over-year to RMB363.5 million. The growth was primarily driven by an increase in the number of system-wide stores from 648 as of March 31, 2023, to 917 as of March 31, 2024. Overall, monthly average transacting customers were 2.8 million during the first quarter of 2024, representing an increase of 22.8% from 2.3 million in the same quarter of last year. Digital orders as a percentage of total orders increased from 79.1% in Q1 2023 to 85.4% in Q1 2024. We continue to strengthen our digital capabilities to meet the growing demand potential for delivery and takeaway services. During the first quarter of 2024, we continued to enhance our operational efficiencies as a result of refinement to our supply chain management and economies of scale. Our food and packaging costs as a percentage of revenues from company-owned and operated stores have decreased by 1.0 percentage points year-over-year. We continued to prune our underperforming stores and optimize our unit economics. These actions allowed us to further deliver year-over-year reductions in rental and labor costs as a percentage of revenues from company-owned and operated stores by 0.9 percentage points and 1.3 percentage points, respectively. We also pared back costs at the headquarters level, helping to reduce our general and administrative expenses as a percentage of total revenues by 4.1 percentage points year-over-year. Turning to liquidity, as of March 31, 2024, our total cash and cash equivalents and time deposits were RMB218.2 million compared to RMB220.8 million as of December 31, 2023. The change was primarily attributable to cash disbursements on the back of the expansion of our business and store network nationwide, along with the repayment of bank borrowings supported by the US$20 million junior promissory note financing provided by Cartesian Capital Group, our existing shareholder. Moving forward, while driving profitable and capital-efficient growth will be at the forefront of everything we do, we will continue to optimize our store unit economics, roll out our differentiated made-to-order fresh food preparation model to drive traffic, enhance our supply chain capabilities and efficiencies, and facilitate our franchisees to manage the growth and profitability of their stores effectively. Now I will turn the call over to Gemma for today's Q&A session. Gemma, thank you.

Gemma Bakx, Head of Investor Relations

Anything you want to say introducing the Q&A or shall I go ahead with the first question?

Operator, Operator

We will continue to optimize our store unit economics, implement our unique made-to-order fresh food preparation model to attract customers, improve our supply chain capabilities and efficiencies, and support our franchisees in managing the growth and profitability of their stores. Now I will turn the call over to Gemma for today's Q&A session. Thank you, Gemma. Would you like to make any remarks before we begin with the first question?

Gemma Bakx, Head of Investor Relations

Thank you, Erin. Our first question comes from Steve Silver from Argus Research. Steve, go ahead with your question.

Steve Silver, Analyst

Thank you and good morning and good evening, everybody. So my question is, if the competitive and the macroeconomic challenges that the company is seeing last longer than currently expected, I'm just curious to get management's thoughts on how the company plans on staying the course in terms of expanding its store-level EBITDA margins and then more broadly executing on its growth strategy?

Yongchen Lu, CEO and Director

Okay, thank you, Steve. Yes, I mean, the pricing competition is expected to last longer than anticipated. But for us, we don't really compete head to head with our peer coffee brands since we not only sell coffee but also provide fresh prepared food. As I mentioned earlier, more than 50% of our orders now include food, which is much higher than the market average. The coffee plus food strategy will continue to serve as our key differentiation point, which can increase our average check and sales at the store level. This differentiated position has attracted thousands of sub-franchisee applications. We have received over 3,000 applications already, and so we will accelerate our sub-franchisee developments in the coming quarters and years to grow our network.

Steve Silver, Analyst

Okay. Thank you so much.

Yongchen Lu, CEO and Director

Thank you, Steve.

Operator, Operator

Thank you. Gemma, over to you for the next question.

Gemma Bakx, Head of Investor Relations

We have a submitted question from an investor who's asking about margins. Luckin's numbers were down significantly in the quarter, including same-store sales and margins as well. What do you think is the reason that Tims' margins are up, be it sequentially over the same quarter last year only? Anything that Tims is doing differently? Or what is your take on this?

Albert Li, CFO

Okay. I will take this question then. I think managing our cost structure effectively is very important to us. And we aim to achieve margin expansion at both the store and corporate levels. Even with the very challenging industry competition, we want to expand our margin. We continue to implement rigorous capital expenditure control and cost reduction measures and have made decisive decisions to prune underperforming company-owned and operated stores. We collaborated closely with almost every supplier to strive for better pricing for our food and packaging items. We invested in our warehousing and logistics to reduce overall freight and transportation costs, and we constantly review the pricing of our core product offerings to maximize margins. Our technology platform allows us to predict daily sales more precisely, enabling us to manage labor scheduling and inventory levels effectively. We also cut down corporate personnel at the headquarters level, while the expansion of our franchise store network will bring more profitable growth moving forward.

Operator, Operator

Thank you. Over to Gemma for the next question.

Gemma Bakx, Head of Investor Relations

We have a question from Sunny Huang from Nordic Asia Investment Group. How do you view the extended price war? Is it more about lacking industry demand or aggressive competitors given the increased number of coffee stores in China in 2023? Could you speak to the sustainability of product price hikes for certain Tims products? There were some in May. What are your plans for any further price hikes going forward?

