THCH

Ladies and gentlemen, welcome to Tims 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, Tims China's Public and Media Relations Manager, for prepared remarks and introductions. Please go ahead, Patty.

Hello, everyone. Thank you for joining us on today's call. TH International Limited announces its first quarter 2026 financial results on that today. A press release as well as a company 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 Director, and Albert Li, our CFO. After the company's 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 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. 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 a substitute for the comparable GAAP measures. The accompanying reconciliation information relating 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 Director. Please go ahead, Yongchen.

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 moderately reduced discount-driven promotions, reallocating resources towards franchise system development and long-term profitability. While certain short-term revenue indicators faced pressure, core user quality continued to improve, in line with the company's strategic transition from prioritizing scale growth to prioritizing quality growth. During the first quarter, we continued our strategic adjustment to prune 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 ticket size decline of 4.8%, which led to a -13.2% same-store sales growth for the system-wide stores in Q1.

A decline was partly due to delivery aggregators backing down subsidies significantly, partly due to under-spending our marketing spending and discount control. Despite a temporary headwind on top-line growth and fierce industry competitions, we continued to witness strong performance of our 2024 and 2025 vintage stores, most of which were compact and made-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. Are expected to achieve a payback period within two to three years. Our 2025 vintage year stores, which are still ramping up now, are expected to achieve similar unit economics too.

In the meantime, our company-owned and operated stores in Tier 1 cities including Beijing, Shanghai, Guangzhou, and Shenzhen, and in those cities with 10+ stores, generated over 10% and 7% store contribution margin in 2025 respectively, outperforming other tier cities with lower store density. We'll continue adding density in existing cities to achieve higher economies of scale. Leveraging several franchise partnerships, new stores will open across multiple core cities and emerging markets, including Shanghai, Guangzhou, Shenzhen, Hangzhou, Beijing, Zhengzhou, Nantong, et cetera, in Q1 2026. The company continued to expand across diversified locations such as transportation hubs, office buildings, commercial complexes, and university campuses, et cetera, 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'll accelerate opening franchise stores on those special channels. During the quarter, the company officially launched its 2026 nationwide franchise roadshow program, systematically communicating its brand strength, operational standards, and unique economic model 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 attractiveness, attracting high-quality partners, and laying a solid foundation for long-term scalable expansion. In the meantime, our super franchise business contributes steady cash flows and profitability. Other revenues 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, amid intensified market competition. Against this backdrop, the company remained focused on improving operational quality and efficiency, making progress across product innovation, brand marketing, and loyal member engagement.

During the first quarter of 2026, the company launched a total of 21 new products across categories, including 15 new beverage products and six new food items centered around seasonal occasions, health-conscious offerings, and localized flavors, with a strong market response. On the beverage side, the Cherry Zero returned with strong consumer recognition, effectively driving traffic and repurchases. The company also introduced limited-time Apple Zero beverage and the zero-sugar, zero-fat, Luo Zero to further address seasonal and health-oriented demand. On the food side, the launch of the Non-Chicken Bagel Sandwich and the Non-Bagel further strengthened localized product innovation. Among the new launches this spring, Apple Zero delivered particularly strong performance, achieving the highest repurchase rate among all product series. In brand marketing and loyalty member engagement, the company focused on Chinese New Year social occasions and the younger consumer segment through diversified crossover collaborations.

Partnerships with the popular drama IP, " Vendetta of An," [Foreign language], Air Canada, and NetEase Cloud Music enhanced brand awareness, member engagement, and penetration among younger consumers. In Q1 2026, transacting members under the age of 30 accounted for nearly 50% of the total membership base. In addition, through a customer acquisition partnership with DiDi, the company successfully added approximately 4 million new members during the quarter, representing nearly three full year-over-year growth. As of March 31st, 2026, our registered loyalty 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 a testament to our customers' support for and embrace of Tim Hortons loyalty program.

At this time, I would like to turn it over to our CFO, Albert Li, to discuss our first quarter 2026 financial performance in more detail.

