TH International (NASDAQ:THCH) held its first-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.

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Summary

TH International Limited reported a 14.6% year-over-year decline in total revenues for Q1 2026, largely due to closing underperforming stores and decreased same-store sales growth.

The company is shifting its strategy from expansion to improving store quality, with plans to resume net new store openings in Q2 2026.

Management highlighted strong performance from 2024 and 2025 vintage stores with improved unit economics and store contribution margins.

The franchise business is expanding, with over 10,500 applications received and nearly 260 stores opened by March 2026.

Cost optimization efforts led to a reduction in food and packaging costs, but the adjusted corporate EBITDA margin remained negative at -11.8%.

New product launches and partnerships are aimed at increasing brand penetration and member engagement, with a focus on younger consumers.

Future priorities include enhancing supply chain capabilities, expanding profitable sub-franchising, and achieving positive EBITDA.

Full Transcript

OPERATOR

Ladies and gentlemen, welcome to teams China's first quarter 2026 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 Patty Yu, Teams China's Public and Media Relations Manager for prepared remarks and introductions. Please go ahead.

Patty Yu (Public and Media Relations Manager)

Patty hello everyone and thank you for joining us. On today's call, TH International announces its first quarter 2006 financial results earlier today, a press release as well as a campaign presentation which contains operational and financial highlights are now available on the company IR website at ir.teamchina.com today you will hear from Yong Chen Lu, our CEO Director and Albert Lee, our CFO. After the complex prepared remarks, the management team will conduct a question and answer session.

You will 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 invest materials contain forward looking statements which are subject to future events and uncertainty. 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 findings 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 substitute 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 Yongsheng Lu, our CEO Director. Please go ahead.

Yongsheng Lu (CEO, Director)

Yongsheng thank you Patty Good morning and good evening everyone. Thank you for joining us today. As the coffee industry entered a seasonal slowdown during the first quarter, the company proactively optimized its operating rhythm and modular delay, reduced discount driven promotions, reallocating resources toward franchise system development and long term viability. While certain short term revenue indicators face pressure, core user quality continue to improve in line with the company's strategic transition from prioritizing skill growth to prioritizing quality overall.

During the first quarter, we continued our strategic adjustments to prove underperforming stores and we expect to complete this process and resume net new store openings starting from the second quarter of 2026. On same store sales growth, we experienced overall comparable transactions decline of 8.3% and an average comparable fixed size decline of 4.8% which led to a negative 13.2 same store sales growth for the system wide stores in Q1. The decline was partly due to delivery aggregators backing down subsidies significantly partly due to underspending our marketing spending and discount control.

Despite the temporary headwinds on top line growth and fierce industrial competitions, we continue to witness strong performance of our 2024 and 2025 vintage stores, most of which were compact and make to order stores. With further optimized store capital expenditures and enhanced store Unit Economics. Our 2024 vintage year company owned and operated stores generated store contribution margin of nearly 15% in 2025 full year and lower teens in Q1 2026 and are expected to achieve a payback period within two to three years.

Our 2025 vintage year stores which are still ramping up now I expect to achieve similar unique amongst two. In the meantime, our company owned and operated stores in tier one cities including Beijing, Shanghai, Guangzhou and Shenzhen and in Those cities with 10 plus stores generated over 10% and 7% store contribution margin in 285 respectively or outperforming other tiers. Cities with lower store density will continue adding density in existing cities to achieve higher economic skills.

Leveraging sub franchise partnerships, new store will open across multiple positive and emerging markets including Shanghai, Guangzhou, Shenzhen, Hangzhou, Beijing, Shenzhou, Lantou, etc. In Q1 2026, the company continued to expand across diversified locations such as transportation hubs, office buildings, commercial complexes and university campus etc, further enhancing brand penetration and consumer reach. Since we launched our individual franchise business in December 2023, we have received over 10,500 applications, signed up for over 440 stores and successfully opened nearly 260 stores by the end of March 2026.

Showcasing continued market confidence in our franchise model, we have witnessed reasonable returns for our franchise stores. For instance, our franchise stores at special channels including railway stations, hospitals and highway rest areas generate store contribution margin of high teens in 2025 and are expected to achieve a payback period of approximately two years. We will accelerate opening franchise stores on those special channels during the quarter.

