Earnings Call: Q4 2021

Aug 19, 2021

Ladies and gentlemen, thank you for standing by and welcome to Minitou Group Holding Limited Earnings Conference Call for the Q4 of Fiscal Year 2021 that's ending June 13, 2021. At this time, all participants are in a listen only mode. After the management prepared remarks, we will conduct a question and answer session. Please note this event is being recorded. Now I'd like to hand the conference over to your host speaker today, Mr. Ethan Zhang, Director of Investor Relations. Please go ahead, Ethan. Thank you, Meng Ru. Hello, everyone, and thank you all for joining us on today's call. Company has announced its quarterly financial results earlier today. An earnings release is now available on our Investor Relations website atir.minsau.com. Today, you will hear from our Chairman and CEO, Mr. Guo Hu Ye, who will start the call with an overview of our business. He will be followed by our CFO, Mr. Steven Zhang, who will address our financial results in more detail before we take your questions. Before we continue, I'd like to refer you to the Safe Harbor statement in our earnings press release, which also applies to this call as we will be making forward looking statements. Please also note that we will discuss non IFRS measures today, which we have explained and reconciled to the most comparable measures posted on the International Financial Reporting Standards in the company's earnings release and filings with the SEC. With that, I will now turn the call over to Mr. Ye. Please go ahead, sir. Hello, everyone. On today's call, I will first give you an update on our operations in June quarter and full fiscal year 2021 and then share our development strategy for the full year 2022. 4th quarter. Revenue was RMB2.47 billion, up 59% year over year and within the company's guidance. Adjusted net profit of RMB145 1,000,000, up to 142% year over year. In terms of regions, domestic revenue was RMB1.95 billion, up 43% year over year. Overseas revenues were RMB526 1,000,000, up 179 year over year. In terms of business units, Minasol, our flagship business recorded a revenue of RMB2.3 6,000,000,000, up 57% year over year, accounting for 95% of our total revenue. Meanwhile, our business recorded a revenue of RMB110 1,000,000, up 136% year over year. Faced a tough operating environment in June quarter and the rapid spread of the delta variant triggered a new round of pandemic in Guangdong province and some other overseas markets. In China, thanks to strong measures taken by the government, the spread of the pandemic was effectively limited in Guangdong and completely controlled by early July. As a result, domestic corporations of the Minsu brand recorded a revenue of RMB1.83 billion, up 39% year over year. Revenue from international operations in the quarter was RMB526 1,000,000, up 179% year over year. Although the overall situation was better than that of the same period in 2022 for international operations, Some of our overseas subsidiaries, such as those in India, experienced a revenue decline sequentially in this quarter due to the impact of Delta variant. Our distributor countries on the other hand experienced a revenue increase sequentially, despite lower than expectation. China, we added 127,000,000 stores during this quarter compared to a net decrease of 2 stores and a net addition of 38 stores during the same period of 2020 2019 respectively. This was an encouraging development for us and we should give credit to support our retail partners here. By the end of June, we had 820 retail partners, increased by 80 year over year, with each partner having 3.5 minstrel stores on average, flat year over year. Despite resurgences, pandemic in China could bring short term pressure. However, Minstin's long term potential in China remains unchanged. For example, as we continue to unlock new opportunities in China's low tier cities. 50% of new stores performed this market in this quarter. We have many cities in our list to enter to further develop. We opened 35 new stores in overseas markets on a net basis this quarter, 40% of which were located in Europe. In Italy, Minstor opened 3 stores consecutively in April, attracting lines of consumers who are outside the stores for a long time. This is the latest example of Minstor's initial success in European markets as represented by Italy, France and Spain and so on. We look forward to continue to serve European customers with Minsoft's relaxing shopping environment and shopping experience. We also entered 3 out markets in this world besides Italy, marked our entry into 98 overseas markets. During this quarter, the average number of floor suspensions in overseas markets was about 300 compared to 200 in the previous quarter, mainly due to the spread of the delta variant this quarter. On the other hand, suspended stores were at a quarterly low of 205 by the end of June, down from 2 28 a quarter ago. However, the recent resurgences of pandemic since July is expected to continue to impact international operations. Assist our overseas partners in tackling the new challenges caused by pandemic resurgences. First