TH International Limited Price & Performance (THCH)

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. 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 Yong Chen Lu, our CEO and Director. Please go ahead, Yong Chen.

Thank you, Gemma. Good morning and good evening, everyone. In the Q3 of 20 24, 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 13.3%. Previously discussed as adjusted store EBITDA margin and a year over year margin expansion of 5.8 percentage points. Demonstrating our continuous [indiscernible] towards delivering further improvements in operational efficiencies and the supply chain capabilities. In our line, [indiscernible] Our differentiated strategy of coffee plus warm food, we prioritize delivering fresh prepared healthy and high quality products and 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 walking 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. Our healthy and high quality product offerings We launched low sugar high fiber and plant based options with particular emphasis on freshness and the preservation of nutrition and flavor of our high quality ingredients.

We also provide transparent nutrition and category information on our menu so that our guests can evaluate the health benefits of our products. And make decisions easily. In order to make our healthy coffee plus bagels and bagel sandwich options accessible to broader audiences our ID team launched Limiting all green bagels and Smile Bagels to fueling 300 calories. And promising 5 0.7 in all our beverage product offerings. That is 0, non dairy creamer 0 coffee whitener, 0 hydrogenated vegetable oil, [indiscernible] 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 one free item start only from RMB 14.9 [indiscernible] about $2 Our launch of our combo start at RMB21.9 that's about no, at only $3 In addition, we have launched Super Bowl Cars which our guests pay RMB6.6 to get 4 times rights to buy [indiscernible] One free item each time at 40% discount. Our guests can get much more than RMB6.6 savings even for one time usage. The costs have been a resounding success. With our guests. We sold over 120,000 cars in Q3 They have been a very effective tool to drive purchase Those who purchased a card demonstrate a 4.6 times increase in purchase frequency.

Compared to those who did not purchase the car. Moreover, our efforts have driven sales contributing to a total of RMB7.6 million in revenue during Q3 this year. We continue to deliver capital efficient growth and we remain committed to offering [indiscernible] Strategic partnership with the sub franchises is underpinning the expansion of our store network. Increasing our density in existing status for quicker services. And broadening our outreach into new cities. Welcome new guests. We have generated strong momentum on individual franchising, the program late last year, We haven't received over 5,000 applications [indiscernible] and signed additional [indiscernible] of the end of September. New certificates we entered during the Q3 [indiscernible] [indiscernible] leverage our brand experience leveraging our brand influence and the high quality products and the service we provide every time we open a new store in a new city we have met with enthusiastic welcoming support from our guests. For instance, our inaugural store in Harbin at [indiscernible] in sales during [indiscernible] Garnering considerable media attention. By September 30, 2024, our registered floor recovery members had reached 22,800,000 reflecting a remarkable 35.3% 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 In Q3 2024, we introduced 10 new beverages and 9 new food items. 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 Drivenience are also cater to the increasing self care demands of our Chinese note consumers. A prime example is the introduction of our 5 red multi grain bagel, Huong Bagel and 5 black [indiscernible] Tim's Bagel Festival in September. [indiscernible] with the principles of traditional Chinese herbs. In recognition of our guests focused on a healthy lifestyle, we collaborate with [indiscernible] [indiscernible] with its healthy green diet quickly proved to be an excellent mascot for us. Thanks to the innovative products and our eye catching furry mascot, [indiscernible] garnered over 63,000,000 [indiscernible] red alone contributed 7,000,000 exposures as backed up [indiscernible] percent surge in user generated content compared to August Search for Tim's Bagel nearly doubled in the posting Tim's brand ranking within the coffee industry by 1 position. [indiscernible] At this time, I would like to turn it over to our CFO, Albert Li, to discuss our Q3 financial performance in more detail.

Thank you, Yong Chen. 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 franchisee business continues to generate a steady stream of cash flows and profitability [indiscernible] We remain committed to delivering cost effective high quality products to our growing customer base. Our overall monthly average transacting customers [indiscernible] RMB3.3 million in Q4 20 24, a 2.4% increase 3,200,000 in the same quarter of 2023. Additionally, digital orders as a percentage of total orders [indiscernible] from 82.6% in Q3 2023 to 86.6% in Q3 2024. [indiscernible] We continue to enhance our digital capabilities to meet the growing demand for delivery and takeaway services. [indiscernible] 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. We continued to streamline our operations by optimizing unit economics This led to a year over year reduction in labor costs others to operating expenses as a percentage of revenues from company owned and operated stores by 3.0 percentage points and 1.1 percentage points respectively.