The Company officially launched its 2026 nationwide franchise loyal show program, systematically communicating its brand strengths, operational standards and unique economic models to prospective franchise partners. At the same time, the Company introduced upgraded franchise support policies including multi store incentives, high revenue rebates and opening support packages, further enhancing franchise objectiveness, attracting high quality partners and laying a solid foundation for long term scalable expansion.

In the meantime, our sub franchise business contribute steady cash flows and profitability. Other revenue increased by 7.7% year over year and profits from other revenues achieved a year over year growth of 14% in Q1 2026. The first quarter marked the traditional seasonal slowdown for the coffee industry. It may intensify market competition. Against this backdrop, the company remains focused on improving operational quality and efficiency, making progress across product innovation, brand marketing and loyal member engagement.

During the fourth quarter of 2026, the company launched a total of 21 new products across categories including 15 new baby products and 6 new food items centered around seasonal occasions, health care, health conscious offerings and localized flavors with strong market response. On the beverages side, the Cherry Series return with strong consumer recognition, effectively driving traffic and repurchases. The company also introduced Limit time Apple Series beverage and zero sugar, zero fat, low dose to further adjust seasonal and health or angular demand.

On the flip side, the launch of the Non Chicken Bagel sandwich and the Non Bagel further strengthen localized product innovation. Among the new launches, the spring Apple Series deliver particular strong performance, achieving the highest pre among all product series in brand marketing and loyalty method engagement. The company focused on Chinese New Year social occasions and the younger consumer segments to diversify crossover collaborations. Partnerships with the popular drama ip, the Vendetta of An Tai Suiji, Air Canada and Nike Cloud Music enhance brand awareness, member engagement and penetration among younger consumers.

In Q1 2026, transacting members under the age of 30 account for nearly 50% of the total membership base. In addition, LUA Customer acquisition partnership will dd. The company successfully added approximately 4 million new members during the quarter, representing nearly 34 year over year growth. As of March 31, 2026, our largest Lauder Club members exceeded 35.9 million, reflecting a remarkable 42.9% year over year growth. The average number of members per store has now surpassed 35,000 serving a solid foundation for growth and that is testament to our customers support for an employees of Tim Horner's loyalty program. this time I would like to turn it over to our CFO Albert Lee to discuss our first quarter 2026 financial performance in more detail.

Albert Lee (Chief Financial Officer)

Thank you. Yongsheng during the first quarter of 2026 our total revenues and system sales dropped by 14.6% and 14.2% year over year respectively, which was primarily due to the closure of certain underperforming company owned and operated stores and a decrease in same store sales growth. Our overall monthly average Transacting customers reached 2.6. 9 million during the first quarter of 2026 compared to 2.92 million in the same quarter of 2025. Digital orders as a percentage of total orders rose from 86.3% in the first quarter of 2025 to 87.5% in the first quarter of 2026.

We continued to enhance our digital capabilities to meet the growing demand for delivery and take away services. Total number of delivery orders increased by 10.2% year over year during the fourth quarter of 2026. We are 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 through refinements in our supply chain capabilities and economies of scale.

We managed to reduce Q1 2026 food and packaging cost as a percentage of revenues from company owned and operated stores by 2.0 percentage points from 30.4% in the first quarter of 2025 to 28.4% in the same quarter of 2026. Rental and property management fees will RMB US$47.2 million 6.8 million for the three months ended March 31, 2026, representing a decrease of 16.2% from RMB 56.3 million in the same quarter of 2025, which was in line with the revenue trend as the number of our company owned and operated stores decreased from 569 as of March 34, 2025 to 541 as of March 31, 2026.

Rental and property management fees as a percentage of revenues from company owned and operated stores increased by 0.7 percentage points from 22.1% in the fourth quarter of 2025 to 22.8% in the same quarter of 2026. Payroll and employee benefit expenses or RMB US$44.8 million 6.5 million for the three months ended March 31, 2026, representing a decrease of 10.4% from RMB 50.0 million in the same quarter of 2025, which was in line with the revenue trend.

Payroll and employee benefits expenses as a percentage of revenues from company owned and operated stores increased by 2.0 percentage points from 19.6% in the first quarter of 2025 to 21.6% in the same quarter of 2026. Delivery costs or RMB 27.3 million US dollar 4.0 million for the three months ended March 31, 2026, representing an increase of 1.0% from RMB 27.0 million in the same quarter of 2025, which was in line with the 8.9% increase in delivery orders from 4.5 million in the first quarter of 2025 to 4.39 million in the same quarter of 2026, partially offset by a reduction in average delivery costs per order.

