Jollibee Foods Corporation (JFC) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Gio Dela-Rosa. I'm Head of Research at Regis Partners. We are very glad to have the opportunity to host Jollibee this afternoon for its full year 2024 results briefing. We have with us this afternoon, Cossette Palomar; as well as Richard Shin, the CFO of JFC. And without further ado, I'll hand it over to Cossette. Thank you.

Thank you, Gio. Good afternoon, everyone, and welcome to the Jollibee Group's Fourth Quarter and Full Year 2024 Earnings Conference Call. Before I turn the call over to Mr. Shin for the presentation of our financial results, let me quickly read this reminder. So this earnings call may include forward-looking statements that are based on certain assumptions of management and are subject to risks and opportunities or unforeseen events. Actual results could differ materially from those contemplated in the relevant forward-looking statement, and the Jollibee Group gives no assurance that such forward-looking statements will prove to be correct or that such intentions will not change. All subsequent written and oral forward-looking statements attributable to the Jollibee Group or persons acting on behalf of the Jollibee Group are expressly qualified in the entirety by the above cautionary statements, okay? So after the presentation, we'll move to the Q&A, okay? So now I'll turn over the call to Mr. Shin.

Thank you very much, Gio and Cossette. So typically, I would start with some financial summaries and walk you through. But for this call, 2 items that I want to point out. One, we'll be extending the Q&A session, another 15 minutes. So in total, we'll be doing 75 minutes on this call today to make sure that we allow for plenty of time and chance for everyone that has dialed in. So a very good afternoon, and thank you for joining us. And also for our friends dialing in from Europe and the U.S., a very good morning to you as well. So let's kick off now with a slight different view in that we'll start with some questions at the forefront. I understand Q4 had numbers that perhaps needs looking into given that it's slightly unusual because of the 2 one-off items that we've recorded in the fourth quarter. So I want to make sure that we address top-of-mind questions right upfront, and then I'll go into the financial summary. So the first question that I'm sure it's on top of mind for those of you dialing in is what strategies are you implementing to really enhance shareholder value vis-a-vis looking at Q4, is that then the run rate? So again, I share this message house, which some of you have seen and those who haven't, just to very briefly walk you through that we have a long-term objective of tripling net income after tax attributable to parent company and to grow our ROIC by 20% by the end of fiscal year 2028. So 2024, which we're about to discuss, is really year 1 in this journey. And again, just to share with you, our strategies have not changed. Our emphasis is on turning around Smashburger, which I'll talk you through. It's really about securing long-term viability and success in China with minimum investments using the assets that we have in China, including cash on the ground. It's really about driving the coffee and tea segment led by CBTL, which has done really well for us in 2024. It's about expanding aggressively our Jollibee brand internationally, led by the U.S., and I'll again walk you through what has happened and what we're seeing on the ground. And of course, to continue to not only lead, but to really dominate. By this, I mean, be significantly larger than our competitor in the Philippines because Philippines continues to be a growth market for us. Underpinning all of this, of course, is our pivot. We're now 69% of our near 9,800 restaurants and cafes are now franchised. So we're pivoting towards becoming a franchiser of choice in an asset-light model, which we've announced a while ago, we continue to do that. You will also see in some of our OpEx discussion today, our intention and commitment to accelerating digital transformation, which in terms of capabilities, a few years back, we were very light. So you will see some of those investments coming through as well. Staying on this first question. If we were to benchmark ourselves against the other top 5 players in the world, being McDonald's, of course. We got Starbucks, we got Chipotle, we got Yum! and we got RBI. In that order of market capitalization, those would be the top 5. This is what we delivered in the fourth quarter. We delivered a same-store sales growth of 5.7% and a system-wide sales growth of 15.9%. What that means is if you look right across vertically down against all the brands, we're actually market leaders in terms of percentage growth, albeit a lot of these companies are larger than us, but we're getting sizable as well, near USD 7 billion in terms of system-wide sales and near USD 5 billion in terms of our revenues. The second question that I want to just right upfront address is, will you triple in [ 5 ]. Your growth rate of 17.7% in 2024 doesn't seem to give us that 26% CAGR rate that is required on a flat line or linear, straight linear calculation. Of course, life doesn't work that way. Our businesses are built and it goes through certain stages. And so our growth rate of 17.7% actually puts us right on track within our internal plan to triple. And triple means getting to PHP 24 billion net income after tax attributable to parent by the end of 2028. Our base year when we put the statement out actually was based on 2023. At that time, we're looking at PHP 8 billion to land the year. In fact, we're 10% ahead. So base year 2023, 10% ahead. Year 1, 2024, on track. And we are now putting this out there, full disclosure that our growth rates are here 15%, 26%, 27% and 26%. And the reason why we believe this is the right pattern and shape is because next year, you'll see later our guidance is right in line with our internal plans. You'll see also that our coffee and tea with higher profits in terms of store economics is starting to really grow faster than some of other segments. And we're also seeing lower losses in Smashburger in China in fiscal year 2026. That is to say 2025, our focus is on China Smashburger loss reduction, which will be completed by 2026. In 2027, all business units shall contribute to the profits, including Smashburger in China. And that's why we're seeing this ramp up because we all know that our international businesses gives us a higher unit level economics. And so in 2028, that momentum then takes us with, again, the higher or better unit level economics of international accelerating and international will be 50% contribution to NIAT by the end of 2028. In terms of the quality of profits in our domestic Philippines business, I know some of you have questioned whether this is now the new run rate. So what I'm talking about is the following. I know there's a lot of numbers here, but stay with me. So fourth quarter 2024 actuals. So these are in billion pesos. And then if you look at -- what are we looking at here, growth rate versus 2023, Q4, you can see that our growth rate here of 7.6% in revenue translated into a gross profit of 2% and a slight loss on the operating profit level and a dip in EBITDA coming back out strong on the NIAT at 7.7% or in line with our revenue. So there's been questions around the quality of these movements. And so I'm going to be addressing that in the following slide. So there are 2 points of profit that I want to talk through. The first level profit, of course, is our gross profit margin. And so that's at the store level, where we have seen and mainly this is driven by the Metro Manila wage hike impact of 5.7%, which is roughly PHP 35 per day from PHP 610 to PHP 645 per month in terms of -- sorry, per day, my apologies, per day in terms of hourly wage workers. And as we expand our stores and as we expand our business, we're also staffing up accordingly. So that also is another multiplier. But that effectively is the reason why we've seen that softness going from 21% GP margin same quarter a year ago down to 19.9%. But I want to give context to this 19.9% because full year gross profit margin was actually 19.4%. So our fourth quarter GP margin actually was superior to our full year average. And that full year average, we're up 30 basis points versus last year without taking price increase to our consumers in the Philippines. We believe that transaction count or volume was the better way to grow our top line, and that's what we did. So we continued with value programs with programs like Mix & Match, which was very successful for us 1.5 years ago, and we continue that into full year last year as well. The next level of profit quality that we're trying to understand here is our OPM, our operating profit margin. And as we all know, between GPM to OPM, we have OpEx and A&P. So let me talk about OpEx. So you can see here within operating expense, labor once again was the key reason why we went from 8.3% OPM margin rate to 6.7%. First, let me tell you, 6.7% will not be the run rate for 2025. It will get closer back up to the run rate of Q4 of 2023 or even better. And the reason for this dip here, this investment really represented corporate functions because JFC as a legal entity has both corporate functions and also the Philippines domestic business. This is a statutory view, so it's a legal entity view. And what we saw there was our ramping up for the second year in a row, which I've explained in the past, we had limited capacity or capability -- sorry, not capacity, capability in brand building or marketing and in technology. And so as we've been gearing up and ramping up in these areas, the cost is coming through. And so therefore, compared to fourth quarter of last year, it's incremental cost. But of course, the revenues will follow in full year 2025. So as a percentage of revenue, our OPM margin will increase upon this investment. On the point of A&P, because I mentioned there are 2 items, OpEx was one in A&P. You can see seasonality, we've been consistent. So Q4, there's significant amount of billings that we received from our agencies and others, and there's a catch-up, if you will, of