TH International Limited (THCH) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Tims China Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] 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.

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 [email protected]. 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.

Thank you, Gemma. My name is Yongchen Lu, CEO and Director of Tims China. In 2023, we made progress in a number of the core elements of our strategy. We delivered greater convenience to our guests by building density in existing cities and entering new cities. We expanded our community and our partnerships, growing our strategic franchising relationships with the blue-chip partners like Sinopec‘s Easy Joy. We continue to drive locally relevant innovation, which had always been a strategic focus for us. And we delivered growth in a capital-efficient manner, loading our stores with a more rapid payback period and accelerating our franchising activities. With our systems and infrastructure solidly in place, our focus is now squarely on driving profitability with a view to achieve corporate EBITDA breakeven later this year. We just celebrated the significant milestones of our 5th anniversary in China and the 60th anniversary of the Tim Hortons brand. With those celebrations behind us, we redouble our focus on the future, and in particular, driving rapid, profitable and capital-efficient growth. We delivered 29.8% and 55.9% year-over-year top line growth in Q4 and full year 2023, respectively, demonstrating robust growth in the first full year following the end of COVID epidemic in China. And notably, the company-owned stores we opened in 2023 are among the most profitable we have ever opened, thanks to our ongoing commitment to innovation, operational efficiencies and optimized unit economics. As of December 31, 2023, our registered loyalty club members reached 18.7 million, representing 66.3% year-over-year growth with the average number of members per store exceeding 20,000, and we just surpassed 20 million registered loyalty club members on March 31, 2024. Our store network development strategy continues its streak of success as evidenced by the impressive sales during the launch of the [indiscernible] cities, achieving RMB 88,000 and RMB 46,000 in sales, respectively. Leveraging our various store formats, we have forged new partnerships with reputable retailers as our sub-franchises, such as Bestore [Foreign Language], opening the first Tims Express store in Bestore shop in Wuhan in December 2023. Building on our substantial long-term investments in branding, technology and infrastructure, we have strategically prioritized the expansion of our franchise business starting in Q4 2023. In the past year, we successfully opened 213 franchise stores with 109 offices opening in the first quarter alone. Looking ahead, we are committed to further strengthening our collaborations with effective strategic partners such as Sinopec‘s Easy Joy while actively pursuing other fitting partnerships. For instance, our recent partnership with Shanghai Metro led to the opening of the first 7 [indiscernible] stores in Shanghai Metro stations, as Shanghai has one of the world's largest metro system, transporting approximately 13 million passengers across the city every day. We anticipate that this partnership will provide greater visibility to the Tims brand and connect us with a larger, diverse customer base. Continuous product innovation has always been a strategic focus for us. In 2023, we launched a total of 107 new products, 47 new beverages and 51 new food and 9 merchandise items. In Q4 2023, our newly launched Jasmine Tea Latte [Foreign Language], Orange Flavored Cinnamon Latte [Foreign Language] and Strawberry Flavored Latte [Foreign Language] were amongst the best sellers. We also collaborate with SpongeBob [Foreign Language], which generates more than 10 million media exposures on [indiscernible] and [indiscernible] gaining significant brand awareness. As an international coffee brand that offers the best value for quality products, we continue to implement our unique Coffee Plus strategy, which had been a key differentiator yielding positive outcomes. Following the successful Bagel and Brew Coffee campaign in Q3, we further advanced the Wednesday Membership Day Campaign, offering discounted combo deals on coffee and bagels to further refine our welcoming combo meals offering. In the fourth quarter, the percentage of orders that included food rose to 54.7%, increased by almost 8 percentage points from 47.1% in the same quarter of 2022. And something on Popeyes, so our Popeyes business had been demonstrating strong momentum since the record-breaking grand opening of our first flagship store on August 19, 2023. Within 135 days, we successfully launched 10 Popeyes stores in Shanghai, achieving an average pace of 1 new store every 14 days, a true testament to the value of the infrastructure we built in Tims, and it is something our team is very excited and proud of. By the end of 2023, our Chinese Popeyes store had sold over 154,700 pieces of various flavors of fried chicken and seafood burgers, offering more dining choices during different meal times. In addition, our local innovative R&D team created a flavored iced and hot milkshakes, resulting in sales exceeding 52,000 cups, demonstrating the popularity of our beverage category as well. Our private domain channels for Popeyes through the mini program in the WeChat ecosystem have successfully attracted over 200,000 dedicated customers who have not only made purchases, but able to grow as well. Looking ahead to the remainder of 2024 and into 2025, the Popeyes team is fully committed to further enhancing our core products and advancing digital marketing initiatives and solidifying our market position through high-quality operational management and optimized profitability. At this point, I would like to turn it over to our CFO, Albert Li, to discuss our fourth quarter and full year 2023 financial performance in more detail. Albert?