of all, we have connected them to local channels such as supermarkets and online channels to boost sales, clear inventory and get cash back. For example, Morocco and Thailand set our flash stores in the Philippines, we cooperate with supermarkets. Our specialized team has enabled operations in about 50 overseas markets to move part of their sales online by providing useful suggestions. Secondly, we launched a new business process management system this quarter, which helps distributors better integrate the whole business process with its standardized and visualized features. This system has helped improve overall efficiency and satisfaction of distributors. Thirdly, by allowing the use of credit tools such as lateral credit for payments, we help relieve a part of distributors' cash flow pressure. Last but not least, we continue to help distributor partners control their costs in areas such as improving average employee output and negotiating more favorable rent deductions. As we pointed out on our last call, Minsto has collaborated with many strong partners in its overseas markets. Who have strength in cash position, shareholder background and bargaining power, now more resilient to the uncertainties caused by the pandemic. We remain confident about Minsa's long term prospects in overseas markets, large trends in supply chain, products, retail know how and the business model remain outstanding. We continue to cooperate with overseas partners to overcome the challenges together. Move to our online business, e commerce revenue was around RMB200 1,000,000 up 136% year over year, mainly attributable to the June 18 mid year shopping festival. In total, online business, including e commerce and O2O contributed 12% of our total revenue. As of June 30, members who had made at least one purchase during the past 12 months were about 33,000,000, up 49% year over year and 10% sequentially. We continue to expand our IP library and this quarter has seen great success in our cooperation with top IPs such as Toy Story, the NBA and Minions, with IP sales up 79% 59% over the same period in 2020 2019 separately. In addition, we plan to leverage Minsto's global store network to introduce more popular products such as flying box to overseas markets. As the first step, we have achieved encouraging results in Southeast Asia and Middle East in this quarter. For example, in its 1st 5 days in Singapore, sales of Flying Box accounted for more than 20% of total store sales. We will test more markets in Europe and Latin America by this year. Now Top Toy. First of all, channel expansion on track. During this quarter, TopToy opened 4 stores, bringing its total store to 33 by the end of June, including 6 DreamWorks stores and 27 collection stores. Just last weekend, our toy museum co branded by Top Toy and celebrated its grand opening, bringing Top Toy stores to a grand total of 54 and recorded total sales of more than 1,000,000 in its first day. We are also preparing for TopToys' 1st R Toy Conover exhibition with China International Comics Festival in Guangzhou in early October. This 10,000 square media exhibition will include top brands such as Bandai and will be a great opportunity for us to both promote Top Toy and accumulate the relevant experience. Secondly, Subtoys business model is improving. With its rapid expansion in this quarter, Subtoys revenue increased by more than 180% sequentially. Subtoys is still in early stage of capacity building and brand promotion and this gross margin level has huge room to improve. Going forward, we expect that Top Toy's gross margin will improve while its operating leverage will be gradually released driven by the expansion of its scale and the maturity of its proprietary IPs. Thirdly, we continue to upgrade our product structure as planned. Subtoys' proprietary products, including 6 of its proprietary IPs now account for more than 5% of total SKUs, with higher gross margin than those of third party products. Our proprietary IPs launched just 3 months ago have gradually caught on in the market. For example, sales of Twinkle and Daimler Tumblr have stabilized within our top 10 SKUs. The sales of Temi's daily series stabilized within top 20. Moving on to fiscal year 2021, despite the continuous impact on global retail industry caused by the pandemic, we still recorded a positive growth with revenue reached RMB9.07 billion. Domestic revenue was RMB7 point 29,000,000,000, up 21% year over year and Oasis revenue was RMB1.78 billion, down 39% year over year. In this year, we continued our overseas expansion, adding an additional 121,000,000 plus stores in overseas market and entering our 98 overseas markets, despite the great uncertainty caused by the pandemic. We also continue to see the market potentials in China's low tier cities with 60% of 406 new Minnesota stores in China located in this market segment. Additionally, we successfully completed our initial public offering, unveiled our X strategy and launched TapToys. We are moving towards our vision of becoming a leading global new retail platform. Looking ahead into the fiscal year 2022, we remain