Jollibee Foods Corporation (JFC), a global quick-service restaurant chain, has reported record-high system-wide sales and profits for the fourth quarter of 2023. The company saw a 9.6% increase in system-wide sales compared to the previous year, with a total of PHP94.2 billion.
Full-year sales also rose significantly, reaching PHP345.3 billion, marking a 16.3% growth. Fourth-quarter revenues climbed to PHP66.7 billion, an 8.4% increase, while full-year revenues hit PHP244 billion, up by 15.2%. The company's gross profit surged by 16.6% in the fourth quarter to PHP13.1 billion and by 22.6% for the full year to PHP45.3 billion.
Operating income for the last quarter increased by 33.2% to PHP2.5 billion, with an annual rise of 45% to PHP14.4 billion. Jollibee's Chief Financial Officer, Mr. Richard Shin, highlighted the brand's strong performance and its recognition as the world's second fastest-growing restaurant brand. The company's MSCI ESG rating improved from CCC to BB, reflecting its commitment to environmental, social, and governance criteria.
Key Takeaways
- Jollibee Foods Corporation's Q4 system-wide sales reached PHP94.2 billion, a 9.6% increase year-over-year.
- Full-year sales grew by 16.3%, totaling PHP345.3 billion.
- Q4 revenues were up 8.4% to PHP66.7 billion, with full-year revenues increasing by 15.2% to PHP244 billion.
- Gross profit for Q4 rose to PHP13.1 billion, a 16.6% increase, and full-year gross profit grew by 22.6% to PHP45.3 billion.
- Operating income for Q4 increased by 33.2% to PHP2.5 billion, and annual operating income rose by 45% to PHP14.4 billion.
- Jollibee's MSCI ESG rating upgraded to BB.
- The Philippines market showed strong growth, while challenges were faced in other brand segments and with foreign franchise brands.
- Jollibee plans to open 750 new stores in 2024, with a focus on international markets and the coffee and tea business.
- The company aims to triple its net income after taxes (NIAT) by 2028.
Company Outlook
- Guidance for 2024 includes a system-wide sales growth of 10% to 14%.
- The company plans to triple its NIAT from PHP8 billion to PHP24 billion by 2028.
- Jollibee aims for a store network growth of 7% to 8% and operating income growth of 10% to 15% in 2024.
- Expansion focus includes international markets, the coffee and tea business, and digital transformation.
- The company is taking an asset-light approach in China and emphasizing franchising, especially in North America.
Bearish Highlights
- Challenges were noted with the Red Ribbon brand in the bakery segment.
- Foreign franchise brands like Burger King, Yoshinoya, and Panda Express face system-wide sales growth challenges.
- Smashburger and CBTL reported losses in the fourth quarter, although the losses for Smashburger narrowed.
- Smashburger's same-store sales growth was negative in Q4 2022 due to reduced promotions.
Bullish Highlights
- Jollibee brand shows robust growth in the Philippines.
- Strong performance in gross profit margin, operating profit margin, and free cash flow margin.
- EBITDA increased by 13.9% for the quarter and 8.3% for the full year.
- Net income grew by 22.4% for the full year, with a reported NIAT of PHP8.8 billion.
Misses
- Operating income for the fourth quarter was down due to higher advertising and promotional spending, tax adjustments, and other corporate expenses.
Q&A Highlights
- The CEO outlined plans for future growth, including increasing the number of franchised stores and digital transformation.
- Jollibee is targeting the U.S. and the Middle East for market expansion.
- The company is working towards profitability for Smashburger and improving CBTL's positioning.
Jollibee Foods Corporation's earnings call revealed a strong financial performance and ambitious plans for international expansion and brand growth. With a strategic focus on franchising, digital transformation, and market diversification, Jollibee aims to solidify its position as a leading global player in the quick-service restaurant industry. The company's commitment to improving profitability and its proactive approach to addressing challenges in specific brand segments demonstrate a clear vision for long-term success.
Full transcript - None (JBFCF) Q4 2023:
Carissa Mangubat: Okay. Good afternoon, everyone. Welcome to the Fourth Quarter and Full Year 2023 Earnings Results Call for Jollibee Foods Corporation. I'm Carissa Mangubat of Regis (NASDAQ:RGS) Partners. I'll be the moderator for this afternoon session. So, we will have a short presentation from the Company and then we will proceed to Q&A after that. So, to give us an update on the most recent results, we have Jollibee's CFO, Mr. Richard Shin; we also have the IR team headed by Ms. Cossette Palomar. So, we'll start off with a quick intro by Ms. Cossette before we move on to the presentation proper. So, Cossette, please go ahead.
Cossette Palomar: Thank you, Carissa. Good afternoon, everyone. Thank you very much for joining JFC's investor briefing. Okay. Just a few reminders, this earnings call may 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 JFC Group gives no assurance that such forward-looking statements will prove to be correct or that such attentions will not change. All subsequent, written and oral forward-looking statements attributable to the JFC Group or persons acting on behalf of the JFC Group are expressly qualified in their entirety by the above cautionary statements. Okay. I'll turn it over now to Mr. Shin.
