TH International Q2 2024 Earnings Report

TH International EPS Results

• Actual EPS: -$1.00
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

TH International Revenue Results

• Actual Revenue: $50.48 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

TH International Announcement Details

• Quarter: Q2 2024
• Date: 8/29/2024
• Time: N/A
• Conference Call Date: Thursday, August 29, 2024
• Conference Call Time: 8:00AM ET

TH International (NASDAQ:THCH) operates Tim Hortons coffee shops in mainland China, Hong Kong, and Macau. The company offers brewed tea, coffee, milk tea, lemonade, hot chocolate, and coffee drinks. It is also involved in franchise related business. The company is based in Shanghai, the People's Republic of China.

TH International Q2 2024 Earnings Call Transcript

Key Takeaways

• Achieved first-ever adjusted corporate EBITDA profitability with a record 10.3% store EBITDA margin, driven by core product focus and operational efficiency improvements.
• System sales grew 1.6% despite pruning underperforming stores, while sub franchise applications exceeded 3,600 and loyalty club membership rose 45.4% YoY to 21.4 million.
• Launched 25 new beverages and 9 new food items in Q2, contributing ~14% of sales; bagel sales climbed to 6 million with a 51.9% attach rate, supported by $45 million+ social media campaign exposure.
• Secured up to $50 million financing from founding shareholders and transferred Popeyes China back to RBI for $15 million to streamline operations and sharpen focus on the TIM’s core brand.
• Improved cost structure: digital orders rose to 86.5% of total orders, while food, packaging, rental, labor, marketing, and G&A expense ratios all declined; rolled out in-store renovations to 300 locations with minimal CapEx.

Presentation

[Operator]

Ladies and gentlemen, welcome to the Tims China second quarter 2024 earnings conference call. All participants will be in listen-only mode during management's prepared remarks, and then 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 Bakx, who heads Tims China investor relations efforts for prepared remarks and instructions. Please go ahead, Gemma.

[Gemma Bakx, Head of Investor Relations at Tims China]

Thank you very much, Nadia. Good morning and good evening, everyone, and thank you for joining us on today's call. My name is Gemma Bakx, Head of Investor Relations at Tims China, and we're announcing second quarter results earlier. We announced it earlier today. The press release as well, as an accompanying presentation, which contains operational and financial highlights, are now available on the company's IR website at ir.timschina.com. Today you will hear from Yongchen Lu, our CEO and director, and Albert Li, our CFO. After the company's prepared remarks, the management team will conduct a question and answer session. You can find the webcast of today's earnings call on our IR site. Now, before we get started, I'd like to remind you that our earnings presentation and investor materials contain forward-looking statements, and they're subject to future events and uncertainties.

[Gemma Bakx, Head of Investor Relations at Tims China]

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, with 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 all that said, I'd like now to turn it over to Yongchen Lu, our CEO and Director. Please go ahead, Yongchen.

[Yongchen Lu, CEO and Director at Tims China]

Thank you, Gemma. Good morning and good evening, everyone. I'm Yongchen Lu, CEO and Director of Tims China. The second quarter of 2024 represents a significant milestone for our company, as we achieve Adjusted Corporate EBITDA profitable for the first time in our corporate history. This result was driven by an intense focus on our core strength of delivering guests great value for money products and a differentiated fresh food offering, coupled with continuous improvements in operational efficiency. This important milestone comes as we deliver our highest ever Adjusted Store EBITDA margin of 10.3%. Our focus on sustainable, profitable growth has included greater emphasis on building our franchise network, collaborating closely with our sub-franchisees to deliver them compelling unit economics while providing our guests with a consistent experience and driving our bottom line profit.

[Yongchen Lu, CEO and Director at Tims China]

Despite a 6.6% reduction in revenue from company-owned stores due to our strategic decision to prune underperforming stores since the fourth quarter of 2023, we have sustained to achieve 1.6% growth in system sales. Our efforts are paying off, not just in our improving profitability, but in the strength of our sub-franchisees pipeline, which stands at over 3,600 applications as of the end of June. As of June thirtieth, 2024, our registered loyalty club members reached 21.4 million, reflecting remarkable 45.4% year-over-year growth. The average number of members per store has now surpassed 23,000, serving as a strong catalyst for our growth and clearly demonstrating our customers' enthusiastic support for Tims China loyalty programs.

