TH International (THCH) Q2 2026 earnings call transcript

Hello everyone, and thank you for joining us on today's call. THI International Limited announced the second quarter 2018 financial results earlier today. A press release as well as a company presentation which concludes operational and financial highlights are now available on the complex IR website at IR. China. com. Today you will hear from John Chen, our CEO, and Albert After the company prepared remarks, the management team will concept a question and answer session. You will find the webcast of today's earnings call on our IR website. Before we get started, I would like to remind you that our earnings presentation and investor materials contain forward-looking statements which are subjected to future events and uncertainties. Statements that are not historical facts including but not limited to statements about the complex beliefs and expectations are forward-looking statements.

Forward-looking statements involve inherent risk and uncertainty, 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 findings with the SEC. This presentation also includes a certain non-GAAP financial measure which we believe can be helpful in evaluating our performance. However, those measures should not be considered substitutes for the comparable gap measures. The upcoming reconciliation information related to those non-gap and gap measures can be found in our earnings press release issued earlier today.

With that said, I would like now to turn it over to John Chen, our CEO. Please go ahead, John.

Well, thank you, Patty. Good morning, good evening, everyone. Thank you for joining us today. Tim Hortons is one of the world's top 10 most valuable restaurant brands, and China represents one of the most compelling consumer markets. It's truly a privilege to take on this role as the CEO of Teams China. I'm truly excited and honored to be here and am very passionate about our future. Since joining the company, well, in fact, I have to say, even before joining the company in mid-June, I spent a lot of my time diving into the business, visiting stores and suppliers, talking to our barristers and store managers, hearing from our partners, and most importantly, connecting with our customers. These learnings have helped me having a strong grip of where we are and what we need to do differently moving forward.

Everything I have seen and heard tell me we have significant strength to build on, and our brand is enduring. Over time, market and competition evolved. Consumer habits changed. There are many things we need to change to get consumers back and get them back more often. I look forward to sharing more about my framework of plan going forward and how to drive our next phase of growth for Teams China Review shortly.

But first, I would like to turn it over to our CFO, Albert Li, for a more detailed overview of our second quarter 2026 financial performance. Albert.

Thank you, Zhang, and welcome to your first TIMSS China earnings call. During the second quarter of 2026, our total revenues and system sales were R&B 207, 3.4 million and R&B 347.8 million, respectively, which dropped by 21.7% and 15.1% year over year. The decrease was primarily due to the closure of certain underperforming company-owned and operated stores and a 17.8% decrease in same-store sales growth.

Our overall monthly average transacting customer reached $2.85 million during the second quarter of 2026, compared to $3.59 million in the same quarter of 2025. Net new store openings totaled two during the second quarter of 2026, representing a net opening of 15 made-to-order stores and, in the meantime, a net closure of 13 non-MTO stores. On same-store sales growth, we experienced overall comparable transaction decline of 16.3% and an average comparable ticket size decline of 1.5%, which led to a negative 17.8% same-store sales growth for system-wide stores in Q2 2026. The decline was partly due to the delivery aggregators backing down their subsidies significantly, and also partly due to our underspend in marketing and advertising spending, and also certain discount control.

Digital orders as a percentage of total revenues rose from 90.4% in Q2 2025 to 91.8% in Q2 2026. We continued to enhance our digital capabilities to meet the growing demand for delivery and take-away services. In Q2 2026, Tim's China continued to execute its product innovation strategy by expanding its all-day menu and enhancing its product portfolio across tier consumption locations. The company launched a total of 27 new products during the quarter, including 20 beverage and 7 food items, further enriching customer choice. And strengthening its all day dying proposition. As of June 30, 2026, our registered Royalty Club members exceeded 37.1 million, reflecting a remarkable 41.7% year over year growth. The average number of members per store has now surpassed 36,000, serving as a solid foundation We are also committed to improving our financial performance by refining store unit economics and boosting operational efficiencies at both store and corporate levels, setting the foundation for long-term sustainable growth.