Richard Shin: Thank you, Cossette. First of all, a very good afternoon and good morning to all of you joining us from outside of Asia. Really appreciate as always your interest in our company and very happy to now share with you a couple of key observations first before we get into the details. So the first point, I think you've all seen the financials, but then to reiterate that the performance impact for both quarter as well as for the full year had delivered a record high system-wide sales. So in particular, system-wide sales for the fourth quarter of PHP94.2 billion, meant that we were at 9.6% ahead of same quarter last year and also looking at quarter-on-quarter, meaning versus our third quarter of fiscal 2023, we're up a robust 8.4% as well. Full year results are PHP345.3 billion, sets a new record, and it's a growth of 16.3%. And that, again, will be referenced back to a little later in my update. That then translated into our revenues of PHP66.7 billion in fourth quarter, up 8.4%, which happens to be the same increase of 8.4% quarter-on-quarter, and our full year revenues base of PHP244 billion, again, record high of 15.2% growth year-on-year. Moving to the middle of the P&L, our gross profits. We're very happy to report that we had another record high of gross profit of PHP13.1 billion, which is 16.6%, up versus prior year and equally strong versus third quarter, up 16.4%, with a GP margin rate of 19.7%. Full year GP margin rate was 18.6%, recognizing that there is still inflationary pressures. The Company, nonetheless, not only maintained but grew its GP margin. In terms of absolute pesos, it's PHP45.3 billion for the year, which is a 22.6% increase versus last year. So at this point, I want to reiterate that, in fact, quarter-on-quarter as well as versus last year, our business has continued to grow and significantly grows. That translates into an operating income of PHP2.5 billion, which is up 33.2% versus last year, with an OPM of 3.8%. However, we're down 41% quarter-on-quarter. And I do have some details on that to show you that we took consciously some timing differences in terms of how we recognize our OpEx. And again, I'll explain and walk you through the area of A&P and how we're investing behind our brands. On a full year basis, PHP14.4 billion or 45% increase versus last year, delivered an enterprise-wide OPM of 5.9%. So now let's dive into the AMT component of what we took into the fourth quarter. So if you can see here, I have five years comparable, so we want to be transparent in showing multiple years. You can see in the fourth quarter, the red bar, the most current fiscal year of 2023. The dark gray bar at the far right is the -- earlier year of 2018, you can see traditionally, fourth quarter did have a higher A&P spend rate for several reasons. There's some catch up, of course, that happens when key media vendors invoice us slightly late. We do catch up for the year on that. But also if we have opportunities to spend wisely ahead of the new fiscal year, we take that decision as well. And certainly in 2023, with our performance, we had opportunity to spend wisely. To the far right side, you can see the full year percentage of A&P as a percentage of SWS. The reason why we use system-wide sales versus revenue is to recognize that we have both franchise and company-owned businesses. So therefore, it's easier just to use the uniform system-wide sales. And clearly, our 2.6% A&P rate for the year is well within the range of the 2.5% to 3% that we typically spend. So once again, A&P, thoughtful, some catch-up, but also spending ahead wisely. The second key message I'd like to share with the audience today is that the Jollibee brand, so not Jollibee Foods Corporation, but the Jollibee brand itself, was recognized by Brand Finance as the second fastest growing restaurant brand in the world and also the fifth strongest restaurant brand globally. And this was a result of the fact that the valuation of this brand surged 51% up to PHP2.3 billion per brand finance. So graphically, just to show you, Luckin Coffee (OTC:LKNCY) was slightly ahead of us, and there was ourself and then the rest of the brands. So this is in terms of growth. And this one here is in terms of the strongest restaurant brands as defined by Brand Finance. You can see, we are, in fact, ahead of the other top five restaurant chains. Moving on to the third key message. Our MSCI ESG rating was upgraded from CCC to BB, and we're very proud of the work the team has done behind this. And you can see graphically here from August 2019 until now, how we've been evolving and we're very happy that we're back to the BB rating. All right. So now let's get into the performance summary before I get into the details. Once again, system-wide sales. On the top left -- on the left-hand side of each box is the quarter and the right-hand side of each box is the full year. These are numbers I've just shared with you. Same-store sales growth, equally, a very strong 5.4% on a larger value pool. And for the full year, it's 10.6%, recognizing also that the earlier parts of the -- in particular Q1, we had a very strong same-store sales growth, in particular, because our Philippines business in 2022 first quarter was under COVID lockdown. So I believe quarters two, three and four are more like-for-like. This same system-wide sales growth was driven by transaction count or volume as well as the average tax increase. We opened a significant number of stores, 658, so ahead of guidance at 6.3% network growth. And at the bottom row now in terms of revenues, I'm showing here quarter-on-quarter as well. Again, just to illustrate that we are not, in fact, slowing down, but rather at the same pace. So 8.4% in the fourth quarter, same for quarter-on-quarter. Gross profit, we were up 16.6% versus last year and quarter-on-quarter, we're up 16.4%. Full year net operating income -- sorry, PHP14.4 billion or 45%, which we shared with you earlier. Just graphically, you can see here, system-wide sales by quarter and how we've been trending since post-COVID. There's a couple of symbols up here, red and also black. The red trophies denote that it's all-time high and the black trophy denotes that it's the all-time high for that specific quarter. So it's been quite continuous for the last six or seven quarters. Top line metrics for fourth quarter as well as the full year. I