A&P. So you can see similar to last year, Q1, Q3 versus fourth quarter, we're in line similar to last year, where our A&P spend is higher. So that, of course, also goes into that operating profit margin erosion that you've seen in the fourth quarter. But again, this is not the run rate. Now the fourth question, the big one, Smashburger. So what's your current perspective on Smashburger's performance and future potential? So let me start by saying the following. First quarter and second quarter of the year, we did very well with positive EBITDA. We've increased, for example, on other quantitative but nonfinancial metrics such as Google ratings. We were hovering below 4, 4.0, and we got that up as high as 4.6. We were also struggling with retention of some of our hourly workers in our stores, that attrition rate, we've improved as well. And of course, our food, safety and cleanliness KPI. So that's applied right across all brands and businesses in all markets. We've seen dramatic improvements in our FSC, as we call it, KPIs. So a lot of positives were happening. We've also announced that we were rebranding and we were taking measures such as working on a simplified menu, not only brand changes in color and logo, et cetera, but really taking a position of we're going to dig in deep to be a very focused better burger player. So that new menu launch was in mid-September of last year. And as we start to see the results, we realized towards fourth quarter that we were not necessarily hitting the mark. So I'll get into that a little bit more when I show you the following points. The bottom line is we've decided to make a management change. So middle of February of this year, we moved fast and we took the decision to mutually part ways with our CEO, Denise Nelson. And following that, we've gone through another layer of restructuring to make sure that we had the right skills that were really geared around a turnaround perspective, a smaller business, so more scrappy, more entrepreneurial, doing more with less A&P dollars. And so that decision mid-Feb, which means our first quarter will still be soft. However, going into the second quarter onwards, we're going to be very focused to improving key KPIs such as transaction count. So now the leader of the business, it's a concurrent role. So Jim Sullivan was and still is our Chief Development Officer, meaning our face to our franchisees and also the person in charge of network expansion, very experienced food operator, having done also burgers with Carl's Jr. He's also done turnaround businesses with Qdoba. He was actually hired by Apollo private equity. He, I believe, has what it takes to take a brand like Smashburger and be very scrappy and really get more out of the limited budget. So we've stripped out since then USD 5 million in terms of G&A and in terms of nonworking A&P that were not very productive. We've also pivoted our channel strategy to be more dependent on repeat customers rather than through aggregators. So all of this combined, you'll see now the key takeaway points, but I wanted to be transparent on this call and call out that 2024 was not a year that we expected to end that way, given the first 6 months was running at a very different pace. So Q3, we reported a negative EBITDA in Q4 also negative EBITDA. Last thing I'll say is Jim will report directly to me, and I will be very hands-on in this turnaround effort for Smashburger. So '24 presented challenges. However, we gained valuable insights that will definitely guide us in the decisions we'll make forward. First, our ADS time line adjustment, meaning the numbers and the targets are still the same as what I've revealed in the past in terms of what will get us to breakeven EBITDA, what would get us to breakeven NOI and what would get us to breakeven NIAT. So that still remains. Our time line shifted a bit because we lost some time in the back half of last year. Second, the menu relaunch. The menu relaunch that I just spoke of did not yield the desired results, meaning we thought we would have repeat consumption. We thought we would have higher ADS that would stick. But in fact, what we found that with the menu redesign, we also alienated to some extent, our regular customers who are coming in for alternative proteins such as turkey, which we took off the menu. We were not as family meal focused. We now have things like tenders and smaller burgers that appeals to families. We also have a very strong beverage strategy in which we're going to highlight shortly some of the new innovation and some new products that we'll be introducing. And finally, I'll say that the high-low strategy is something that really came out of this. Everyday low price, great 100% certified Angus beef burger, along with what we're known for, which is the innovative premium burgers, we're going to continue to have that strategy. For 8 months, we did not have any new news on our menu. And this, of course, eroded our transaction count. Third, channel investments. Our promotional efforts were very heavily leaned. And as we saw that the menu wasn't really producing the results that we had hoped for, we became more heavily reliant on aggregators like Uber Eats with more discount promos and basically promos that really did not result in repeat consumer behavior. Fourth, learning our A&P investments. Moving forward, everything will be measured and everything will have a return on ad spend. Fifth, our employee retention and other improvements. It is critical for us to understand that what really makes this business happen is our restaurant crew and the district officers and the senior district officers that are managing these stores and are out there on the battlefield. We didn't give them any new news, as I said. We then really, I guess, complete our task of driving new transaction count into the store through marketing efforts. So essentially, our focus right now is for the restaurant crew to do what they're very good at doing. But at the same time, the corporate Smashburger office has a role to really making sure that we reengage lapsed customers and we start attracting new customers through very targeted advertising, but also very targeted menu item and community marketing and trade marketing that we'll be rolling out. And then finally, our franchisees. So we spent quite a bit of time since mid-February. There is a franchisee council that's represented by different franchisees in different parts of the U.S. And we're listening to them, and we're hearing them loud and clear. Do not alienate regular customers who are looking for certain products that no longer are on our menu. And of course, all that being said, we understand that the franchise segment is really split between the traditional and of course, the nontraditional. And the great news here is our nontraditional, such as airports, et cetera, are doing fantastic. So they're really continuing to grow. And as more people are traveling through airports, et cetera, we're starting to see a lot of benefits being well positioned. So we've also signed up new airports, new airport operators as well as signed up now 7 military bases in which we were asked to come in to be the one and only better burger brand that will be served in those naval and military bases. So there's some bright spots also on that side of the business. So these are the numbers that I shared in the past. They still remain the same. So we're now back down to USD 3,700, although we did hit USD 4,000, but again, it wasn't sustained. And so therefore, we're going to rebuild this but in a sustainable method, i.e., channel shifting more to dine-in, making sure our to-go app works very well so that we have that customer experience to be fluid and less reliant on costly highly promoted aggregators. Moving on now to the next top of mind question, which is what's going on with Jollibee North America's EBITDA because in Q4, we saw a dip. And here's the number that you saw. We went from PHP 900 million down to PHP 600 million in quarter versus the same quarter last year comparison. On a full year basis, we did see a 28% growth because I've always been saying North America Jollibee is one of our best performing highest per unit level economics, et cetera. So what happened? What happened was, without getting into all the technical details, in 2023, in the fourth quarter, we had a onetime booking of royalty recognition of PHP 648 million. We did not have that in 2024 because we started to book those across all 4 quarters, meaning fourth quarter got a smaller proportion of that booking. And so therefore, that dip really was a net gain of PHP 347 million, if you were to adjust for that timing difference of that booking. That only gets us to par, right? So if you add the PHP 347 million back to the PHP 600 million, it gets us to PHP 900 million. The other thing that we saw again is we saw labor, in particular, hourly wage labor. 