Yongchen Lu, CEO and Director

Okay. I'll take this question. Yes, as I mentioned, the pricing competition is lasting longer than expected. This is because many coffee brands compete primarily on coffee products, which are becoming more common with similar tastes and profiles. To gain market share, they have to compete on price. However, we differentiate ourselves by not only selling coffee but also a variety of food. Yes, we did increase our bagel and bagel sandwich prices in early May, and we didn’t see much impact on our sales. Our food offers a significant differentiation point. We have competitively priced combos, such as breakfast with one cup of coffee plus one bagel for RMB19.9, and a lunch menu combo with one cup of coffee plus one bagel sandwich starting from RMB26.9.

Operator, Operator

Thank you. Over to Gemma for the next question.

Gemma Bakx, Head of Investor Relations

We have another submitted question that asks about the evolution of your franchising strategy since its announcement last September. Which aspects have exceeded your expectations and which have lagged?

Yongchen Lu, CEO and Director

Okay. I'll take that. Our individual franchising strategy has been evolving very well and has received over 3,000 applications already, which has exceeded our expectations. We haven't promoted it much yet, but the vetting process for partners and suitable sites is very time-consuming. We want to ensure that we only select the right partners to work with for many years ahead. We are also focused on opening the right sites to ensure profitability for our sub-franchisees. The value projects are taking more time than we expected, but we are increasing personnel and streamlining the process to expedite the opening of franchising stores in the future.

Operator, Operator

Thank you. Over to Gemma for the next question.

Gemma Bakx, Head of Investor Relations

We have a question about the supply chain. You have many new products and flavors. Could you provide insight into what your supply chain looks like and how you optimize it?

Yongchen Lu, CEO and Director

Okay. I'll take that as well. Over the past five years, we have built a robust supply chain infrastructure and capabilities. For instance, we have leveraged our increasing scale to secure competitive costs from our suppliers, achieving high gross margins for both company-owned stores and our franchisees. We ensure that we have at least two suppliers for nearly all materials to safely supply everything needed. Additionally, we have multiple distribution centers in China to cover the entire country, enabling us to open in many new cities as needed. We have also established a flexible and responsive process that allows us to launch new products every two weeks to adapt to market and customer demand.

Operator, Operator

Thank you. Over to Gemma for the next question.

Gemma Bakx, Head of Investor Relations

We have another submitted question that concerns competition and how it has developed over the last year. What does this mean for Tims, given the perceived weakness of the Chinese consumer?

Yongchen Lu, CEO and Director

Yes, we touched upon that earlier. As we all know, one competitor has rapidly emerged, opening thousands of franchise stores last year and initiating a pricing war in the coffee industry that has affected us to some extent. This pricing war may persist for a while. Nevertheless, as I mentioned earlier, Tims does not compete head-to-head with other coffee brands, given our coffee plus food differentiation strategy. We will continue to focus on our unique product offerings and accelerate our sub-franchising development to expand our network.

Operator, Operator

Over to you, Gemma, for the next question.

Gemma Bakx, Head of Investor Relations

Our next registered question addresses the food orders and Tims' efforts to boost them. How do you see those efforts relating to the competition?

Yongchen Lu, CEO and Director

Our strategy is working well for us. The percentage of our orders that include food rose to 52.7%, an increase of over 8 percentage points from 44.2% in the same quarter of last year. With such a differentiated strategy, we don't need to compete head-to-head with our peer coffee brand; our food offerings are a strong incentive.

Operator, Operator

Thank you. Over to you, Gemma, for the next question.

Gemma Bakx, Head of Investor Relations

Our last submitted question relates to Tim's loyalty program. How many of your loyalty customers are transacting on average? Do transacting customers have a higher spend? Do you work a lot with coupons?

Albert Li, CFO

Okay. I will take this one then. We just celebrated the core milestone of surpassing 20 million loyalty club members as of March 31, 2024. Our monthly average transacting customers, as I mentioned before, were about three million during the first quarter this year. On average, our loyalty members purchased approximately 2.5 to 3 times more in eight months compared to non-member customers, who spent 80% more on average. Regarding discounts, we do offer many attractive promotional activities to attract new customers and encourage existing customers to repurchase, increasing customer frequency, but we do not rely heavily on coupons. Our creative marketing and overall product quality and service offerings are very attractive to our customers. Thank you.

Operator, Operator

Thank you. Over to you, Gemma, for the next question.

Gemma Bakx, Head of Investor Relations

This completes our questions, as far as I can see. Yes.

Operator, Operator

All right. Thank you. So we're coming to the end of the conference call. Gemma, over to you.

Gemma Bakx, Head of Investor Relations

Thank you. Thank you, operator. Thank you very much, Yongchen and Albert. This concludes today's earnings conference call. We thank you so much for your participation, for dialing in, and also for your interest in Tims. We look forward to reconnecting with you again in the very near future.

Yongchen Lu, CEO and Director

Thank you. Thank you, all.

Albert Li, CFO

Thank you, all.

Operator, Operator

Thank you. This concludes our call today. You may disconnect.