Tim's China reports 8.6% food revenue growth and positive adjusted EBITDA, driving optimism for sustainable profitability in the second half of 2025.

OPERATOR - (00:00:39)

Ladies and gentlemen, welcome to TIMS China's second quarter 2025 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 Box who heads Tim's China's investor relations efforts. For prepared remarks and introductions, please go ahead.

Gemma Box - (00:01:06)

Hello everyone and thank you for joining us on today's call. My name is Gemma Box, Head of Investor Relations and TimsChina announced its second quarter 2025 financial results earlier today. A press release as well as an accompanying presentation which contain operational and financial highlights are now available on the company's IR website at ir.timschina.com today you will hear from Yongqian Liu, our CEO and Director and Albert Lee, our CFO. After the company's prepared remarks, the management team will conduct a question and answer session. You can find a slide presentation and the webcast of today's earnings call on our 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 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 would now like to turn it over to Yongqian Liu, our CEO and Director. Please go ahead Yongqian thank you Gemma.

Yongqian Liu - Chief Executive Officer and Director - (00:03:09)

Good morning and good evening everyone. In Q2, we reinforced our differentiated coffee plus freshly prepared food strategy with the successful launch of Live Fit Lunchbox platform, a series of new combo products for the launch daypark to further drive our top line growth and enhance store unit economics. The product lineup include hot baked bagel sandwiches, energizing lunch wraps and loaded power bowls paired with coffee or other beverages, all at an acceptable price point. As a result, food revenue increased by 8.6% year over year and food revenue contribution as a percentage of sales reached a historical high of 35.2%, an increase of 2.8 percentage points from 32.5% in the second quarter of 2024. Our system sales continue to grow during the quarter achieved a 1.4% year over year increase. Our sub franchise z and retail businesses continue to deliver steady cash flow and profitability. Profits from other revenues achieved a year over year increase of 110.3%. At the same time, we return to positive adjusted corporate EBITDA and reduced adjusted net losses by 16.2% during the quarter. These achievements underscore Tim's China successful disciplined execution and our unwavering commitment to achieving sustainable long term profitable growth on store development. Leveraging sub franchisee partnerships, we expanded our store footprint into 98 cities including the city of Zibo in Shandong Province and Lishui in Zhejiang Province, Lu'an in Anhui Province and Jinxiu in Guangxi Province that we entered in Q2 while maintaining capital efficiency and delivering absolute convenience for our guests. Since we launched our individual franchisee programs in December 2023, we have received over 8,100 applications and successfully converted over 400 stores by the end of second quarter. Showcasing enthusiastic market confidence in our franchisee model. We have established attractive and desirable store unique economics for sub franchisees with a reasonable two to three year payback period on average and have targeted to open on a gross basis around 200 franchise stores in 2025. We are also focused on special channel store development with 18 new store openings in locations such as railway stations, airports, highway rest areas, hospitals, universities and schools, etc. As of June 30, 2025, our registered Laurier Club members reached 26.2 million, reflecting a remarkable 22.4% year over year growth. The average number of members per store is now close to 26,000, serving as a strong catalyst for our future growth on product categories and offerings in China's highly competitive beverage market. April marked the onset of peak seasonal demand, triggering intensified rivalry among brands aiming to capture market share and drive top line growth. Therefore, Teams China executes a focused product led strategy in Q2, strengthening its position across key consumption occasions and customer segments. We introduced a total of 43 new items during the quarter, 28 beverages and 15 food products, reflecting our commitment to innovation and menu diversification. This robust pipeline supports our dual goals of increasing same store sales and expanding our consumer base on beverage portfolio expansion. To meet growing consumer demand for healthier lighter beverage options, we launched the Sparkling Cold Brew series building on the success of our Grape Variant with additional fruit inspired flavors. The sparkling texture differentiates the line from our values here at Americano, while the use of cold brew coffee enhances the perceived quality and attracts black coffee into the acid. Seeking a refreshing upgrade for our milk coffee drinkers, we reintroduced the Water Buffalo Milk series, leveraging its naturally creamy, lightly sweet profile that resonates well in warmer weather. Positioned alongside our affordable and latte offerings, this creates a compelling product mix that strengthens our appeal across both price sensitive and premium seeking customers. Recognizing rising demand for non coffee options, particularly among families and younger guests, we expanded into adjacent categories by launching a series of non calculated beverages including the Ice Cap line as well as cold tea, et cetera. These products leverage existing product ingredients and infrastructure, enabling efficient innovation while broadening our afternoon beach. Together, these initiatives have enhanced the depth and balance of our beverage portfolio across price tiers and consumer needs, driving higher basket diversity and category penetration on Lunchtime growth and Data expansion Building on the successful launch of Light and Fit Lunchbox series in Q1, we extended the platform in Q2 with two new formats, the Rap Series and the Energy Bowl Series. These additions reinforce our positioning in the growing light and healthy meal segments and strengthen our competitive advantage during the lunch day part. We are confident that the full live meal box lineup not only meets rising demand for nutritious, convenient meals, but also serves as a catalyst for for traffic growth. Early data indicate positive spillover effect with increased lunchtime business contributing to higher engagements during the breakfast and even dinner day part beyond revenue generation, this initiative enhances brand equity by positioning teams as a proven provider of balanced and everyday solutions, not just coffee In July, we announced the appointment of the immensely popular and multi talented singer, songwriter and influencer influencer Lars Wong as our official Brand Ambassador for the year. Lars will launch a dynamic series of collaborations aimed at expanding the reach of Tim's China brand and introducing its flavorful, healthy and light products to ever growing audiences, especially among Gen Z consumers. These efforts designed to drive traffic, increase average transaction value and establish new consumption occasions. At this time I would like to turn it over to our CFO Albert Lee to discuss our second quarter 2025 financial performance in more detail.