just want to take time a little bit to share with the key points. And now let's just switch to a full year. So you can see for system-wide sales and for same-store sales, other than Highlands Coffee, pretty much every single one of our regions, business and global brand clusters have delivered a very strong growth rate. So in total, 17.6% for Philippines, system-wide sales. And for global, it was 16.3%, with a very strong performance by international, 14.4% as well. And I'll spend a bit more time later on diving through some of these businesses. This is a new chart compared to previous earnings call, but I wanted to talk a little bit more in detail about our key market, which is the Philippines. So this field here is system-wide sales and same-store sales growth, both quarter-on-quarter and also versus last year. Just to make sure that we understand that, in fact, Philippines remain strong, and let me break that down for you. So within the Philippines, we have clustered under champion brands, and that also denotes certain level of investment behind these brands. Of course, Jollibee as expected, but within the Philippines market, Chowking and Mang Inasal are considered champion brands in their dominance of their specific sectors. And so the way to read this is if you look at the second column here, fourth quarter, you can see system-wide sales in billions. You can see the growth rates of both system-wide sales and same-store sales growth. You can also see the same growth rates in the third quarter, so you can compare quarter-on-quarter how these brands are doing. So if you would take system-wide sales for Jollibee, fourth quarter growth was 10.4%, whereas we had a stronger growth rate in the third quarter. But nonetheless, you can see still robust growth happening for the Jollibee brand. Where we start to see some of the lag happening is in our other brands, in particular, around Red Ribbon, where it competes in a very difficult bakery segment, and we're adjusting that. We have quite a bit of work done, and we'll continue to work on adjusting to improve within this difficult segment. And the foreign franchise brands, of course, are our strategic brands that we represent in the Philippines, which are Burger King, Yoshinoya and Panda Express. So there's some learnings there as well. Although system-wide sales growth continues, the same-store sales growth of these brands, there are some challenges, which we're working through. So not all is perfect in the Philippines, but I would say more so than not, for us to continue to deliver on a full year basis -- sorry, on a Q4 basis, here, you can see a growth of 11.6% quarter-on-quarter. So let me repeat that again. Fourth quarter was stronger than third quarter by 11.6% for total Philippines, led by, of course, Jollibee here, 11.2%, total champion brand category of 10.8%. Although the percentages are good here, we still have some work to do, as I said, in some of our smaller brands. The other thing I want to address is why is our operating income down to PHP2.5 billion from Q3 of PHP4.3 billion. And the reason again is the timing of our A&P. You can see, as illustrated earlier, fourth quarter does have higher A&P spend traditionally. And also, we're pulling forward some for early spend. And there was also some adjustments that we've taken in our taxes and license. So essentially, what this is, is withholding tax adjustments on royalty of prior years, which were not addressed in prior years, but we took the opportunity here to catch them up. And of course, other corporate events and expenses, which typically happens in the fourth quarter or we booked them in the fourth quarter versus in the third quarter. So this, to me, is timing as it represents the full year expenses. So when you look at these expense movements, and you can see why our operating income is down. But again, as mentioned earlier, top line and middle the P&L continues to be robust and strong for the fourth quarter compared to the third quarter. Financial details, some of these numbers you've seen, so I just want to highlight again the tiering that we're seeing. The 16.3% system-wide sales growth, we're able to gear positive gross profit of 22.6%. And of course, operating income at a faster gear of 45%. Some footnotes on the side here to share with you, essentially saying that these were pretty much all record highs again. Now on the EBITDA. We did have an increase of EBITDA of 13.9% for the fourth quarter. And on a full year basis, our EBITDA grew versus last year at 8.3%. Net income grew full year at 22.4%. And what we report here is an PHP8.8 billion NIAT ahead of guidance, and it's 16% growth, with an EPS growth of 16.5% at [7.455]. Some key metrics. So let me show you fourth quarter first and then the full year. The gray is 2022 and the red bars are 2023. So gross profit margin, earlier, I showed this number of 19.7%. Operating profit margin also grew as did NIAT. Our free cash flow margin significantly grew. And here is just another way of looking at it. If we were to compare our free cash flow to our NIAT dollars, you can see in 2023, it's almost 4x of cash flow to our NIAT dollars, slightly down from the year before, but later, I'll show you CapEx in our investments as well. On a full year basis, however, you can see similar trends right across, finishing the year at 18.6% on GPM, 5.9% on OPM, 3.6% on NIAT margin, free flow cash -- free cash flow margin, sorry. And of course, the ratio between free cash flow and NIAT is also higher than the year before. Okay. Now that's a nice segue into our capital allocation, cash and balance sheet. So again, our CapEx spending for the year was PHP11.3 billion. In 2022, we have spent PHP9.7 billion. So that is an increase. And where the significant increase, as always, you can see in terms of absolute dollars, not the percentage here, is for our store operations. So that's new stores, that's renovations, that's upgrading our kiosks and upgrading our point of sale. So all that's necessary, but consumer phasing, that goes in here. This is right across, as you can see, 42% in the Philippines, and the balance from our other businesses outside of the Philippines. This commissary is to make sure that we have enough capacity for demand. So there's always upgrades there, but it's not a significant portion of our CapEx. And this last component here, well, we will call