Earnings Call: Q3 2021

May 19, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Minnesota Group Holdings Limited Earnings Conference Call for the Q3 of Fiscal Year 2021 that ended March 31, 2021. At this time, all participants are in a listen only mode. 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, Jason. Hello, everyone, and thank you all for joining us on today's call. The company has announced its quarterly financial results earlier today, and earnings release is now available on our Investor Relations website at ir.minsou.com. Then you'll hear from our Chairman and CEO, Ms. Guohu 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 would 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 reported under the International Financial Reporting Standards in the company's earnings release and filings with the SEC. During the Q and A session, please repeat your questions in Chinese. It is asked in English. Management will answer in Chinese and I will translate it in English. With that, I will now turn the call over to Ms. Yiye to give you a business update. Please go ahead, sir. Hello, everyone. For the March quarter of 2021, Minstor recorded a revenue of RMB2.23 up the 7% year over year and in line with the company's guidance. Our domestic business delivered combined revenue of RMB1.79 billion, up 75% year over year and 12% compared to the same period of 2019. In today's conference call, I share the major developments we have achieved for both Min Song and TopTory this quarter. For MINISO, our domestic operations continue to deliver an encouraging recovery this quarter. While occasional cases of COVID-nineteen in early January result in shutdowns for certain stores, we took a number of measures and launched a series of new products in the following months to achieve a healthy recovery. As a result, domestic operations of Minso brand recorded revenue of RMB1.72 billion, up 71% year over year and 12% compared to the same period of 2019. We added 44 new Minto stores in China during the quarter, with more than 90% of new stores located in Tier 3 and PL cities. During the past 12 months, we made significant progress in executing our strategy to penetrate into our Tier 3 business, with 70% of new stores located in Tier 3 and Tier 3.0 cities. We've noticed that nearly positive operating metrics for our new stores, such as average ticket size, conversion rate and cross selling rates are similar in lower tier cities with Tier 1 and Tier 2 cities, where rental expenses are more attractive, providing a better ROI for our retail partners in the long term. As of March 31, less than 40% of our stores were located in the low tier cities. As lower tier cities accounted for more than 70% of China consumer spending, more than 60% of GDP and contributed 2 thirds of the country's economic growth. Going forward, we see a lot of opportunities in lower tier cities and we'll continue to unlock new client opportunities there. As for overseas operations, revenue was RMB441,000,000, down 28% year on year and 5% quarter over quarter. During the same period of previous year, COVID had not fully rounded. However, during this quarter, many countries have experienced major setbacks on the path to pandemic recovery, especially in Southeast Asia and Latin America, where many of all overseas stores are concentrated. In these areas, many countries have continuous reporting new records in case numbers and have adopted stricter control measures. By the end of March, 2 28 overseas stores were temporarily closed, and many others were forced to reduce leasing hours due to the impact of COVID-nineteen, resulting in the year over year revenue decline. Less than that, we have made encouraging progress in our overseas market expansion. The number of overseas stores increased by 29 in this quarter, surpassing the added growth opportunity in the same period in 2020, demonstrating our overseas partner's confidence in the midst of long term conservatism. The value growth in new growth in new stores taken from countries in the Middle East and Europe, while the pandemic recovery went well. This includes spend, while we opened 6 new stores during the quarter. In January, Minso opened its 1st store in the 2nd largest city in Moscow, which was the market growth overseas market we have entered. The mission of Minsto is to provide global consumers with high quality and affordable lifestyle products. In this quarter, we continue to focus on product and innovation. So I'd like to share additional details on this front. First of all, in product development, we focused on strategic new categories. In this quarter, in China, sales of strategic new categories such as toys and snacks increased significantly year over year. Specifically, sales of toys were up nearly 2 fold year over year, in which building blocks were up more than 3 fold. Sales of snacks were up 104% year over year, which sugar candy kit sales increased by 168% year over year. 2nd, we kept innovating our business, Take our first ZAM store, fashion mask store as an example. Its sales in a single day exceeded RMB 10000, which is a very encouraging number for a vertical retail store and provided us with confidence and experience in expanding them in all the categories and will translate this new successful business to our cities in the near future. Let me give you another example. During the pandemic, we proactively leveraged innovative ways such as live streaming to distribute merchandise to overseas partners. That's been proved to be quite effective in promoting the recovery of overseas business, The 2 live streaming events in this quarter generated revenue of RMB160 1,000,000. 