Albert Lee - Chief Financial Officer - (00:11:39)

Thank you Yongqian. We continued to demonstrate our capabilities to further improve our financial performance by refining store unit economics and driving efficiencies at both store and corporate levels. Our subfranchisee and retail business contributed steady cash flows and profitability in the first half of 2025. We further improved our company owned and operated store contribution margin and adjusted corporate ebitda margin by 2.7 and 2.8 percentage points year over year respectively. We remain focused on delivering high value for quality healthy products and sought for services to our ever growing customer base. Our overall monthly average transacting customers reached 3.59 million in Q2 2025 and a 14.3% increase from 3.14 million in the same quarter of 2024. Additionally, digital orders as a percentage of total orders rose from 86.5% in Q2 2024 to all time high of 90.4% in Q2 2025. We continue to enhance our digital capabilities to meet the growing demand for delivery and takeaway services. In Q2. Our company owned and operated store revenues dropped by 12.5% year over year which was primarily due to the planned closure of certain underperforming stores and a 3.6% decrease in same store sales growth. We have seen positive same store transaction growth since April and our same store Transaction growth was positive 3.4% in Q2. In the meantime, revenues from our franchise business and retail business increased by 50.7% year over year. The number of our Franchise stores increased from 333 as of June 30, 2024 to 449 as of June 30, 2025. Our system sales increased by 1.4% year over year. We also made significant progress in boosting operational efficiency in Q2, setting the stage for our long term sustainable growth through refinements in our supply chain capabilities and economy of scale. We reduced the food and packaging costs as a percentage of revenues from company owned and operated stores by 0.8 percentage points year over year. Food and packaging costs accounted for 30.1% of our company owned and operated store revenues during the quarter. We continued to streamline our operations by pruning underperforming stores, refining staffing arrangements and optimizing store managerial efficiency. These actions 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 1.0 and 0.4 percentage points year over year respectively. Rental and property management fee as a percentage of revenues from company owned and operated stores increased by 0.9 percentage points from 19.3% in the second quarter of 2024 to 20.2% in the same quarter of 2025 which was primarily due to a 3.6% decrease in same store sales growth for company owned and upgraded stores in the second quarter of 2025. Delivery costs as a percentage of revenues from company owned and operated stores increased by 1.8 to 11.8% in the second quarter of 2025 compared to 10% in the same quarter of 2024, which was primarily due to the higher delivery revenue mix. As a percentage of total revenues from company owned and operated stores, the number of delivery orders for company owned and operated stores increased by 10.2%. Year over year, we made more efforts to promote our newly launched light and fit lunchbox series products, our marketing expenses as a percentage of total revenues accounting for approximately 4.0% during the quarter, an increase of 0.5 percentage points year over year. Our general and administrative expenses decreased by 5.2 year over year, which was primarily due to our cost optimization measures at the headquarter level. General and administrative expenses as a percentage of total revenues remained relatively stable at 10.8% in the second quarter of both 2024 and 2025. As a result of the foregoing effects, we have been able to achieve positive adjusted corporate EBITDA again during the quarter as we achieved earlier in the second and third quarters of 2024. Turning to liquidity, as of June 30, 2025, our total cash and cash equivalents, time deposits and restricted cash or RMB 178.8 million compared to RMB 184.2 million as of December 31, 2024. The change was primarily attributable to cash disbursements on the back of the expansion of our business, partially offset by the drawdown of additional bank borrowings. Looking ahead with profitable growth always being front and center of everything we do, we are posed to further enhance our operational efficiencies such as supply chain optimizations and rigorous cost controls to draw out our differentiating made to order fresh and healthy food preparation model to drive traffic, to optimize the overall store unit economics and to accelerate the expansion of our successful sub franchising. I will now turn it over to Yongqian for concluding remarks followed by Q and A.