1/3 of our Jollibee restaurants in the U.S. are in the state of California. And as many of you would have heard of or read of, there was a minimum wage increase to USD 20 per hour. That significantly impacted all QSRs across the board. And so the impact for us was another 4. So if you adjust for those 2 items, it's more in line with the full year growth. Why the U.S.? You've seen this chart before, but we've updated that last time, the number was USD 12,900. The latest number now is USD 13,400. This is what we do in our average store per day. USD 13,400 ADS, which puts our business in North America significantly above all other businesses. And if you were to use the Philippines as a benchmark because this is where our growth engine is, you can see the difference in ADS. More importantly, when you translate that on a unit level, so here, we took a 2-piece chicken joy with a side in a drink as an index. And you can see we make 5x more cash margin selling the same product in the U.S. as we do in the Philippines, which is a very aspirational market on its own. So therefore, we'll continue to invest in the U.S. We'll absorb the wage labor costs and so forth. We do take price in the U.S. unlike the Philippines. And so we'll continue to manage our gross profit as well as our OPM margins. I think you're familiar that, again, 2 years in a row, we were voted the best chicken in the U.S. And so this gives us also further confidence that 2 things. The brand has potential and one -- and second, you can see the 103. This is the number of stores in North America. In terms of all of our stores within Jollibee, only 103 are in North America, which clearly means we're under-indexed. So you've heard a lot about our franchising efforts, and so that's the path we're taking. The next top of mind question is how is CBTL progressing and performing overall? So these are fourth quarter data points. So just to show you how to read this, this is 4 quarters of last year plus the reference quarter -- fourth quarter of 2023. And these numbers here in bold in the middle are growth rates. So Q1 of 2024, we grew 16% versus Q1 of 2023 and so on. Over here, this is where we took a price increase in the U.S., which stayed with us with very little volume loss, meaning it was quite inelastic in the sense that we didn't lose too much volume. And of course, things, as always, normalize. But this rate, as I showed you earlier, with the Starbucks growth rate is actually above market rate. And similar comment on same-store growth and of course, revenue. These are the growth rates here. And on EBITDA margins, you can see, again, so not only top line growth, but also driving cash profit EBITDA growth rates as well. So CBTL is in a very different place than where it was a couple of years ago. This is the same view, but for the full year, I think the bottom line really is fiscal 2024, we delivered a 14% growth year-on-year. And if you were to look at the coffee and tea category where CBTL sits in, it's still our -- in the fourth quarter, it's still our #1 business, followed very closely by Highlands Coffee and our new acquisition of Compose, in total, delivering PHP 1.9 billion in EBITDA profit. And for the fiscal year, you can see we have a 50% growth in this category. And what's interesting here is because of the timing of when we bought Compose, which is mid-August, the full year doesn't really reflect all 12 months, which we'll see in 2025. So this, as I said earlier, is a category that we are investing behind and driving hard. Right. Now let's get to the financial highlights very quickly. So this is a full year view. And again, as I said, we're on track versus our internal plan on this 5-year as we grow at different pace and rates as businesses that are not profitable will start breaking even and start to contribute at a higher contribution rate that starts to ramp up in the last 3 years of the 3-year plan, as I showed you earlier. So we finished the year at 10.6%. That gave us a NIAT growth rate of 17.7%, including the fourth quarter onetime hit, which I'll get on to here. So I've also said a few quarters back that we are very focused on not only growing the P&L, but managing our capital wisely. That includes some of our investments in the past. So when we extracted Tim Ho Wan from Titan, I think that was announced, what happened was there was a gain in the Titan Fund, so what we call an acquisition premium in the fund, which, of course, translates into onetime loss in other income for us. So that was the tune of PHP 0.6 billion. And so if you were to adjust for that, plus -- we had some cash and fixed income instruments, U.S. dollar-denominated instruments, which we cashed out in order to purchase Compose, which again, as explained earlier, is doing very well for us and is giving us a very good yield on that investment. We paid for that 70% of Compose. We pay for that mostly in cash, so 53% in cash and 47% in term loans. So that 53% cash component, part of that came from these fixed income instruments. So therefore, unlike the same quarter of 2023, we did not have any unrealized gain from what we call our FVTPL or mark-to-market instruments. So if you were to take those 2 onetime items out, fourth quarter, on a like-for-like basis, our core business grew by 53.8%. On a full year basis, like-for-like, we would not have ended at 17.7%. We would have ended closer to 30% growth rate adjusted for these 2 strategic decisions that we purposely made. And the reason we took Tim Ho Wan out of Titan, as we all understand, is we had that capital, but we didn't have a [ notepad ] to go with it because it was sitting in a fund. We now have control of Tim Ho Wan, and we now have the ability to build that brand and also to enjoy the net operating profits that it will produce going forward. I think this was covered. So -- sorry, it was not covered. Earlier, I showed you Philippines domestic. This is now the group view. So not just Philippines, but Philippines plus international. And you can see, one, the positive gearing of 10.5% top line growth revenue, driving gross profit almost the same rate, 10.1% and driving operating profit -- sorry, this is the fourth quarter. My apologies. Let me just shift to the full year because I think we've explained the fourth quarter. So the 10.6% revenue similar to fourth quarter revenue growth, driving gross profit at 14.2%, operating profit at 17.7% and of course, our NIAT at 17.7%, so positive gearing that we saw in the year. In terms of other KPIs such as system-wide sales, same-store, all this material will be available, but I just wanted to call out that it was a significant growth in our core business. And adjusted for those capital allocation decisions, we actually had a stellar year. And even without those adjustments, 2024 still goes down as our best year and the first year that we actually achieved higher than PHP 10 billion in NIAT. This view actually shows you by quarters. And the reason for that is because we wanted to explain that we have a trend going here. We have a rhythm of growth revenues, you can see. Again, the bold in the middle, these are same quarter -- same period last year. So you can see double-digit growth right across revenue for now all 4 quarters of the year. That, again, producing also significant operating income. 2024 Q2, this growth rate here, this is not the normal rate per se because we had a softer Q2 and 2023. But nonetheless, you can see a double-digit operating income growth coming off of a double-digit revenue growth. EBITDA, I think you've seen this in our MD&A, but essentially, in the spirit of disclosure, we are now showing you -- even though the numbers look as if they're negative, I've explained right upfront what's causing these movements. So net-net, for the full year, the Philippines did grow their cash profit, EBITDA, including the investments that we've made, as I've explained earlier, and also absorbing the Metro Manila wage increase. You can see we're growing our business on an annual basis of 9%. China, I think there's going to be some Q&As on that, so I'll save that for later. North America, Asian brands, which is effectively Jollibee, which I covered. Smashburger, I've covered. EMEA, I didn't cover, but EMEA also continues to have a very significant profit growth versus last year, driven really by 2 engines, Vietnam being one and also rest of Asia and Middle East and part of Europe being the other part of EMEA. Coffee and tea category, again, in terms of percentage, it's the segment that's growing the fastest. And it's also on an economic unit level basis, quite profitable for us. It's fast payback where brands like Highlands Coffee, we do build our own stores because of the incredibly fast payback. So we're going to continue really to invest the money back into Vietnam to expand network because the macro headwinds that I've talked about for many quarters in Vietnam we're now seeing for the first time in Q4 of 2024, a positive rolling base or same-store sales growth after many quarters of negative -- although we're negative, we're less negative than the industry decline for coffee and tea in Vietnam. But in Q4, we're now seeing that reverse into a positive RB. So I think our strategy to continue to expand, knowing that the macro would go and the real consumption would come back, I think we're in a very good place. And strategically, in Vietnam, as we're by far the #1 coffee player, we also get very good upstream negotiations on a robusta coffee bean price because I think all of you understand that coffee bean price has been challenging, both for Robusta and for Arabica. So just getting towards the end now, free cash flow. I know there's a lot here, so let me just punch out the key points. Our underlying EBITDA margin slightly above last year. So we're running our business at 13.8% EBITDA margin. This year, the size of the pie has grown. So therefore, the inventory and the receivable amounts have grown. And later, I'll show you efficiency in our days turnover, but that's what's really driving that. And of course, when you get down here, our CapEx, we spent PHP 11.6 billion, so slightly more than last year, but significantly lower than our initial guidance. So therefore, we produced PHP 22.5 billion of free cash from operations and we're running our business at 8.3% -- sorry, FCF margin rate, which is higher than our OPM margin rate. This slide, I just wanted to show you the efficiencies. So collection, we are getting more efficient, collecting a day quicker. But again, our revenues are growing, our number -- sorry, our AR balances are also growing, which you saw in the operating cash flow. And days of inventory, similarly, we're getting a lot more efficient with now 38 days. But again, the business is getting larger. So you're seeing some of that inventory in absolute terms are being tied up in our cash. The rest are in line. And of course, we have our covenants, maximums and minimums. And in all 3 cases, we're significantly better than our maximums and minimums. Guidance. So on our network, similar to 2024, 4% to 8% organic store build-out, which is roughly 700 to 800 new stores. System-wide sales growth, 8% to 10% range. The first few months of fiscal 2025, we're seeing that we're running at higher than this. So that's good news. Same-store sales growth, 4% to 6%. Again, first few months, we're seeing that we're right on the high end of that range and operating income growth, 10% to 15%. All right. So I will just check in time. Yes, we're doing good. So I'll open up now for the next 30 minutes or so for Q&A.

