Jollibee Foods Corporation (JFC) has reported a robust financial performance in its second quarter, with significant growth across key financial metrics. The company saw a 27.3% increase in net income and a record high system-wide sales of 95.8 billion. Despite challenges in China, Jollibee Foods showcased strong top-line revenue growth, with a notable 30.3% growth in earnings per share (EPS) to $4.8 for the first half of the year.
The company's expansion plans include reaching a store count of 4,000 in the next six to nine months, with a strategic focus on North America and the U.S. market in particular. Jollibee Foods has decided against raising capital through Series C preferred shares and will instead repay obligations using cash and short-term debt facilities.
Key Takeaways
- Jollibee Foods experienced a 27.3% increase in net income during the second quarter.
- The company reported system-wide sales reaching a record high of 95.8 billion.
- Same-store sales growth stood at 7.4%, with additional growth from new international stores.
- Jollibee Foods plans to expand its store count to 4,000 within six to nine months.
- The company will focus on its Jollibee brand in North America and invest in digital channels.
- Financial strategies include optimizing capital structure and using cash and short-term debt to meet obligations.
Company Outlook
- Jollibee Foods aims to become a world-class franchisor of choice and is shifting towards a franchise-based growth model.
- The company has withdrawn plans to raise capital through Series C preferred shares to optimize shareholder value.
- Jollibee Foods expects solid growth in the third quarter despite a slight dip in sales growth in July and mid-August compared to June.
Bearish Highlights
- Jollibee Foods acknowledged the tough market conditions in China and has reduced capital investment in the region.
- The company faces the challenge of turning around the performance of Smashburger.
- Risks associated with franchising are recognized, but the company believes in its brand strength to mitigate those risks.
Bullish Highlights
- Jollibee Foods saw double-digit growth in revenues and a 26.8% increase in operating profit.
- The company's strong performance was highlighted in the Philippines, North America, and Europe, Middle East, and Asia regions.
- Jollibee brand's success in the U.S. is attributed to strong digital channels, consistent menu offerings, and positive customer feedback.
Misses
- There were no specific financial misses reported during the earnings call.
Q&A Highlights
- Jollibee Foods discussed its operational strategies, including focusing on the Yonghe King brand in China and optimizing its portfolio.
- The company plans to continue operations in China, focusing on value segment and risk mitigation.
- Franchise vetting and store opening processes in the U.S. take about 18 months.
Jollibee Foods Corporation's second-quarter earnings call revealed a company in the midst of significant growth and strategic realignment, particularly in its international operations. Despite setbacks in China, the company's performance in other regions, especially the U.S., is a testament to its adaptive strategies and strong brand presence. With a clear focus on digital sales, menu innovation, and a franchise-based growth model, Jollibee Foods is positioning itself for continued success in the competitive global food industry.
Full transcript - None (JBFCF) Q2 2024:
Hazel Tanedo: All right. Good afternoon, everyone and thank you for joining Jollibee Foods Second Quarter Results Call. So, I'm Hazel Tanedo from AB Capital, and I'll be the moderator for today to give us updates on Jollibee and their recent results as well as the Company's strategies moving forward. We have here Mr. Richard Shin. Of course, everybody knows him. Jollibee Foods CFO; and of course, Ms. Cossette Palomar, Investor Relations; and I think some other members of the team, right, Cossette, are with us today. So, before we start the presentation proper, I think Cossette, you have to read a few disclosures or disclaimers, and then, we'll pass the floor on to Mr. Shin. Cossette, the floor is yours.
Cossette Palomar: Thank you, Hazel. Good afternoon, everyone and welcome to the Jollibee Group's second quarter 2024 earnings call. Well, before we get started, I would like to remind you that our remarks today will include forward-looking statements that are based on certain assumptions of management and are subject to risks and opportunities or unforeseen events. Actual results could differ materially from those contemplated in the relevant forward-looking statement and the Jollibee Group gives no assurance that such forward-looking statements will prove to be correct or that such intentions will not change. All subsequent written and oral forward-looking statements attributable to the Jollibee Group or persons acting on behalf of the Jollibee Group are expressly qualified in their entirety by the above cautionary statements. And now, I'd like to turn over to Mr. Shin. Thank you.