Yongqian Liu - Chief Executive Officer and Director - (00:18:47)

Thank you Albert. Our second quarter performance reflects continuous improvements and resilience in our business and execution as well as both challenges and opportunities in this industry. We extend our heartfelt gratitude to our guests, team members, business partners, shareholders and everyone supporting our endeavors and journey together. We have built over 1000 stores in 90 cities, a robust community of over 26 million loyalty club members, a unique coffee plus fresh prepared food business model offering the best value for quality products, a unique advantage of offering franchise opportunities as an international coffee brand in China and a refined store unit economics With a target payback period within two to three years. With these milestones, we started first in our commitment to sustainable profit growth and to generating long term value for our shareholders. I will now turn the call over to Jemma for today's Q and A session.

Gemma Box - (00:19:55)

Thank you. Yes, thank you, Yongqian. We will turn it over to Q and A now and open it up for our registered questions. Let's begin with the first one. Go ahead operator.

OPERATOR - (00:20:06)

Thank you. If you would like to ask a question over the phone lines, you will need to press Star one and one on your telephone and wait for your name to be announced. And to withdraw your question, please press Star one and one again. Or if you wish to ask a question via the webcast, please type it into the box and click submit. We will take our first question from the phone lines. This is from the line of Steve Silver from Argus Research Corporation. Please go ahead.

Steve Silver - (00:20:38)

Thank you operator. And thank you for taking my questions. I was hoping you could provide your current thinking on the rate at which you can review the growing number of sub-franchise applications to accelerate the rate of new store growth and ultimately return to net store growth.

Yongqian Liu - Chief Executive Officer and Director - (00:20:58)

Yeah, I mean, I want to clarify. Okay. I mean for the Q2 we continue to prune underperforming company owned stores as well as franchise stores, especially those non made-to-order stores, those express stores. Among the 49 closures in Q2, 41 were such non MTO express stores. So if we exclude these stores, actually we had 31 net openings of made-to-order stores. So I mean based on the pipeline we have so far, our target is still to open around 200 new made-to-order stores in 2025 on gross basis and will open majority as sub franchisee stores and will continue to improve underperforming stores over the year to improve profitability. So I mean last year, this year we'll continue to close non performing stores and aiming at improving profitability. And we expect, okay, we'll have over 100 net openings and we expect 200 to 300 new openings every year in the next few years. Thank you.

Steve Silver - (00:22:29)

So it looks like the company continues to make good progress in managing its costs. Although marketing expenses did go up as a percentage of revenues in Q2. I'm curious as to your thoughts on how sustainable that trend would be and what impact it would have on the business same store sales growth and its margins?

Yongqian Liu - Chief Executive Officer and Director - (00:22:50)

Yes, I mean our same store sales has been recovering well and we expect we will have positive same stores in the third quarter and in the second half of the year. And the market Spends in the second quarter and some part of third quarter was to support the Lunchbox campaigns. I mean Lunchbox is a big campaign this year and which has been improving which has been working so far. So we can see the full contribution has been continuing to grow and we have reached the historical higher contribution in the second quarter and we expect that will continue.