committed to pursuing the following strategies. Firstly, we will continue to expand and upgrade our store network and refine our business model. Secondly, we continue to focus on product and supply chain as well as introduction of more popular products to fully leverage our strengths in product design and cost control. We also continue to execute our IP strategy and expand our IP library fully utilize the brand awareness and the appeal of top IPs. Thirdly, we will continue to depend consumer engagement and drive the omni channel experience. We also improved our ability to operate private traffic through mini programs, DTC capabilities, launching products, exclusive online and improving our recommendation algorithm. Fourthly, we'll continue to closely monitor the pandemic development and adjust our business plans dynamically By continuing to cooperate with our overseas partners in various aspects, we'll help them receive energy for future development. Finally, we will continue to leverage our strengths and core capabilities to explore new business opportunities. This concludes my prepared remarks and now I will turn the call to our CFO for financials. Thank you. I will start my remarks with a review of June quarter financial results and then provide additional color regarding the September quarter. Please note that I will be referring to non IFRS measures, which have excluded share based compensation expenses. Revenue was RMB2.47 billion, increased by 59% year over year and 11% quarter over quarter and above the midpoint of the company's guidance range of RMB2.3 billion to RMB2.5 billion. The year over year increase was primarily driven by the growth of the company's domestic operations and the recovery of international operations. Revenue generated from the company's domestic operations was RMB1.95 billion, increased by 43% year over year. Revenue generated from domestic operation of Miniso brand was RMB1.83 billion increased by 39% year over year, mainly driven by a year over year increase of 14% in average store count and a year over year growth of 23% in average revenue per store in China. Revenue generated from company's international operations was RMB526 1,000,000 increased by 179% year over year, reflecting recovery of company's international operations from the same period of 2020. From quarter over quarter perspective, revenue from company's domestic operations increased by 9%, driven by a sequential growth of 6% in minisource offline sales in China and a sequential growth of 15% in e commerce business due to June 18th mid year shopping festival. Revenue from international operations increased by 19% sequentially. According to National Bureau of Statistics in China, in the first half of twenty twenty one, retail sales of supermarkets, convenience store, department store and the special store increased by an average of 22% compared to the same period of 2020 and then 7% compared to the same period of 2019. Over the same period, Miniso Group sales increased by 54% and 8 percent separately, better than the industrial average. And it was achieved against the background of the pandemic resurgence in Guangdong province, which lasted for nearly 50 days. During that day, the estimated loss in GMV was about RMB50 1,000,000. Gross profit was RMB639 1,000,000 increased by 60 8% year over year and 2% quarter over quarter. Gross margin was 25.8% as compared to 24.4 percent a year ago and 28.1 percent a quarter ago. The year over year increase of gross margin was primarily due to an increase in revenue contribution from the company's international operations, which typically has higher gross margin than the company's domestic operations. Revenue from international operations account for 21% of the company's total revenue compared to 12% in the same period in 2020. The quarter over quarter decrease was mainly attributed to increased promotion activity during the June 18th mid year shopping festival and the second inventory clearance in certain cities that aimed to take hold the negative impact caused by the reoccurrence of the pandemic in Guangdong province. Selling and distribution expense was RMB264 1,000,000 increased by 15% year over year, but decreased by 4% quarter over quarter. The year over year increase was primarily attributable to increased personnel related expense and the marketing expense as with the year over year revenue growth and the brand awareness improvement of both MINISO and Top Toy. The quarter over quarter decrease was primarily attributed to rental deductions related to COVID-nineteen in certain international markets. G and A expenses were RMB188 1,000,000, increased by 59% year over year and 20% quarter over quarter. The year over year increase was primarily due to 1st increase in personnel related expense and IT expense for our new initiatives such as Top Boy And the second, we took necessary measures to reduce our general and administrative expense to take hold the challenge caused by the pandemic during the same period of 2020, resulting a lower comparison base for these expense. The quarter over quarter increase was primarily due to increased