Richard Shin: Thank you very much, Cossette, and a good afternoon and a good morning for those who are dialing in from different time zones. So, let's crack on and as usual, provide a quick update and open up to live Q&A thereafter. Quite a bit of numbers, but I thought this is a good format to really show both Q2 as well as on the right-hand side, we have the H1 or six months results. So, from revenues all the way down, you can see versus last year, we had top line double-digit growth of 10.6% on revenues. Equally exciting and perhaps more importantly, our gross profit dollars were up nearly 20% as a result of that, with operating profit delivering a 26.8% increase. And our EBITDA also is hanging strong at 18.4%, resulting in final net income of 27.3% for the quarter and 25.5% growth for the first six months. NIAT, of course, the final number here at 3 billion is an increase of 30.8% or for six months, 28.9%. Some other key KPIs that I want to share here, system-wide sales continue to grow. It's a record high of 95.8 billion or an -- sorry, or a 12.1% increase. Our same store sales growth, a rolling base was a very robust 7.4% in the context of the industry and the environment, both in the Philippines and also outside markets like the U.S. We're very proud of this number. Although, it's lower than the growth rate of Q2 of 2023, we also recognize that environments different as well. It's on a larger size business that we've grown another 7.4%. Gross margin in terms of margin rate or percentage, it's now running at 19.5% margin rate, which is 150 basis point above same quarter of last year. And for the sixth month, we're running our business just under 19% and 18.9%, which is 90 basis point higher than same period of last year. Operating margin here, we're running the business now 7.5%, which is all-time high, with the Philippines -- and I'll just move your eyes down here. With the Philippines OPM at 10.1, and I'll explain this 10-basis point loss in a second. And, of course, international coming off of a lower base, but, a strong for us, a strong 3.4%. This point one here, we do recognize that even though it's a strong dominant business that we have in the Philippines. We continue to invest in our people mainly, and also, we took the opportunity really to get together with our franchisees and spend some time through conventions and other forms to really excite the brands again. So, some of those costs came in in the first half of the year or specifically in the Q2 of the year. This, of course, means versus the consensus that was out there. The general consensus on Bloomberg was diluted EPS of 2.26. We are now delivering 2.618, so beating that. And an adjusted net income consensus of 2.6 billion, and we are delivering 3.2 billion, again the growth rates shown here. Slightly different view. I haven't shown this slide in the past, but I thought to put things in context again, we looked at our comparables both in the top five as we always talk about one day the ambition of top five. And we also looked at some of the players like Yum China, and we can see various degrees of rolling base or same store sales growth. So here on top is us, JFC. Yum Brands, they were down 1%. Yum China was down 4%. McDonald's (NYSE:MCD) Global was down 1%, and so forth. So, we just want to show this again, to recognize that there's certain pockets of challenges, in particular, China, which I'll come on to a little bit later on. And you can see luck in here. As fast as they are growing the system wide sales growth of 35%, we also see that the same store sales took a little bit of a step back. Now, this is a quarter view, and the quarter view here really shows the contribution to rolling base and the 12.1% growth in rolling base coming from the Philippines -- excuse me. 12.1% system wide sales growth coming from the Philippines is mainly contributed by rolling base or same store sales growth of 9.1% and the balance coming from new stores. International, it's same rate of growth, systemwide sales of 12%. But as we've always indicated, our growth is coming both from new investments and new stores as well as same store sales. So, you can see the split there, giving us the total average that I just mentioned. Keep note notable. So, in the Philippines, it's really our flagship brand, Jollibee, but also our other two champion brands as we categorize them. Mang Inasal, which also had a very strong quarter. And Chowking, which is the largest Chinese QSR in the Philippines, also had a very strong growth. In international operations, we had double digit system-wide sales growth, not only for Jollibee, but also for CBTL. And of course, China had some challenges, as mentioned earlier. Graphically, depicting what that all means, what that means is Q2 of 2024 is in fact our best quarter, regardless of seasonality that we've had so far. So, it gets the retrofit for all-time high. And you can see the past eight or nine quarters in which we were growing quarter-on-quarter, but also on -- sorry, not, quarter-on-quarter, but quarter, same period last year quarters. So just wanted to show that. If we then take a slightly deeper view of where all that's coming from in terms of our regions and our business units, you can see the split out here. What's very interesting again is international growth rate of 12%. We had really good growth actually coming from North America, led by Jollibee Brand. So that's the NAAB here. Smashburger was slightly off on the rolling base. It did have a strong Q2 in 2023, but nonetheless, there's a bit more work to be done there, but we're extremely proud of the team we've built and the clarity we now have to really move forward with that. And I think the third and fourth quarter should continue to build off of what we've been building there. Middle East -- sorry, Europe, Middle East and the different parts of Asia, we pull out Vietnam because outside of the Philippines, Vietnam is our largest Jollibee market. You can see a solid 20% same store sales growth, giving us nearly 39% system-wide sales growth. And Jollibee, rest of Europe, Middle East and Asia, 16% growth there. So, we're continuing to invest behind our ground outside of the Philippines. Chowking and EMEA also gets a nod here for delivering a solid 9% rolling base growth. Coffee Bean and Tea Leaf system-wide sales 25.6%. Where is that coming from? It's 11.4% from the same store. And this is right across. We have strong performance. Later, I'll go into the details of this, but we have strong performance in the U.S., in Southeast Asia, as well as Middle East. Superfood, we're happy with this number because for many quarters, the macro headwinds in Vietnam are such that all the work growing faster than everyone else in that market. There was a decline of rolling base, but now we're down to very low single digit decline of rolling base and also system-wide sales 16, denoting that we continue to build very fast returning stores in Vietnam. Milksha continues to be solid, and overall, I've shared these total numbers. Now, if we switch gears and just look at the first six months or year-to-date, June, you can see that system-wide sales double digit revenues double digit growth, same store sales, respectable 6.3, of which most of us coming from volume or transaction count, TC, 5.2%. And our average check is slightly up as well. At this point, I'd like to say that we've taken very minimal pricing. By that, I mean less than 1% in the Philippines and about 3.5% in our bigger markets like North America. So really the average check is coming from mix of different markets, but also mixed within the market of, what we believe, is giving us the volume, which is the value play, but at the same time, we'll continue to grow our traffic. So, net-net, we are growing the top line through mainly volume but also through some mix. Gross profits again were up 16.2% at 24.3 billion for six months, giving us a