Thank you, Yongchen. 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 2.69 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 takeaway 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 costs as a percentage of revenues from company-owned and operated stores by 2.0 percentage points from 30.4% in the fourth quarter of 2025 to 28.4% in the same quarter of 2026. Rental and property management fees were RMB 47.2 million, $6.8 million for the three months ended March 31st, 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 31st of 2025 to 541 as of March 31st of 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 benefits expenses were RMB 44.8 million, $6.5 million for the three months ended March 31st of 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 were RMB 27.3 million, $4.0 million for the three months ended March 31st of 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 4.9 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, $2.6 million for the three months ended March 31st of 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 RMB43.4 million, $6.3 million in Q1 2026, representing a decrease of 7.9% from RMB47.2 million in the same quarter of 2025, which was primarily due to a decrease in credit loss of accounts receivable and cost savings from professional and other service fees. Adjusted general and administrative expenses as a percentage of total revenues increased 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 -11.8% in the fourth quarter of 2026, compared to -9.8% in the same quarter of 2025. Turning to liquidity, as of March 31st of 2026, our total cash and cash equivalents and deposits and restricted cash were RMB 111.4 million, $16.2 million, compared to RMB 129.7 million as of December 31st of 2025.

The change was primarily attributable to cash disbursements on business operations, partially offset by the drawdown of additional bank facilities. We are pleased to enter into a definitive agreement with THRI, our brand owner, for the issuance of up to $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 critical 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 sub-franchising and to achieve corporate EBITDA breakeven. With that, I will now turn it over to Yongchen for concluding remarks, followed by Q&A.

Thank you, Albert. Before we turn to Q&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 Hortons 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 established an 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 cities, most of which are made-to-order stores with expected payback period between two to three years, and a unique advantage of offering franchise opportunities as an international coffee brand. Today, China stood as the largest international market in Tim Hortons global system by number of stores, and Tims China has moved beyond its startup and exploration phase and entering a new stage of high-quality growth. Effective from June 15th, 2026, I am honored to take on a new role as Chairman, while I'll remain as engaged and committed to the company's long-term success as ever.

I'm excited to work with John Cheung, 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 Tims China and to generate long-term value for our shareholders. I will now turn the call over to Patty for today's Q&A session. Patty?

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

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

Thanks, operator, and thanks for taking my questions. Same-store sales growth has been under pressure during Q1, both on comparable transactions as well as average comparable ticket sizes. 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?

Yeah. Very good question, Steve. Thank you. Actually, we have seen same-store sales recovering very well. Recently, especially for the past few weeks, after we launched several great marketing campaigns. I believe we have better same-store sales in the second quarter, and we expect much better for the rest of the year.

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

Okay. Steve, I think I will take this question. On the overall, I think profitability level for our company-owned stores, we would expect that the margin profile can be improved gradually and can be improved further from existing level. I think firstly, as Yongchen has mentioned, in terms of the recovery on same-store sales and also we have seen a very positive trend on the same-store sales in the second quarter. With the improvement on the same-store sales, definitely we are expecting higher revenues at the store level. I think accordingly, in terms of the store labor cost, rental, and other operating costs, that percentage of revenue will naturally go down, right? That's the first point.

I think secondly, we are in the process of I think wrapping up in terms of pulling our underperforming stores, which we expect it can be mostly completed within the year. Definitely, we are expecting a higher percentage of higher-margin stores. I think including those 2025, 2024, and the later vintage year stores and also those special channel stores. The higher-margin stores will take a higher percentage of revenues of that. I think thirdly, I want to highlight is on gross margin. As you can see, during the first quarter of 2026, even our top line is under pressure, we still improve our gross margin by 2.0 percentage points.

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.

Yeah, I just want to add a point here. Our major problem for the early vintage stores are with the rent, because we open a lot of larger format stores for brand building. You can see the rent percentage of sales are very high for early vintage stores. If you look at the recent vintage of stores like 2024, 2025, and even the stores we opened this year in 2026. The rents are very reasonable, and now they have teens store level contribution margins. I believe now with the new CEO, John Cheung, with his strong background in sales and marketing, under his leadership, I believe now the sales will improve further. That will also contribute now even higher store contribution margin in the future. Thank you.