professional service fee. Turning to our profitability, operating profit was RMB188 1,000,000 compared to a loss of RMB30 1,000,000 in the same period of 2020 and a profit of RMB161 1,000,000 in the previous quarter. The year over year improvement in operating profit was primarily due to our business recovery, both in China and overseas market, while the quarter over quarter improvement was due to the reduction in foreign exchange loss and the credit reversal in this quarter. Adjusted net profit was RMB145 1,000,000 increased by 2 42% year over year and flat quarter over quarter. Adjusted net margin was 5.9 percent compared to about 2.7 percent a year ago and 6.7 percent a quarter ago. Adjusted basic and diluted earnings per ADS were both RMB0.48 in this quarter compared to RMB0.16 a year ago and RMB0.52 a quarter ago. Turning to our balance sheet, as of June 30, 2021, the combined balance of company's cash, cash equivalents, restricted cash and other investments was RMB6.88 billion compared to RMB2.86 billion a year ago. Turning to working capital, turnover of inventories and the trade receivable remain flat sequentially. The Board of Directors has approved a dividend of about RMB300 1,000,000 and I want to take this chance to share the company's capital allocation strategy here. When deciding the total amount of the dividends, we have considered the level of profitability that we have achieved in fiscal year 2020 and could have achieved in fiscal year 2021 without the pandemic. Our capital allocation strategy is new in the future will prioritize new growth opportunities such as new strategic initiatives and new store expansion. We will also remain committed to bring return to shareholder through anticipated dividend payments. Looking ahead into September quarter of 2021, we expect our total revenue to be between RMB2.45 billion and RMB2.65 1,000,000,000 which represents an increase of 18% to 28% year over year. The latest resurgence of the pandemic from Nanjing in China has spread to several provinces and is still evolving. The company currently estimates that its sales will continue to be pressured by the lingering effect of the pandemic in short time, which will lead to a reduction a reduced traffic or even the temporary closure of the company's store. We will continue to focus on those elements of the business that's under our control such as product innovation, inventory management, operating efficiency and omni channel strategy to drive sales and protect margins. This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you. We will now begin the question and answer session. Your first question today comes from the line of Ms. Hsiung Chen from Goldman Sachs. So two questions for management. One is, can you please share the quarter to date trend for both China and a few like important international market situation? And secondly, for Tubtoy, Mentor mentioned that the gross margin upside will come from a better product mix. So can you share with us the IP development and other product mix enhancement strategies going forward? Thank you. Thank you for your question, Xia. In terms of the pandemic influence our mass business. So this round of pandemic began at around July 20. Although we have taken active measures such as to increase our online promotions and other strategies to deal with it, it has somehow impacted our business. Based on our track recently, the influence is across the board in the 3 tier cities. For Tier 1 cities, the estimate loss in GMV for those influenced stores were about 10% of its daily normalized level. And for Tier 2, the impact is estimated to be more than 20% and for Tier 3, it's below 10%. And we currently estimate that the overall impact for the GMV is about 15% for our domestic business. And in terms of province or regions, the most impacted were provinces such as Jiangsu, Henan and Wunan. For these three provinces, the estimated JPY growth is about 30% to 40% of its scaling online level. And we currently estimate that the impact of the that the only 1 month on overall performance is diminishing with the strict control by the government and the overall impact is diminishing too as the pandemic is gradually brought under control. And based on the past experience in China, it usually takes about 45 days to control the whole situation. And we believe at this time that it will happen for this for both of this round of pandemic too. In terms of the recovery in overseas markets, in June quarter, the overall recovery rate was about 55% compared to the same period in 2019. And the recovery rate was about 55% in April, 60% in May and 50% in May, and 50% in May, effectively. In terms of region, Asian markets, our largest overseas market with our about 40% of overseas growth has lagged behind peers. The overall recovery rate there during the quarter was about 35% to 40% of pre COVID level in the same period in 2019, while Latin America, our 2nd largest. So, with about 50% of our stores down, the recovery rate was about 60%. And on the other hand, we have seen strength in other markets such as Middle East and North Africa and Europe too. For Middle East and North Africa, the recovery was about 70% and for Europe, it was about 77%. And these two areas saw strong growth in Germany. For Middle East and North Africa, it increased about 2% compared to same period of 2019. Europe as a whole increased 77%. But these two areas, again, they are our emerging market and we temporarily have do not have many stores there. And in terms of countries, if we look at the top 10 countries in terms of sales, Mexico recovered to around 70% from the same period. 