[Yongchen Lu, CEO and Director at Tims China]

The ongoing support from our customers inspires our team to continue delivering the best value for quality products. During the second quarter, we launched several impactful marketing campaigns, including collaborations with the Suzhou Museum and the Minglan Zhifou IP, which collectively garnered a combined total exposure of over 45 million across WeChat and the Little Red Book social platform. Continuous product innovation is central to our strategic vision. In Q2 2024, we introduced 25 new beverages and nine new food products, which contribute approximately 14% of our top-line sales. Standout offerings such as the Floral Latte, Gardenia Green Tea Latte, Buffalo Milk Latte, Xinluo Latte, and the low-fat real juice fruit Americano series, Tiancheng Meishi, Xiangli Meishi, have resonated strongly with customers. We are committed to delivering healthy food options for our guests.

[Yongchen Lu, CEO and Director at Tims China]

With our customers' preference for healthy products in mind, we have also advanced our distinct coffee product strategy, launching new bagel products like the Strawberry Yogurt Smile Bagel and Thick Yogurt Smile Bagel. The total number of bagels sold increased from 4.8 million in Q2 last year to 6 million in Q2 2024, with a percentage of orders that include food rising to 51.9%. To further enhance our strength and leadership in differentiated food products offerings and healthy food options, we completed make-to-order renovations for nearly 300 stores to date. With very limited capital expenditure investment, we have witnessed strong incremental food revenue growth already.

[Yongchen Lu, CEO and Director at Tims China]

We are on track to roll out our renovations model to more stores by the end of the year to demonstrate to our customers that at Tims China, our food is fresh prepared on site. Additionally, we secure up to $50 million in financing in Q2 2024 from our founding shareholders, Cartesian Capital Group and RBI, which underscores the commitment of our founding shareholders to our dynamic business. This year is a pivotal one for us, and fortifying our balance sheet is an important step forward towards ensuring our long-term success in a highly competitive market. This transaction enables us to drive growth in, and intensify our focus on our core Tim Hortons brand.

[Yongchen Lu, CEO and Director at Tims China]

Strengthening our core brand remains a key element of our strategy, and in order to provide an even sharper focus on developing the Tims brand, we agree with RBI to transfer the Popeyes China business back to them at the end of the second quarter. This transaction allow us to streamline our operations and focus on our core business areas, while providing us with $50 million in capital, which will be instrumental in driving further business expansion and optimizing our balance sheet. At this time, I would like to turn over to our CFO, Albert Li, to discuss our second quarter 2024 financial performance in more detail. Albert?

[Albert Li, CFO at Tims China]

Thank you, Yongchen Lu. In the second quarter of 2024, we achieved positive Adjusted Corporate EBITDA for the first time. We reached this significant improvement in our financial performance by optimizing our store unit economics, cutting costs at headquarters, and closing underperforming stores. We remain committed to delivering cost-effective, high-quality products to our growing customer base. Our overall monthly average transacting customers reached to 3.1 million in the second quarter of 2024, a 12.1% increase from 2.8 million in the same quarter of 2023. Additionally, digital orders as a percentage of total orders rose from 80.6% in Q2 2023 to 86.5% in Q2 2024. We continue to enhance our digital capabilities to meet the growing demand for delivery and takeaway services.

[Albert Li, CFO at Tims China]

During the second quarter of 2024, we made more significant strides in enhancing our operational efficiency. Through refinements in our supply chain management and economies of scale, we reduced the food and packaging costs as a percentage of revenues from company-owned and operated stores by 3.1 percentage points year over year. We continued to streamline our operations by pruning underperforming stores and optimizing unit economics. These actions led to a year-over-year reduction in rental expenses, labor costs, and other store operating expenses as a percentage of revenue from company-owned and operated stores by 1.5 percentage points, 3.0 percentage points, and 1.3 percentage points, respectively. Benefiting from our cost optimization measures and increased brand recognition, our marketing expenses as a percentage of total revenues decreased by 2.6 percentage points year over year.