Great. That's helpful. 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. More recently, it looks like some of the tea 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.

Yeah. The tea players has been more aggressive now in entering to the coffee sector than before, and price very low. That's exactly now I want to highlight our differentiation point. We are not only a coffee player. We offer coffee + [freshly] prepared food. That's very different from our peer coffee brand player and also the milk tea player. That's where I know we are very strong and very different. That's why now we have so much belief in our differentiation model for the future.

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

Thank you, Steve.

Thank you, Steve.

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

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

Yes. With that, now, 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.

Ladies and gentlemen, welcome to Tims China fourth quarter and full year 2025 earnings conference call. All participants will be in listen-only mode during management's prepared remarks, and there will be 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, Tims China's Public and Media Relations Manager, for prepared remarks and introductions. Please go ahead, Patty.

Hello, everyone, thank you for joining us on today's call. TH International Limited announced its fourth quarter and full year 2025 financial results earlier today. A 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, Director, and Dong Li, our CFO. After the company's 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 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 as 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 Director. Please go ahead, Yongchen.

Thank you, Patty. Good morning and good evening, everyone. Thank you for joining us today. As we just celebrate the 62nd anniversary of the globally renowned Tim Hortons brand and the seventh anniversary of Tims China, we're excited to continue serving our innovative and local relevant offerings to our fast-growing loyal guests. As of December 31st, 2025, China stood as the largest international market in Tim Hortons' global system by number of stores. We continue our growth trajectory, generating total system sales of RMB 1.57 billion in 2025, a 7.6% increase compared with 2024, fueled by mainly 25 net new store openings and expanding our store network to 1,047 across 92 cities in China. Food sales as a percentage of the total revenues account for 33.4% in Q4 2025, increased from 24% in Q1 2023.

Orders with food items account for 51% of total orders in Q4 2025, increased from 45.2% in Q1 2023. 2025 marked a critical transition year for the company. We further solidified our differentiated strategic positioning in Coffee Plus fresh prepared foods, completing made-to-order renovations of over 74% system-wide stores, while strategically pruning certain underperforming stores, especially those non-MTO express stores. On same-store sales growth, we managed to achieve overall comparable transactions growth of 2.7% in 2025. We had to apply higher discounts on delivery business to mitigate intensified competition due to aggregator platform dynamics, which led to a 2.4% decline in the same-store sales growth for system-wide stores in 2025. Despite the headwinds of fierce competitions, especially from low-price local brands, our team demonstrated strong resilience and maintained our margins well at both store and corporate levels.

2025 full-year company-owned and operated store contribution margin was 7%, compared with 7.4% in 2024, which was primarily attributable to the temporarily increased delivery-related cost due to aggregator platform dynamics. 2025 full-year adjusted corporate EBITDA margin actually improved by one percentage point. 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, and are expected to achieve a payback period within three years. Our 2025 vintage year stores are still new, but are ramping up right now. We believe they will have similar unit economics too.

In the meantime, our company-owned and operated stores in Tier 1 cities including Beijing, Shanghai, Guangzhou, and Shenzhen, and in those cities with 10+ stores, generated over 10% and 7% store contribution margin in 2025 respectively, outperforming other tier cities with lower store density. We will continue adding more company-owned and operated stores in existing stores to achieve a high economy of scale. In 2025, we strategically expanded our store footprint while maintaining capital efficiency, delivering absolute convenience for our customers. Leveraging the franchisee partnerships, we accelerated market penetration, entering 92 cities by year-end, including the debut of our first stores in Mianyang, Sichuan Province, Datong, Shanxi Province, and Xinxiang, Henan Province during the fourth quarter of 2025. This growth strategy not only further strengthened our brand presence but also ensured sustainable scalability through optimized resource allocation.