Benefiting from our cost optimization measures and increased brand recognition, our marketing expenses as a percentage of total revenues decreased by 2.3 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 [indiscernible] And consecutively quarterly adjusted corporate EBITDA profitability after the Q2 of 2024. 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 compared to RMB RMB219.5 million as of December 31, 2023. The change was primarily attributable to the financing from our funding shareholders. Partially upside 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. [indiscernible] We are committed to fostering our brand and broadening our appeal by offering great value for money with our fresh and health food selections. Additionally, we are collaborating closely with our sub 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 Yum Chen for concluding remarks followed by Q and A. Thank you, Albert. Before we turn to Q and A, I would like to highlight 2 core messages to take away today. 1st, TIMSS China is committed to continuing to distinguish itself by delivering great value and differentiate our products. To our guests, avoiding direct participation in the ongoing price and walk. 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 double franchising network. Together, these two initiatives help us continue to drive improving profitability. I would like to take this opportunity to express my our heartfelt [indiscernible] To the diligent work of every Chief 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. [indiscernible] Thank you, Albert, and thank you, Young Chen. Let's begin with the first question. Go ahead, Sarah. [indiscernible] Thank you. We will now take our first question this is from the line of Steve Silber from Argus Research Corporation.

Please go ahead.

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? [indiscernible] the operating cost leverage, right, Steve?

Yes.

A percentage of sales, yes.

Yes. I mean, definitely. I mean, as you know, our major cost items include the printed paper, rent and labor and then okay, the office G and A. So I mean, as we can see, F and P are variable. But we are still able to reduce F and P cost in the materially year over year as Albert mentioned, we have reduced over 6 [indiscernible] and for labor, no, almost half are fixed And for rent, the majority is fixed. And for occupancy and the majority are not fixed. So when we increase our revenue, these fixed costs will be allocated So that's why we'll continue to see the margin improvement when we increase our revenues. Steve.

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

Yes, I mean, there are some timelines [indiscernible] 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 franchisees stores. So I mean although we'll receive more than 5,000 applications we are very strict in vetting process. We are using third party to conducting background We interview the applicants very carefully, checking their experience and the work readiness to see whether they fit us. And also we use networking planning team and our roster 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 year. And the next year.

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?

Yes, we do. I mean no, I mean, the loyalty members tend to have much more purchase frequency than nonmembers. That's why the member program is powerful. And especially as we just discussed about the bubble car, I mean [indiscernible] [indiscernible] The multiple times right 6.6 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.

Great. Thank you so much for taking the questions.

Thank you, Steve.

Whilst we wait for any more telephone questions, I think Gemma, do you have a question? There's a question that reached us and it is to ask please give an update on the status of franchising, the number of units, what the outlook is anything qualitative about the types of applications you have. You touched on it already, Yong Chen. 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?

Yes, I mean, the price competition is young ongoing, much longer than I expected. I mean, for Teams, again, we really differentiate ourselves using coffee plus fresh prepared warm food at affordable price. The strategy really differentiate teams from our peers we don't need to compete head to head. And I mean and we price our products competitively. For example, our coffee starts from RMB 16 and our price competitive lies especially with our combos As I mentioned earlier, our breakfast combos 1 cup of coffee and 1 fresh prepared food [indiscernible] And our launch combo start from RMB21 point 9, about $3 And again, I know we use [indiscernible] rides car. So our guests can enjoy [indiscernible] That's why we see a much more push frequency for those people who buy the car. So I mean we use the combos, we use okay the benefits of members to price our product, we're competitively in the market.

Thank you so much, Yong Chen. Sarah, are there any other questions? If not, I have one. Not yet. Another question that came in, Yong, Jan or Albert, how important are the renovated open kitchens for Tim's franchises and why?

Yes. I mean, it is very important. Yes, no, I just make sure that the fresh prepared food is the big differentiated point for teams. Compared with other coffee brands in China. [indiscernible] will allow our guests watch our staff craft fresh meals from start to finish [indiscernible] cup of coffee or drinks [indiscernible] 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. Back to you. Thank you.

Sarah, are there any other questions in your queue? Otherwise, I have one more that came in. None on the phone, current One question that reached 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.

Yes. Okay, sure. So I would take this [indiscernible] CapEx for a typical store is around 450,000 to 500,000 [indiscernible] dollars 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. Yes. So actually we think the payback period of 2 to 3 years is very attractive and it is a proven track record.

Sarah?

No questions on the phone lines. All right. Then I think we might be through.

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

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. Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect. [indiscernible]