Delivery costs as a percentage of revenues from company owned and operated stores increased by 2.6 percentage points to 13.2% in the fourth quarter of 2026, compared to 10.6% in the same quarter of 2025, which was primarily due to delivery revenue. As a percentage of total revenues from company owned and operated stores increased from 53.1% in Q1 2025 to 65.1% in Q1 2026. Other operating expenses were RMB 18.2 million US dollar 2.6 million for the three months ended March 31, 2026, representing an increase of 0.9% from RMB 18.0 million in the same quarter of 2025.

Other operating expenses as a percentage of revenues from company owned and operated stores increased by 1.7 percentage points to 8.8% in the fourth quarter of 2026 compared to 7.1% in the same quarter of 2025. Benefiting from our cost optimization measures and improved brand influence, our Marketing expenses were RMB 9.8 million 1.4 million in Q1 2026, representing a decrease of 43.7% from RMB 17.4 million in the same quarter of 2025. Marketing expenses as a percentage of total revenues decreased by 2.0 percentage points from 5.8% in the first quarter of 2025 to 3.8% in the same quarter of 2026.

Our adjusted general and administrative expenses were RMB 43.4 million 6.3 million in Q1 2026, representing a decrease of 7.9% from RMB 47.2 million in the same quarter of 2025, which was primarily due to a decrease in credit loss of accounts receivables and cost savings from professional and other service fees. Adjusted general and administrative expenses as a percentage of total revenues increased by by 1.2 percentage points from 15.7% in the fourth quarter of 2025 to 16.9% in the same quarter of 2026.

As a result of the foregoing, adjusted corporate EBITDA margin was negative 11.8% in the fourth quarter of 2026 compared to negative 9.8% in the same quarter of 2025 Turning to liquidity as of March 31, 2026, our total cash and cash equivalent time deposits and restricted cash for RMB1 1.4 million US$16.2 million compared to RMB 129.7 million as of December 31, 2025. The change was primarily attributable to cash disbursements on business operations partially offside by the drawdown of additional bank facilities. We are pleased to enter into a definitive agreement with THRI, our grant owner for the insurance of up to US$55.0 million additional senior secured Convertible notes, which underscores the strong commitment of our brand owner and founding shareholder.

The proposed financing transaction provides per vital capital to fund further expansion of our store network nationwide and to fortify our balance sheet. Looking ahead, our near term priorities would be to deliver sustainable revenue growth to further enhance supply chain capabilities and expand store level profitability, to continuously optimize cost structure, to accelerate the expansion of our successful subfranchising and to achieve proper EBITDA breakeven. With that, I will now turn it over to Yong Chen for concluding remarks followed by Q and A.

Yong Cheng

Thank you Albert. Before we turn to Q and A, I would like to take this opportunity to express my utmost gratitude to our customers, employees, business partners and shareholders for your continuous support, dedication and belief during the past seven years. With a heartfelt passion in the Tim Holland's brand and a strong confidence in the China market, we began our journey from the very first store at the People's Square in Shanghai seven years ago.

Together we have now exceptional and overwhelming community as one of China's top coffee brands with over 35 million Loyalty Club members, a unique coffee plus fresh prepared healthy food business model offering the best value for quality products as an international coffee brand, differentiated and comprehensive store formats with over 1,000 stores in 93 states, most of which are made to other stores, we expect payback period between two to three years and a unique advantage of offering franchise opportunities as international Coffee brand.

Today, China stood as the largest international market in Tim Hortons global system by a number of stores and teams. China has moved beyond its startup and exploration phase and entering a new stage of high quarter growth. Effective from June 15, 2026, I am honored to take on a new role as Chairman. While I remain as engaged and committed to the company's long term success as ever, I'm excited to work with Mr. Zhong Chen, our new CEO who brings more than 25 years of extensive experience leading major consumer companies in China and across Asia and with proven record in brand building, consumer insight, business growth and operational management to drive the next phase of growth for Teams China and to generate long term value for our shareholders. I will now turn the call over to Patty for today's Q and A session.

Patty Yu (Public and Media Relations Manager)

Thank you, Yong Cheng. We will turn it over to Q and A and open it up for our registered questions. Let's begin with the first question. Operator, please go ahead.