net operating income of 9.2 billion. Significant increase both in the margin rate as well as the dollars. And, of course, NIAT at 5.7 billion. And then, if we continue down and, really, the new information here is just the, EPS. So, six months ended EPS, 4.8 and that represents a 30.3% growth versus last year. Year to date, we see similar patterns. Philippines here, mainly by same store sales growth. International, we've got mix of store expansion as well as same store sales growth, giving us a total of 6.3% same store sales growth and an additional 4.5% from new stores. Again, very similar to what the key drivers are. So, our focus on specific brands is going to pay off. Very similar for first half of the year, 11%. For Philippines, 11.5% for international to give us the average. So, let's switch gears now to, EBITDA, by region and business unit. I've used different formats in the past, but I think this one is probably a bit more comprehensive. So, Philippines, where we've delivered 6.4 billion for the quarter or 12.5 billion for the six months, and you can see the growth rate versus the same period of prior year. China, we continue to grow at the EBITDA level despite some challenges at rolling base and system wide sales, as I've shown you. We're delivering a near 40% growth in EBITDA for the quarter. And for the first six months, we're delivering a 0.5 billion EBITDA cash profits in China. North America, Asian brand led by Jollibee. Again, it's the star there. You can see the numbers and the growth rates. And also, Smashburger, we're slightly behind where we want to be with Smash, but we do understand that we are investing in the management team. We believe we now have a complete team. Underneath Denise Nelsen, our CDO, we now onboarded our, Chief Development Officer, who will look after franchising as well as our network, as well as our Chief Marketing Officer who joined us a few months ago. So, we're gearing up now for really the growth stage to happen. Middle East -- sorry, Europe, Middle East, and rest of Asia growth continues to be strong, led by Jollibee brand. It's essentially Jollibee and a little bit of Chowking, but more Jollibee. And under the coffee and tea segment, we have three brands here. Our Compose Coffee, obviously, are not in the numbers yet until we officiate that end of this week. So, CBTL growth rates Highlands Coffee as well, and Milksha coming I think it's a little scratch or a typo here, but it's coming off of a smaller base, but nonetheless continue to provide us with nice margins. So, international now for the second quarter is contributing one-third or 34% of the EBITDA, up slightly from 29%, same period last year, but on a larger scale pie. So, we are moving in the right direction and we're very confident that the momentum will continue on as we continue to get the brand stronger in particular Jollibee outside of the Philippines. I want to just address Smashburger head on to show you that we do have a very clear target and our emphasis right now is really on the average daily sales. So, we'll start with that, and we believe this is what's going to get us to store NOI positive. As so. we are inching towards the 4,000 marks. We believe we have a stronger and more relevant menu now -- we've menu redesigned quite a bit and we have not opened any new stores. In fact, we converted some company-owned stores to franchise stores and we closed a few of the non-performance location stores. But nonetheless on a smaller store network basis, we continue to be around 3,600. And of course, our goal is to get it up to 4,000 within the next six to nine months. Then if you look at revenue gross profit EBITDA of the quarter and of the first half of the year, you can see what we're delivering. So, it's a 2.2 billion for the quarter and 4.4 for the first half of the year, giving us Php294 million in gross profit and Php179 in EBITDA. We're still trailing slight NOI negative. As I mentioned in the past, and our target really is to get it to four and then beyond four to reach to profitability by the end of 2025 early 2026. CBTL, earlier I showed you this slide with system-wide sales and rolling base and new store. Now, let's take a breakdown of where that's coming from. So, U.S., because we're not really in Canada, but U.S. is really driving that growth. So, same store sales growth of 13% for the quarter, slightly lower in the first quarter. So, that's why for the first half of the year, year-to-date, June, we're now running our business at 8.8, same store sales growth. And of course, the other geography that's doing really well for us is Middle East. And that sits here in the rest of the world. And that's grown partly due to some of the political reasons why people are choosing our brand. But beyond that, we have been expanding. And I think we're also in terms of brand recognition getting better known. So, in terms of where our stores are globally, so you can see the layout of the Americas, Middle East, and of course, Southeast Asia here with Malaysia, Singapore, Philippines being significant markets for us and some up here in Korea. So, with a store count of 1,186, 33 of the last 39 store openings all through franchising primarily were in Kuwait as well as in the Philippines, but Middle East again, we have a nice pipeline of new stores coming through. And I just wanted to share this. It's more, I guess, a recognition of the brand. So, this was a recognition really for one of our franchise partners who runs our store in the airport in Kuwait. And again, the brand was recognized by customers to be in the top 10 brands. So, things are happening. So, we're very happy with the work behind that got us to a place where the brand is getting recognized. Short P&L here, revenue, gross profit, and EBITDA again significant growth right across as you can see for both the quarter and the first half. There's still some work to be done. We are NOI positive in Q2, but we want to continue this trend. So, there's still more work to be done, but, nonetheless, I know that there are many that are interested in this investment and just wanted to show you deeper cut of it. I also wanted to show you vis-à-vis now that we're talking about international operations. Recently, we did get voted as the number one chicken in the U.S. by USA Today. And so that has sparked quite a bit of interest actually, and this will indeed help us in our efforts to franchise because as the brand gets recognition such as this plus a strong box economics, running stores at significantly higher than competition ADS, we think we're positioned well for franchise expansion. Switching now to effectiveness measure. So, let's just summarize the margin rates. So, gross profit margin, this light gray here is Q2, 2023. The black here is Q1 of this year and this red bar is Q2 of this year. So, you can see the evolution of continuous growth, both quarter versus same quarter prior year but also quarter on quarter. And for OPM, you can see here at the high of 7.5%. And that all translates to our NIAT margin now running at 4.5%. Free cash flow, for Q2, which is the middle column here. Our EBITDA margin now is around 14.6%, and our net cash generated from operations is 21.8%. Our CapEx spend, you can see here in the first half, is about 5 billion. Later, I'll talk a little bit about the new guidance on CapEx. But yes, these are all necessary CapEx for renovations and new stores. But nonetheless, we're being very selective. And where possible, we are opting for the franchise model. Free cash flow from operations at $10.7 billion, much stronger than the Q1. And I do want to call this up because in the Q1, we did have some timing of payments and payables, et cetera, inventory levels that we were adjusting down, et cetera. And so, we had, I would say, a mediocre free cash flow margin, but Q2 is back to where we should be running our business. If you take the impact of IFRS-16 or