Earnings Call Transcript - THCH Q4 2023

Operator, Operator

Ladies and gentlemen, welcome to Tims China Fourth Quarter and Full Year 2023 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 Gemma Bakx, who heads Tims China Investor Relations efforts for prepared remarks and introductions. Please go ahead, Gemma.

Gemma Bakx, Investor Relations

Good morning, good evening, everyone, and thank you for joining us on today's call. My name is Gemma Bakx, Investor Relations. TH International Limited announced its fourth quarter and full year 2023 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 its Q&A session. You can 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 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.

Yongchen Lu, CEO

Thank you, Gemma. I'm Yongchen Lu, CEO and Director of Tims China. In 2023, we made significant strides in key areas of our strategy. We enhanced convenience for our guests by increasing our presence in existing cities and expanding into new ones. We grew our community and partnerships, strengthening our strategic franchising relationships with notable partners like Sinopec's Easy Joy. We continued to innovate in ways that are locally relevant, which has always been a top priority for us. We achieved growth efficiently by opening stores with quicker payback periods and ramping up our franchising activities. With our systems and infrastructure firmly established, our primary focus is now on driving profitability, aiming for corporate EBITDA breakeven later this year. We recently celebrated our 5th anniversary in China and the 60th anniversary of the Tim Hortons brand. With those celebrations behind us, we are now concentrating on the future, particularly on fostering rapid, profitable, and capital-efficient growth. We reported year-over-year top-line growth of 29.8% in Q4 and 55.9% for the full year 2023, showcasing strong growth in our first full year post-COVID in China. Notably, the company-owned stores we opened in 2023 are among the most profitable we have ever launched, thanks to our commitment to innovation, operational efficiencies, and optimized unit economics. By December 31, 2023, our largest loyalty club reached 18.7 million members, reflecting a 66.3% year-over-year increase, with an average of over 20,000 members per store. We also surpassed 20 million registered loyalty club members by March 31, 2024. Our strategy for store network development continues to succeed, as shown by impressive sales during the launches in Yitong and Tangshan, with sales reaching RMB88,000 and RMB46,000, respectively. Utilizing our various storefronts, we established new partnerships with reputable retailers, such as B Store, introducing the first Tims Express store in Wuhan in December 2023. Building on our long-term investments in branding, technology, and infrastructure, we prioritized expanding our franchise business starting in Q4 2023, successfully opening 213 franchised stores in the past year, with 109 openings in the first quarter alone. Looking ahead, we remain dedicated to strengthening our collaborations with established partners like Sinopec while actively seeking other suitable partnerships. For example, our recent collaboration with Shanghai Metro led to the opening of the first seven portfolio positioning stores in metro stations, tapping into one of the world's largest metro systems, which serves about 13 million daily passengers. We believe this partnership will enhance the visibility of the Tims brand and connect us with a more diverse customer base. Continuous product innovation remains a core strategy for us. In 2023, we launched a total of 147 new products, including 47 new beverages and 51 new food items. In Q4 2023, our Japanese heat coffee series and cinnamon latte emerged as top sellers, while our collaboration with another brand gained over 10 million media exposures on popular platforms, enhancing our brand visibility. As a global coffee brand offering great value, we continue to execute our unique coffee plus strategy, which differentiates us and yields positive results. Following the successful bagel and blue coffee campaign in Q3, we advanced our Wednesday membership day campaign, offering discounted combos to enhance our meal options. In Q4, food orders accounted for 54.7% of total orders, an increase of nearly 8 percentage points from the same quarter in 2022. Regarding our Popeyes business, it has shown strong momentum since the grand opening of our flagship store on August 19, 2023. Within just 135 days, we launched 10 Popeyes stores in Shanghai, maintaining an average pace of one new store every 14 days, showcasing the strong value we've built in Tims. By the end of 2023, our Chinese Popeyes stores sold over 154,700 pieces of chicken and seafood burgers, providing more dining options. Additionally, our local R&D team developed flavored milkshakes, resulting in sales of over 52,000 cups, highlighting the popularity of our beverage offerings. Our private channels for Popeyes have attracted over 200,000 active customers who have engaged positively. Looking forward to 2024 and beyond, the Popeyes team is dedicated to improving our core products, enhancing digital marketing efforts, and strengthening our market position through quality operations and optimized profitability. I will now hand it over to our CFO, Albert Li, to discuss our fourth quarter and full-year financial performance in more detail. Albert?