Okay. Hi, everyone. So we're now ready for the Q&A with Richard. [Operator Instructions] Before I proceed to any questions either from -- either on the Q&A box or from the floor, maybe I'll throw the first one to Richard right now. Richard, you already sort of expected this question. My question is about China. What do you think is happening there? Is it a macro thing? Is it a competition thing? Is it execution? Maybe you can also tell us what management is planning to do.

Okay. Great. Thank you, Joe, for that question. So first, let me describe who we are in China. We don't have Jollibee in China, and we don't have coffee and tea in China for obvious reasons. KFC in China is quite dominant, and we're not quite ready to pick a fight with them. In terms of the coffee and tea space, I think you're all very well aware of the growth and the power of the likes of the Luckin and recently IPO-ed in Hong Kong Mixue, which now by store count is the biggest QSR in the world. So we're not quite ready to go in with our brands there. So who we are in China is actually Chinese cuisine. And we are playing now in the value segment. So our lead brand in China, as you know, is Yonghe King. And what we noticed in January and February, is we've tested now several models of reprice positioning ourselves for both breakfast and for lunch into positions where we thought -- it's a slight unit level margin erosion, but I wouldn't say much. So we go from 77% to around 70% margin on food cost. But that is what we're seeing now, depending on the model that we're testing, anywhere between 26% to 93% transaction count uplift. Now as we all do, because we don't make big bets and go for it, we are rolling this test into more stores and more stores. And pretty soon, it will be nationwide. So our strategy in China, we always said we will not leave China because we're in the value segment, Chinese cuisine. And this makes sense, whether consumer confidence is low, medium or high, people still will need to eat a proper breakfast and a proper lunch. And what we're now seeing is that at the right price, which is what we thought, we thought that consumer confidence level being where it's at, they're a little bit more selective with how they spend their money. Having said that, we also know that 34% of every dollar earned in China, people are putting away a savings. So there's an incredibly high savings rate. So we think once there are stimulus packages and programs, which the government is now talking about to boost consumption in China, domestic consumption in China. As the government gets behind that as they have recently done in the private sector for tech, we believe that consumer confidence will rise, and we believe that we're well then positioned with our strategy, which has always been to expand in Tier 3 and 4 cities with a franchise model. So, so far, the numbers are what they are, but we believe the right strategy for us, again, is franchise model, right price segment and really just ride the wave when it comes in terms of consumer confidence rising.