lease payments, then the true free cash flow margin is 10.9, which, again, in contrast to our P&L margin rates, we're running at a superior cash margin business. Almost there. I just want to talk a little bit about way forward in terms of our five-year direction. And, so let me use our message house that we use this pretty much, from top management all the way down to the organization. This came through last year when we did our five-year planning, but this year we had a three-and-a-half-day session with the top leaders and we fine-tuned it and we added in green here an emphasis. It's not enough to just grow our earnings or triple NIAT, which we're ahead of pace, by the way, on this target, but it's not enough to do that. In order for our value to grow, we have to work on also our trading multiple, which is not at its historical height. So, we do believe that there is room for improvement there. And we believe that the quickest path to that improvement really is to show the investment community that we're serious about how we invest our capital and the returns we expect. So, we're setting a target of 20%, I know it's a significant number in today's day of high wax and the rest of it, but nonetheless, this 20% is the target that we set for 2028 and we'll have a glide path towards getting there. The other major change, I know a lot of you have this question on mind, what are you going to do about China? We do see some other conglomerates in the Philippines announcing their withdrawal from China. We are not, we're not withdrawing from China, but nonetheless, we're going to be very capital or investment sensitive. So, it's pretty much going to be focused on our lead brand, Yonghe King, and it's going to be focused on franchising in the Tier 2s and 3s series, which I've said consistently in the past. But the new here for China, we're realizing that consumers are looking for value. And so, we're going to optimize the portfolio by positioning Yonghe King as a key value player. So, we're going to go back to our roots of simpler menus and really driving that value proposition where affordability is a big topic in China. But nonetheless, we have several store models that we've been experimenting with. And in fact, I'm up in China next week to really do a full week's deep dive review with the team. So, as our CEO, so we take this very serious, and we're going to take a look at how to position Yonghe King for growth through franchising. Smashburger, we're not beating around the bush. We are very serious about turning around to the place of contribution to NOPLAT, so that we will start driving our ROIC as well. And then the foundation cutting right across all of our five must wins really is around becoming a world-class franchisor of choice. So, a lot of work's being done around this in terms of systems and process and training and sort of getting geared up when we have markets right now where we're 100% company owned store, like in the U.S. where we're going to start to really convert those ratios into franchise-based growth. Preferred share is rationalization. I just wanted to bring this topic on the table, because I think many of you would have seen our decision to really withdraw from the initial plan to raise through Series C preferred shares. But we see that there are opportunities really to have better solutions for our shareholders to optimize their value on capital structures. So, we put that out there. One of the reasons is we are seeing stronger performance in the first half. And we're also seeing equally strong performance forecast in the second half. So, there's a few things we're going to do in addition to that. We're going to bring cap expending down, and of course, by, doing all of the above, we think that we will not be in a place of our inability to repay on October 20th. This preferred share the first tranche of 3 billion that's coming due. So, from the first half earnings, 1.5 billion, so this will be cash or excess cash. And then for the second half, we'll have a short-term debt facility with a much lower interest rate. We're not, signing up for a fixed at this point until there's more clarity in the rates. So, we were able to, look at a lower rate option, and, of course, our plan is to, pay that obligation off before the end of December as well. So, it's really cash. So that's how we'll do it. What does it all mean into our ratios? Well, debt to EBITDA or covenant ceiling is three. We're going the right direction down to 1.4, total liabilities to equity, our ceiling is three. We've inched down slightly from 1.8 to 1.7. And debt service coverage, are minimal as 1.3. And we significantly, improved that position. New guidance. So, essentially, because of the challenges in China and a lot of the unknowns, we are going to hold our systemized sales and rolling base to where they are. And our Q1 sorry, Q2 and first half performance indicate that, that's probably the right range. In terms of store opening, we're also holding that, and we won't talk about the compost component until it's actualized. But just for comparables, we put that here. And our store network growth, we're bringing that slightly down for reasons I mentioned. We're going to go capital light lighter, and, also, we're going to be more cautious with new stores and be more aggressive with driving our same store sales growth. So, from seven to eight, we're going down to six to seven. And with, of course, those ratios will significantly change. Capital expenditures, we're bringing it down from 20 to 23 to 16 to 18. And as a result of all of that, we are increasing our operating income guidance from 10% to 15% range up to 18% to 20% range. We recognize that we're hovering above that, so we built in a little bit of conservatism here. But this does not mean that we plan to go backwards in the second half. It's just building in a little bit for the unknowns. But, nonetheless, I think that's a fair range at this stage. So, CapEx reduction, I think, now that you have the question, are you really cutting muscles or fat? Or what's going on here with your CapEx reduction? Because I've always said our, CapEx is around two-thirds for stores, whether it's new or renovation. And the answer is we'll continue to invest in Jollibee, both outside of Philippines but also in Philippines. So, we're not slowing down on that at all, full stop. In the Philippines, we are slowing down on non or by single market, I mean, brands that exist only in one market like the Philippines. And we are moving brands like Chowking, heavier to franchise. Mang Inasal already at 97%, but, there's a long tail brands that we are not going to be investing capital as a priority as we would for Jollibee. And for China, again, I don't want to call out, and I think everyone's saying the same thing. Earlier, I showed you the slide with, Yum China and Luckin and others. It is a reality. We need to be very cautious. But nonetheless, we do have a long-term stance in China. So, the way we're doing that again, to just repeat myself, is really improving performance on existing stores with new store models and new menus and being catered at the core of it with value proposition, meaning driving volume as a KPI. And of course, shifting to the franchise model, which we've already started doing, but really making sure that the rest of this year and go forward is really around franchising. North America, we have not opened any new Smashburger stores, for example. So, we'll continue to make sure box economics deserves full out franchising effort. But nonetheless, we are pipelining. And of course, our coffee businesses CBTL, Highland, we're exploring also where we're 100% or predominantly company owned like Malaysia, options around franchising as well, as the brand becomes more popular and stronger. So, that's how the CapEx will be readjusted now. Okay. Just mindful of time. So let me stop share and pass the floor to Q&A.