Thank you, Yongchen. During the fourth quarter of 2023, we enhanced our operational efficiency across a number of dimensions, [indiscernible] that proved to be redundant at the headquarter level, and we pruned our underperforming stores, which we have decided earlier to give a full-year post-COVID to evaluate. These actions allowed us to deliver year-over-year reduction 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 had sold a total of nearly 60 million cups of beverage and over 21 million of 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 RMB 388.5 million in Q4 2023. The growth was primarily driven by an increase in the number of systems by 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 transaction customers were [ 3.4 ] 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 equivalent, time deposits and short-term investments were RMB 220.8 million compared to RMB 611.5 million as of December 31, 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. And as we mentioned, in March 2024, we entered into USD 20 million promissory notes financing with Cartesian Capital, our existing shareholders. Going forward, and 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.

Yes. 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 warm food business model, offering the best valuable, quality products at an international coffee brand, differentiated and comprehensive store formats with 900-plus stores in over 60 cities and a unique advantage of offering franchise opportunities as an international coffee brand. We just celebrated the significant milestones of our 5th anniversary of being in China and the 60th anniversary of the Tim Hortons brand. With these milestones behind us, we look forward to fully being focused 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?

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

[Operator Instructions] Gemma, over to you.

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 amongst those peers?

Yes. Okay. Thank you for the good question from our friend. So I mean 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 annual consumption still represents extremely low penetration, less than 10x compared to countries such as U.S., Germany and even other Asian countries such as South Korea and Japan where the per capita annual consumption right now is over 200x. So overall, China's coffee industry has been experiencing a rapid growth with significant potential for further expansion, indicating that the market is far from reaching saturation. There is definitely 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 operate business. Despite a price war leading to strong revenue and unit growth, margins will inadvertently get compressed. And this margin pressure will likely lead to financial strain. So nobody would like to be able to maintain this aggressive pricing strategy for much longer. So on the plus side, right, the pricing war effectively helps expand the coffee market by making it accessible to wider audience through low prices and increased availability. This strategy indirectly benefits us as these new consumers, initially drawn by lower prices, may eventually seek high-quality and affordable options. As the price war eases and the consumers interested in exploring diverse coffee offerings grows, our well-positioned brand is ready to capture this emerging market segment. Our differentiated product offering at compelling prices with fresh food option is so good that we actually don't have to compete actually with those brands, and we take some shares from the market. Given the growth of the market overall, we have a very good spot for ourselves. Again, we have seen that in the last 12 months. We have opened more stores than we had previously, and they are amongst the most profitable that we have opened to date. So the energy and the profitability are coming at the same time. And there is no -- certainly no sign of cannibalization even noticed by this price war.

Next telephone question comes from the line of Steve Silver from Argus Research Corporation.

In case the name didn't come through, it's Steve Silver from Argus. It's great to see the target for achieving corporate EBITDA breakeven this year. First question I have, Tims 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?

Yes. Thank you, Steve, for the good question. No, I mean, we will focus on -- our priority, we will focus on increasing density in the 60 cities. But we will also enter into the new cities within the clusters we have opportunity to organize. As you may [indiscernible], we had 4 major clusters in China, right, the Eastern China cluster, mainly Shanghai, and specific North Costal Shanghai. [indiscernible] in the cluster. Then, we will enter into more space in that cluster given the efficiency of supply chain, the logistics and the marketing and management, et cetera. So that's one example. And we have clusters in Beijing, the Beijing cluster, and we have clusters in Guangzhou and Shenzhen, and we have clusters in Chengdu, et cetera. So I mean we'll enter into more use cases in those clusters and that will bring infrastructure and the system we have build into those clusters already.

Yes. So I had also 1 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.

Yes. I mean, that question, I'll briefly, I mean, as Albert mentioned, we have 3 million average transacting customers located actively there. And also, I would have liked to emphasize who to purchase with. I mean, we will measure, okay, the people that come to our stores more than 2x so that the prepurchase rate is above 4%, which is, I think, above average for the industry.

For our next question, Gemma, over to you.

We have another question coming in via our webcast link. And it is how do you most differentiate yourself from your competition in terms of price, in terms of product offering, and in terms of they priced as well?

Yes. I think food is the most differentiated part compared with other coffee brands in China, especially in our select stores, where we offer made-to-order fresh food. And we offer combo [indiscernible] price. For example, for breakfast combos of 1 type of coffee plus 1 bagel, we price at only RMB 19.9, which means [indiscernible] for the breakfast combo. And for lunch combos, 1 cup of coffee plus 1 type of sandwich starting from RMB 26.9, which is like $4. So as I mentioned earlier, in the fourth quarter, the percentage of orders that include food rose to 54.7%. More than half of orders come with food, increased by almost 8 percentage points from 47.1% in the same quarter of 2022. So despite the price war going on last year, our same-store sales continue to grow in 2023 given our differentiation strategy.

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 proceed the margin outlook going forward?