Thanks, Richard. Maybe we'll start with a question from the floor. John Te, we'll unmute your line.

Richard, I have 3 questions. First is on CBTL. I'll probably go one by one then. First on CBTL, I think we've noticed some management changes also in CBTL. Mr. Miñana is again heading CBTL, I think, on -- in the interim. But could you explain why was that the case? And maybe if there were any strategic changes, what was the rationale behind? And will there be a new strategy in that brand going forward?

First of all, good to see you, John, kind of see you. I know you're on video mute at the moment, but thanks for the question. So early December of last year, we had a resignation by John In de Braekt, who was our CEO for CBTL Global based out of Singapore. We've accepted his resignation. We thought it was the right move. John took the business to a level where we're now ready to do what we're doing today, which is really to grow the U.S. market and also to be serious about our franchise model in the rest of the world outside of Malaysia and Singapore, where we have our own company-owned stores. So the person really to get into the granular sort of nuts and bolts of box economics and franchisee management, et cetera, is someone like Pepot, who is a 30-year veteran with us and who's run many businesses, including Jollibee in the Philippines years back. He's also been Head of our North America business in the past, et cetera. So we've recently appointed Pepot as permanent CEO for the CBTL global role. I do want to emphasize that along with that, we did make some restructuring because I've always said in the past, store level was not the issue. It was actually our large G&A, and we had different pockets of G&A, one in the U.S. and one in Singapore because it's our global office. So we started to address that. And we -- I can't get into the details of it, but we've already started the restructuring program. And so we made some significant changes in our top leadership team there as well to address speed, capabilities, but also cost to run this business. And so that's what we've seen. I could share with you the U.S. is still running at a very high single-digit same-store sales growth. And for me, this is quite amazing given what we're seeing with Starbucks and some of the other large players. To that note, we have also onboarded a month ago or 45 days ago, Tara Hinkel. Tara Hinkel comes with very good network development background, in particular with franchisees, and she's worked for 2 very large organizations. So one is Yum! So Taco Bell was the brand that she was in charge of for franchise development. And of course, prior to that, she has coffee experience with Starbucks for many, many years. And so I've met Tara. I've been out there a couple of weeks ago. And what I can see is real energy, real capability. So I'm probably the most confident about CBTL U.S. that I have been for many months. So yes, onwards and upwards, but we're very happy with these moves. It's very familiar. We're also managing CBTL very closely as a subsidiary now, even though we have a 20% minority shareholder. We're not managing it through the Board. It's through a subsidiary, and Pepot will also report directly into me for that business.