3rd, we strengthened our IP advantage by successfully launching products with new IP partners such as Chip and Dale. Samsung have official Blessing and Bilibili during this quarter. So far, we have fully covered 6 major IP sectors, as global trendy IPs, ACG IPs, Chinese traditional IPs, creative art toys IPs, sports and gaming IPs and have solidified MISO's position as the leading IP player in the industry. On the operational side, we have been dedicated to improving the efficiency of municipal stores by introducing information system and detailed tactics during the past several years. For example, average number of employees per store in China dropped from 10 a few years ago to 6 in the last quarter and dropped further by nearly 10% during this quarter, effectively reduced the cost burden of our retail partners. Minsto's omni channel strategy continued to be well executed during this quarter. We continue to reaching and activate members through various ways such as private traffic operations and give incentives such as coupons, which I mean program to improve retention and repurchase rate of labor. As of March 31, members who had made at least one purchase during the past 12 months were about RMB30,200,000, an increase of RMB2 million sequentially and nearly RMB80 1,000,000 from the end of June 2020. As a result of the above mentioned measures, revenue contribution from online channels exceeded 10% for the first half in this quarter, with e commerce contributed RMB171 1,000,000 or 7.7 percent of net revenues, and O2O contributed about RMB17 1,000,000 or RMB3.1 of net revenues. Now I'd like to share more about Top Toy. As the first new business incubated on the act strategy, this is Top Toy's 1st full quarter. We continue to see healthy trends in each aspect of its operation, including optimization of its economic model, expansion of product categories, improvement of omni channel strategy and positive initial results of IP strategy. The first DreamWorks store, Top Toy, has been in operation for 5 months. Our team has been refining its business model. So far, we have opened 4 DreamWorks stores, each of which has created very good opening performance among peers, giving us great confidence in the success of 3 more stores. At the same time, we are also testing smaller stores such as collection stores as well as flash stores, and we'll continue to review TopToys operations in our dynamic business, and we'll provide more updates on last quarter's call. Top Toy is committed to building the world's largest and most comprehensive collection shop of art toys. To achieve this, it has been adopting a multiple category strategy to expand the addressable market of art toys while reducing reliance on the gaming single category. In this quarter, we added sculptures as the 8 category of Top Toy to enrich its product line. Garage Keys, Building Vault and Assembly Gundam were 3 rising categories figures by consumers during the quarter. And their revenue contributions continue to increase. So far, Toptoy has about 2,500 SKUs, increased from 1500 when it got started. In terms of channels, Toptoy has been building its omnichannel capabilities since day 1. Today, it covers 15 cities in China, within 25 offline stores. Meanwhile, it plans to open robot shops as the 1st overseas store within this year. In terms of online channels, it has accumulated more than 300,000 members in its WeChat meeting program. In addition, it opened its Tmall flagship store in late April and will cooperate with other e commerce giants such as jknew.com and Zohimi to open more stores. On April 28, Top Toy held a zammy branding event in Shanghai to introduce its proprietary IPs such as Twinkle, Cammy and YouYou. I'd like to take this opportunity to share TopToi's IP strategy. We estimate 30% of TopToilet's products will be through self owned IP or through cooperation with IP partners, and the other 70% will be through 3rd party IPs. Proprietary and exclusive IPs, because of its originality and uniqueness are much easier to communicate with fans. They have high gross margin and enable TopToi build competitive advantages. To focus on IP development, TopToi has cooperated with nearly 3 100 designer and supply partners, including talented designers such as Koyokoyama, Japan's top designer. The March quarter was Minsto's 1st full quarter as a public company. We have experienced accelerating recoveries in domestic operations and profitability as we continue to focus on product innovation. Top toy continues to achieve new milestones as we continue to sharpen our business model, product, sales channels and proprietary IPs. Looking forward in 2021, Minstor will continue to penetrate further into China's lower tier cities by opening more stores and capture more greater market share in mid high ROI regions. Meanwhile, we'll continue monitoring the pandemic recovering in overseas markets carefully and rapidly adapt our expansion plan as necessary to embrace its recovery. This concludes my formal business update. I'll now turn the call to CFO for financial results. Thank you. I will start my remarks with a review of March quarter financial results and then provide additional color regarding the June quarter. Please note that I will be referring to non IFRS measures, which have excluded share based compensation expenses. Revenue was RMB2229 1,000,000, representing a year over year increase of 37% and a quarter over quarter decrease of 3%. The year over year increase in revenue was driven by the recovery of our domestic operations, which increased 75% to RMB 17.8 8,000,000. Within our domestic operation, revenue of ministore offline stores were RMB1544 1,000,000, increased 69% year over year. Revenue over e commerce were RMB171 1,000,000, increased 86% year over year. In overseas markets, revenue declined by 28% year over year as compared to a decline of 51% year over year in the previous quarter. The quarter over quarter decrease was mainly due to seasonality and an influence of pandemic. Our business is subject to seasonal fluctuation, typically with a strong performance in the