OPERATOR

Thank you. To ask a question via the telephone, please press 11 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 11 again. To ask your question via the webcast, please type it into the Q and A box and click Submit. We will now take our first phone question and the question comes from the line of Steve Silver of Agus Research Corporation. Please ask your question, Steve. Your line is open.

Steve Silver (Analyst)

Thanks operator and thanks for taking my questions. So Steam store sales growth has been under pressure during Q1 both on comparable transactions as well as average comparable ticket sizes. So considering the aggressive delivery aggregator subsidies since Q2 of last year, can you just discuss your current thinking on the same store sales growth that you see for the rest of 2026?

Yongsheng Lu (CEO, Director)

Yeah, no, very good question Steve. Thank you. Actually we have seen SIM store sales recovering very well recently, especially for the past few weeks after we launched several great marketing campaigns. So I believe we'll have better same store sales in the second quarter and we expect much better for the rest of the year.

Steve Silver (Analyst)

Great. So You've also cited 2024 and 2025 store trends for strong performance and maybe mid teens store contribution margins. More recently you've talked about the special channel stores generating high teens store contribution margins. So can you just talk about your expectations on store margin profiles moving forward?

Albert Lee (Chief Financial Officer)

Okay Steve, I think I will take this question. Okay. So on the overall I think profitability level for our company owned stores, you know, we would expect that the margin profile can be improved gradually and can be improved further from existing level. I think firstly as mentioned, so in terms of the recovery on same store sales and also you know, we have seen a very positive trend on the same store sales in the second quarter. So you know, with the improvement on the same store sales, definitely we are expecting higher revenues at the store level.

So and I think accordingly in terms of the store labor cost, rental and you know, other operating costs as a percentage of revenue will naturally go down. Right. So that the first point I think secondly, we are in the process of I think wrapping up in terms of pulling our underperforming stores. So which we expect it can be mostly completed within the year. So definitely we are expecting a higher percentage of higher margin stores, I think including those 2025, 2020 and the later vintage year stores and also those special channel stores. So the higher margin stores will take a higher percentage of revenues on that.

And I think certainly I want to highlight some gross margin. So as you can see, during the fourth quarter of 2026, even our top line is under pressure. We still improve our gross margin by 2.0 percentage points. So I think based on those initiatives on supply chain optimization for economy of scale, launching higher margin products, and also in terms of optimizing the recipe for existing core products, I think that will all help us to continue improve our gross margin.

Yongsheng Lu (CEO, Director)

Yeah, I just want to add a point here. I mean our major problem for the early vintage stores are with the rent because we open a lot of larger format stores for brand building. So you can see the rent percentage of sales are very high for early vintage stores. But if you look at the recent advantage of stores like 2000 94, Tornado 5 and even the stores we open this year in 2026, I mean the rents are very reasonable and they have high, they have team store level contribution margins.

And I believe with the new CEO John Chen, with his strong background in sales and marketing under his leadership, and I believe that the sales will improve further that will also contribute even higher store contribution margin in the future. Thank you.

Steve Silver (Analyst)

Great, that's helpful. And one more if I may, could you talk a little bit about the current competitive landscape? You guys have talked about quite a bit about the competition on the coffee side. But more recently it looks like some of the key players in China have entered into the coffee business with some lower priced offerings. I'm just curious as to whether you think that will have any impact on your business strategy.

Yongsheng Lu (CEO, Director)

Yeah, I mean, yeah, I mean the tea plate has been more aggressive in entering into the coffee sector than before and price very low. And that's exactly. I want to highlight our differentiation point. We are not only coffee player, we offer coffee plus freshly prepared food that's very different from our peer coffee brand player and also the tea milk tea player. I mean that's where I know we are very strong and very different. So that's why we are so much believing our differentiated model for the future.

Steve Silver (Analyst)

Great, thank you so much for that and best of luck continuing to stabilize and return to top line growth.

Yongsheng Lu (CEO, Director)

Thank you. Thank you Steve.

OPERATOR

Thank you for your question. As a reminder to ask a question via the telephone, please press star 11 on your telephone keypad. To ask your question via the Webcast, please step into the Q and A box and click Submit. Once again, that's star 11. For questions from the telephone line and to type your questions in the Q and A box via the Webcast and click Submit.

Patty Yu (Public and Media Relations Manager)

Operator, I don't see any question coming up.

OPERATOR

Yes, thank you so much for your time, and let's discuss more next quarter. Thank you. Thank you. That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.