Specifically, as we continued to benefit from higher efficiencies in supply chain and cost reduction on raw materials, logistics, and warehousing expenses, we managed to reduce Q2 2026 food and packaging costs as a percentage of revenue from company-owned and operated stores by 1.8 percentage points, from 30.1 percent in the second quarter. Rental and property management fees, or RMB, 47.9 million in Q2 2026, representing a decrease of 15.6% from RMB 56.8 million in the same quarter of 2025, which was primarily due to a decrease in the number of our company-owned and The first question is is that the company owned and operated stores increased by 1 percentage points from 20 in the second quarter of 2025 to 21 in the same quarter of 2026 In the meantime, rental and property management fees for comparable stores decreased by 5.2% year-over-year in Q2-2026, which demonstrated our continued efforts to negotiate permanent rent concessions with our landlord.

Payroll and employee benefits expenses were R&B 43.9 million in Q2 2026, representing a decrease of 12.6% from R&B 50.2 million in the same quarter of 2025, which was primarily due to a decrease in revenues from company-owned and operated stores. Payroll and employee benefit expenses as a percentage of revenue from company-owned and operated stores increased by 2.1 percentage points, from 17.8% in the second quarter of 2025 to 19.9% in the same quarter of 2026. Delivery costs were R&B 28.9 million in Q2 2026, representing a decrease of 13.3% from R&B 33.3 million in the same quarter of 2025, which was in line with the 11.9% decrease in delivery orders from 8.2 million in the second quarter of 2025 to 7.2 million in the same quarter of 2025.

Delivery cost as a percentage of revenue from company owned and operated stores increased by 1.3 percentage points to 13.1% in the second quarter of 2026, compared to 11.8% in the same quarter of 2025, which was primarily due to an increase in delivery cost. The total revenue as a percentage of total revenues from company owned and operated stores from 61.0% in the second quarter of 2025 to 65.7% in the same quarter of 2026. Other operating expenses were R&B 17.4 million in Q2 2026, representing a decrease of 14.7% from R&B 20.4 million in the same quarter of 2025, which was primarily due to a decrease in revenue from company-owned and operated stores. Other operating expenses as a percentage of revenue from company-owned and operated stores increased by 0.7 percentage points to 7.9% in the second quarter of 2026, compared to 7.2% in the second quarter of 2025.

As a result of the foregoing, company-owned and operated store contribution margin were 5.7% in the second quarter of 2026, compared to 9.6% in the same quarter of 2025. Benefiting from our cost optimization measures and improved brand influence, our marketing expenses were RMB 13.3 million in Q2 2026, representing a decrease of 4.4% from RMB 13.9 million in the same quarter of 2025. Marketing expenses as a percentage of total revenues increased by 0.9% points from 4.0% in the second quarter of 2025 to 4.9% in the same quarter of 2026 as we spent more marketing efforts to support our franchise business during the second quarter of 2026. Our adjusted general and administrative expenses which excludes one, share-based compensation expenses of RMB 0.3 million, and two, impairment losses of rental deposits of RMB 2.3 million or RMB 39.6 million in Q2 2026, representing an increase of 14.4% from RMB 34.6 million in Q2 2026.

This was primarily due to a RMB 4.2 million increase in professional and other service fees. Adjusted general and administrative expenses as a percentage of total revenues increased by 4.6 percentage points from 9.9% in the second quarter of 2025 to 14.5% in the same quarter of 2026. As a result of the foregoing, adjusted corporate EBITDA margin was negative 7.6% in the second quarter of 2026, compared to positive 0.6% in the same quarter of 2026.

Turning to liquidity, as of June 30, 2026, the total amount of our cash-on-cash equivalents and restricted cash were R&B 121.1 million compared to R&B 129.7 million as of December 31, 2025. The change was primarily attributable to cash disbursements on business operations, partially off-site by the drawdown of additional bank borrowings. We successfully closed the initial tranche of US$15.8 million in additional senior secured convertible notes issued to Tim Houghton's Restaurant International, GMBH, our brand owner and founding shareholders. With the process from this US$55 million series of proposed financing, we plan to drive our innovation and product offerings, invest more in marketing activities, and deploy a more balanced store network development strategy by opening both company-owned and operated stores and franchised stores going forward.

Looking ahead, our core near-term priorities would be to deliver sustainable revenue growth, to further enhance supply chain capabilities, and expand store-level profitability of both company-owned and operated stores and franchised stores, to continuously optimize cost structure of our corporate marketing and G&A expenses and to achieve corporate EBITDA break-even.

With that, I will now turn the call over to John.