Albert Li, CFO

Thank you, Yongchen. During the fourth quarter of 2023, we enhanced our operational efficiency across a number of dimensions. We carried back costs that proved to be redundant at the headquarter level and we pruned our underperforming stores, which we had decided earlier to give a full year post-COVID to evaluate. These actions allowed us to deliver year-over-year reductions in rental and labor costs as a percentage of revenue from company-owned and operated stores by 6.9 percentage points and 1.3 percentage points, respectively. Our marketing expenses and adjusted general and administrative expenses as a percentage of total revenues decreased by 2.1 percentage points and 5.8 percentage points year-over-year, respectively. In 2023, we sold a total of nearly 60 million cups of beverage and over 21 million bagel products, representing a year-over-year growth of 71.3% and 129.4%, respectively. Our system sales grew by 35.9% year-over-year to RMB388.5 million in Q4 2023. The growth was primarily driven by an increase in the number of system-wide stores from 617 as of the end of 2022 to 912 as of the end of 2023, and a 7.6% same-store sales growth for company-owned and operated stores in 2023. Overall, monthly average transacting customers were 3.9 million during Q4 2023, representing an increase of 55.1% from 1.9 million in the same quarter of last year. Digital orders as a percentage of total orders increased from 81.2% in Q4 2022 to 83.6% in Q4 2023, and we continue to strengthen our digital capabilities to meet the growing demand potential for delivery and takeaway services. Turning to liquidity, as of December 31, 2023, our total cash and cash equivalents, time deposits, and short-term investments were RMB220.8 million, compared to RMB611.5 million as of December 1, 2022. The change was primarily attributable to the settlements with investors who entered into an equity support agreement with us, as well as cash disbursements on the back of the rapid expansion of our business and store network nationwide, offset by an increase in bank borrowings. In March 2024, we entered into US$20 million promissory notes financing with Cartesian Capital, our existing shareholder. Going forward, with profitability being front and center of everything we do, we will continue to enhance our supply chain capabilities and efficiencies, roll out our differentiating made-to-order fresh food preparation model to drive traffic, and accelerate the expansion of our successful sub-franchising. With that, now let me pass it back to Yongchen for closing remarks. Thanks, Yongchen.

Yongchen Lu, CEO

Thank you, Albert. Before we turn to Q&A, I would like to take this opportunity to express my heartfelt gratitude to our shareholders, investors, business partners, and team for your continued support and hard work. Together we have created a strong community of over 20 million loyalty club members, a unique coffee plus one food business model offering the best value for quality products as an international coffee brand. The brand added a comprehensive store format with 900 plus stores in over 60 cities and a unique advantage of offering franchise opportunities as an international coffee brewer. We just celebrated the significant milestones of our 5th anniversary being in China and the 6th anniversary of the Tim Hortons brand. With these milestones behind us, we look forward to fully focusing on driving profitability with a view to achieve corporate EBITDA breakeven later this year and generate long-term sustainable value for our shareholders. Now, I will turn the call over to Gemma for today's Q&A session. Gemma?

Gemma Bakx, Investor Relations

Let's begin with the first question. Go ahead, operator.

Operator, Operator

Gemma, it's your turn.

Gemma Bakx, Investor Relations

We have the following questions submitted via our webcast link. How does the Company perceive the competition in the Chinese coffee market, especially the price war in recent years? How does the company differentiate itself and compete effectively among those peers?

Yongchen Lu, CEO

Yes. Okay. Thank you for the good question from our friends. So despite the macroeconomic headwinds in China, the coffee market growth remains robust due to increased urbanization and disposable income. It is worth noting that the current coffee market in China is still in its early stages of development. Per capita consumption still represents extremely low penetration, less than tank types compared to countries such as the U.S., Germany and even other Asian countries such as South Korea and Japan where the annual consumption right now is over 200 tons. So overall China's coffee industry has been experiencing rapid growth with significant potential for further expansion, indicating that the market is far from reaching saturation. There is not a price war going on which we do not believe is sustainable, though we do see some market disruptions. However, in the long run, this does not seem to be a profitable way to offer this despite a price war leading to strong revenue and unit growth margins, which will inevitably get compressed. And this margin pressure will likely lead to financial strain. So no one would like to maintain this aggressive pricing strategy for much longer. On the positive side, the price will effectively help expand the coffee market by making it accessible to a wider audience through low prices and increased availability. This strategy indirectly benefits us as these new consumers, initially drawn by lower prices, will eventually seek high-quality yet affordable options. As the price war eases and consumers interested in exploring diverse coffee offerings grow, our well-positioned brand is ready to capture this emerging market segment. Our differentiated product offering at compelling prices with fresh food options is so attractive that we do not really compete directly with those brands. Given the growth of the market overall, we have established a very good position for ourselves. Again, we have opened more stores than we had previously, and they are among the most profitable that we have opened to date. So the energy and the profitability are coming at the same time. And there's certainly no sign of cannibalization even despite this price war. Thank you.