Since we launched our individual franchising business in December 2023, we have received over 10,000 applications and successfully opened over 300 stores by the year-end of 2025, showcasing continued market confidence in our franchise model. We have witnessed reasonable returns for our franchising stores. For instance, our franchising stores at special channels including railway stations, hospitals, and highway rest areas, generated 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 these special channels. In the meantime, our sub-franchisee business contributes steady cash flows and profitability. Profits from other revenues achieved a year-over-year growth of 55.7% in 2025. Product innovation has always been an important strategic focus for us. In 2025, Tims China accelerated product innovation across both beverages and food, launching a total of 178 new products.

96 new beverages and 82 new food items, which contributed over 25% of our top-line sales. Standout offerings have resonated strongly with customers. Seasonal beverage highlights during the first quarter include the pomegranate, Rose Cheese, and Oat Latte series, offering a diverse and differentiated flavor portfolio. We also focused on adding non-coffee beverage offers complementary to existing product portfolio during the afternoon tea daypart. Total number of non-coffee beverage cups accounted for approximately 18.3% of total beverage cups sold in 2025 compared to 14% in 2024. On the food side, we continued to strengthen breakfast dayparts and launched several campaigns to promote lunch daypart in 2025. For instance, we introduced a breakfast combo with expansion of our croissants lineup with new offerings such as cheese, chicken, and roasted coconut cheese croissants, which suits the morning routines offering greater value.

Building on our classic bagel breakfast sets, the croissant combo includes protein-rich options like meat, catering to higher energy needs in colder months. Meanwhile, the croissant itself is light yet satisfying, perfect for those wanting a hearty but not overly filling breakfast. In addition, Tims China continued to broaden its bagel sandwich range, introducing new products including the black truffle mushroom bagel and the spicy pickled cabbage beef bagel, further enriching its savory menu. We continue to strengthen our leadership in the bagel platform, selling a total of over 80 million bagels and bagel sandwich products cumulatively as of the end of 2025. The fourth quarter, being the holiday season, saw us rolling out a series of marketing campaigns designed for these special occasions. From Halloween to Thanksgiving and Christmas, we enjoyed the festive spirit with creative promotions and themed activities to grab consumer attention.

During the first quarter, Tims China continued to enhance brand relevance and consumer engagement through a series of marketing and product innovation initiatives. The company strengthened its cultural positioning through high-profile collaborations, including a limited-edition partnership with the hit TV series of "The Vendetta of An," "[Non-English content]," as well as a co-branded campaign with People's Daily, "[Non-English content]," to celebrate China's National Day and honor everyday heroes across the country. These initiatives leverage culturally relevant storytelling to deepen consumer connections and drive social engagement. In parallel, Tims China advances sustainability initiatives by expanding its Bring Your Own Cup program and increasing the incentive to RMB 8 per cup. As of now, the program had attracted over 200,000 participants, reducing carbon emissions by approximately 8 tons, equivalent to planting around 368 trees.

The company also introduced eco-friendly straws in collaboration with Tencent's CarbonXmade program, using carbon capture technology to convert industrial carbon dioxide into sustainable materials. SGS certification confirms that every 100 straws store 3.185 grams of carbon dioxide, reinforcing Tims China commitment to sustainable product innovation. As of December 31st, 2025, our registered loyalty club members exceeded 31 million, reflecting a remarkable 29% year-over-year growth. The average number of members per store has now surpassed 29,600, serving as a strong catalyst for our growth and clearly demonstrating our consumers' ongoing support for Tims China's loyalty programs. At this time, I would like to turn over to our CFO, Dong Li, to discuss our fourth quarter and full year 2025 financial performance in more detail.

Thank you, Yongchen. We continue to strive for excellence in delivering high value for quality housing products and sought-for services to our ever-growing customers. In the fourth quarter, we achieved positive net new store openings and continued our strong momentum in system sales, achieving a 4.0% year-over-year growth. Our overall monthly average transacting customers reached RMB 3.43 million during the fourth quarter of 2025, a 14.3% increase from RMB 3.01 million in the same quarter of 2024. Additionally, digital orders as a percentage of total orders rose from 86.1% in Q4 2024 to 89.3% in Q4 2025. We continue to enhance our digital capabilities to meet the growing demand for delivery and takeaway services. Total number of delivery orders increased by 33.7% year-over-year during the fourth quarter of 2025.