Thank you, Albert. Second quarter is a period of transition for the company. Results are disappointing. Top line revenue and same store sales were both in significant decline as we are losing share to competition. All the revenue was affected by our strategic adjustment of closing underperforming stores, as well as we have been recycling last year heightened phase of delivery business. Prior to my joining to Tim Horton as CEO, I have had 30 years of building and stewarding world-class consumer brands. And here in Team Horton, it becomes very clear to me, we need to significantly step up our effort to win back our customers and to gain new customers through providing superior products, offering and experience. Might it be diner or delivery.

Also support with our great team Horton's hospitality and services. Our unwavering aspiration with product and service quality will drive everything we do and every decision we make going forward. I have a few points I want to share with you online. First and foremost, we have been and will continue to focus our resource to accelerate our product innovation based on thorough consumer customer understanding and insight. Ranging from improving the appearance flavor of our core products to creating exciting innovations and also in ways we offer meal bundle and promotion activities So far we have looked into more than 10,000 of our loyalty club members information to get insight from the feedback. And we have hired external professional advisors to support the process.

Also, we are starting effort to work with our core coffee bean suppliers and also our in-house coffee masters to pursue the best fit of coffee to the Chinese consumer needs and tastes.

Second, we'll strengthen our capacities in product innovation and marketing to ensure we're able to bring superior products and experience to consumers in much faster time and more cost-efficient manner. We will enhance investment in our organization. We will work with strategic partners, our suppliers, to enhance our capabilities, especially in certain categories like dairy and bakery. We will broaden our CRM and marketing efforts beyond current loyalty club program to reach new customers, and as importantly, to enhance interaction and frequency.

Third, we'll further enhance our operation excellence to escalate our service level and enhance overall guest experience. Additional efforts are being made on staff recruitment, training, and labor scheduling to enable us to deliver the level of service we aim at.

Fourth, on store network development, we are working on two fronts at the same time. On one hand, we are closing underperforming stores, which have started before my arrival to this company. Yet, at the same time, we are expanding stores with our new and enhanced product offering and services. We will focus more in top tier cities in our expansion so that we can concentrate our resource and effort, especially among the office work area trade zone or some special channel like train stations, major transportation hubs, airports, universities. This is a reliable channel that we have good data to predict the traffic and the project have a high accuracy in our project sales revenue. And lastly, on productivity front, I and the team are keen to use more technology, especially AI, to increase our efficiency, Ranging from inventory management to labor shift planning to marketing material production and all the way to more personalized message and promotion activities planned for our members.

With that, I turn back to Patty to continue with our call.

Thank you, Joe. We will turn it over to Q&A session. And the open tab for our registered questions. Let's begin with our first question. Operator, please go ahead.

Well, thank you, Mr. Silver, for your questions. Indeed, our imperative is to get back to our business fundamentals, to regain customers, and to gain new users. Well, in short, our top priority is to raise our gain in innovation, to offer more competitive products and experience to our customers. We are working on strengthening our call products, products that we offer during breakfast and lunch day part.

Products that, like bagel, we make it popular in this market, China, and we'll continue to bring innovation so that we can differentiate better from competitors. At the same time, we will offer some new products that have been the strain for our operation in other markets like melt. We will even try some new bakery in other day pots. Also, we are working on strengthening our coffee offerings, especially those milk-based coffee offerings, latte. I look forward to sharing more details when we have the new product ready sometime later in the year. And we are seeing opportunities in filling some gaps that we see there's still space to grow like afternoon day part. So that's our top priority, raising our game in innovation.

Our second priority is to improve our store economics, as Albert earlier mentioned. We will continue to work on efficiency on the off-front, the rental, labour, even our food product costs. We have done a lot over the last years, but there is still room that we can work on. At the same time, importantly, we will continue to close the underperforming store. As I mentioned, this initiative has started even before my arrival. I will continue to drive that. The important thing is to expand store, new store, in clearly defined network strategy, primarily top tier cities, primarily office, transportation, hub, trade zone, and our defined network strategy and discipline. And to make the two earlier priorities possible, one thing I've been attending a lot of my efforts and resources is to build capabilities to make them both happen.