2019, while Asian countries, including our subsidiary countries such as Indonesia and India, were about 50% 75%, respectively. Resource can be in Middle East countries such as Saudi Arabia, which saw 64% increase over the same period in 2019 Israel, which saw 51% increase and the Morocco, which saw 99% increase, I mean, due to the increase in the number of stores. But overall, these areas I mentioned just now, the recovery rate is still well below 80%. Before your second question, Michelle, on Tapoi, in terms of sales per store, our DreamWorks stores, we are not talking about 4 stores in the last quarter, but we have 8 now beyond that, we have more than 40 collections stores now. So, the average performance is quite stable. For DreamWorks, monthly sales stabilized at RMB2 1,000,000 and for collection stores, it's stabilized at RMB600 ks. Overall, average sales per top quartile store is more than RMB900 ks. In terms of product, so far we have operated with about 200 suppliers and developed more than 3,300 SKUs of popular products. And nearly 500 of them have been sold out. And about 80% of sales of Top Point Now contributed by its top 120% best sellers. And as we shared before, Hub Point now has 8 categories and more than 100 and 20 subcategories. And in terms of consumption of consumers, let me show a few figures. First is ASP. So, average ticket size for TUPTOY is relative high at RMB150, while DreamWorks can be as high as 200. And the second is a toy like Minstor has strong holiday back. And for example, this year, we had 6 public holidays in the first half, accounting for 16% for all days, but its revenue contribution during these 6 holidays were up 30%. And for our proprietary IPs, now we have 6 SKUs with gross margin of about 60%. And average revenue of our proprietary SKUs is 4 times that of top choice average. And during this quarter, we also launched our Yi Fanxiang function mini program that is it was a huge success. For example, we launched 3 to 4 STU every month with each of their sales people the average of top toys. And this turnover rate is extremely high, extremely fast that can be sold out within 10 minutes after launch. So all in all, we estimate that our proprietary products, including our proprietary IPs, co branding IPs and exclusive IPs will account for 20% to 25% of total SKUs in 1 year and 30% to 40% in 2 years. Merchandise gross margin for sub toy is now at 43% compared to less than 40% 6 months ago, mainly due to increased revenue contribution from proprietary products and our improved bargaining power with suppliers because firstly all of our third party products such as BJT voice, action figures and get it for all purchased in small quantities. But in the second half, this will change. The percentage of the large orders will increase, so will our toys merchandise gross margin. Thank you. The next question comes from the line of Lucy Yu from Bank of America. So considering that COVID-nineteen is going to be lasted for at least a relatively longer time, so how should we think about the development in both domestic market as well as overseas market, especially in terms of marketing and channel development? And also in terms of new retail format development, is there any update that could be shared with us? And the second question is on the margins. GP margin declined or contracted a little bit on a Q on Q basis. So could we break that down into promotion activities and inventory clearance? So how much of the margin contraction is due to each factors? And then going to the next quarter, which is September quarter, how should we think about the margin trend? Thank you. Lucy, this is Steven and I will address your first questions on channel expansion. For our online business, we have experienced a rapid growth during the past 1, 2 years. And now its revenue contribution is about 12%. But if you look at the past 1 or 2 years, the DOU growth was both more than 100%. So as an important part of our omni channel strategy, we'll definitely invest into online continuously, including our outdoor business, DTC, e commerce and so on. The e commerce ecosystem has changed a little bit a lot in the past year or 2, such as live streaming, going and kuai shou. And we are also actively following up on this trend, but We're not burning cash to pile up GMV as we showed in our past call. Instead, we will insist on profitable and healthy way to develop our online business. So it has been and so it will be. For example, we are more focused on digitization here to reach and active our users in a more low cost, but more efficient way. Lucy, this is Jack here. And in terms