Amidst microeconomic volatility and intensive market competition, our team demonstrated strong resilience and achieved profitability improvement through enhanced operational efficiencies, supply chain optimizations, and rigorous cost controls. In Q4 2025, our adjusted corporate EBITDA margin improved by 3.3 percentage points year-over-year. During the fourth quarter of 2025, our total revenues dropped by 7.3% year-over-year, which was mainly due to the closure of certain underperforming stores. Benefiting from the expansion of our franchised store network, with the number of our franchised stores increased from 446 as of December 31st, 2024 to 485 as of December 31st, 2025, our system sales increased by 4.0% year-over-year to RMB 359.4 million during the fourth quarter of 2025. We are committed to improving our financial performance by refining store unit economics and boosting operational efficiencies at both store and our corporate levels, setting the stage for our long-term sustainable growth.

Specifically, through refinements in our supply chain capabilities and economy of scale, we reduced the 2025 full year food and packaging costs as a percentage of revenues from company-owned and operated stores by 1.4 percentage points year-over-year. We continued to streamline our operations by pruning underperforming stores, optimizing unit economics, refining staffing arrangements, and optimizing store managerial efficiency. These actions led to a reduction in 2025 full year store labor costs and other operating expenses as a percentage of revenues from company-owned and operated stores by 0.8 percentage points and 0.1 percentage points year-over-year, respectively. We expanded our branding initiatives and promotional offers to drive traffic. Our marketing expenses as a percentage of total revenues increased by 1.2 percentage points year-over-year.

Our adjusted general and administrative expenses as a percentage of total revenues decreased by 7.4 percentage points year-over-year, which was mainly attributable to a RMB 9.7 million, $1.4 million decrease in credit loss of accounts receivables. Turning to liquidity, as of December 31st of 2025, our total cash and cash equivalents, time deposits, and restricted cash were RMB 129.7 million, $18.5 million, compared to RMB 184.2 million as of December 31st, 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 facilities. In the meantime, with the issuance of the $89.9 million 2025 Senior Secured Convertible Notes and the amendment to our existing 2024 unsecured convertible notes in December 2025, we have successfully repurchased the entire outstanding amount due under our variable rate convertible senior notes due 2026.

Looking ahead to 2026, 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 and healthy food preparation model to drive traffic, optimize overall store unit economics, and accelerate the expansion of our successful sub-franchising. I will now turn it over to Yongchen for concluding remarks, followed by Q&A.

Thank you, Dong. Before we turn to Q&A, I would like to take this opportunity to once again express my heartfelt gratitude to our customers, employees, business partners, and investors for your continuous support and dedication and trust. Together, we have created an overwhelming community of over 31 million loyalty club members, a unique Coffee Plus freshly 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 92 cities, most of which are made-to-order stores with expected payback period between 2 years-3 years, and a unique advantage of offering franchising opportunities as an international coffee brand. With these milestones behind us, we are steadfast in our commitment to sustainable growth and to generating long-term value for our shareholders. I will now turn the call over to Patty for today's Q&A session. Patty?

Thank you, Yongchen. We will turn it over to Q&A session and open it up for our registered questions. Let's begin with our first question. Amber, please go ahead.

Thank you. To ask a question via the telephone, please press star one and one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one and one again. To ask your question via the webcast, please use the Q&A box available on the webcast link. Once again, that's star one and one for questions. We will now take our first question from the phone line of Steve Silver of Argus Research Corporation. Please ask your question, Steve. Your line is now open.

