TH International Q3 2024 Earnings Call Transcript

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November 12, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, welcome to Tim's China's Third Quarter 2024 Earnings Conference Call. All participants will be in listen only mode during management's prepared remarks and there will be a question and answer session to follow. Today's conference is being recorded. At this time, I would like to turn the call over to Gemma Backs, who heads TIM's China's Investor Relations efforts for prepared remarks and introductions. Please go ahead, Gemma.

Speaker 1

Thank you, Sarah. Good morning and good evening, everyone, and thank you for joining us on today's call. My name is Gemma Wachs, Head of Investor Relations. TIMSS China announced its Q3 2024 financial results earlier today. The press release as well as an accompanying presentation, which contains operational and financial highlights are now available on the company's IR website at ir.

Speaker 1

Timschina.com. Today, you will hear from Yongchen Lu, our CEO and Director and Albert Li, our CFO. After the company's prepared remarks, the management team will conduct a question and answer session. You can find the webcast of today's earnings call on our IR website as well. 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.

Speaker 1

Statements that are not historical facts, including, but not limited to, statements about the company's beliefs and expectations are forward looking statements. These forward looking statements involve inherent risks and uncertainties, and our actual results may differ materially from those forward looking statements. All forward looking statements should be considered in conjunction with the cautionary statements in our earnings release and risk factors included in our filings with the SEC. This presentation also includes 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.

Speaker 1

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'd like now to turn it over to Yongqian Liu, our CEO and Director. Please go ahead, Yongqian.

Speaker 2

Thank you, Gemma. Good morning and good evening, everyone. In the Q3 of 2024, we maintained adjusted copper EBITDA profitability despite the ongoing price competition in the Chinese coffee market after achieving our first ever adjusted copper EBITDA profitability in the Q2 of 2024. We are committed to focusing on product differentiation and providing great value for our customers. We achieved our highest ever quarterly company owned and operated store contribution margin of 13 0.3% previously disclosed as adjusted store EBITDA margin and a year over year margin expansion of 5.8 percentage points, demonstrating our continuous efforts towards delivering further improvements in operational efficiencies and supply chain capabilities.

Speaker 2

In alignment with our differentiated strategy of coffee plus warm food, we prioritize delivering fresh prepared, healthy and high quality products at affordable prices to our customers. On fresh prepared food, we have completed the made to order renovation of 539 new and existing stores by the end of October, adding working stations designed for efficient, fresh and handmade food preparation and open kitchens. With this investment, our guests can watch our staff craft fresh meals from start to finish. On healthy and high quality product offerings, we launched low sugar, high fiber and plant based options with particular emphasis on freshness and preservation of nutrition and flavor of our high quality ingredients. We also provide transparent nutrition and calorie based information on our menu so that our guests can evaluate the health benefits of our products and make decisions easily.

Speaker 2

In order to make our healthy coffee plus bagels and bagel sandwich options accessible to broader audiences, our I and d team launched bagel products with fueling 400 calories, limiting all green bagels and small bagels to fewer than 300 calories, and promising 50s in all our beverage product offerings, that is 0 non dairy creamer, 0 coffee whitener, 0 hydrogenated vegetable oil, 0 trans fats and 0 instant tea powder. On providing free value, we price our products competitively, especially our combos. Our breakfast combos, 1 cup of coffee and 1 warm fry item, start only from RMB14.9, that's about $2 Our launch of a combo start at RMB21.9, that's about only $3 In addition, we have launched Super Bowl Cars, which our guests pay RMB6.6 to get 4 times the right to buy 1 drink and one food item each time at 40 percent discount. Our guests can get much more than RMB6.6 savings even for one time usage. The cards have been a resounding success with our guests.

Speaker 2

We sold over 120,000 cards in Q3. They have been a very effective tool to drive purchase frequency. Those who purchased a card demonstrate a 4.6 times increase in purchase frequency, compared to those who did not purchase a card. Moreover, our efforts have driven sales, contributing to a total of RMB7.6 million in revenue during the Q3 this year. We continue to deliver capital efficient growth and we remain committed to offering Absolut at convenience for our guests.