That's great news, Richard. And I apologize, I couldn't turn on the camera because I don't see the option here. But on to the second question. CapEx, I think, is also slightly higher this year. I think in our previous conversations, we have guided that maybe a franchising model lowers CapEx moving forward. So I guess which formats are getting a greater share or the incremental dollar than previously expected?

Okay. So let me talk about CapEx. So again, you described the content slightly higher. Let me describe now the context. So originally, we had a guidance of around -- I think it was 22-ish, PHP 22 billion CapEx level, and we've been bringing that down. And we -- I think in the last guidance, we cut it even below PHP 15 billion. So context is we started the year much higher. The proportion of how we spend CapEx has been changing over the years. In the past, it was predominantly renovation or new store build-out. And where the CapEx money went in 2024 actually was on tech, as I mentioned, because we didn't have basic things like loyalty programs or apps. So there's a certain amount of investment needed we didn't have basic things like CRM or digital asset management. So all these were built out. So it's no longer predominantly store, but it's sharing with technology, which, of course, gives us transaction count and gives us revenues and sales. So it's a good investment from that perspective. We also spent some CapEx in 2024, expanding our capacity in our commissary as well. So I think that number is slightly higher than last year, but we have new capacity, which wasn't in there last year, and we also have higher levels of tech assets. And the rest of it is going to stores. But you'll see it's less into stores now because of the franchise model.

Perfect. That's very clear. On to my final question, maybe on Smashburger a little bit more. We talked about re-expanding the menu. So first is when can we see the new menu architecture? And the second is we've talked about delaying the store level ADS targets, but I think the 4,000 kind of threshold holds for store level OP breakeven. When do we expect this to happen?

John, I don't want to be that boy who cries wolf that table. And by the time he cries wolf like the 10th time, nobody comes to his aid and he gets eaten by the wolf. So I'm going to be very measured in my response because I want to be realistic. You can also tell by my tone, I'm very serious about this business. First thing I'll say is the burger segment in North America is over USD 100 billion in terms of value per annum. And I think it still was the right choice years ago when we decided to invest in this business. We just haven't been able to put something together in terms of leadership, in terms of clarity of strategy, in terms of menu and so forth, brand as well. I believe we're as close to that. Jim Sullivan, as I mentioned, again, I don't want to oversell him because -- let's see what he can produce, but he's a different animal completely, meaning he is probably more attuned to the way finance people would think about store ops in terms of really measured cost of inventory, cost of labor and so forth. So the conversations that I'm having with Jim are at a very different level and the speed that Jim is moving is at a very different level. Having said that, he only got this post February 14. I'll never forget that day because it's Valentine's, and I was not at home with my wife. I was actually in Denver, working with Jim on this. So what I will say is we have very clear transaction count targets that are repeatable. It will get us to the ADS, John, but the pivot here from ADS to transaction is that TC is something that once we have and we can maintain, it's repeatable. Whereas ADS, what we've noticed is you can buy ADS through aggregator program and lose ADS. So that slight pivot and mindset really is making a huge difference. In terms of menu innovation, I was there last week, we tested and tasted through 13 different items that we are pipelining in. Now LTOs and things like that, you should not overdo it, but we have so many fantastic innovative products that we're going to start bringing to market and it's happening now. To your question, when, it's literally happening now. We are one of the best in St. Patrick's Day yesterday, hitting significant levels because the team is energized. Our team is thinking in a very different way. And then the last thing I'll say is the high-low strategy, which I'll unveil at the appropriate time, really is about giving people a reason to come visit us because we have everyday low price. But at the same time, we are not a QSR. So we're going to make sure when they come, they'll get that burn-in brisket burger at $13.99 as well. So we can trade them up. So I think this high-low strategy is something that consumers really -- if you look at Chili's, which is one of the fastest-growing businesses in the U.S., they're doing exactly that. The $10.99 low every day, but they don't promote it in the store. When people come in, they're promoting their highs. And what we're seeing is that strategy really resonates with families in America, the way they eat. So I'll unveil all the specifics to breakeven transaction count numbers, et cetera. But I want to be measured because I don't want to be overpromising right upfront. But my energy level on this business is significantly different than what it was in the past. And it's because we're doing -- we're going back to basics. We're doing things that we should have been doing last year. Unfortunately, the second half of last year, we missed. We tried. It didn't work. So as simple as that. So we're a lot more measured, and we're testing things before we do national rollouts.

All the best, Richard, with Smashburger, and thank you for the insights.

We'll take the next question from Divya. Divya, please ask your question.

Yes. Am I audible?

Yes, we can hear you.

Okay. Great. Just a couple of questions from my side. The first question is on Compose Coffee. If I look at the EBITDA contribution in the third quarter, that was just half a quarter that we had. We made almost about, I guess, PHP 0.5 billion of EBITDA. And we have a very similar number even in the fourth quarter, even though we had a full quarter. So can you help us understand why the fourth quarter number was pretty similar to third quarter, even though we had the full? Is there some sort of slippage on it? Or is there any other reason? And my second question is on Philippines. Jollibee. If you can just help us understand what's the target and the growth outlook for 2025 in terms of store rollout for Philippines? And if we again plan to kind of start rolling out more aggressively in Philippines?