of your questions about new business, as we shared that, our vision is to become a global leading new retail platform. So we definitely have some source and some internal incubation and so on. But we do not think that this is right time to shell and we'll definitely shell more when we have some major Lucy, in terms of your questions on GP margin, in this quarter, as we explained that two reasons have resulted a sequential decline versus the media shopping password. We have increased promotions to maintain our market share. And the second is due to the pandemic in Guangdong and we have made some inventory clearance to tackle challenges. So overall, these two regions have decreased our GP margin of about 1.5%. And if we look at the next quarter, the September quarter, for e commerce, we do not see any influence in this side because there were no major driving fast flows during this quarter. But for the second, the pandemic, since late July, the pandemic from Nanjing has spread in many provinces in China. So we estimated that based on past experience, it is going to be completely controlled at least 45 days. And so in short term, we see some gross margin pressure here. And we will continue to do some inventory clearance to tackle this in engine pandemic. So we estimate that the GP margin for the September quarter, Maybe it will improve sequentially from this quarter, but it will be still lower than our normalized GAAP during the past several quarters. Thank you. Okay. Thank you. The next question comes from Jerry Wang from Citiq. Please go ahead. I would like to know about the changes in category structure of Miniso since 2021 and with the proportion of each category such as food, brand, food, brand, good and extra and which category will be highlighted in the future? Thank you. Jerry, this is Jack. Thank you for your question. In terms of your question on product, the revenue contribution of our 11 categories are relatively evenly distributed and are relatively stable. During the past 2 years, categories such as toys and snacks have grown rapidly. For example, sales of toys now account for about 7.9% and the sales of snack account for about 8.9%. Another category, personal care was the start of the first half of this year. 1 with its revenue share now reached about 10% compared to 7% in the same period of 2020. If we look at the category structure, the 11 categories, the structure, they are relatively stable. And we do not see big change in the future, but we do think that there exists opportunities in some subcategories such as art toys and such as toys and snacks 1 year ago. In the future, we do not think we do think that culture and creative products will have their markets because young people love it. And this is the same for personal care products. And for IP products, which we are very good at, as we shared earlier in my prepared remarks, sales of IP products increased 59% compared to the same period in 2019 and accounting for 25% of our sales. Thank you. Okay. I'll translate to myself. This is Rebecca from Haitong International and I just have one question about a Mini's overseas business. Could you please share the current revenue mix of 3 overseas models they directly operated distribution and franchise? And also could you please give us more color on the restocking status and the trend of the distributors? Thanks. Hi, Rebecca. Thank you for your question. This is Stephen. Now, in terms of GMV, our distributor markets usually account for 60% to 70%, similar with its share of our overseas stores and subsidiary countries account for another 30% to 40%. And before the COVID-nineteen, such as in the Q2 of 2019, that the GMV in our subsidiary companies' the share was about 30%. But in this quarter, in the due quarter of 1, because of the delta variance GMV in our subsidiary countries accounted for only 2%. And in terms of revenue, this quarter, it's 70%, 30%. So, the 70% is from distributor country. And in terms of merchandise delivery amount of distributor order, in the 1st 7 months in Q1, total shipments order decreased 30% to 40% compared to the same period in 2019 and increased about 60% compared to the same period in 20 20. And as you mentioned, our overseas distributors, as our CEO, Sheldon, Yu Yu prepared remarks that we have cooperated with many strong overseas partners in our overseas markets. And if I remember right, the CR10, that means the concentration rate of our top 10 distributors in our international operations, has been stabilized at 60% during the past few years. So these major distributors, they have strengths, cash position, in shareholding structure, in bargaining power. So we do believe that we are more resilient to tackle the difficult declines during the pandemic. And this is also a proof that our digital market is stable. Thank you. Okay. Thank you, everyone. Thank you once again for joining our conference call today. So if you have further questions, please do not hesitate to contact Minisource Investor Relations team and our contact information can be found on today's press release. So we will see you next quarter. Have a nice day. Bye