Speaker 2

Our strategic partnership with sub franchises is underpinning the expansion of our store network, increasing our density in existing cities for quicker services and broadening our outreach into new cities to welcome new guests. We have generated strong momentum on individual franchising. Since we launched the program late last year, we have received over 5,000 applications, opened 43 already and signed additional 984 as of the end of September. New cities we entered during the Q3 of 2024 including Harbin, Shijiazhuang, Yanchen, Dongying, Heze and Huangshi, leverage our brand experience leverage our brand influence and the high quality products and services we provide. Every time we open a new store in a new city, we have met with an enthusiastic welcome and support from our guests.

Speaker 2

For instance, our inaugural store in Harbin achieved over RMB 100000 in sales during its 1st 3 business days, garnering considerable media attention. By September 30, 2024, our registered Law and Club members had reached 22,800,000 reflecting a remarkable 35.3 percent year over year growth. The average number of members per store has now surpassed 24,000 serving as a strong catalyst for our future growth and clearly demonstrating our customers' consistent support for TIM's China loyalty programs. The ongoing support from our customers inspires our team to continue to deliver the best value for quality products. In Q3 2024, we introduced 10 new beverages and 9 new food items.

Speaker 2

We have been integrating more healthy ingredients into newly launched products, alongside our principle of freshly handmade. Our successful products not only resonate with current health driven trends, but also cater to the increasing self care demands of our Chinese consumers. A prime example is the introduction of our 5 red multi grain bagel, Wuhan Bagel, and 5 black Multi Grain Bagel, Wuh Hei Bagel, during the annual Tim's Bagel Festival in September. These products merge Tim's signature Green Bagel concept with the principles of traditional Chinese herbs In recognition of our guests' focus on a healthy lifestyle, we collaborated with Menghai, the panda. Menghai, a hugely popular panda star with its healthy green diet, quickly proved to be an excellent mascot for us.

Speaker 2

Thanks to the innovative products and our eye catching furry mascot, the 2024 Tim's Bagel Festival garnered over 63,000,000 media exposures. KOL seatings on rent alone contributed 7,000,000 exposures and sparked a 160% surge in user generated content compared to August. Searches for TIMSS Bagels nearly doubled in September, posting TIMSS brand ranking within the coffee industry by one position. At this time, I would like to turn it over to our CFO, Albert Li to discuss our Q3 financial performance in more detail. Albert?

Speaker 3

Thank you, Yong Chan. In the Q3 of 2024, we delivered adjusted corporate EBITDA profitability again. We remain dedicated to enhancing our financial performance by refining our store unit economics and driving efficiencies at the corporate level. Concurrently, our rapidly growing sub franchising business continues to generate a steady stream of cash flows and profitability, bolstering our margins. We remain committed to delivering cost effective, high quality products to our growing customer base.

Speaker 3

Our overall monthly average transacting customers reached 3,300,000 in Q4 2024, a 2.4% increase from 3,200,000 in the same quarter of 2023. Additionally, digital orders as a percentage of total orders rose from 82.6% in Q3 2023 to 86.6% in Q3 2024. We continue to enhance our digital capabilities to meet the growing demand for delivery and takeaway services. During the Q3 of 2024, we made more significant strides in enhancing our operational efficiency. Through refinement in our supply chain management and economy of scale, we reduced the food and packaging costs as a percentage of revenues from company owned and operating stores by 6.1 percentage points year over year.