A - Hazel Tanedo: Thank you, Richard. I'm sure everyone's excited to ask you about the 20% ROIC and the more disciplined capital allocation. But before that a few reminders. May I remind everyone to use the raise hand function. Otherwise, like some of you have already done so, please e-mail me your questions. So, we'll start the ball rolling with Joseph. Joseph, you may unmute and ask your question.
Unidentified Analyst: Thanks, Hazel. So, hey, Richard. Hey, Cossette. Congratulations on the very strong results and great, great presentation, great disclosure. Very good to see. I'm just going to go ahead off and congratulate you guys and great presentation again. My question is on the franchising model, right? Like this is clearly a strategic direction that leads you to grow store base, grow revenues, asset life, very profitable. It actually sounds almost too good to be true. So, I actually wonder how you think about what are the downside risks to this strategy? And for example, in China, right, where it's clearly challenged, if you do more franchise stores there, or even in the U.S., if it happens that they don't perform well, like how do you think about that risk to potentially like taking back the store or reputation risk or quality risk or anything like that?
Richard Shin: Yes, it's a great question. The answer is there is risk, and there is risk because we predominantly in many markets, we are operators. But if we look at the top five players, franchising is a model that works. It doesn't mean you get a hit rate of 100% for every store. So, one way to mitigate that risk, Joseph, is we're going to find the right partners, we're going to take clusters. So, if they take a cluster of stores, net-net as a cluster, they make money, then I think we weathered through some of the perhaps the wrong real estate location selection, et cetera., point one. Point two, I think the brand has to be strong and the brand has to be ready to be franchised. So that's why I think we spent so many years just building our stones and really honing that. And we think it's prime and right now in the U.S. And we say that because our ADS is 13,000 inching up to even 14,000. With rollout in about 30 locations, we're seeing that it's getting like 300 to 400 ADS uplift without cannibalization really soft drinks. So, we do feel that the proposition of a good box economics is fair enough for the franchisees. So, that's another way to mitigate some of the risk by having strong ideas. And then I would say the last piece of it is, we have to be very good at servicing franchises. And that's the piece that, as I mentioned earlier, we have to really learn how to do that because we're great at operating our stores, so we have to just convert that. So, what are we doing about that? We're looking to the Philippines where Jollibee is two-thirds franchised. And so, we're working with leaders there to really have that playbook, that training that we're going to roll out to other markets. Specific to China, you're right. It's a very different market and model. So, we think the lighter stores. So, although Luckin's kind of hit the wall a little bit with that 20% negative RB, if you really look at their growth, it really came from a lighter model, very innovative menu, ability to really, work on digital, meaning you don't need big sit-down spaces. So, you can really work through other channels, to make that store more productive. And in China, it's our top market for digital sales. So, these are some of the things that gives us confidence, but China will be tough. I'm not going to sugarcoat this one. It's tough for everyone. So, therefore, we've taken the decision to really go absolutely almost zero capital investment, if you will. So, we think that's the way to get through China. But North America, we think, there'll be more demand and supply at some point.
Hazel Tanedo: Next question comes from John. John, you may ask your question.
Unidentified Analyst: A few quick questions from me. First is just talking about Jollibee in the U.S., mid-teen same store sales growth. That was tremendous. Can we break down PC and AC? And I would guess it's predominantly transaction count. So, any feedback from, I guess, as your team as to what's driving that? Is there a specific demographic you're targeting, or new products that's driving sales, et cetera?
Richard Shin: Yes. That's a great question. Okay. And the answer to that, John, is we'll send you the data deck so that keeps me honest. But what we understand in terms of our business reviews that we have with Beth and her team is, the channel mix is very interesting. So, we're picking up a lot through our digital channel. So, the same box is really actually producing differently. Secondly, I think, we're just very consistent with our menu. We haven't expanded too wide. But nonetheless, I think our core, core products on the menu were putting our advertising dollars and efforts behind chicken joy, behind the sandwich and so forth. And so, I think we're seeing that concentration, doing really well. And, ultimately, I think the price point and the taste value that consumers keep coming back to and saying, your chicken tastes really good. So, chicken as a category is fast growing. Our price point is spot on. We haven't taken price more than 3.5% this year as I mentioned. So, I think it's a combination of just being steady and allowing people to really, experience us. And in terms of demographics, we've crossed over. We're 83, if not higher now, non-Filipino purchasing. So, that's why we we're very excited about the boneless or the handheld category going forward as well because, that really is the bigger category for us to really push through. That's where Chick-fil-A and others and they dominate those markets. You have a second one?