it main office, but in fact, what's really in there is our technology. I think some of the Q&As are sent, one of the question was our level of investment in technology. So not all of 13 is for technology, but the majority, so I would say, around 10% of that is for technology, which again, is a significant ramp-up from under 5% the year before. This is the plan for 2024. And as always, we take a conservative view. And when there are opportunities for us to buy franchise systems or build company stores, we do take that decision as well. So historically, although we show ranges such as this, it is not to say that we will spend all of it, but this is in fact, the ceiling of what we're looking at. So very similar proportion to where we spend our CapEx, but what will drive the P&L, really, is the store spend. We will ensure our stores have enough products is our commissary. The reason for the increase here is there will be a new commissary launch in 2024. Again, this has been planned in a few years back, because we're quickly reaching our capacity in some of our plants. So this is an expansion here. And of course, our investment in technology continues. Moving to balance sheet. You can see from cash all the way down, I think what's important here is our net debt reduced to PHP9.7 billion from PHP16.2 billion. Our working capital metrics are improving, so a day quicker on collections, two days lower on a larger base for inventory. And our ratios are all improving as such as well. The right-hand side here, it's just information that shows you in terms of our financial obligations that is structured at the moment. So you can see bank loans and senior bonds. In total, around 60% of our capital structure is debt accounted and around 40% through our seniors and preferreds are equity accounted. So 60-40. In terms of bank loans themselves, we're about 2/3 floating, 1/3 fixed. And in terms of interest on total obligations, were about 1/4 floating and 3/4 fixed. And it's important to mention this, let me start with this because in 2023, we continue to enjoy a weighted average interest rate of 4.5%. And that's because we have locked in and we continue to enjoy those tenures. And you would have seen that we recently subscribed to further increase of preferred shares as we had upper ceiling limit. So, we've done that and essentially, we're well positioned into the future. So I'll recap on 2023 guidance. We've met our guidance of -- sorry, we met our guidance of between 15% to 20% in system-wide sales as we delivered 16%. And in terms of rolling base, we beat our guidance with 11% actual, slightly above our range of 7% to 10%, store network of 6% was within our guidance. And in terms of our operating income growth of 45%, it was ahead of our guidance between 20% to 25%. Sharing with you here now the 2024 guidance, system-wide sales on a larger pie, of course, will be somewhere between 10% to 14%; rolling base slightly lower in terms of number, 5% to 7%, but again, we'll deliver more dollars in pesos in terms of absolute; store network growth will be somewhere between 7% to 8%, so even ahead of where we are, which is to say, we are continuing to find opportunities for new stores, both in the Philippines and outside; and operating income growth guidance of 10% to 15% or PHP15.9 billion to PHP16.5 billion. Again, as a reference point, we finished 2023 at PHP14.4 million. Just very quickly, our longer-term objective or five-year out view is to triple our NIAT. And when we sort this five-year strat plan, we had talked about PHP8 billion as being the milestone for 2023. As I've just shared with you, we're slightly ahead now, because we delivered PHP8.8 billion, but we are looking to triple the value from PHP8 billion to PHP24 billion of NIAT by 2028. These themes are not new. I've always spoke of the importance of the Philippines and continue to dominate in this market, the importance of China and how they're going to play their building scale to our Chinese brands led by Yonghe King through franchising. We always talked about the coffee and tea category being a very large addressable market and also very profitable in terms of high margin. So we're going to continue to have several brands in Europe, but CBTL, being the forefront brand. And of course, Jollibee, Jollibee, Jollibee. You can see our brand equity -- sorry, brand value has significantly increased or continue to drive efforts towards that, led by the U.S. and other key markets in Asia. I just want to end with our CEO's quote, where I think he summarizes very properly and nicely here where he talks about looking forward to 2024. And that is, looking out to 2024 and beyond, we'll continue to focus on our priorities. We'll scale the business with our four big focus areas of expanding our Jollibee brand internationally, growing our coffee and tea businesses, exponentially growing in China in multiple lower-tier cities for franchising, sustain and -- sustain our strong growth and market leadership in the Philippines. We'll ramp up franchising to support our global expansion. We'll also accelerate our digital transformation and bring capabilities on par with global quick service restaurant leaders to increase operational efficiency and further improve customer experience and revenue management. We will work on driving JFC's long-term growth. We'll remain committed to governance, FX and sustainability and responsible business practices. Our strategies combined with our portfolio of strong and valuable brands and the support of our talented global team gives me the confidence that we'll be able to achieve our goal to triple our value in terms of NIAT in five years. I believe everything I shared with you speaks to this summary. And at this point, I shall take questions. Thank you.
A - Carissa Mangubat: Okay. Thank you, Richard, for the presentation. We already have a few questions in the chat, so let me start off with that. In the interest of time, I'll just consolidate the similar questions. So there's quite a few questions here on CapEx and store expansion. So the budget is PHP23 billion for this year. Are you really expecting to spend that much since historically, the actual CapEx is -- always seems to be much lower. And of the 750 new stores, how much would be company-owned and franchised? And if you could provide a breakdown of how many stores you plan to open for market?
