TH International Limited (THCH) Q4 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to Tims China's Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

Thank you very much. Hello, everyone, and thank you for joining us on today's call. My name is Gemma Bakx, Head of Investor Relations of Tims China. We announced fourth quarter and full year results 2024 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, 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. Those 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. 2024 marked a pivotal year for the company. We solidified our differentiated strategic positioning in Coffee Plus Fresh Prepared Food, completed the made-to-order renovation of almost all company owned and operated stores, surpassed 24 million registered loyalty club members and received over 6,200 individual subfranchisee applications by year-end. In Q4 2024, we celebrated the grand opening of the 1,000th Tims China Shopping Center Shanghai, where the Tims China story began. This achievement is a testament to Tims China's enduring presence in the region and to our ambition for further growth. Amidst macroeconomic volatility and intense market competition, our team demonstrated great resilience and achieved significant profitability improvements through enhanced operational efficiencies, supply chain optimizations and rigorous cost controls. 2024 full year company-owned and operated store contribution margin, which is EBIT margin previously and full year adjusted corporate EBITDA margin improved by 5.3 percentage points and 9.9 percentage points year-over-year, respectively. Continuous product innovation has always been a strategic focus for us. In 2024, we launched a total of 92 new products, 47 new beverages and 45 new food items, which contribute approximately 25% of our top line sales. [Standardize] offerings have resonated strongly with our guests, such as beverages, including [indiscernible] fragrant coconut water [Foreign Language] and Buffalo milk latte [Foreign Language], and food items include Angus beef and cheese [Foreign Language], Pistachio Smile Bagel [indiscernible], Black Gold Cheese Mammoth Bagel, et cetera. We continue to strengthen our leadership in the bagel platform, selling a total of approximately 22 million bagel and bagel sandwich products in 2024. To boost revenue across breakfast, lunch and [indiscernible] daypart, we have launched an all-day solution tailored to our guests' needs at different times. We have customized our operations for each day of the day -- each part of the day, shifting from simple promotions to scenario situation-based strategies. We have focused on understanding and meeting our guests' specific needs during each time period. For instance, we introduced a breakfast combo with [indiscernible], which suits morning routines and offers great value starting from RMB 14.9, just about USD 2. Building on our classic bagel breakfast sets, the [indiscernible] combo includes protein-rich options like meat, catering to high energy needs in colder months. Meanwhile, the [indiscernible] itself is live yet satisfying, perfect for those wanting a hardy but not overly filling breakfast. Recently to boost the lunch sales and offer our guests a healthy lunch options, we have introduced the light bagel burger lunch box, cheesy bagel bowl [indiscernible]. This product caters to the needs of health-conscious consumers by providing a nutritious and convenient meal. The lunch box combines a light yet filling bagel burger with other healthy yet tasty items, making a perfect choice for those who want a satisfying lunch without a heavy feeling. This product series pricing competitively from RMB 25.8, just about USD 3.5 has been warmly welcomed by market since the launch, contributing meaningfully incremental daily transactions per store. In 2024, we strategically expanded our store footprint while maintaining capital efficiency, delivering absolute convenience for our guests. A significant milestone was reached in Q4 2024 with the grand opening of Tims China 1,000th store in Shanghai, marking a pivotal moment in our national expansion journey. Leveraging sub-franchisee partnerships, we accelerate our market penetration, entering into 82 cities by year-end, including the debut of our first stores in Chuzhou, Hengshui, Jiangmen, Shenzen and Suzhou during the fourth quarter of 2024. This growth strategy not only strengthened our brand presence, but also ensured sustainable scalability through optimized resource allocation. Since we launched our individual franchisee business in December 2023, we have received over 6,200 applications and successfully opened around 100 stores by the year end of 2024 and signing a lot more, showcasing market confidence in our franchise model. We have established an attractive store unit economics for our subfranchisees with a reasonable 2 to 3 years payback period on average. As of December 31, 2024, our registered loyalty club members exceeded 24 million, reflecting a remarkable 29.7% year-over-year growth. The average number of members per store has now surpassed 23,000, serving a strong catalyst for our growth in the future and clearly demonstrating our guests' ongoing support for Tims China loyalty programs, which inspires our team to continue delivering the best value quality products and services. At this time, I would like to turn it over to our CFO, Albert Li, to discuss our fourth quarter and full year 2024 financial performance in more detail.