Gemma Bakx, Investor Relations

Thank you. Our next telephone question comes from the line of Steve Silver from Argus Research Corporation. Please ask your question, Steve.

Steve Silver, Analyst

Okay. Hello, everybody. And in case the name didn't come through, it's Steve Silver from Argus. So thanks for taking the questions. It's great to see the target for achieving corporate EBITDA breakeven this year. First question I have, Tim's recently put out a press release mentioning having entered your 60th city in China. I was hoping you could discuss the forward-looking plan in terms of whether new store openings will focus more on entering new cities and markets or whether it will be more of increasing penetration into existing markets?

Albert Li, CFO

We will concentrate on our priority, which is increasing density in our fixed facilities. Additionally, we will expand into new cities within the clusters where we are already operating. We have four major offices in the East China cluster, primarily in Shanghai and nearby cities. In this current phase, we plan to increase our presence in that cluster due to the efficiency of our supply chain, logistics, marketing, and manufacturing. For example, we are also focusing on our operations in Beijing, Guangzhou, and Chengdu, among others. We will continue to expand into new areas within those clusters, utilizing the infrastructure and systems we have already established.

Steve Silver, Analyst

It is helpful. Thank you. So I had also one question about the loyalty program. I think now surpassed 20 million users earlier this year and showing very solid growth. I was just hoping you could provide a little context around that in terms of maybe any percentage of active users among the registered base and just maybe any context how that compares across the industry. Thank you so much.

Albert Li, CFO

Yes, I mean that question I'll answer briefly. Albert mentioned we have 3 million multi-dollar investments average in active customers. Now calculate the active rate there. I would like to emphasize the repeat purchase rate. We all measure the consumers who come to our stores more than two times. That pre-purchase rate is about 40%, which is above average for the industry.

Steve Silver, Analyst

Great. Thank you so much for taking my questions.

Operator, Operator

For our next question, Gemma, over to you.

Gemma Bakx, Investor Relations

Thank you, Operator. We had another question coming in via our webcast link and it is how do you most differentiate yourself from your competition in terms of price, product offering, and dayparts as well?

Albert Li, CFO

Yes. I mean, food is the most differentiated part for us compared with other coffee brands in China, especially in our dinner stores where we offer made-to-order fresh food. We offer combo meals at very compelling prices. For example, for breakfast combos of 1 cup of coffee plus 1 bagel, we price at only RMB19.9, which means less than $3 for breakfast. For lunch combos, 1 cup of coffee plus one bagel sandwich starting from RMB26.9, which is like less than $4. As I mentioned earlier in the fourth quarter, the percentage of orders that included food rose to 54.7%, more than half of orders that come with food increased by almost 8 percentage points from 47.1% in the same quarter of 2022. Despite the price war going on last year, our same-store sales continue to grow in 2023 given our differentiation strategy. Thank you.

Operator, Operator

Thank you. Please go ahead, Gemma.

Gemma Bakx, Investor Relations

Thank you, operator. Our next question from our webcast link is what is your expectation on the same-store sales growth for 2024 and how does the company perceive the margin outlook going forward?

Yongchen Lu, CEO

Okay, sure. I will take this question. Thank you, Gemma. As you mentioned, the Chinese coffee market is actually showing stronger potential. Right? So we believe in terms of per hectol, annual consumption will rise quite significantly over years. We have recently noticed a strong recovery in terms of ticket sales at some intense levels. Even though some of the intense competition is beginning to run down. With the price war subsiding, as consumers seek a broader exploration of coffee options, we believe our brand is well positioned. Our 2023 same-store sales were 7.6% for the whole year for 2023. I think we are also expecting single-digit or even high single-digit same-store sales growth for this year. With that said, I think our positioning is bringing in a lot of new customers while many of our existing customers are increasing their coffee consumption. Our coffee plus warm food business model will significantly differentiate us and contribute to our same-store sales growth in the future. Thank you, Gemma.

Operator, Operator

Thank you. The next question is for you, Gemma.