Richard Shin: Okay. So the answer is we always show you the ceiling. And the reason for that is when we get Board approval, we ask for retain earnings appropriation to be linked to that ceiling. We do not plan to spend to the ceiling as in the past, we've demonstrated ways to do so. So I think it will be very similar in 2024 as well, Ken. Having said that, what drives the business really is growth and expansion. So I want to make sure that we're well indexed in terms of what drives us. So our quickest payback business is coffee and tea. Depending on the brand, it's somewhere between two to three years. So that will be about 40% of our store openings in 2024. And of course, Philippines will be about 20%. And then the rest of international, combined with the coffee business, will be the balance of the 80%. Specific to China, we're looking very much at a very asset-light approach and looking to open very few stores with our own capital, but rather through the franchising model. In markets like Vietnam, we'll continue to open our company-owned stores because they're quite profitable. And I think the lesson there is if the franchise network isn't strong enough, we'd rather open our own, and that's been working for us in markets like Vietnam. Maybe I'll just address Kimberly's question of Smash, because I'm sure many people are asking, is this real or is this not real? The answer is, this is real. And I've always said, there are some pillars that we're going after. So we stopped building new stores, which slows down the losses of new investments. And we continue to work on quartile three and four to make sure that they get to profitability. So a lot of work behind it, but the short answer to Smash is really focused on store-by-store level profitability.
Carissa Mangubat: There's also a related question. If the losses of Smashburger and I guess CBTL also, did they narrow or widen in the fourth quarter? And when would we expect these businesses to turn profitable? And what are we doing to achieve this?
Richard Shin: Yes, Smash -- our loss is definitely reduced. So we have a bit of work to go, but not much more. And soon, I'll be very happily reporting Smashburger net operating income profits as well. But I don't want to overpromise, but I mean by very soon, as we're starting to see really good momentum. And I should say at this point that we had the opportunity to now onboard a new CEO for Smashburger. She comes -- I think you all know her reputation once you look her up, her name is Denise Nelson, but she comes from Starbucks (NASDAQ:SBUX). And I've spent some time her with actually last week in Denver, and I have to say, she's an incredible executive, and I think we're in good hands there. For CBTL, it's been bumpy, I have to tell you. So fourth quarter was worse than third quarter. And the reason for that, I think, is because our North America company-owned store is not really positioned, and we knew this when we bought the brand years back, but it's taken a bit of time. So that's our priority for this year is to make sure our positioning of our company-owned store in the U.S., in particular, it's mainly California. 95% of our stores that's company-owned is in California. So we have some plans to address that.
Carissa Mangubat: Okay. Thank you, Richard. So, we'll go to the queue now. We have Divya. So Divya, you may now ask your question.
Unidentified Analyst: I had two questions and just one follow-up on the CBTL, then Smashburger. My first question is just on margins, specifically on international segment margins. We saw that, that slipped back into losses in the fourth quarter. Could you just help us understand why the operating income for international slipped into losses? Is it that the A&P is disproportionately higher there? And when we think about 2024, how should we think about this as an entire international segment? What kind of margins are you targeting for this year? That's my first question.
Richard Shin: Okay. Thank you, Divya. If I remember, in Q3, I think we had reported something like 3.3% international margin, and we're quite happy because that was the highest in the last five years. That's not it's a good number, but relative to the stage of our business in international, that had slipped you, right? And the main reason, in terms of the magnitude and contributors was CBTL and Highlands Coffee, very different. Highlands Coffee is delivering about twice the profit of CBTL on a store basis, but -- store-level basis. However, Highlands Coffee did suffer quite a bit from a lot of the macro headwinds that we're seeing in that part of the world, Vietnam, being very -- I guess, dependent on China in many ways, in particular, in the Tier 3 cities. So when we did a deep dive analysis of what's driving Highlands Coffee down, it was really that Tier 3 where the frequency was coming up. So people are not going as frequently as they were, when they are more confident about the economy. But Tier 1 and 2 still remains relatively strong. So we recognize that this is a bit of timing. And as things turn, we do see improvements in early months of this year. CBTL is simply -- the losses are coming from the U.S. company-owned stores. Because excluding that, it's pretty much a franchise business, other than Singapore and Malaysia with our company-owned stores, but they're very profitable. So again, there's a very clear plan on adjusting the Company-owned stores in the U.S. So that's what's dragging it. In terms of what do we anticipate for 2024, I anticipate that in the back half of 2024, the U.S. company-owned store issue will be resolved. And Highlands would have come to a better place. So I do see international pulling up. The rest of our businesses outside of those in international such as EMEA, North America, Asian brands, et cetera, they're all doing extremely well.
Unidentified Analyst: Just in terms of the quantification of that margin, like you said, 3.3% was good, but it's not a good number stand-alone. Like what do you think International margins can go to by the end of this year?
Richard Shin: I think by the end of this year, we should be in the low singles. And more importantly, I think looking out to -- we'll see quite a bit of momentum coming through in '25 and in 2026. What we're looking at really is getting this to high single digit as soon as we can. Because on a unit economic basis, Divya, when you look at our business, for example, our Jollibee U.S. versus our Jollibee Philippines, just using that as an example, Jollibee U.S. on a per unit basis, we have about $12,000 average daily sales per store, whereas in the Philippines, it's about 5,200. So it starts from that. And also, our gross profit margin on food and packaging cost is about 66% to 67% in the U.S. versus about 55% in the Philippines. So the more Jollibees we have in the U.S., our P&L starts to pull up the international segment. And to do that, I've always talked about the need to switch to franchising. Because at some point, we have to make sure we can build stores quickly rather than with our own capital all the time. So you're going to start to see that coming through in other years.