Thank you, Yongchen. We are committed to further improving our financial performance by refining store unit economics and driving efficiencies at both store and corporate levels. Our sub-franchisee business also contributed steady cash flows and profitability. During the first quarter of 2024, we continued to improve our company-owned and operated store contribution margin and adjusted corporate EBITDA margin by 3.9 percentage points and 0.1 percentage points, respectively. Full year 2024 company operated -- company-owned and operated store contribution margin and adjusted corporate EBITDA margin improved by 5.3 percentage points and 9.9 percentage points, respectively. We remain focused on delivering high value for quality healthy products and services to our growing customer base. Our overall monthly average transacting customers reached 3.01 million in Q4 2024, a 1.0% increase from 2.98 million in the same quarter of 2023. Additionally, digital orders as a percentage of total orders rose from 83.6% in Q4 2023 to 86.1% in Q4 2024. We continue to enhance our digital capabilities to meet the growing demand for delivery and takeaway services. Our 2024 full year total revenues and system sales dropped by 10.8% and 6.2% year-over-year, respectively, which was primarily due to the closure of certain underperforming stores and a 15.8% decrease in the same-store sales growth for system-wide stores, offset by a 105.3% increase in our sub-franchisee business revenues as the number of our franchised stores increased from 283 as of December 31, 2023, to 446 as of December 31, 2024. In 2024, we made significant progress in boosting operational efficiency, setting the stage for our long-term sustainable growth. Through refinements in our supply chain capabilities and economy of scale, we reduced the food and packaging costs as a percentage of revenues from company-owned and operated stores by 3.5 percentage points year-over-year. As many of you may know, we source most of our coffee beans from the RBI global coffee beans ecosystem, mostly in Malaysia and also recently in Yunnan provinces of China. And our other supply chain are sourced locally. Geopolitical tensions, natural disasters and unexpected events can disrupt even the most efficient supply chains. While with our strong and diversified supply chain, we have well mitigated these risks to ensure a reliable flow of products to our stores and our guests while maintaining exacting standard. We continue to streamline our operations by pulling underperforming stores, optimizing unit economics, refining staffing arrangement and optimizing store managerial efficiencies. These actions led to a year-over-year reduction in rental and property management fees, labor costs and other operating expenses as a percentage of revenues from company-owned and operated stores by 0.5 percentage points, 2.4 percentage points and 0.5 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 1.5 percentage points year-over-year. Our adjusted general and administrative expenses as a percentage of total revenues increased by 0.3 percentage points year-over-year. Excluding those onetime nonrecurring items like credit losses of accounts receivables and professional fees regarding transactions for the Popeyes deal and related with the reverse stock split, our adjusted general and administrative expenses as a percentage of total revenues would have been decreased by 2.3 percentage points year-over-year, which led to basically a drop from 13.9% in 2023 to 11.6% in 2024. So with all these good efforts, we have been able to improve adjusted corporate EBITDA margin by a very remarkable 9.9 percentage points in 2024. Turning to liquidity. As of December 31, 2024, our total cash and cash equivalents, time deposits and restricted cash were RMB 184.2 million compared to RMB 219.5 million as of December 31, 2023. The change was primarily attributable to the financing from our funding shareholders, partially offset by cash disbursements on the back of the expansion of our business and store network nationwide and the repayment of certain bank borrowings. Looking ahead, and thanks to our team's resilience and tireless work, Tims China is standing at the turning point to achieve full year corporate EBITDA breakeven with profitable growth being front and center of everything we do, we are excited to further enhance our supply chain capabilities and efficiencies, roll out our differentiating made-to-order fresh and healthy food preparation model to drive traffic, finance optimization of overall store unit economics and accelerate the expansion of our successful sub-franchising. I will now turn over to Yongchen for concluding remarks followed by Q&A.

Thank you, Albert. Before we turn to Q&A, I would like to take this opportunity to once again express my heartfelt gratitude for our guests, employees, business partners and investors for your continued support, dedication and trust during the past 6 years. Despite the challenging time during the 2-year COVID period and the fierce price competition in the past couple of years, together, we have built the brand from scratch to over 1,000 stores in 82 cities, create a robust community of over 24 million loyalty club members, a unique Coffee Plus Fresh Prepared Food business model offering the best value for quality products and a unique advantage of offering franchise opportunities as an international coffee brand. With these milestones behind us and with our demonstrated operational flexibility, we are steadfast in our commitment to sustainable growth and to generating long-term value for our shareholders. Moving into the spring of 2025, we look forward to regaining growth on our top line and to continue our expansion with plans to open at least 200 stores this year, the majority of which will be through our successful subfranchise while maintaining our focus on operational excellence and profitability. I will now turn the call over to Gemma for today's Q&A session. Gemma?