[Albert Li, CFO at Tims China]

Additionally, we streamlined our headquarters costs, resulting in a significant reduction in Adjusted General and Administrative Expenses as a percentage of total revenue by 3.4 percentage points year over year. Turning to liquidity, as of June 30, 2024, the company's total cash and cash equivalents, time deposits, and amount due from related parties in relation to the financing from RBI, were RMB 253.2 million, compared to RMB 219.5 million as of December 31, 2023. The increase was primarily attributable to the financing from our founding shareholders, partially offset by cash disbursements on the back of the expansion of our business and store network nationwide and the repayment of bank borrowings. Looking ahead, our focus remain on executing our strategy to drive profitable and capital-efficient growth.

[Albert Li, CFO at Tims China]

We will continue to strengthen our brand and expand our guest value, great value for money.

[Albert Li, CFO at Tims China]

... freshly prepared food offering. We will also work closely with our sub-franchisees to drive traffic and enhance our supply chain efficiencies, improving their store economics, and in turn, driving our bottom line profitability. Now, I will turn the call over to Gemma for today's Q&A session. Thank you, Gemma.

[Gemma Bakx, Head of Investor Relations at Tims China]

Thank you very much, Albert. Over to you, operator. Do we have questions for our Q&A?

[Operator]

As a reminder, if you wish to ask a question over the phone, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Alternatively, you can submit your questions via the webcast.

[Gemma Bakx, Head of Investor Relations at Tims China]

Nadia?

[Operator]

There are no questions at this moment on audio lines.

[Gemma Bakx, Head of Investor Relations at Tims China]

Okay. Thank you. I have a question here that came in, and it says: "Congratulations on achieving your first-ever Adjusted Corporate EBITDA profitability. That's a significant milestone. Can you elaborate on how the company can maintain and achieve continuous profitability going forward?

[Yongchen Lu, CEO and Director at Tims China]

Okay. I'll take this one. So I mean, we successfully, you know, achieved Adjusted Corporate EBITDA profitability for the first time, as I just mentioned, amidst the, you know, macroeconomic challenges and intense competition in the Chinese coffee market. So this really, you know, inspires us to provide more exceptional value for money products for our guests going forward. So moving forward, we are, you know, standing first in prioritizing profitable growth as our core strategy. Firstly, we'll be, you know, bolstering our revenue through our unique coffee plus fresh prepared food strategy, complemented by our target precision marketing initiatives that resonated with our customers very well. Secondly, you know, we have achieved significant benefits from improving operational efficiency, reducing basically all cost elements year over year, as Albert just now mentioned in detail.

[Yongchen Lu, CEO and Director at Tims China]

This confirms to us that our relentless focus on optimizing unit economics is crucial for securing our long-term profitable growth and success. So given the significant brand recognition we have, you know, built in the market, partnering with our franchisees make us well positioned to drive our profitable growth capital efficiently. Back to you, Gemma.

[Gemma Bakx, Head of Investor Relations at Tims China]

Thank you.

[Operator]

Thank you so much. And now we're going to take the next question from Steve Silver, from Argus Research Corporation. Just give us a moment, Steve, and your line is open now. Please ask your question.

[Steve Silver, Senior Equity Research Analyst at Argus Research Corporation]

Okay. Thank you, operator. My questions are that, in the past, Q4 has been the most active quarter for new store ads, and I'm just curious if there's any visibility emerging into the growth outlook for this year's Q4?

[Yongchen Lu, CEO and Director at Tims China]

Yeah. Thank you, Steve, for the question. Yes. No, we expecting much more, more openings in Q3, and especially in Q4 as usual. So yeah, we are, we have done very well in the individual franchising for the first half. We opened 20 already, and we have signed additional 52 at the end of June. And we are now getting the momentum on the individual franchising, so we're expecting to much more openings in the second half of this year.