Unidentified Analyst: Got it. My second question is on Philippines. I just wanted to understand that the same-store sales growth has been slowing, and you showed that nice bifurcation by brand. Do you think that the foreign brands are underperforming because of down trading? And what is the risk that the overall business also goes down to low single-digit same-store sales growth? And also, this is a question I have -- we've been asking in the past, but if you can refresh our view on it, that why are we not more aggressive in store openings in Philippines in the recent years and not even in 2024, I think.
Richard Shin: Yes. Okay. So Philippines, I think it's the first time I've shown this chart because there's quite a bit of interest. This is our disclosed material, but we summarized to call these champion brands, the Jollibee, Chowking and Mang Inasal. And you can see there, it's low double digit in terms of growth rates. So those brands are doing extremely well. We have fantastic leaders on those brands that we continue to invest at the right level, and it's returning. So for example, Jollibee Philippines, payback is now 3.3 years. So extremely good payback and good margins. The foreign franchise brands, it's really three. And what we've noticed on a brand like Panda Express, it has extremely high ADS. But we also noted that the frequency and trial rates are not as high as a lower price point Jollibee. So consumers are not coming back as frequently as they are. So what are we doing? What we're doing is we're obviously going to make sure that the number of restaurants we've built is limited for brands like that, and we're also looking at lower ADS or lower meal package options for consumers with perhaps slightly smaller quantity, but more affordable price point. That's really the brand that seems to be dragging everything down in that group. Burger King continues to grow. But again, it's at a slightly different price point to Jollibee. So we're seeing, in the Philippines, the reality of different price points having different levels of growth rates. I remember -- the last part of your question is then why not more? We are building as much as it is necessary to build in the Philippines, meaning that we don't want to be overdependent on one market. And if that market, for whatever reason does not perform, then we don't have any other place to go to. So that's why we've been so aggressive on international to make sure that we have legs and pillars set. And this takes time, as you know. So that's the reason for that. And the second reason is within Philippines, we are -- within Metro Manila, we are quite saturated. So therefore, growth is going to come from market share still and same-store sales growth, predominantly. Not to say we're not building stores, but at a slower rate as in the provinces where we have more upside. So we're balancing that as well. But the main reason, again, is box economics or unit economics and the opportunity or size of price for us is really outside of the Philippines, and we need to start seeding that because in the future, we cannot go back in past to seed that. So we're going to keep that right balance.
Unidentified Analyst: Perfect. And just last small question. Same-store sales growth for Smashburger became negative in the fourth quarter. So while we saw profitability improvement, it seems that the same-store sales growth was negative. Could you just comment on what's happening there?
Richard Shin: Absolutely. So Q4 of the prior year being 2022, under the old management, there's quite a bit of promos. So the BOGOs and -- we're testing different things on Internet as well in terms of discounts for online orders, et cetera. We've significantly reduced those promos and we are now positioning it to be a core -- sort of core menu. So we're seeing some of that. But that's on -- that's purposely thought through. And the reason for that is we don't want to build a business on promos. So we're seeing that coming down. But in terms of profitability, we're increasing. Because a lot of those promos that gave us the RB for same-store sales growth in 2022 fourth quarter, we're seeing that profitability wise, they're quite neutral. So it's a mix between more solid sales that's giving us better margins.
Carissa Mangubat: Thank you. So we'll go over to the chat again. So there's a few questions here about your long-term targets. So the long-term target is to triple operating profit in five years, that implies 25% annual growth. However, you're just targeting 10% to 15% for this year. So how do you reconcile that? And how does the -- how do these targets translate in terms of how much is coming from top line growth and margin expansion between the Philippines and international? And where do you expect the split of Philippines and international to be in terms of net income?
Richard Shin: Okay. I'm just going to refer to some notes. You're absolutely right, it is around 25%, 26% bottom line CAGR to get there. So let me just give you the shape of things that we're seeing. So revenues, we do see this 2x, and that's about a 15% CAGR, and that gets us to that tripling bottom line. In terms of OPM, we're seeing around 10%. We're right now 5.9%. So we see that coming up, mainly because Philippines will come up slightly, but international will pull up, as mentioned earlier. In terms of the split between Philippines and the rest of the world, at that point, international will be the majority. So it will be around 55% to 60%, with Philippines being about 40%. And in terms of franchising to company-owned stores, we think we'll be around the 80% franchise level. Today, we're at 57%. So that's the bigger shape of it. And I guess the specifics of it, it's going to take more than this call to go through. But it's based on the following principle. In large markets, where you have a higher value pool, our ability to grab the value pool means we need to get in there with some strategic alliances, whether it's around technology, with our networking or real estate. So those are the seeds that we've been planting at the moment. Second, we need to get into arrangements with franchisees that's able to take cluster regions. So we have mapped out already the areas that we would like to expand in. And the good news, if you take a job -- our brand like Jollibee in the U.S. is where it's just so tiny compared to the demand and the opportunity that we see there. So we've just entered our 14th state, which is to say we have many more places to go. And we are actually in the process of screening our franchisee partners for several of those states. So both existing states, where we would open more stores to the franchising, but also new states. So a market like the U.S. can accelerate and grow pretty quickly. So those are kind of the how. And of course, China, we will continue to stick with our Chinese cuisine direction, because we believe that if you're a multibrand in a country like China, it may be quite difficult to manage. So first thing, very focused. And of course, our coffee brands are showing that they can be easily franchised. So we'll continue to expand those brands for franchising. We've got John and Brian coming through.