Thank you, Yongchen. We'll turn it over to Q&A and open it for registered questions. Let's begin with the first one. Go ahead, operator.

[Operator Instructions] Your first question comes from Steve Silver from Argus Research Corporation.

Curious as to what your current thinking is on the state of the balance sheet, in particular, with the focus on profitable growth and subfranchise expansion in 2025, if there are any specific strategies you're employing to manage cash flow while balancing growth and your debt obligations?

Okay. Thanks. I think I will take this question first. Okay. So firstly, I want to mention as of the end of 2024, our total cash and cash equivalents balance totaled approximately RMB 184 million. And on top of that, we have maintained a very stable total drawable bank facilities of approximately RMB 400 million, I think, in the past couple of years. And actually, we are in the process of obtaining like new bank facilities as of now. So that will be like one source of cash. And I think in the meantime, thanks to those meaningful improvements in our profitability at both the store and the corporate level and also as part of our rigorous implementation of our cost control initiatives and also including those -- our enhanced capability at supply chain. So basically, I think our store operating and also in terms of the headquarter actually -- expenses actually are quite streamlining. So I think we have effectively slowed in terms of the cash burn rate actually compared with the past couple of years, okay? So -- and then I think as you have mentioned, our sub-franchising is -- can generate very steady cash flow and profitability while in the meantime, we can continue to expand our store network since the last couple of years. So that will -- we will continue to accelerate that from this year, okay? And we believe we have established a very attractive unit economics for our sub-franchisees with the 2 to 3 years payback on average, as Yongchen has mentioned. So basically, I think we are no longer cash burning like as in the past years. And so in the meantime, I think if we do want to expand in terms of the company-owned stores, we can actually rely on some additional bank facilities. And in the meantime, I also want to highlight the fact that in the past years, our like shareholders, including our funding shareholders, [indiscernible] and also RBI, they invested a very meaningful investment in the past. And this has showed a strong support from our shareholders to Tims China's sustainable growth. Yes.

Yes, just I want to add. Steve, thank you for your call. I just want to echo some points again. First of all, we are at the turning point to corporate EBITDA breakeven this year. And also, we have proven our sub-franchising model with [indiscernible] unit economics. So we'll use franchisee to expand our store network from now on, which is [indiscernible] capital efficiency for us. So we don't need a lot of capital to grow the business here.

That's helpful. And one more, if I may. The price of coffee beans has been extremely volatile so far in 2025. I'm curious as to whether there are any implications on your thinking about food and packaging costs and store contribution margins.

Albert, you take that.

Okay, sure. Yes. Okay. So I think actually, on the coffee bean side, I just firstly want to mention that actually, we rely on the RBI global coffee bean ecosystem in terms of supplying actually very reliable and I think it's cost-effective coffee bean cost in the past. And so even with the coffee bean like in terms of the coffee bean pricing increase, so I think like part of the measure we had is that we have started to source locally from those Yunnan coffee beans. This is relatively less expensive. And I think that the pricing actually is much better. And so our cooperation with Yunnan bean sources is under the cooperation with local roasteries in China approved by RBI, so in addition to what we already had with RBI's Malaysia roastery. And secondly, I want to mention is that in terms of the coffee bean cost as a percentage of our total cost is actually it only accounted for about, I think, like less than 14% in terms of our overall food and paper costs. So actually, the overall coffee bean cost actually is not very material. And in the meantime, Tim's menu is very diverse, featuring not only coffee, but also a variety of healthy food items like bagels and [indiscernible], right? So those diverse menu actually help us to mitigate the impact of -- on the increase of coffee bean costs. And we believe that with the current coffee bean pricing, actually, it can be quite mitigated by in terms of the downward pricing on our other supply chain materials. Okay. And I also want to highlight the fact that actually, last year, our total supply chain actually in terms of our gross margin has improved by 3.5% year-over-year. Okay. And I think lastly, I want to mention that if the coffee bean costs will maintain the current pricing, our expectation is that the overall impact on our like margins will be less than 90 basis points for the full year 2025 basis. So hopefully, this actually clarified the questions.

We have a webcast question from Jonathan Norwood who asks, how are comp store sales trending so far in calendar 2025? And have the coffee price wars recessed at all?