Unidentified Analyst: Yes, second question. Obviously, CBTL tremendous performance. And I hear that it is already NOI positive in 2Q. So, is there an updated guidance whether the target of breaking even in 2025 is pushed forward to the second half of '24? Updates would be very great.
Richard Shin: Yes. So, we are profitable everywhere except U.S. because of our infrastructure that mentioned this in previous calls as well. So, that's a consistent message. And I can't say too much on that, but we're very close to having that all addressed. So, I'm not sure how the numbers line per se because there's always a restructuring cost and a few of those one-off costs that comes through. But I'll say on a normalized basis, there's no reason why it cannot be NOI positive given the franchise model and also given that there's one area of company-owned stores that we are addressing currently. So that's the best I can do. But the answer is, yes, I wouldn't write this brand off.
Unidentified Analyst: All right. Very clear. Thanks, Richard. Third is maybe the pipeline of franchising in the U.S. You sounded really excited about it. But I don't think we've seen the numbers come through yet. Maybe give us a quick update on the status as to when that might happen?
Richard Shin: Yes, sure. So, there's three brands. So just quickly go through. So, for Smashburger, again, we think we need to be ready. The brand needs to be ready. So that's a deliberate sort of don't attack it too fast and hard, but soon as we're ready, we've got Jim who joined us recently who is already mapping out every possibility and every franchise after that would be well suited for us. As CBTL, I think you're going to see some big news around franchising there. For Jollibee, we've already pipe-line quite a bit. I can't disclose the number, but we pipeline already significant amount of stores, and of course, these stores then need to be built. So, it won't come into our piano this year, but the pipeline for Jollibee U.S. is probably the most exciting part right now.
Unidentified Analyst: Thanks, Richard. And what's holding back the Jollibee built?
Richard Shin: Yes. To be honest truth is it took a while for us to get licenses. I think coming -- I know it's been a while since COVID, but really the bureaucracy of getting the permits and the licenses. So that took quite a bit. Then after that, we had an organization of one person in the franchise function. Clearly, that's not going to help. So, we're addressing that. And I think the last component really is just is the timing right now for a new brand to come and really pitch against the existing brands such as KFC and Popeye, and we feel the timing is right now. So those were the three main reasons why we are where we are in terms of timing. But again, I'm less worried about that because I rather get it done proper. And then once we're ready, then the momentum and acceleration will really come through. But yes, it's all hands-on deck now to all the USA.
Unidentified Analyst: Perfect. Thanks. Very last question. The OP income target upgrade does not include Smash -- I'm sorry, does not include the coffee business you acquired, so 20% is organic?
Richard Shin: Correct. Organic.
Hazel Tanedo: So, Richard, we have a few I'll just compress this compress it as much as I can, but a lot of questions on the U.S. business. So, congratulations. Jollibee is the number one on U.S. today best fried chicken. What are your plans to step on the gas to roll out franchise Jollibee USA? Are you still rolling out company owned stores in the U.S.? And if so, how many stores this year and next year?
Richard Shin: Okay. So, the plan or the program for this year was 14 stores. So, we're keeping it to that number. And this is important because leases are signed. And so, therefore, we're committed to those and they're in locations as you've seen our first store in Seattle, et cetera. So, we're no longer all concentrated in one state. So, I think that's all very important. So that's about it. There are leases signed for 2025, which, can go either way. Some company stores, but most of it, we think we can, provide those leases to franchisees. So, what we're looking at right now and a lot of work is really, going around real estate planning. So, we're very clear that we don't want to be in every state overnight, 30 key cities. And it's a mythology of sort of where do we want to be, what leases are available, and we're driving leases. So, we do have a pipeline of more leases. And then we're getting, we're going through our process of interviews and vetting to find the right size franchisee. Ultimately, in five years' time, the franchisee will look slightly different because there'll be those who can handle, let's say, 50 stores in five-year, development plan. Today, we're more comfortable with, let's say, 10, 15, 20 store types of players. And this all makes sense. But, what's very interesting now is we think that dynamic may actually move faster with slightly bigger franchisees will come to us. And in those cases, they'll come with their own real estate plans as well. So, I think that's how we really accelerate is finding the right partners, continuing the work on the real estate location and leases, and, of course, recruiting, people who, know, who've done this before in the U.S. in the QSR space. So those, I will say, will be the main factors to drive this faster.
Hazel Tanedo: Thanks, Richard. And then moving over to Smash, we noticed that 2Q EBITDA was lower than 1Q EBITDA. Can you discuss a little bit more about, the SG&A, the cost, with Smash? Did you see a big increase? And what might have been cost of the quarter-on-quarter decline?
Richard Shin: There's two ways to look at it. You can say because when you look at Q2 last year versus Q2 the year before, our RB rate was higher. So, you can you can make the excuse that we're coming off of a higher base, but I don't want to do that because I think, Smash, it is not -- it's not performing the way some of our other brands are performing. But I'm still very excited about this because I've seen some really good work. A lot of this stuff I can't disclose because we haven't disclosed it yet. But I know September, for example, is a big month for us in terms of a new brand launch and the marketing programs behind that and so forth. And we've only onboarded our CMO few months ago as well. So, I think what we are seeing is we're seeing less of BOGOs and promos and all the stuff we did to we have wings and all those things which we stopped. And so, we were chasing a lot in Q2 last year. We cut a lot of those things. And we're not opening new stores. So therefore, I think you're seeing the effect of that. But again, the fundamentals really -- the plan that we have is actually a very exciting plan for us to get back to basics, to be the best, better burger player that it shouldn't or it could be. So yes, so that's what it is. It's an adjustment to letting go of things. So, we're not chasing K&L's anymore, letting go of things, which also means you're going to lose some of those sales like wings and promos and so forth. And we really want to build a solid, proper business.