So build abilities, capabilities, strength and capability in innovation, in marketing, strengthen and continue investing in our capabilities in operation and the business development, i. e. new store development. So in short, those are three top priority for me, for our leadership team, and for our organizations. I would be I will be very glad to share with you progress as I'm moving along in this road. In the meantime, the target I can't share with you, but I can share with you all cylinders are firing now, and we are reserving no resource to drive progress on the off-front I just shared. And I hope this party will bring some signs of results or improvement very soon.

But for the time being, I can't share with you a particular timeline. I hope you can bear with us.

That's great. Thank you. And one more, if I may. So with the recent commitment from RBI to invest $55 million into TIMSS China, And you mentioned the receipt of the first tranche from the financing. Is there any update on the number of net new stores that you plan on opening in the second half of 2026 and 2027, and whether there are any changes to the new store mix between company-owned stores and franchise stores? Yes the funds come in in a very timely manner and a very much needed period We prioritize actually with strengthening the model of our business So as I mentioned our top priority number one is raise our game in innovation So we will prioritize more of the resources in bringing in more productive innovations and strengthening our marketing performance by both investing more in marketing as well as behind a strengthened team and resources.

So those will be our top priority. We will expand our store footprint with discipline, hopefully with our new offering proven. So going forward, I won't share a particular number, but we will diligently expand according to the strategy I just shared, i. e. prioritize cities in the top tier cities and also in In particular, trade some. But answering your questions on the company-owned store and franchise network, we are aiming at a more balanced approach. So we will see both company-owned store and franchisee support store will contribute roughly equal in our new store network. So that's what I can share for the time being. Great. Thank you so much for the information. Best of luck. Thank you.

Thank you.

Okay, I will take this one. Okay, so yes, as you have mentioned, so our marketing investment are expected to increase, as John has highlighted in the second half, especially I think starting from September because we have the annual actually brew coffee and also In the meantime, we have identified marketing efficiency as one of the most important levers for us to consider in terms of rebuilding our customer traffic and also support our sustainable revenue growth. I think in the first half, our marketing expenses were relatively under-spaned. I think because we are building up our marketing team and also actually recruiting more talents in both marketing and also in the product category team.

Okay, so I think starting from the third quarter, so we are adding additional talents in marketing and also in product innovation, and we plan to invest more, actually significantly invest more in terms of the scale and in the meantime, the effectiveness of our marketing activities. So our focus will not only drive in die in business or take away business or delivery transactions in just one parameter. So actually we want to expand all the day parts from all channels and we are also expanding our CRM and marketing beyond our existing Lt members to reach new customers. So, okay, so I think in the meantime, so we want to attract more customers through giving more effective, actually, in terms of the coupons from those e-commerce channel.

And in the meantime, we also want to make sure that in terms of their frequency and also in terms of their average spending per customer will also increase over time.

Okay, so to conclude, we will definitely increase our marketing spending, and the key metrics for us is not only a specific, you know, how many marketing dollar or marketing percentage to spend, but I think more importantly in terms of the return and effectiveness of our marketing efforts. So, we expect our overall business will recover, and with the store network expansion, we will continue to balance our investment in customer acquisition, traffic growth, and also our profitability.

Maybe I will take on these questions. Well, indeed, we noticed there are many different forms of new entrants to the coffee market, as we said, some examples from the tea chain. However, on our side, it's very clear to us that we have to offer the best value to our customers. And value is delivered through the combination of product, experience, and also pricing. So our strategy is to ensure we can always provide superior product, coffee in this case, as you asked to our customers. Whether we are talking about the more basic product like black coffee, Americano, or the more innovative limited time product offering. That relates to the effort and resource we are putting in innovation as I mentioned earlier.

So to continue to be able to offer consumers superior product and experience. Experience as much as for services and the ambience a consumer can experience in our restaurant as well as in delivery. And then the third is price. We have a lot of effort in working on our costs and also on our combination of product offering to ensure some consumers who want the most basic product that can enjoy a very good cup of coffee from us at a very affordable price. So we are also planning programs to deliver part of our product mix at a price-comparative fashion. So we have answers to different needs of our customer-consumer at different day parts. So I and the organization and our team are aiming at bringing the best value to our customers.

Okay, so thank you for joining today's conference call. We look forward to providing timely update on any progress we have made on our new business plan and also our corporate strategies. So I look forward to speaking in the next quarter. Thank you.