Okay. Yes, I'll take that question. So yes, the same-store sales growth is a very important operating metric that we monitor closely. The fluctuations in the same-store sales growth over the past year reflects the short-term uncertainties in China economic and consumption sentiment and the intense industry competition. While in the mid-to-long term, with the increasing customer demand in coffee consumption from both expanding coffee population penetration rate and rising [indiscernible], which will leave significant room for growth. What's more, as we talked, again, again, in China is not only -- it's not singly focused on the coffee market, and we continue to see strong and growing demand for our freshly prepared healthy food products. For example, our latest launch of the lunch box, the light bagel burger lunch box. These products have been warmly welcomed by the market and achieving an average about 20-plus incremental daily transaction per store. And we are going to have another 2 ways to further enrich the lunch box offerings and drive further growth from there. Lastly, we have seen an improving trend in the same-store sales growth since October 2024, and our goal is to achieve positive same-store sales growth in 2025.

[Operator Instructions] We have another webcast question from Jonathan Norwood. Can you comment on your liquidity position as of today?

Yes. I think we have actually addressed that question in terms of the balance sheet, okay? So as of the end of 2024, we had a total cash and cash equivalent of about RMB 184 million. And in the meantime, I think we also had about like nearly $390 million in terms of our bank borrowings onshore. And also we had 2 convertible notes. One is actually on the [Indiscernible] in 2021 and also one issued last year. Yes. So I think based on our current -- in terms of our current business plan, we believe that actually we can maintain a good liquidity in terms of the potential like new bank facilities we will secure and also potential financing that I think currently we are contemplating, yes. So I think based on our management's current like business plan, we are well like capitalized.

[Operator Instructions] We have a follow-up question from Steve Silver from Argus Research Corporation.

Okay. Just curious as to your current thinking about how the company is planning on driving product innovation in 2025. You spoke a lot about the healthy food strategy evolving to meet customers' trends and demand. Just curious, your current thinking about the speed at which you're able to bring new innovative products to the product menu.

Okay. Okay. Steve, I'll take that question. Yes, I mean, as I mentioned, the product innovation remains a core strategic focus for us. Now in 2024, we introduced a total of 92 new products, including 47 beverages and 45 food items. These new products account for approximately 25% of total net revenue. So as a leading coffee brand in China, we commit to provide fresh, healthy and delicious products to our distinct guests. So to achieve that goal, we have spent money, renovating more than 600 stores into made-to-order model last year and [indiscernible] in all our beverage and our product offerings. And going forward, our product innovation will continue to work around these products of freshness and healthiness for our key target customer segments, including white collar, family and fitness enthusiasts. So our coffee plus bagel combo has become a goal to breakfast choice for guests, offering high-quality affordable options that balance taste and nutrition [indiscernible] has become staple for our loyal clientele driven by taste, convenience and value. Building on this momentum, we extended the concept to launch with our debut of the light bagel burger lunchbox, a healthy made-to-order new solution that has got a strong market acceptance since it's launch in February. The 3-item combo, including 1 bagel sandwich, 1 [indiscernible] and 1 drink sells only from RMB 25.8, which is about USD 3.5. So I mean, right now it contributes about 20 transactions per store per day. And as I mentioned, okay, we are going to launch another 2 waves to further drive the lunch box for us. So I mean, our Coffee Plus Fresh Prepared Food strategy serves as a key differentiator, allowing us to avoid pricing wars and concentrate on delivering long-term value. And we are confident that our dedication to provide a high-quality and affordable offerings will ultimately enable us to succeed in this competitive market.

Great. And then you mentioned during your answer about your loyal customers. I'm curious, given the fact that we are now into April of 2025, whether there's any color you can provide directionally about the expansion of the loyalty program without giving any specific numbers just in terms of the trend there, whether it's continuing from 2024 levels?

Yes. I mean it's -- the loyalty club members continue to go high day over day. I mean, we have several ways to attract the loyalty club members. First of all, we are continuing to open new stores through a franchising model. And I mean, many new customers will come into our store that become our loyalty club members. Secondly, we have lots of online channels to attract the loyalty club members through [Indiscernible] the cooperations with other aggregators or platforms, et cetera. And thirdly, we usually cross over -- to cross over branding with a lot of good brands like Tesla, like, [Blue] [Indiscernible] all the good brands in China, which will bring us lots of new club members as well.

There are no further questions at this time. I'll now hand back to the company for any closing remarks.

Thank you for all your time, and let's look forward to a great year ahead. Thank you.

Thank you.

Thank you very much.

Thank you. Bye-bye.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.