Hazel Tanedo: And on a different light, CBTL did very well quarter and quarter. Can you talk a little bit more about why this was so strong?
Richard Shin: We have three regions of strength. Malaysia was one, Middle East was the other. But if you look at America, again, America was, I think 13% RV, if I remember. What happened in America was a few things. One, we had some bugs in our app. So, our loyalty program was a mess. So, we fixed those apps. So, if you want to call it a new app, so that was one. We had very -- we had new marketing people on Board and we're very targeted on data marketing. And so, a lot of our marketing campaigns really hit. And so, we saw lift from better marketing programs. We also had LTOs, which were probably going to start converting into regular menu items. There was one, I forget the name, but it was a TikTok sensation. And then credit goes to the team. Somehow, they knew about it and they made sure that every store had that product. So, when people came and they said, oh, I saw this thing on TikTok, do you guys have it? We had that product. So, there was some lift coming from products. So the main thing is were those three.
Hazel Tanedo: So, another question just popped in back to JFC U.S. So, given the success of JFC U.S. and chicken concepts in the U.S. like Wingstop (NASDAQ:WING) in particular, has Jollibee U.S. become a much higher priority than Smashburger?
Richard Shin: Oh, this is a trick question I know, because whichever child I choose -- no, they're different priorities. Jollibee, I've always said is priority number one, two and three, right? This is us, it's Jollibee. And U.S. is the best unit economic model we have in our business. And we're 101 stores. Last time, I reported 100, since then we're 101. So yes, full stop Jollibee doesn't change priority, always remains a priority. Turning around Smash also remains a high priority. We have to get the investors trust on this. I know it's taken a lot longer than desired. Some people perhaps would make the argument like why bother? But yes, we feel it's a category that we believe in and it's a brand we believe in. So, we're very close. So, I'm not going to walk away from that either. But we're putting the right level of emphasis but in terms of capital, it's very clear. Jollibee gets the capital. That's why Smash is…
Hazel Tanedo: Richard, after -- sorry, go ahead.
Richard Shin: No, that's why Smash…
Hazel Tanedo: After the…
Richard Shin: You go.
Hazel Tanedo: After the USA Today article, did you see an increase in franchise interest?
Richard Shin: I don't know, but I'm sure if the U.S. team was here, I'm sure they would have some anecdotal responses, but we're not entertaining moms and pops. So, I have friends, in fact, some friends in Canada as well saying, hey. Can I get a Jollibee franchise? I'm like, no. That's not the model. So, yes, I'm sure interest is there, but we have a plan. And we have a way to sort of filter through those partners. We have a very clear vetting system as well, because as the early question from Joseph, how do you make sure they succeed? And the answer is they succeed because they're operators, and they've done this before and you have picked the right partners.
Hazel Tanedo: Next question comes from the [Flora Jenette]. You may ask your question.
Unidentified Analyst: Just a question on the Jollibee U.S. SSSG versus Smashburger. Just curious what are the reasons for the divergence in SSSG performance? Although, a while ago, you did allude to the fact that there were less promos for Smashburger. Apart from that, any other reasons for the divergence?
Richard Shin: No. I think that's. First of all, hi, Jenette. Thank you for the question. I think when we look at the data, there was a lot of stuff in Q2 of last year that we're not seeing in Q2 of this year. In terms of segment, it's a very different segment from affordability and price. What's interesting is in Jollibee U.S., on average, we get 500 transactions. And if you look at lunch before lunch, slightly before lunch, after lunch, it's a very interesting mix of a lot of traffic coming through. When we look at, Smashburger, one of the date parts that we're very interested in increasing, and that'll give us a few $100 a day, inching ourselves up to 4,000, is the lunch part. So, lunch is if there are three parts, lunch will be a third and dinner will be two-thirds. So, when I see data like that, it's quite interesting because, that means the affordability for lunch is slightly different for a Fast Casual versus a QSR. And also, the way we cook our burgers takes a little bit of time because it's never frozen. It's always fresh. It's always pressed. It's always it goes through the proper way of cooking it. So, the product comes out the way it should. So, we're working through, some options around lunch. But yes. No. I think it's just a very different business, Fast Casual and QSR. And the and the brand, I think, is in a very different place, compared to Jollibee. So, that's where it's at. But, again, I go back to people. I do believe in Denise and her team, and I've seen some really good thinking and some really good, work that they've been putting together to address all of these things.
Unidentified Analyst: Thanks, Richard. Second question is, on your U.S. expansion. You've talked about strengthening your brand, brand acceptance, selection of franchisee partnership. Can you talk about, the production and support system? Can you talk about the strategy on supply chain as you increase your franchise, stores? Are you increasing your supply supplier, I mean, diversifying and expanding your supplier? Or is there plan to set up commissary? And maybe if you can give numbers like at what point in terms of number of stores would you be able to at least cover your headquarter cost?