Yes. Okay. Great. Thank you, Divya, and good to see you as well. So you're right. Mathematically, it's not linear, half of Q3 versus all of Q4. And there's a couple of things there. One, the way we were accounting for some of our inventory, so goods in transit, et cetera, there was an inventory adjustment that happened in Q4. I don't want to get into the technical accounting piece of it, but again, there was an adjustment. If that had been spread over all the quarters, then I think you would have seen a smoother line. I say this because I think the question behind the question really is what is your run rate? And what can we expect on a full year basis for 2025. So if it's okay, maybe offline, we could dig a little bit deeper in terms of the run rate expected because there's a few other variables for 2025, and that's the bean price, which were hedged up until end of June. And now we're very actively because we have a larger coffee business. So we're collecting our bean buying. So that's a big synergy initiative that we kicked off to see if we can buy Arabica, combine the volumes of CBTL and Compose. And that will give us a very different competitive level of bean pricing. So as we're doing this work, I don't want to quote numbers that may move or shift. But that's the other big variable when we start thinking about run rates for Compose. But I think offline, Divya, we can walk you through all the levers as to why those 2 quarters were different. But one of the major reasons was there were significant inventory valuation impact. In terms of the Philippines specific targets, Cossette and Mona are on the call. If we can e-mail that -- the details to you because I don't have it memorized, but we can share with you our targets. Now on stores, I can tell you that we're going to be more aggressive this year in terms of both new stores but also renovation of stores because we all know when we renovate, we do get that permanent uplift in our ADS. So we'll get the numbers to you, Divya, but the short answer is we're going to be more aggressive in 2025 in terms of store build-out and renovation in the Philippines, in particular with Jollibee. For Chowking and Mang Inasal, which are our other 2 champion brands, that will be predominantly by franchise. So for Mang Inasal, I think we have maybe like 1 company store coming in as a test store. But all of that growth is going to come from franchise. Okay. Should we move on to the next question?

Yes. I assume you're very satisfied with that answer from Richard. I'll take a question from the Q&A box right now. This is a question from [ Mark Angeles ]. Maybe a little bit provocative. It seems like -- he says, it seems like China and Smashburger are/have been chronic headaches for JFC. Why not write it off?

Okay. I think the simple answer is I cannot. Now let me try to contextualize. First of all, China as a market is not a market, especially in our industry and our footprint and our history of actually having cash in China that we've made in the past. We're not funding China at all, not a single dollar. So writing off a business that will come around and turn, and we're seeing, as I mentioned earlier, between 26% to 93% TC uplift with these new pricing menu models that we've been rolling out. It will be -- I think it will be irresponsible to write off China. Smashburger, I get this all the time, but I think what's important here is the reason why we bought this business. And I think the reason we bought the business is because we believe, again, as our Chairman always says, superior taste. That's the first gate. Second, scalable. And third, it's in an industry that's over [ 100 billion ] value per year. And I think if I really look back and try to analyze the "bad luck" of maybe having the wrong structure, the wrong leadership team or the wrong brand positioning, et cetera. I think we've learned a lot and probably we learned probably more in the last 6 months than ever. So I've cited all the lessons learned earlier in my slide. The write-off is not something we even think about. What we think about every day is winning the small battles of getting to breakeven measured by transaction count and ADS. So -- but we'll be measured. We're not investing in Smash through tons of A&P and G&A. As I mentioned, we've scaled back and we stripped out already [ 5 million ] and possibly more to go for the rest of the year. But we'll -- yes, we'll keep up the good fight. And on a unit level economics, and I'll end it there, [ Gio ] Smashburger gives us the highest food margin of any of our brands at 80%. Again, I'm always about the unit economic because if you can figure that out and then you can scale it, you have a faster growth than other markets where you have smaller margin per unit. So we'll keep going even though it's difficult. And it is difficult, but we do see light at the end of the tunnel for both.

Got it. I'll read another question from the Q&A box before we proceed to the hands raised in a little bit. This is a question from Angelo. You -- and I'm reading the question right now. You mentioned that California wage hikes were a large contributor to lower margins. What's the strategy in place for passing through these costs to end customers as wages increase in regions? And how does that affect your [ A&P ]?

Yes. So I think on 2 dimensions. One is, again, 1/3 of our stores being in one state, in particular, a state that has very high labor costs, we need to dilute that down. And so our expansion plan really helps dilute the dependence of the California P&L. On a more granular level, what we're seeing is price -- taking price during inflationary times inflation, not only in food cost, but labor costs as well, consumers understand that because everyone is doing it. And so we've been doing that to absorb. So I think as we cycle through, you'll see the margin rates improve again. And so you just can't rush it. You can't take too high of a price in one shot. You got to be tapered and you got to just make sure you continue to drive your ADS. Sales solves all since, as we say. And our ADS now is a record high of USD 13,400. So we cracked USD 13,000. We were always hovering around USD 13,000, but now we crack USD 13,000. So we'll continue to drive our top line growth as well to mitigate the cost component.

Thanks, Richard. I hope that satisfies you, Angelo. I will take the next question from one of the hands raised, Karisa Magpayo, I will unmute the line right now.

Yes, I just wanted to ask -- I have 3 questions. One is on the U.S. business. Can you share some updates on the franchising efforts? Are you already able to sign up franchisees? How many franchise stores are you planning to open this year?