Steve Silver - (00:23:50)

Great. And one last one for me, just a big picture question just in terms of how TIMS is balancing the need to invest in order to grow revenues while at the same time being conservative with operating capital. Really just your current thinking about your capital needs in order for TIMS to take the next steps towards sustainable profitable growth.

Albert Lee - Chief Financial Officer - (00:24:12)

Okay, sure Steve, I think. Let me address this question. So as we just mentioned during the earnings call, we returned to positive adjusted corporate EBITDA this quarter as we did in the second and third quarter quarter of last year. So we believe we are very close to full year adjusted corporate EBITDA break even as of this moment. Which means we are very close to realizing or achieving operating cash flows self sufficient. So in terms of that I think we are not actually burning cash at the operating level. So in the meantime if we could secure additional capital, actually we continue working very hard on that. I think in terms of securing more bank loans onshore and also we are also working on certain financing plan for the company to bring more capital to the company and to the business. So if we could actually secure more additional financing capital, we would consider open more profitable company owned and operated stores in the meantime. So honestly speaking, we want to achieve a very good balance between opening more company owned stores and also in terms of balancing our overall financial position. So hopefully I can address your question here.

Steve Silver - (00:25:56)

Yeah, that was helpful. Thank you very much.

Albert Lee - Chief Financial Officer - (00:25:58)

Thank you Steve.

OPERATOR - (00:26:01)

Thank you. I will now hand back to Gemma to read the questions coming through via the webcast.

Sarah - (00:26:08)

Yes, thank you. Sarah, we received a couple questions online. You already commented on same store sales trends. Is there anything additional you can say about those trends thus far? And also in particular your outlook for the remainder of the year that you haven't addressed when you spoke with us earlier?

Yongqian Liu - Chief Executive Officer and Director - (00:26:27)

Yeah, we talked about the same stores already. I mean we improved quarter by quarter in the second quarter. The same store sales decreased has been now to only 3.6% and we have seen a very positive trend in recent months and again we expect, okay, we'll achieve positive same store sales in Q3 and in the second half of this year.

Sarah - (00:26:57)

And could you provide an update on the refinancing of the convertible debt?

Yongqian Liu - Chief Executive Officer and Director - (00:27:03)

Yeah, we are in the group right now and we will disclose when it's ready.

Sarah - (00:27:12)

Okay. Another question we received online is how can we better monetize the Tim's loyalty members, which is sort of 26 million by now. The question is about the theoretical spend of $1 per member per week and what that would generate in annual sales. What is realistic in this regard and, and how could this be better monetized?

Yongqian Liu - Chief Executive Officer and Director - (00:27:37)

Yeah, it's a great question, but it's also a very challenging question. I mean we kind of, we have a goal in mind. We need to dig and derive the value from the memberships. So we have the mind there. We need to design a good product and campaigns and attract those members to spend more in our stores. I mean that's something we are working every day.

Sarah - (00:28:06)

Okay. The last question I have online is do you expect your liquidity position to improve going forward?

Yongqian Liu - Chief Executive Officer and Director - (00:28:18)

Yeah, I think as you know what I have explained to Steve's last question. So actually we are actually approaching to operating cash flow self sufficient. So we do not expect to burn cash and in the meantime we are working very hard to bring in new capital to the company. So as of this moment I think we are very confident that we can actually we are in a good liquidity position for now.

OPERATOR - (00:28:50)

Sarah, those were the questions I have that came in online. Thank you. As a reminder, if you would like to ask a question question over the phone lines, you will need to press star one and one on your telephone and wait for your name to be announced. And to withdraw the question you can press star one and one again. And as a reminder to ask a question via the webcast you can type it into the box and click Submit. Please stand by while we check for any further questions. There are no further questions at this time. So with that, that concludes today's question and answer session. I would like to hand the call back to Yong Chen for closing remarks.

Yongqian Liu - Chief Executive Officer and Director - (00:29:50)

Thank you always for your time and attention. And as okay, we mentioned earlier we are optimistic now about the second half of the year. We are at a turning point of positive same store sales and positive corporate EBITDA. So we'll see you again in the Q3 and report back the good news. Thank you.

OPERATOR - (00:30:18)

Thank you. Thank you all very much. Thank you. Bye bye. Thank you. That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.