[Steve Silver, Senior Equity Research Analyst at Argus Research Corporation]

Okay, thank you.

[Operator]

Thank you. Dear participants, as a reminder, if you wish to ask a question over the phone, please press star one one on your telephone keypad. Alternatively, you can submit your questions via the webcast.

[Gemma Bakx, Head of Investor Relations at Tims China]

Nadia, can I ask the next question that came in?

[Operator]

Yes, of course. Please do, Gemma.

[Gemma Bakx, Head of Investor Relations at Tims China]

The next question that we received is: Does your Q2 Adjusted Store EBITDA margin of 10.3% have room to grow further in the coming months, which are typically the busiest of the year, as Steve pointed out, I believe?

[Yongchen Lu, CEO and Director at Tims China]

Yeah, I mean, we always keep a sharp eye on streamlining our line of operations, you know, refining our supply chain and cutting costs wherever, you know, appropriate. So, I mean, we are happy with the margin we have achieved in Q2, and we'll always seek further improvements where we can find. And with the... Now, sorry, back to Gemma. Mm.

[Gemma Bakx, Head of Investor Relations at Tims China]

Nadia, are there any more questions? No? Then I'll ask the next one that came in, which is: In the context of our competitors exhibiting signs of growth weakness recently, how does Tim's analyze and interpret the competitive landscape in the Chinese coffee market... as it stands today?

[Yongchen Lu, CEO and Director at Tims China]

Okay, I will take that one. So I mean, in the second quarter of 2024, the Chinese coffee market continued to face, you know, huge challenges with notable players like Luckin and Starbucks in China experiencing a decline in the same-store sales by 20% and 14% respectively, as they, you know, released in their, you know, last quarter earnings, and we believe our distinctive coffee plus fresh prepared food strategy sets us apart and does well amongst the intense competition, as we have done. Even as China navigates the trend of reducing consumption and trading down, there continues to be a strong and enduring pursuit of convenient and healthy food options among consumers, so our great value for money, coffee plus bagels combination is well positioned to cater to this trend.

[Yongchen Lu, CEO and Director at Tims China]

To accelerate this strategy, we have completed make-to-order renovations in nearly 300 stores to date, which has showed a, you know, great, you know, growth in food sales. We are on track to further roll out these renovations model to most of our stores by the end of the year. With very limited capital expenditure investment, we anticipate these strategic enhancements will significantly drive incremental growth in our food revenues. Back to you.

[Gemma Bakx, Head of Investor Relations at Tims China]

Thank you very much. Nadia, is it okay if I ask the next one?

[Operator]

Yes, please follow.

[Gemma Bakx, Head of Investor Relations at Tims China]

All right. Regarding the ongoing price war, as it's described, where do things stand with regards to that price war as it's ongoing? Are there any signs in your view, is there anything that you're seeing that the battle is cooling off or losing steam?

[Yongchen Lu, CEO and Director at Tims China]

I mean, we have possibly, you know, being as bewildered as, you know, the next person about how long some of our competitors have been going at it. Now, I believe some can last longer, some cannot go on forever. That said, no, we had not expected it to last this long.

[Gemma Bakx, Head of Investor Relations at Tims China]

As a follow-up that I'm receiving here, where does Tims China position itself in the ongoing price war? Where does it see itself? Where do you see yourself?

[Yongchen Lu, CEO and Director at Tims China]

I mean, while you know, obviously it has an effect on us, right? But we do not really, you know, proactively, you know, participate in the pricing war. I mean, we are not in the premium category. Our brand is value for money. So rather than lowering our coffee price, so we have been promoting our combos, coffee plus, you know, bagel, coffee plus other, you know, fresh prepared food at a very attractive price. So we'll continue, you know, doing that strategy and differentiate us from other, you know, coffee players, and also we are launching value lines, both in coffee and food, to adapt to the market right now.