Richard Shin: Yes, got it. Let me start directly with the largest capital investment question. We will not set up a commissary in the U.S. That model works in the Philippines for many reasons because historically it's been there and also, we got a very large footprint in the Philippines. So, we actually get a synergy and it's a competitive advantage for us to actually have commissaries in the Philippines. In the U.S., even the large players like McDonald's, they've all gone to strategic vendors. So, we do the same and we're using all the top players for protein providers and so forth. So, I think for a supply chain is essentially working with our existing and if they're operators of other brands, then they probably can also use some of the suppliers that they're accustomed to as long as we vet through them and make sure that they're the right suppliers for our brand as well. So, our supply strategy in the U.S. will remain the same in that it will be an outsourced model to large strategic suppliers. In terms of covering headquarter costs, I think that question was connected to if we were to build a commissary, right?
Unidentified Analyst: Yes.
Richard Shin: Okay.
Unidentified Analyst: But if there's none, does it mean it will be easier and faster?
Richard Shin: Yes, I would say we have the right size organization. If for example, we want to 500 stores, maybe we need a few more bodies, especially around the franchise support part. But one of the ideas we have is we have operations teams that looks after cities and clusters. And so, U.S. is a big country, so you can have somebody in California head office flying everywhere. So, we are looking at things like that where we need to put people in the field as our franchise network expands. So, there'll be additional headcounts coming through that way. But we believe that these will be minimal and it'll be absorbed basically by the royalties and other fees that we'll get for franchise. So, store development fees, et cetera.
Unidentified Analyst: Do you still need to know is there a number or target in terms of stores that you think will be able to at least cover that cost?
Richard Shin: I think it's variable, [Jenette], if I'm thinking through it, because whenever I have that analysis, meaning we could only hire cinema people if we only have a cinema news franchise source. We haven't actually had that thinking. The way we're looking at it is converting some of our operations team into those geographies to support franchisees coming to those cities or those markets. That's how we've been thinking this. We'll be leveraging headcounts that way. And for incremental headcount, we again think that it's not going to be like 50 new people. So yes, I think the cost will be worth the investment for sure if we can get franchising really to be the dominant footprint, which by 2028 franchise stores should be about 75% or company-owned store, if not more.
Unidentified Analyst: Yes. Thank you. Last question.
Richard Shin: So, if I'm meaning three franchises for every one company on sub side.
Unidentified Analyst: Okay. Got it. Last question. Just very quick. How long does it normally take to vet a franchisee candidate to signing the contracts to site selection, securing permits to store setup?
Richard Shin: So, the permit is state by state, so that work's been done. We've signed some already, so we'll continue to sign more. So, the vetting of the franchisees, I would say is not the bottleneck. What the bottleneck's going to be really is location identification, lease signing, design, construction, and opening. And in the U.S., I understand it's about an 18-month process. So that process has started with the franchisees that we've already signed. But, again, we'll fully disclose once we're able to disclose further numbers around those.
Hazel Tanedo: Richard, last two questions sent by chat. What's keeping your spirit strong to keep operations in China despite a number of peers withdrawing out of the country? Also, it was mentioned that China is also a factor for tempering guidance. What would it take for JFC to reinvest, away from China to other markets?
Richard Shin: That's a big question because it's not necessarily my decision and only my decision. It's a larger decision. But I think when the family, the previous executives before my time as well, et cetera, decided that there'll be couple of strategic key markets, U.S. and China being those, it went back to the old school of where's the largest total addressable markets? Where does it make sense for a business like ours? So, change or QSRs. And so, I think all those fundamentals haven't changed. What we're realizing now in China is, couple of things. If you invest too much ahead of the curve, the returns won't be coming in the way they used to in the past. So that's why we really pull back on all company owned stores. Number two, we did make quite a bit of money in China and therefore the cash sits in China and stuff from those profits. So, we're not allocating capital to China. It's being self-funded. Number three, I would say, with, Yonghe King being a very close to value proposition brand in fact you could even say it's a value brand. We think that this is the right segment. Value segment is the right segment. So, therefore, we're tweaking couple of hero products and pricing those at a really hero pricing and starting to get, traffic and building the store smaller. So, by having a lighter, more simple, and really focused with value as proposition, we think we could be at profitability. And so, the spirits are there only because I don't know. Maybe I'm alone in this thinking, but it's very difficult to sort of, just pull out of China because time times are tough given that there's been so much invested in it, and we've made money in that market for so many years. So, I know it's not a perfect answer, but we're doing everything to risk mitigate. And I think that's my role, and to limit allocation and make sure ROIC driven thinking. So, we're not building fancy new things in China. We're just carrying on with what we have in yes. Tough question.
Hazel Tanedo: So, to end on a lighter note, last question from us before we wrap up. How is SSSG trending so far in July and August where the Philippines considering that competitors have tried to replicate Jollibee's mix and match offering? Are we seeing continued increase in both transaction count and average check?
Richard Shin: Yes, we're winning. So, the mix and match continue and our market share data indicates that we're still growing. So, we do have positive RV in July and mid-August, but I don't think it's going to be the same level per se as we had in June. June was a fantastic month for us, but keep in mind also July had some natural disasters and a few other things that happened in the Philippines. But nonetheless, vis-à-vis same month previous year, we're trending up, but the percentage is not as high as June, but we still have the rest of August and September. So, I think we'll have a very solid growth third quarter as well.
Hazel Tanedo: Thanks, Richard. So, everyone, that's all the time we have for today. So, with that, we end our session on Jollibee Foods, and we thank you, Richard and Cossette, for sharing your views and thoughts today and for answering all of our difficult questions. So, to all the participants, thank you again for joining us. If you have further questions, please e-mail me, send us an e-mail or send Cossette an e-mail, and Richard will try his best to get back to us ASAP. So, take care. You may now disconnect.
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