Gemma Bakx, Investor Relations

Thank you. The next submitted question from our webcast is, what can we expect from Popeyes in the rest of 2024? How is the rollout going? How is fried chicken different from the Chinese coffee market? And can Popeyes benefit from Tims China's built community and network?

Yongchen Lu, CEO

Yes. I mean, I'll take that question. So, as we all know, China has an extremely large chicken market and Chinese consumers really like chicken and fried chicken. Such a larger market can certainly accommodate another great Western fried chicken brand like Popeyes, in addition to KFC, which has over 10,000 stores already in China and is extremely successful. By offering great taste products and a vibrant, young, and energetic store environment, as well as casual table service, Popeyes has been well accepted by consumers in Shanghai, as you can see in our sales and our traffic. We will continue to build the brand and open stores as planned. There are a lot of synergies between Tims and Popeyes. Most of the systems and infrastructure Tims has built over the past five years can be used for Popeyes, like the digital systems, store network planning capabilities, supply chain capabilities, as well as the members and community. That is why we were able to launch Popeyes in just five months instead of the typical one-year new market entry process and achieved record-breaking first-day transaction numbers. As I mentioned, we have over 20 million loyalty club members, and we look forward to introducing our more than 20 million loyal customers to Popeyes using the built networks to reach out to them. This is a very powerful tool. Thank you.

Operator, Operator

Thank you. Gemma, you may continue with the web questions.

Gemma Bakx, Investor Relations

Thank you. What is your current thinking on the state of the balance sheet given that most of the infrastructure is built out and the business model is shifting to franchises?

Albert Li, CFO

Sure. I will take this one. Yongchen has mentioned that achieving operating cash flow self-sufficiency and becoming corporate EBITDA breakeven is one of the top priorities for the company in 2024. With that, we actually expect our overall operating cash flow status to improve quite significantly this year. In the meantime, as we are also focusing more on the sub-franchising business model, we believe that the profitability and cash flows generated by the sub-franchising business will add significant value and contribute to the overall cash balance, helping us reduce the overall leverage ratio. We anticipate that our overall leverage ratio can decline going forward. We are also considering financing solutions and maintaining a good balance in terms of bank facilities. As a public company, we still have a lot of access to potential financing alternatives. We are quite confident that our overall balance sheet status can improve over time in 2024. Thank you.

Operator, Operator

For next question, Gemma, over to you.

Gemma Bakx, Investor Relations

We have a question from Oliver Mihailiks regarding the balance sheet. How will you position it sustainably by the end of 2023? Current liabilities stood at nearly RMB200 million while current assets were only RMB65 million, and net operating cash flow remained negative. The recent issuance of RMB20 million in promissory notes at a specific interest rate appears to be a temporary solution. Have you discussed this with the major shareholders? Can you provide an update on their perspectives and your current plans? Thank you.

Yongchen Lu, CEO

Yes. I mean, as Albert mentioned, we expect to achieve corporate EBITDA breakeven very soon. We have shifted to a capital-efficient manner of opening stores by using franchises. We will generate operating cash flow very soon and leverage the franchise store openings. We expect to open around 500 franchised stores this year by building strategic partnerships we have such as Sinopec's Easy Joy. We have received more than 2,500 applications from the market for individual unit franchises. We are confident we can improve our cash flow and balance sheet through operating cash flow and our pipeline opening strategy which will generate cash and profitability. As Albert mentioned, our major shareholder has provided us a $20 million promissory note, which has further enhanced our balance sheet. Thank you.

Operator, Operator

Thank you. Over to Gemma for the next question.

Gemma Bakx, Investor Relations

Thank you. We have a question from Brian Jones from RBC. For Popeyes, I believe you have implemented the new kitchen and supply chain for your locations. Can you speak to how fast your locations can serve clients versus global system averages? Can you talk about the productivity that you're seeing at the Tims stores that you own? Thank you.

Yongchen Lu, CEO

I think we implemented a cable service system for Popeyes, so guests can come into the stores, sit down, and use their mobile phone to scan a QR code to place an order at the table. Our staff will prepare the food and bring it to the table. This casual service is well-received by consumers. Our service speed is efficient, and everything is running smoothly, contributing to the brand's acceptance in Shanghai, the most competitive market. We expect to continue utilizing this system and open stores as planned. Thank you.

Operator, Operator

Thank you. We are coming to the end of this conference call. Gemma, over to you.

Gemma Bakx, Investor Relations

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

Yongchen Lu, CEO

Thank you. Thank you for your time.

Albert Li, CFO

Thank you.

Operator, Operator

Thank you. That concludes our call today. You may now disconnect.