Speaker 3

We continued to streamline our operations by optimizing unit economics. This led to a year over year reduction in labor costs and other store operating expenses as a percentage of revenues from company owned and operated stores by 3.0 percentage points and 1.1 percentage points, respectively. Bending from our cost optimization measures and increased brand recognition, our marketing expenses as a percentage of total revenues decreased by 2.3 percentage points year over year. Additionally, we streamlined our headquarter costs, resulting in a significant reduction in adjusted general and administrative expenses as a percentage of total revenues by 2.7 percentage points year over year. As a result, we achieved our highest ever quarterly company owned and operated store contribution margin of 13.3% and consecutively quarterly adjusted corporate EBITDA profitability after the Q2 of 2024.

Speaker 3

Turning to liquidity. As of September 30, 2024, the company's total cash and cash equivalents and time deposits were RMB203.7 million, US29.1 million dollars 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. Moving forward, our strategic focus remains firmly on delivering profitable capital efficient growth. We are committed to bolstering our brand and broadening our appeal by offering great value for many with our fresh and house food selections.

Speaker 3

Additionally, we are collaborating closely with our sub franchisees to boost customer traffic and optimize our supply chain efficiency, thereby enhancing overall store economics and our bottom line profitability. I will now turn it over to Yim Chen for concluding remarks followed by Q

Speaker 2

and A. Thank you, Elba. Now before we turn to Q and A, I would like to highlight the 2 core messages to take away today. First, TIMSS China is committed to continuing to distinguish itself by delivering great value and differentiating our products to our guests, avoiding direct participation in the ongoing price and war. Secondly, we are equally committed to pursue capital efficient growth, most particularly via deployment of our proven small format stores and further growth of our sub franchising network.

Speaker 2

Together, these two initiatives help us continue to drive improving profitability. I would like to take this opportunity to express our heartfelt gratitude to the diligent work of every Keep China employee, the love of our guests, the support and encouragement from our partners and the trust of our investors and stakeholders. Now, I will turn the call over to Gemma for today's Q and A session. Gemma?

Speaker 1

Thank you, Albert, and thank you, Yongjian. Let's begin with the first question. Go ahead, Sarah.

Operator

Thank you. Thank you. We will now take our first question. This is from the line of Steve Silver from Argus Research Corporation. Please go ahead.

Speaker 4

Thank you, operator, and thanks for taking my questions. It's great to see that the costs are being contained as the revenue growth navigates the industry wide challenges. I'm curious as to how much room do you see for continuing expense leverage moving forward?

Speaker 2

Yes. I mean, the operating cost leverage, right, Steve?

Speaker 4

Yes. As a percentage of sales, yes.

Speaker 2

Yes. I mean, definitely. I mean, as you know, our major cost items include the paper, rent and labor and then, okay, the office G and A. So I mean, as we can see, FMP are variable, but we are still able to reduce FMP costs materially year over year. As Albert mentioned, we have reduced over 6 percentage points.

Speaker 2

And for labor, almost half are fixed. And for rent, the majority is fixed. And for oxygenated, the majority are not fixed. So when we increase our revenue, these fixed costs will be allocate. So that's why we'll continue to see the margin improvement when we increase our revenues, Steve.

Speaker 4

That's helpful. Thank you. So in the prepared remarks, you mentioned that there were 5,000 sub franchise applications received to date. Is there a timeline for converting many of these to, I guess, granted status and then on to operating status?

Speaker 2

Yes. I mean, there are some timelines, but I think most importantly, we are extremely careful in choosing the right partners and choosing the right locations because, okay, the right partners and right locations are critical factors to be successful in opening franchise stores. So I mean, although we'll receive more than 5,000 applications, we are very strict to embedding process. We are using 3rd party to conducting background checks. We interview the applicants very carefully, checking their experience and the willingness to see whether they fit us.

Speaker 2

And also we use networking planning team and our real estate team to vet their locations, whether the locations are right for to open stores. So I mean the progress is strong so far. As we mentioned, we opened 43 already and signed additional 94. So we'll see much faster progress in the Q4 and then the next year.

Speaker 4

Great. And one last one for me. You mentioned the 22,800,000 loyalty members growing at a very healthy rate. Do you have any data that shows the impact of the loyalty program on repeat customers and perhaps any differences in transaction size among the loyalty members?