Unidentified Analyst: Brian here. Can I just follow up on the comment that you made because if you look at...
Richard Shin: Brian, you want to unmute?
Unidentified Analyst: Sorry, can you hear me?
Richard Shin: Yes, all okay now.
Unidentified Analyst: Okay. Great. I wanted to just clarify on the statement that you just made, because if you look at the momentum of store openings, we don't -- it's not really going to get you to those targets that you set. So just to clarify, what we're really going to see from the franchise side is really a lot more Jollibee stores in the U.S. through this plan, group franchise other states, is that correct?
Richard Shin: Yes. You're absolutely right. Our momentum of store opening of 6%, 7%, 8% or 500, 600, 700 stores is not going to get us there. So it's a completely different model that we need to get to, and that's what we've been working on. So Jollibee U.S., for example, we'll get to 500 stores from our 72 stores today. And of that 500 stores, other than 2024, where we start to leverage towards the build out, the balance of it, predominantly is going to come from franchising, as an example of how we're building this up.
Unidentified Analyst: And can you just remind me again, the time line of when you'll be launching this new franchising model?
Richard Shin: 2025 is the first full year for franchising.
Unidentified Analyst: Got it. And just to clarify also on your guidance for 2024. Because if you look at the system-wide sales growth targets versus your operating income targets, they are pretty similar. So it seems to imply not much operating leverage for this year. So I'm just wondering if you could elaborate on -- is there any factors that you could consider and how you think about margins this year?
Richard Shin: Yes. I think for 2024, there is a, I guess, a mixed appeal of the current model, which is still skewed to opening new stores. And that shift is going to happen, as I say, a little bit out. So I think you're seeing some of that. But what I'm really focused on, actually, Brian, is the top line and the middle of the P&L. Because I think on the expense of the rest of those components, those are variables that we can dial up or down. For example, technology, we can always dial up or down where a lot of our investments are going. But it's really focused on driving same-store sales growth and not necessarily store expansion. So 2024, I think, we will probably end up seeing similar or much stronger key metrics, but it's not a transformational level. We don't get to 20%, 30% OPM, for example, because simply, the math doesn't work when you have 57% franchise stores owned.
Unidentified Analyst: Right. But do we expect some operating leverage to be true this year as well?
Richard Shin: Absolutely. Yes. We'll continue -- the Philippines as such, the top line will continue to grow faster than our expense line. So -- and Philippines is still our number one topic contributor. So, I think our operating leverage will come through there. Absolutely.
Carissa Mangubat: Okay. Our next question in the queue is from John Te, John?
Unidentified Analyst: Actually, Richard, just three questions. Firstly, if you could just clarify, EBITDA for most of the international brands were actually positive during the fourth quarter, but the operating income minus -- the question earlier alluded to, was negative. So is it just a negative leverage impact from lower sales from CBTL in the U.S. and Highlands impacting, I guess, leases, is what's in between, is like cash...
Richard Shin: Yes. So everything below EBITDA, as you would imagine, so mainly depreciation and amortization, but also the interest component. So all those are unfortunately dragging down to a net negative NOI. But the way I see it, there's a couple of tweaks to some of the businesses that I mentioned. That tweak, it's not that difficult to make happen. But at the moment, it's mainly because of the D&A and interest expense that's causing the negative versus a positive EBITDA.
Unidentified Analyst: Second is on China. China was great. Can you explain what Jollibee has done differently compared to the other restaurant brands in China?
Richard Shin: I've always said China is challenging. So I know there are great numbers in terms of movements, but I don't want to take full credit in the sense that fourth quarter of 2022, China was still locked down. So I don't know, kind of there's a history lesson, but kind of really kind of reopened August 30, 2023. So that's to say our fourth quarter 2023 was the first quarter with no partial or full lockdown. So that's why quarter four 2022 versus quarter four 2023, you're seeing that significant movement. Having said that, the businesses are doing well in terms of -- hence our units turning the corner. Yonghe King is our biggest and most strong brand. So yes, there is some hard work and good work there, but it's also relative to a lower quarter in fourth quarter 2022. But I am bullish on China because I do think that we have the talent there, and we are seeing some positive momentum, but I'm always cautious about China because of its unpredictability as well.
Unidentified Analyst: Maybe a longer-term question on franchising, in particular. You already mentioned that 2025 will be the start of this big program to increase the share of franchise stores. Can you just elaborate more if you can on specific targets, particularly, you say, in the U.S. or in Coffee Bean, where these brands will drive expansion?
