Ladies and gentlemen, welcome to Tims China Fourth Quarter and Full Year 2023 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'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 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 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 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 has always been a strategic focus for us. And we delivered growth in a capital-efficient manner, loading up stores with a more rapid payback period and accelerating our franchising activity. 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 redoubled 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 largest loyalty club members reached RMB18.7 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 Yitong and the Tangshan cities,…

Thank you, Yongchen. During the fourth quarter of 2023, we enhanced our operational efficiency across a number of dimensions. We carried back costs 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 RMB388.5 million in Q4 2023. The growth was primarily driven by an increase in the number of system-wide 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 transacting customers were 3.9 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 take away services. Turning to liquidity, as of December 31, 2023, our total cash and cash equivalent, time deposit and short-term investments were RMB220.8 million, compared to RMB611.5 million as of December 1, 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 to mention in March 2024, we entered into US$20 million promissory notes financing with Cartesian Capital, our existing shareholder. 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.

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 one food business model offering the best value for quality products as an international coffee brand. The branch added a comprehensive store format with 900 plus stores in over 60 cities and a unique advantage of offering franchise opportunities as an international coffee brewer. We just celebrated the significant milestones of our 5th anniversary being in China and the 6th 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?

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 friends. So 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 capital and consumption still represents extremely low penetration, less than tank types compared to countries such as U.S., Germany and even other Asian countries such as South Korea and Japan where the capital annual consumption right now is over 200 tons. So overall China's coffee industry has been experiencing rapid growth with significant potential for further expansion, indicating now that the market is far from reaching saturation. There is not 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 offer this despite a price war leading to strong revenue and the unit growth margins will inevitably get compressed. And this margin pressure will likely lead to financial strength. So no one would like to be able to maintain this aggressive pricing strategy for much longer. So on the plus side, right, the price will effectively help 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 and eventually seek high quality yet affordable options. As the price more eases and consumers interested in exploring diverse coffee offerings growth, our well-positioned brand is ready to capture this emerging market segment. Our differentiated product offering at a compelling prices with fresh food options is so good that we actually don't really compete directly 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 today. So the energy and the profitability are coming at the same time. And there's no, certainly no sign of cannibalization even despite this price war. Thank you.

Thank you. Our next telephone question comes from the line of Steve Silver from Argus Research Corporation. Please ask your question, Steve.

Okay. Hello, everybody. And in case the name didn't come through, it's Steve Silver from Argus. So thanks for taking the questions. It's great to see the target for achieving corporate EBITDA breakeven this year. First question I have, Tim's 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 the, it'll be more of increasing penetration into existing markets?

No, I think we will focus on our priority, we will focus on increasing density in the fixed facilities. But we will also enter into the new cities within the clusters we have operated already. Now as you may have touched on from me, we have four major offices in China that East China cluster, mainly Shanghai and the cities are close to Shanghai. So I mean, we have in the currency 2015 the cluster then we'll enter into more space in that cluster given the efficiency of supply chain, the logistics and the marketing and the manufacturing, et cetera. So that's one example and we have classes in Beijing, the Beijing class, and we have classes in Guangzhou [indiscernible] and then we have classes in Chengdu, et cetera. So I mean we'll enter into more new states in those classes and leveraging the infrastructure and the system we have building in those classes already.

It is helpful. Thank you. So I had also one 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? Thank you, so much.

Yes, I mean that question I'll answer briefly. I mean Albert mentioned we have 3 million multi-dollar investments average in acting customers, okay, now calculate the active rate there. And also I would like to emphasize the repeated purchase rate. I mean, no. We all measure, okay, the people, the consumers come to our stores more than 2 times or twice or more than 2 times that the pre-purchase rate is about around 40 percentage, which is I think, above average for the industry.

Great. Thank you, so much for taking my questions.

For our next question, Gemma, over to you.

Thank you, Operator. We had 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 dayparts as well?