Thanks, Operator, and thanks for taking my questions. Over the past few quarters now, you've highlighted franchise stores in special channels such as the railway stations, hospitals, and highway rest areas, and you've cited their strong contribution margins, and the two-year payback periods. While you've mentioned in your prepared remarks that you see openings under this model accelerating, can you quantify at all how much of a part of the future store mix you expect these channels to comprise, and really what impact you expect this to have on future operating results?

Yeah, sure. Thank you, Steve, for your question. The beauty of the stores on special channels, especially on railway stations and highway rest areas, it's purely dine-in business. They don't rely on delivery. Also, we don't need to give discounts on those stores in those special channels. Those stores have very high gross margin and no delivery costs. Despite the rent might be higher, but still, those stores are generating high-teens store contribution margin. The payback is very attractive, around two years, even lower than two years. I mean, in China, there are a lot such areas. There are tens of thousands of stations.

Airports, rest areas in the highways, and hospitals, we have generated the momentum in those channels. As we mentioned, essentially, we are the only international coffee brand that open to individual franchise. We are attracting lots of interest from those franchisee partners. This year we'll accelerate our openings on those channels.

Great. Company-owned and operated store contribution margins have now been negatively impacted by the higher delivery costs over the past few quarters. Is the company doing anything specifically to mitigate these risks in 2026, to improve same-store sales growth as well as the store contribution margins?

Okay. Steve, thank you for the question. I think I will take this one. Right. As you have mentioned, due to those aggregator platform dynamics in 2025, which led to very aggressive subsidies that we have been seeing, that, I think on one hand, drives higher delivery orders and also higher percentage of our delivery revenue mix. In the meantime, we have also suffered from actually increased delivery costs because of this. I think overall it's within our expectations because we want to manage our top-line growth, our same-store sales, our margins, and also our pricing well. Actually, we are taking every step to maintain or even expand our store contribution margins. As you can see, even though I think the whole year 2025 store contribution margin for company-owned stores was slightly decreased from 7.4%-7%.

I think, overall, we have, in the meantime, actually increased our gross margin. The food and packaging cost as a percentage of revenue actually has decreased by 1.4 percentage points. In the meantime, we are still in the process of pruning some of the underperforming stores and achieving better economy of scale labor costs. As you can see, the full year 2025 labor cost has also improved, as well as store other operating expenses. We will do everything we can to actually mitigate potential delivery costs. I think in the meantime, we are also negotiating with those delivery aggregator platforms actually to strike a better delivery cost. In terms of the delivery cost per order, we want to improve the cost structures to streamline the delivery cost per order as well.

I think lastly, we are also actually increasing some of the pricing on the deliverable products. That is to mitigate the potential headwinds from higher delivery costs. Overall, I think our goal is to at least maintain, and even achieve certain margin improvement on our store contribution margin, despite in terms of the aggressive subsidies from those delivery aggregator platforms might still continue in 2026. We expect that trend might be mitigated or might be slowed down this year. Thank you, Steve.

Yeah, that's helpful. Thank you. One more, if I may. In 2025, net store growth, it was positive, but it was a little more modest than maybe what previous thoughts might have been around store expansion. Yet, at the same time, the franchise applications sounds like it continued to be very strong, and the loyalty membership continues to expand significantly, almost 30% in 2025. Just, I'd love to hear your thoughts in terms of the underlying demand, in terms of what we might think about for system sales growth in 2026.

Yeah, we are in the process of pruning the underperforming stores for the past two years, and we'll do so this year as well. As you know, we opened a lot of high-rent stores during 2019-2022 and even 2023. High-rent, larger store format for the brand-new building, and also the rent back then was very high, much higher than the current situation. We are in the process of continuing pruning those underperforming stores. That's why you see the revenue for company-owned and operated stores has dropped last year and this year for the last two years. In this year, we will continue to prune some underperforming stores. As we mentioned, the newer vintage of our stores have higher store contribution margins for the stores we opened in 2024 and in 2025, have store margin around 15%.

Now this newer vintage of store format has been proven. We'll continue to open such format for both company-owned and the franchisee stores. We are targeting to achieve net store openings this year of at least 100, and by even more when we see the capital secure. That's the process. We'll continue to expand the network and that's the plan for now.