summer quarter than in March quarter. However, we took several effective measures, such as launching more popular products to boost the sales and penetrating further into low tier cities in China in this quarter. The sequential decline of revenue was only 3% compared with the sequential decline of 11% in March quarter 2019, which represented a normalized seasonality before pandemic. Gross profit was RMB627,000,000, increased 19% year over year and decreased slightly quarter over quarter. Gross margin was 28.1%, the highest in the past 4 quarters since the outbreak of pandemic, showing a positive sign of our continued business recovery. Gross margin was 32.4 percent a year ago and 20% a quarter ago. As we have explained in last quarter, the fluctuation in gross margin was due to change in our revenue mix. The year over year decrease was due to a decrease in revenue contribution from our more profitable overseas operation, which was 19.8% of net revenue in this quarter as compared to 37.3 percent a year ago. The sequential increase in gross margin was mainly and O2O in this quarter, despite the decrease in revenue contribution from our overseas operation, which was 20.1% of net revenue a quarter ago. Selling and distribution expenses was RMB275 1,000,000, increased 18 percent year over year but decreased 10% quarter over quarter. The year over year increase was attributed to increased logistic expense, which was in line with the recovery of our business during this quarter and the increased marketing expenses as we continued to strengthen brand recognition for Miniso and TOTOY. The quarter over quarter decrease was primarily due to the decrease in marketing related expense and the personnel related expenses, such as payroll and the travel expenses caused by seasonality. G and A expense were RMB157 1,000,000, increased 29% year over year and flat quarter over quarter. The year over year increase was primarily due to increase in personnel related expense and IT expenses. We took measures to reduce G and A expense when the COVID-nineteen pandemic broke out during the same period of 2020, such as trimming down the personnel related expense and IT expense, resulting a low comparison base for these expenses. Turning to our profitability. Operating profit was RMB161 1,000,000, increased by 3 fold year over year and twofold quarter over quarter. The year over year improvement in operating profit was primarily due to our business recovery in China, while the quarter over quarter improvement was due to the reduction in operating expense and other net income or loss, which was a loss of RMB 55,000,000 in the previous quarter, but an income of RMB 8,000,000 in this quarter. Adjusted net profit was RMB149 1,000,000, increased by 10% year over year and 77% quarter over quarter. Adjusted net margin was 6.7%, the highest in the past 4 quarters since the outbreak of pandemic compared to about 8.3% a year ago and 3.7% a quarter ago. Basic and diluted earnings from continued operations per ADS will hold 0.4 dollars compared to $0.76 a year ago and $0.08 a quarter ago. Adjusted basic and diluted earnings per ADS were RMB0.52 compared to RMB0.44 a year ago and RMB0.28 a quarter ago. Turning to our balance sheet. As of March 2021, the combined balance of company's cash, cash equivalents, restricted cash and other investments were RMB 7,000,000,000 compared to RMB 6 900,000,000 a quarter ago. The increase was primarily due to the cash flow generated from the operation. Turning to working capital. The turnover of inventories and the credit receivables remain flat sequentially. Looking ahead into June quarter of 2021, we expect our total revenue to be between RMB2.3 billion and RMB2.5 billion, which is representing an increase of 48% to 61% year over year. As we continue to operate in a time of significant uncertainty in regard of the timetable of pandemic recovery in our overseas market, we remain cautious in our sales outlook in this market. However, we are encouraged by our efficient working capital management, steady recovery of gross margin, disciplined investment and expense in the new business, all of which has laid a solid foundation for us to deliver consistent, strong financial performance and long term shareholder value. 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. Our first question is from Michelle Chang from Goldman Sachs. Please go ahead. I have three questions for management. First one is, the company introduced a new retail platform strategy and we successfully developed Top Toy. So can management share the thoughts about the future development and also what experience we can learn from Top Toy development? And second question is about the overseas recovery. So on the one hand, we control the inventory and also the expansion. But have we like reviewed overseas distributors financial situation and the business environment and how this will impact our expansion in the future? And thirdly, for the domestic business, we have been expanding aggressively in the lower tier city. And can you share with us for those stores opened in the past few quarters, the operational situation? And also how do we see the business opportunities in the lower tier city going forward? Okay. Michelle, thank you for your question. For your first question on app strategy, We certainly have some high yield and so on our new categories, but now, top toys has gained preliminary success at this moment. And we are actually in the planning and preparation Okay. Michelle, for your second questions for the overseas, I think these questions need to be analyzed case by case. Now we had more than 1700 office stores right now. And in terms of office distributors, the top 10 distributors accounted for more than 60% of our overseas stores. So the concentration is quite high and stable. For these big distributors, they only have they absolutely are uncomfortable