Okay. Sure. I will take this question. Thank you, Gemma. So as Yongchen mentioned, the Chinese coffee market is actually showing strong growth potential, right? So we believe in terms of the per capital annual consumption will rise quite significantly over years, okay? And then -- so we have recently noticed a strong recovery in terms of ticket sales at some of the intense -- I mean even though some of the intense competition is being -- I think, is beginning to mark. So with the price war subsiding, so -- and as consumers seeking a broader exploration of coffee options, we believe that run actually is well positioned. And as you have noted in the press release we just made, our 2023 same-store sales was 7.6% for the full year for 2023. And I think we are also expecting like single digit or in a high single-digit same-store sales growth for this year. And then -- so with that said, I think our position as we speak towards a lot of new customers, and we are also seeing like many of our existing customers actually increasing their like coffee consumption, so -- and that will probably have 1 food business model actually built still be expected to significantly differentiate us and contribute to our same-store sales growth in the future.

[Operator Instructions] For next question, over to you, Gemma.

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?

Yes. I mean -- I'll take that question. So China, as we all know, an extremely large and kicking market, and Chinese consumers do [indiscernible] chicken, fried chicken, et cetera. And such a larger market can certainly accommodate another great western fried chicken brand like Popeyes [indiscernible], which has over 10,000 stores already in China and being extremely successful in China. Now by offering great taste buds in a vibrant, young and [indiscernible] as well as no casual table service, Popeyes has been well accepted by consumers in Shanghai, and we can see that in our sales and [indiscernible] continues to build the brand and open stores as planned. Now then, there are a lot of synergies to drinking the Popeyes, the most of the systems and infrastructure Tims had to deal with over the past 5 years can be used for Popeyes, like the digital systems, [indiscernible] capabilities, supply chain capabilities as well as the members and communities. That is why we were able to launch Popeyes in just about 5 months instead of a typical 1 year new market entry process and achieved one of the record-breaking first-day transaction numbers. And as I mentioned, we have over 20 million loyalty club members at Tims, and we look forward to introducing our more than 20 million loyalty club members to Popeyes and to have that in the open networks to be able to reach out to them and bring them to our new brand like [indiscernible].

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

Okay. Sure. I will take this one. Okay. So as Yongchen has mentioned, I think actually to achieve operating tax flow self-sufficient and becoming [indiscernible] is one of the top priorities for the whole company in 2024. So with that, we actually are expecting our overall in terms of operating cash flow status will actually improve quite significantly this year. And in the meantime, as we are also focusing more and more on the sub-franchising business model, we believe in terms of the profitability, in terms of the cash flows that can be like brought by the sub-franchising business will actually add quite a significant value and contribute to the overall -- to actually in terms of the cash balance and also to help us reduce the overall leverage ratio quite significantly. So I think in terms of the -- on the balance sheet, we are expecting our overall leverage ratio can be actually declined like going forward. And in the meantime, we are also actually considering actually in terms of financing like solutions in the medium time, such as actually, where we still keep a very good balance in terms of the overall bank facilities. And I think, as a public company, we are still open to -- and we still have a lot of access to potential financing alternatives. Yes. So actually, we are quite confident that our overall, actually, balance sheet status can improve over time in 2024.

We have a question come in from [indiscernible], and it is a follow-up question on the balance sheet. How will you bring it into a sustainable position? At year-end 2023, current liabilities were nearly RMB 200 million, while current assets were only RMB 65 million. Net operating cash flow was still negative. The recent RMB 20 million issuance of promissory notes at a certain interest rate seems like a stop-gap measure. Have you had conversations with the major shareholders? And can you update us on what their views are and what your current plans are?

Yes. I mean, as just a note, Albert mentioned that we expect to achieve corporate EBITDA breakeven very soon. And also, we have shifted to a capital-efficient manner of opening stores by using 5 different franchisees. So I mean, we actually will generate operating cash flow 1st June, and also, we'll leverage the franchise store to open that network. We expect to open around 500 franchise stores this year by building the strategic partnerships we have such as Sinopec‘s Easy Joy and also we just opened to the individual unit franchisees, and we have received more than 2,500 applications from the market. So I mean -- so we are confident, okay, we can improve our cash -- balance sheet very soon by operating cash flow and partly by operating strategy of which we are putting as cash and the profitability. And of course, as I mentioned, we -- Cartesian Capital, our major shareholder, has given us RMB 200 million in profit and loss and not to -- which had further increase -- enhance our balance sheet.

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. Again, you speak to how fast your locations can serve clients versus global system averages. Can you talk to the productivity that you're seeing at the 10 stores that you own?

We -- I think we are -- I think right now, the Popeyes has used the table service system. So actually [indiscernible] can come into the store and pay a sufficient balance first. And just are using their mobile phones to scan the QR code to take the order and -- at a table. Then our staff will bring -- will make the food and bring the food to the table, so I mean -- which is very casual [indiscernible] kind of service. So I mean -- I think we -- our service fee [indiscernible] so that's why the brand of Popeyes has been well accepted in Shanghai and most competitive market, and we expect to continue to use that system and continue to open stores as planned.

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

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, very near future. Thank you so much.

Thank you. Thank you for your time.

Thank you.

That concludes our call today. You may now disconnect.