Yes. Okay. So you know what's interesting, Karisa. So our CEO or I guess I can call it CEO of Jollibee North America, Ms. Maribeth. She recently was invited to be a keynote speaker at one of the big franchise conventions, very recently, I think it was a couple of weeks ago. So the reason I'm answering your question with that first is this has never happened in the past. And it's never happened in the past because there was never any knowledge of Jollibee in the past nor any interest in Jollibee in the past. But -- so that has changed. So what's been happening is we are, of course, going out, having discussions, but we're also getting a lot of inquiries coming in. All this is to say that '25 is not linear to '26, '27 and '28, what Beth has put out there, and I think we can beat it, but what she has put out there in writing now is that we'll be 3.5x of where we are today, meaning 350 stores by the end of 2025. In the past, I've used the number 500 because I think that's more aspirational because anything could happen in the back few years. So the way this process works, as I mentioned in the past, is you got to state by state, get permits and licenses. So that work is done. We're pretty much completed. You got to be out there in the trade. That work is happening. You've got to identify real estate locations so that when someone comes to you, but needs a little help with real estate planning. We have a solution, which cities, which locations, which trade areas. All that work has been done. So the bulk of the heavy lifting has been done. So this year, the numbers won't be great, Karisa. But what I can tell you is the quality of our first store franchise store is going to be a great quality store because it's going to be at L.A. Airport or LAX. And this for us is a very symbolic first store opening for franchise because that really means the brand has now come to a place where it can be invited to places like high-traffic airports and actually win. And so the people we're working with the franchisees, nontraditional franchisees we're working with, of course, we'll have other airports and so on. So I think nontraditional segment is very interesting. The first traditional franchise store will be open in New York in Queens. And that's going to happen very shortly. So I'm not sure exactly what the number is pipeline for this year. But again, I'm more excited about the process that's been completed, the targets that's been set and how we're progressing to sort of ramp those up in years to come. I know it's not the numeric answer you're looking for, but I think that this is the most honest answer I can give you because when it goes, it goes fast. And I'll give you the last example, and I'll end there. So Flint, who is by far the largest franchisee in the U.S. They've got, I think, 2,600 restaurants of different brands. And their model is very different. They've only opened 10% of those stores and 90% of those stores, they acquire already opened stores, and we have 104 already opened stores. So there's inquiries, people from the likes of Flint. And when I check with Tara, how things were in Taco Bell, it's exactly the same model. They grab great real estate, they open their own store, and then they convert those to franchise stores. So we have a couple of options now, 100% franchise or build and flip, making sure you recover your capital plus margin. So very exciting times. But yes, we will get to those numbers and beyond.

I appreciate the color. My second question is on Tim Ho Wan. Do you expect this to be earnings accretive already? How much of an earnings uplift do you expect to get from Tim Ho Wan this year?

Yes. When we took it out of Titan, it's only been a couple of months, but there's a lot of discovery. So I'll give you the good and the bad very quickly. So one of the key markets for Tim Ho Wan when it was in Titan Fund because it was a Singapore-based fund was one of the champion markets for Singapore and it used to be very profitable. That is no longer the environment in Singapore. And I'm talking about the everyday sort of domestic consumption, not tourists, right? So that's been unfortunate, but it's a reality of what's happening there in terms of the food space. Hong Kong, on the other side, has been a super star. We've opened a new store in Sha Tin. We've renovated [ Olympic ]. We opened new store at K11 in Tsim Sha Tsui. So Hong Kong is a star, and it's very profitable. We have also franchise, 100% franchise businesses in markets like Taiwan, which, of course, it's all profit accretive. So when you add all that and take the China piece because it was always sitting in China with the China business because it was -- the Jollibee China actually owned Tim Ho Wan business there as a master franchisee. If you take China out, our aim is to be profit neutral, balancing the Singapore losses to slightly accretive in year 1 and 2025 is year 1. But this brand, I have to tell you, has so much legs. So we're really doubling down and finding sites very quickly is in the U.S. And so our Irvine store will open in May. And that -- we haven't seen the financials because it's under renovation, but it's one of the top traffic malls for especially the Asian community. So I guess what I'm saying is if you take China out as if it was still part of China, we're aiming for it to be profit neutral in its first year. It may miss slightly, so I want to caveat that. But I know we have the right team and the right strategy. So year 2 onwards, we're just going to keep rolling with this because it's a brand-new business for us.

Richard, lastly, on the other income, the income from the write-off of liabilities, I noticed there was a huge jump in 2024. It was trending lower already in previous years. I was wondering what's the nature of this jump? And how should we see this moving forward?

Okay. So the delta was [ 600 million ]. So we ended the quarter at [ 1.3 ], I think it was. That delta [ 6 ], if I remember, 340 million or, let's call it, half was due to unredeemed loyalty. I'm going to call it gift cards, okay? I know it's not a physical gift card. But Happyplus, which was the old loyalty platform that we have in the Philippines, we're now migrating that to a different platform. So what's happened was all the -- because these are prepaid loyalty cards. So what's happening is the unused portion, we've been accruing it just in case the consumers come and they use it. So revenues upfront accrue. And now that we are shifting to a new platform, all that becomes our cash, not only P&L, but that becomes our cash profit. I think 2/3 of it comes through as cash. So that was a big chunk. The other big chunk was what we call goods -- GRIR, I think it's called. So goods received, invoice received. So what happened was we received the goods, but the invoices never came. So of course, it's not on our books, but we've now released that. So to your question on whether this is recurring, it's nonrecurring. And a very small amount, and we're still filtering through some of the potential overaccruals on A&P, but a very small amount that came through. So that part will be recurring. But as you know, we did a major cleanup a couple of years ago, and that portion of it is very small. But the majority were the 2 items that I mentioned, which are nonrecurring.

I think we have quite a lot of questions left, including a raised hand. Unfortunately, I don't think we have much more time or any more time, in fact. Management will try to address each and every question everybody has offline either today or in the coming days. I just wanted to remind everybody that the call is recorded and will be made available to the public on Jollibee's website and the presentation as well will be made available there. So unfortunately, we will have to end this call right now. I will hand it over to Richard for any final words.

Okay. Firstly, thank you again. I know it's a time investment for everyone who's logged in and called in and especially our friends from Ohio and other places where the hour time difference is quite rough. So thank you for that. I guess in closing, I hope I've made very clear that Q4 does not represent run rate. We've explained adjusted. In fact, it's record growth rates. Q1, so far, what we're seeing is very in line with our run rate of above industry, and we'll continue to do that. We'll take on and tackle all tough challenges. And I've personally committed to that as well. I've said twice a couple of the businesses, they will report to me directly. So we are going to do that. And we'll keep driving our great businesses of Jollibee, the Compose Coffee, the Highlands of the world so that we can continue to accelerate profit contribution. And we will deliver the 5-year tripling, as we've said. And year 1, in my view, we're right on track to slightly ahead of track. So with that, thank you again. And if there's any more request to dialogue through e-mail or face-to-face or calls, Ms. Cossette will make sure that we're looking after all of our investors and shareholders properly. Okay. Thanks, everyone.

Thank you, everyone.