at this moment. But outside the very strong cash position in shareholder structure and in their cost control abilities. So our judgment is that there's no big risk for these big distributors. For the smaller ones, absolutely, some of them will face even bigger difficulties. And as we shared before that, we now have 80 distributors in our office market. Certain distributors' financial difficulty will not influence the whole big picture of our overseas market. And if you look at the past 4 quarters' performance of our overseas business, no matter in revenue or in net income, I think the most difficult time has passed. And we even see some overseas markets, some distributors are accelerating their pace of expansion, such as Italy and Portugal, which we have entered during the Q1 and Q2 this year. And for example, Spain, this country alone has opened 6 stores in the Q1. So that's the answer for Well, 3rd question is on logistics. First of all, we think Minnesota's product and our business model is very competitive in lower tier cities. As Mr. Ye mentioned just now, the key operating metrics such as average sales price, cross selling rate and conversion rate, they are very similar for today, Mizuho entered has entered about less than 300 cities in China. But if we look at Tier 3 and below, there are 2 70 more in China. No one I mentioned the 10,000 countries in China. So the addressable market is big enough. In terms of EUE, we have been continuing to monitor during the past year as we can talk before then. A typical store sales can generate sales of RMB 3,000,000 to RMB 4,000,000 annually, and the rental cost can be controlled within 8% of sales. So the payback period has been as short as in 6 to 80 markets. It's very similar to MINISO's first stage in 20 The next question is from Lucy Yu from Bank of America. Please go ahead. The first question is about membership. So we have accumulated members for a while. So what we have learned from this big data? And how are we going to more utilize this data to help with our operations? Second question is about the GMV recovery in China and overseas market in April May. And how should we think about the recovery trajectory for the second half? 3rd question is about Top Toy. So what's the store opening plan for this year as well as more operating metrics? Thank you. Okay, Lucy. Thank you for your questions. All your questions are members as we share that by the end of this quarter, and we have accumulated 30.2 members, and we have using various ways to outreach and activating things. So we have some members figures to show in terms of average sales price, the members were double of that of non members. And in terms of repurchase rate, non Ordinary customers on average, they come and buy for 1.5x each year versus 3x of members. So as Stephen added that, we have realized the important role that members taken in our improvement of our program. So our outstanding of the importance of members have been improving during the past year, and we'll make more efforts to improve that in that rate. So we have for example, we have managed our members in different stage in their life cycle. And so that we can carry out more targeted marketing to outreach and different key things and increase the retention and repurchase rates of these members. Let me quickly update our business in China and overseas market. In April May, we have 2 public holidays in China. So we can see very strong sales increase during the Q holidays. But after the holidays, we can see a quick decrease and to get normalized of the sales. So we believe that in China, the pandemic influence is still down. So the overall recovery is still at much better percent. So in overseas market, by the end of last month, by April 30, the overseas market as a whole is a bit a little bit worse than we were Netherlands on March. We have more than 300 stores were temporarily shut down because of the stricter cost control measures control measures by the different countries. And for those in this for those stores in business, the sales recovery rate average were lower, over 5% lower than in last month. If you look at the second half of this year, we see stable growth and stable recovery in China and unstable situations in overseas. And the pandemic recovery for overseas market is still a way to see. For example, in India, where we have 150 stores, as for now, 9 people are paying and for some developed countries such as the U. S, where the production vaccine projection is quite good. We actually see a good recovery of the sales trend. But in the U. S, we now have only more than 30 stores. So the influence is quite significant for all of these markets. Thank you. Okay. In terms of Top Toy, in terms of the expansion plan, we have no big change with our update. We maintain our guidance of 90 to 100 stores by year and calendar year end. In terms of economic model, it is continuously being refined. I want to share our DreamWorks stores, the 4 DreamWorks stores. The monthly sales of each has been quite stable at 2,000,000 in a month. And we are also testing our type 3 stores, which sales monthly sales can be stable at RMB600,000 per month. In terms of the retail partners, we also held a quite big roadshow of our retail partners by the end of at the end of April, and we saw strong willingness of our retail partners to open top toy stores. And we have been receiving positive feedback and quite positive proposals, effective proposals for them. There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to management for any closing remarks. Okay. Thank you again for joining us today. If you have any further questions, Min Son, please feel free to contact Mr. Sohu san, our team and our contact information can be found on today's press release. We'll see you in the next quarter. Have a good day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.