Great. Thanks for taking the questions, and best of luck throughout the year.

Thank you, Steve.

Thank you. Our next question comes from the phone line of Fu Li He from TF Securities. Please ask your question. Fu Li, your line is open.

Hello. Thanks for taking my question. I have three questions. The first one is about gross margins. Your gross margin improved by 1.4 percentage points in full year 2025. This is quite impressive. Can you explain more on the factors behind this, and how would you expect your gross margin in 2026?

Thank you, Fu Li. I think I will take this question related to gross margin. As you have mentioned, our food and packaging cost as a percentage of revenue from company-owned and operated stores actually decreased from 31.5% in 2024 to 30.1% in 2025, representing an improvement of 1.4 percentage points. In the meantime, I also want to highlight that if you take a look on the fourth quarter 2025, the cost percentage was 29.4%. Actually, it represents a two-percentage points margin improvement from the first quarter of 2024. I think the overall improvement was mostly because of the following factors. The first one is better economy of scale, as our overall GMV has increased and our overall store network has expanded. Two, we have tried actually many ways in terms of on the supply chain optimization projects.

Especially on existing food and packaging materials, we have almost renegotiated the unit cost and in terms of the overall pricing with each of the supply chain vendors. I think thirdly, we have optimized our discounts program. Actually, so that basically we have improved the average pricing a little bit. Especially we have increased the pricing on delivery products, which definitely would help on the margins. Fourthly, we have also seen higher margin on our new product launch. As we have mentioned, we have actually launched nearly 180 new LTO products in 2025. Most of these new LTO products had higher margins. I think lastly, we have also optimized the recipe of existing core products and some other material costs there, and also in terms of the transportation and the freight costs. This has also contributed to our overall margin expansion in 2025.

Going forward, I think we will continue to implement the above measures and plans, and we're targeted to further reduce our food and packaging costs as a percentage of revenues by at least one-two percentage points in 2026. That would be our target for this year. Thank you, Fu Li, for your question.

Very clear. The second one is about margin profile. You mentioned company-owned and operated stores in Tier 1 cities and in those cities with 10+ stores generated over 10% and 7% store contribution margin in 2025, respectively, outperforming other tier cities with lower store density. Can you explain more details about the differences on margin profile of these stores? Thank you.

Okay. I'll take this one. Thank you for your question. It's a great question. The density really matters.

I mean, the more stores we have in the city, the more brand awareness we have in the city, and the more efficiency on the marketing campaign, and the lower cost on delivery and supply chain, and more efficiency on the management. I mean, the density really matters. I mean, the data clearly shows that we have the highest margin on Tier 1 cities. As we mentioned earlier, for the 2024 and 2025 vintage stores, our store margin is above 15%, and most of the stores are open in the Tier 1 and high-tier cities. We'll continue to add more company-owned and even franchisee stores in existing cities to add density. The density really helps on everything. Thank you.

Okay. The last one is about store count targets. What's the store opening and closure target for 2026, and expected mix between company-owned and operated stores and franchise stores? That's all.

Yeah, we would just answer the similar question from Steve. We target to achieve net store openings of at least 100, including both company-owned and franchise stores. We are very happy to see our new openings just have very high margins, so we'll continue to open. Although we'll continue to improve some underperforming stores, but we should be able to achieve net store openings, again, at least 100 this year.

Thank you, Fu Li. Thank you. I'll now hand back to Patty to read any questions coming through via the webcast.

It seems that we have no questions online. Is that right, Emily?

That's correct. At this time, there are no further questions. With that, we conclude today's question-and-answer session. I'd like to hand the call back to Yongchen for his closing comments.

Yeah. Thank you all for your time. I know it's been a challenging year, but we have been able to improve our margins, and achieve net store openings, and we expect to even improve our margins further this year and achieve accelerated openings this year. Stay tuned. We'll see you soon. Thank you.

Thank you. That does conclude today's conference call. Thank you for your participation. You may now disconnect your line.