Richard Shin: Perfect. So Philippines, I think, it's understood. And the mix is not going to change that dramatically. So it's already running on 2/3 franchise model in the Philippines. Certain brands are already 98% franchised like Mang Inasal, which is one of our champion brands. So, I think Philippines is not going to be that transformational change in terms of franchising. But if you look at, again, North America, what we are seeing is in 2025 onwards, predominantly, maybe more than 80% of all new stores should be through the franchise model. And that's what we're planning out. And that's the work that the team is leaning towards. When you look at Smashburger, by not opening any new company-owned stores in 2024. And so therefore, all new store openings, including those of international, which will start to happen late this year, too, to early 2025, you'll see 100% of Smash go in that direction, unless there's one or two, for whatever reason, we want to keep those as kind of the hub-and-spoke model, where -- you saw that really is a bit larger footprint, et cetera. But otherwise, that brand is going that direction. CBTL U.S., we're looking at all new stores being franchised as well. So, the only company-owned stores for CBTL will be in Singapore and Malaysia, and those at some point -- we haven't looked at franchising for those two markets. But other than that, U.S. and the rest of the world, are a franchise model. So that's -- yes, that's kind of some of the key brands and this is the beauty of how we're swinging that pendulum.
Unidentified Analyst: Awesome. No, that's great news, Richard. Just a quick clarification. In case I missed it, the 25% CAGR on EPS assumes that operating margins blended will reach 10% by the end of the period, right, 1-0?
Richard Shin: I don't have a direct answer, but yes, I can't remember all the -- sort of the steps in between. But what's more important for me rather than the OPM margin because, again, that depends on how you dial up the franchise company-owned store mix, but it's the absolute dollars that we're chasing in terms of going after market with better unit economics.
Carissa Mangubat: Thank you, John. So we'll just take one more question. I guess we have time for one more. Just a follow-up on the five-year plan, you highlight coffee and tea as a key pillar of growth. But yet in many markets, we are seeing rising competition in this segment. You see many of the Chinese competitors are now expanding beyond China. In Indonesia, I also have aggressive players. Can you give more color on your growth plans for coffee and tea?
Richard Shin: Okay. Thank you, [Ren], for the question. You're absolutely right. To go into China with CBTL at the moment, which you may -- we can have different views on whether CBTL's in the same category as Starbucks, but it is a premium positioning with cafes. That does not appear to be the right strategy as we can see what's happening to Starbucks in China, and we can see what's happening to the Luckins of the world. So for our coffee and tea strategy, we're not that bullish or aggressive in China. So I say that because the competition there is quite different in that they will take losses for many years to scale. So before we take that on, we think there's plenty of opportunities outside of China for coffee and tea businesses. So one by one, so if you take the Highlands Coffee, we still have a lot more to go within this home market at Vietnam. But we are looking at some other markets outside of Vietnam at the moment to start slowly seeding. And then if you look at Milksha, which is another brand in the category, we're looking at the U.S. as the next big international market to enter. And then, of course, CBTL, I think we spoke of, but the U.S. -- the footprint of 200 stores there is simply not acceptable. They're going to go larger but through franchising. And then, of course, opportunistic markets like the Middle East at the moment, where it has some of the fastest growth rates for us in our coffee and tea business.
Carissa Mangubat: So I think we can take one more. Last question. We have a follow-up from Brian.
Unidentified Analyst: Richard, a quick follow-up on Smashburger. Because if you look at what you've commented, we're not growing stores for this year. And franchise stores, actually, we saw a reduction in the number of stores in 2023. So with new management coming in, I'm just wondering what's the strategy change, if there any, there? And what are some of the milestones that you'd like them to hit as we turn this business around and such, so we can see growth on the revenue stores or margin?
Richard Shin: Yes. Great question. So we did close down stores, Brian, you're right, because the loss makers, we did close down in 2023. So we're now sub-240. I don't know what the latest number is, but I think it's around 236, that's the first point. The reason for that is we want to make sure we know what we're doing, 100%. And then from there, we're going to spring forward, as we've always talked about, the key steps to turning this business around. So the magic number is around 3,300 ADS or EBITDA breakeven across the board. And in terms of consistency as well. You can't have some stores that's 2,000 and some stores that's 3,300. You have to pretty much get everybody up there, that's point one. So that's quite achievable. The target that I believe we're going to set is more in line with what we're seeing in other past cash flows. So there's no reason why we shouldn't be looking at the 4,500 and 5,000 levels going forward. So I think the new CEO -- and we'll let her settle in and drive these KPIs, but at 4,000 NOI positive, operating income positive. So you go beyond EBITDA, I mean that's rear view mirror. Now you go for NOI positive. So I think it's going to be north of 4,000 in terms of being significantly positive. So those are -- that's the key target at the moment, Brian. We are absolutely focused on ADS, average daily sale. The reason is because the business has engineered itself to be running at a very solid 75% to 78% good margin business. So again, higher than our chicken businesses. So we know that once we get the ADS, the box economics starts to work with this brand.
Carissa Mangubat: Okay. So I think that's it for today -- that's all the time we have for today. I think there's still some questions and maybe the IR team will just get back to them after the call. So thank you everyone for dialing in. Thank you, Richard, for giving us a very helpful discussion on the results, and we look forward to seeing more good things from Jollibee Foods in the coming year and years. So again, thank you, everyone. Thank you also Cossette and Mona, who are on the call with us today.
Richard Shin: Thank you, Carissa. Thank you, everyone.
Carissa Mangubat: Have a good afternoon, everyone.
Richard Shin: Thank you, Carissa. Thank you, Mona.
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