[Operator]

Thank you, Gemma. And now we're going to take the question from audio lines. Just give us a moment. And the question comes from the line of Steve Silver from Argus Research Corporation. Your line is open. Please ask your question.

[Steve Silver, Senior Equity Research Analyst at Argus Research Corporation]

Operator, and thanks for taking this follow-up. With the recent capital infusions and the achievement of corporate EBITDA positivity in this quarter, I was curious what the company sees as its primary need for capital moving forward, given that the sub-franchise model is capital light by nature?

[Albert Li, CFO at Tims China]

Okay, I will take this one. Thank you, Steve. Okay. So, as Yongchen Lu has mentioned, you know, I, I, and, you know, to further, like, strengthen our leadership in the coffee plus strategy, so we will be making additional investment in terms of, you know, to, like, implement the made-to-order renovations. So the, you know, the MTO renovation, will enable our customers actually to see, you know, the, the fresh food ingredients, and also our fresh food preparation process to be more visualized to them. So, we believe this will offer expanded, like, revenue opportunities for us.

[Albert Li, CFO at Tims China]

And with this MTO renovation, we can also ensure that all of, like, most of our stores can offer actually standard menu among all our store formats. And we also believe that, like, the return on such MTO stores will be very good. And secondly, we also plan to enlarge our spending on, like, more actually marketing initiatives or efforts to actually address, like, new markets from multiple channels. So we will definitely invest certainly in marketing. And we will also invest, like, in R&D to offer more attractive and also good value for money products, like more value line products to our customers.

[Albert Li, CFO at Tims China]

And lastly, I want to mention, like in terms of how we want to use the capital more efficiently, is that we do also have plan to open, like certain, like new company-owned and operated stores. I want to mention that, you know, actually on the back of the reuse of certain coffee machines, kitchen equipment, and furniture from those, like, store closures, we think actually the additional incremental CapEx will be quite limited. So to address your question, I think that that would be the plan for us, like, how we want to deploy the recent capital injections from our shareholders. Thank you, Steve.

[Steve Silver, Senior Equity Research Analyst at Argus Research Corporation]

Okay. Thank you for the additional color. I appreciate it.

[Operator]

Thank you. The speakers are now for the questions from the virtual lines.

[Gemma Bakx, Head of Investor Relations at Tims China]

All right. I have one more here, if I may, and the question is: Do you expect the store count to go up this year, or will you continue to focus also on pruning more underperforming store and also on store renovations? The second part of the question is, do you foresee, now that you've demonstrated success in expanding, your capital efficient sub-franchise model, do you foresee any further changes in store concepts for Tims?

[Albert Li, CFO at Tims China]

Yes, we do expect the store count to go up in second half. No, I mean, especially in Q4, as now I just mentioned to you, you know, these, you know, questions. You know, as our individual franchisings are ramping up quickly, I mean, for the first half of this year, we focused more on pruning underperforming stores, and right now, we have achieved the positive corporate EBITDA, and also we have opened very successfully in our individual franchising, so we are ramping up to open more in the second half. Back to you, Gemma.

[Gemma Bakx, Head of Investor Relations at Tims China]

Mm-hmm.

[Operator]

Dear participants, thank you for all your questions for today. There were no further questions, and I would like now to hand over the conference to Gemma for any closing remarks.

[Gemma Bakx, Head of Investor Relations at Tims China]

Thank you all very much. I have no further questions here either. Thank you very much for sharing our good news with us today, and we look forward to speaking with you very, very soon. Thank you very much.

[Albert Li, CFO at Tims China]

Thank you, everyone.

[Steve Silver, Senior Equity Research Analyst at Argus Research Corporation]

Thank you, everyone.

[Albert Li, CFO at Tims China]

Yep. Bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.

Participants

Analysts

• Steve Silver, Senior Equity Research Analyst at Argus Research Corporation
• Gemma Bakx, Head of Investor Relations at Tims China
• Albert Li, CFO at Tims China
• Yongchen Lu, CEO and Director at Tims China