Yes. I mean, food is the most differentiated part for us compared with other coffee brands in China, especially in our dinner stores where we offer made-to-order fresh food. And we offer combo meals at very compelling price. For example, for breakfast combos of 1 cup of coffee plus 1 bagel, we price at only RMB19.9, which means, okay, less than $3 for the breakfast. And for lunch combos, 1 cup of coffee plus one bagel sandwich starting from RMB26.9, which is like less than fourth quarter dollars. 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.

Thank you. Please go ahead, Gemma.

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 perceive the margin outlook going forward?

Okay, sure. I will take this question. Thank you, Gemma. So, as you mentioned, the Chinese coffee market is actually showing stronger potentials. Right? So we believe in terms of the per hectol, 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 run. So with the price war subsiding, so and as consumers seeking a broader exploration of coffee options, we believe our brand 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 whole year for 2023. And I think we are also expecting like single-digit or even high single-digit same-store sales growth for this year. And then so with that said, I think our positioning as we see it in a lot of new customers and we are also seeing like many of our existing customers actually increasing their like coffee consumption. So and our coffee plus warm food business model actually will still be expected to significantly differentiate us and contribute to our same-store sales growth in the future. Thank you, Gemma.

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

Thank you. 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, no, as we all know, it's an extremely large chicken market and Chinese consumers really like chicken fried chicken etcetera. Such a larger market can certainly accommodate another great Western fried chicken bread like Popeyes in addition to KFC, right, which has over 10,000 stores already in China and being extremely successful in China. By offering great taste products, vibrant, young and energetic store environment as well as no casual table service, Popeyes has been well affected by consumers in Shanghai, and you can see that in our sales and our traffic. And we'll continue to build the brand and open stores as planned. And there are a lot of synergies between Tims and Popeyes. The most of the system and infrastructure Tims has built over the past five years can be used for Popeyes like the digital systems, store network planning capabilities, supply chain capabilities, as well as the members and community. That is why we were able to launch Popeyes in just about five months instead of a typical one year new market entry process and achieved order like breaking first day transaction numbers. And as I mentioned, we have over 20 million loyal club members and teams and we look forward to introducing our more than 20 million Florida governments to Popeyes and to have that in built networks to be able to reach out to them and bring them to our new brand that is very powerful tool. Thank you.

Thank you. Gemma, you may continue with the web questions.

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

Sure. I will take this one. So Yongchen has mentioned, I think actually to achieve operating cash flow self sufficient and becoming corporate EBITDA breakeven 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 decline like going forward. And in the meantime, we are also actually considering, actually in terms of financing like solutions in the meantime such as actually 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. So actually we are quite confident that our overall actually balance sheet status can improve over time in 2024. Thank you.

For next question, Gemma, over to you.

We have a question come in from Oliver Mihailiks [ph] 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 RMB200 million while current assets were only RMB65 million. Net operating cash flow was still negative. The recent RMB20 million issuance of promissory notes at a certain interest rate seems like a stopgap 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? Thank you.

Yes. I mean, as you know Albert mentioned, we expect to achieve corporate EBITDA breakeven very soon. And also we have shift to capital efficient manner of opening stores by using a franchisee. So I mean we actually will generate an operating cash flow very soon and also we'll leverage the franchisee store to open that network. And we expect to open around 500 franchisee 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 the balance sheet very soon by operating cash flow and the pipeline opening strategy which will bring us cash and profitability. And of course, as Albert mentioned, we at this time our major shareholder has given us a $20 million profit and note and not to which has further increased enhanced our balance sheet. Thank you.

Thank you. Over to Gemma for next question.

Thank you. 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. And can 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 Tims stores that you owned? Thank you.

I think we applied, I think right now the Popeyes have used a cable service system. So actually that our guests can come into the stores and sit down first and just use their mobile phone to scan the QR code to place the order 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 and our consumers realize that kind of service. So I mean, I think we our service speed is good and our full is good and service is good. So that's why the brand of Popeyes has been well accepted in Shanghai, the most compatible market. And we expect to continue to use that system and continue to open stores as planned. Thank you.

Thank you. 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.

Thank you. That concludes our call today. You may now disconnect.