Speaker 2

Yes, we do. I mean, no, I mean, the loyalty members tend to have much more purchase frequency than, okay, non members. That's why the member program is powerful. And especially as we just discussed about the above all, at Zuubal car. I mean the members purchase Zuubal car, the multiple times rights for 6.6.

Speaker 2

I mean in Q3 alone, the purchase frequency is 4.6 times more than the average members. I mean, we'll use various effective tools to drive the frequency among our members, which we can do a lot of work over the days on months to come.

Speaker 4

Great. Thank you so much for taking the questions.

Speaker 2

Thank you,

Operator

Whilst we wait for any more telephone questions, I think, Gemma, do you have a question?

Speaker 1

There's a question that reached us and it is to ask, please give an update on the status of the franchising, the number of units, what the outlook is, anything qualitative about the types of applications you have? You touched on it already, Yong Chan. And the other question is, if you could please give an update about the pricing competition in coffee, how is the bundling combination meal strategy, how is that going?

Speaker 2

Yes. I mean, the price competition is still ongoing, much longer than I expected. But I mean, for teams, again, we literally differentiate ourselves using coffee plus fresh prepared wongfu at affordable price. The strategy not really differentiate teams from our peers. So we don't need to compete head to head.

Speaker 2

And we price our products competitively. For example, our coffee starts from RMB16. Our price competitiveness lies especially with our combos. As I mentioned earlier, our breakfast combos, 1 cup of coffee and 1 fresh prepared food start from RMB14.9, about $2 and our lunch combos start from RMB21.9, about $3 And again, we use Subbable Cart, the multiple rides cart. So our guests can enjoy 1 cup of coffee plus 40% discount.

Speaker 2

So that's why we see a much more purchase frequency for those people who buy the car. So I mean we use combos, we use, okay, the benefits of our members to price our product fluid and pathway in the market. Back to you, gentlemen.

Speaker 1

Thank you so much, Yong Chen. Sarah, are there any other questions? If not, I have one.

Operator

Not yet. Thank you.

Speaker 1

Another question that came in, Yong Chan or Albert, is how important are the renovated open kitchens for Tim's franchises and why?

Speaker 2

Yes. I mean, it is very important. Since I just mentioned, the fresh prepared food is the biggest differentiated point for teams compared with other coffee brands in China. And the Open Kitchen will allow our guests watch our staff craft fresh meals from start to finish. And freshly prepare food coupled with a cup of coffee or drink at affordable price will really differentiate teams from our peers and help teams expand into more dayparts, for example, into lunch daypart and even dinner daypart that will help continue to drive sales growth over time.

Speaker 2

Back to you.

Speaker 1

Thank you. Sarah, are there any other questions in your queue? Otherwise, I have one more that came in.

Operator

None on the phone currently.

Speaker 1

One question that Risush is, whether you can speak to the capital required for the company owned stores versus the capital lightweight to fund the sub franchise and include the payback?

Speaker 3

Yes. Okay, sure. So I will take this question, right. So yes, currently our CapEx for a typical store is around on the like 450,000 to 500,000 so it's basically around $70,000 and with a payback period of actually between 2 to 3 years. So actually, we believe it is a very attractive unit economics and actually we will continue to use this actually store model to attract like a large number of franchisees and audiences.

Speaker 3

Yes, so actually we think the payback period of 2 to 3 years is very attractive and it is a proven track record.

Speaker 1

Thank you. Sarah?

Operator

No questions on the phone lines.

Speaker 1

All right. Then I think we might be through.

Speaker 2

Great. Thank you. Thank you all. Thank you for your time.

Speaker 1

Thank you all for dialing in. And we look forward to connecting in the coming days weeks. Of course, if you have any questions for us, please let us know. Thank you very, very much and see you soon.

Speaker 2

See you soon. Thank you. Bye.

Operator

Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect. Speakers, please stand

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