Earnings Call: Q2 2021

Feb 25, 2021

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to Maniso Group Holding Limited's Earnings Conference Call for the Q2 of fiscal year 2021 that ended on December 31, 2020. At this time, all participants are in a listen only mode. After the management's 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. Yiseng Zhang, Director of Investor Relations. Please go ahead, Yixin. Thank you, Raul. Hello, everyone, and thank you all for joining us on this call. The company has announced its quarterly financial results on Wednesday, and the Relations website at ir.stockin.com. Today, you will hear from our Chairman and CEO, Mr. Hu Hu Yi, who will start over with an overview of our business and growth strategy. He will be followed by our CFO, Mr. Steve Zhang, who will address our financial results in more detail before we take your questions. Before continuing, I'd like to refer you to the Safe Harbor statement in our press release, which also applies to the call as well as we will be making forward looking statements. Please also note that we will discuss non IFRS measures section, which we have explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards, Inc. Earnings Release and Finance with the SEC. With that, I will now turn the call over to Mr. Steven Zhang, Mr. Tianhe, Mr. Tianhe, Mr. Tianhe, Mr. Tianhe, Mr. Tianhe, please go ahead, sir. Thank you, Yi Chen. Hello, everyone, and thank you for joining us today. In today's call, I will give you an update on Miniso in December quarter and then share with you our new access strategy. For Miniso, we are pleased to see our domestic operation record an encouraging performance, while our overseas operations move further along the path of recovery. During this quarter, we add 100 and 84 new stores to our global store network. While the pandemic hit offline retailer globally in calendar year 2020, we add 303 new sold during the year, demonstrating our partners' confidence in our resilient business model and faster than average recovery speed. As for our domestic operation, we delivered a net addition of 100 and 35 new stores in China in this quarter, accounting for around 60% of total net additions in calendar year 2020. Besides, we continue to unlock opportunities across China's low tier cities at about around 60% of new stores opened in this quarter are located in this market. As for overseas operation, we entered 2 new countries and opened 40 9 new stores in this quarter, according for 63% of net additions in calendar year 2020. Despite 153 overseas stores were temporarily closed by year end and many other overseas stores being forced to reduce their business hours due to the impact of COVID-nineteen, revenue generated from overseas operation increased by 32% sequentially. In terms of sales recovery, in China, while occasionally case of COVID-nineteen happened from time to time in this quarter, we reached an overall recovery rate at about 95%. Some stores in low tier cities are covered to 100% or even pickup growth. In overseas market, the average recovery rate reached to around 60%. Yet with the pandemic fluctuation several times and the holiday social gathering increased the difficulty of recovery in some countries. We saw unstable and fragile recovery trend for the overseas market as a whole. Product wise, we stick to our 711 philosophy as a core of our product strategy, provide a customer with a fresh and amazing treasure hunting experience. In addition, we continue to seek cooperation with new IT partners. For example, by cooperating with Bilibili, we launched a series of new products and activities that were warmly received by our customers. This collaboration has laid on the foundation of a highly overlapped user base between miniso and Bilibili. Besides, our sponsorship to 1 of Bilibili's Gala for Chinese Lunar New Year enhance our communication with young customers and refresh Minisoul brand image. IP initiative is an important component of our product strategy and we will remain committed to launch more IP product in the future. As a young public company, Ministo announced our access strategy in December, further illustrating our vision of becoming a global leading new retail platform. Today, I would like to take this opportunity to talk about our strategy in 2 topics. 1, why access strategy? And the second, how do we achieve our vision? Why extra strategy? We celebrated the 7th anniversary of Miniso brand in 2020. Our team has accumulated a core strength in supply chain management, retail know how, asset allies business model and digitalization. As we realize a huge potential in many sectors in new retail, we believe it is right to expand this core strength into this new sector. Let me share with you in detail and discuss why they are very critical. Lastly, efficient supply chain is our core comparative advantage. We operate with more than 600 highly qualified supplier partners who are able to meet our sophisticated demand. By connecting their unmatched manufacturing ability with our unique customer insight and massive data, we pioneered the C2M industry along before e commerce player. As a part of our efforts to optimize the supply chain, we build a mutually beneficial relationship with them by procure products in larger volumes, being punctured with our payment to them and guiding them towards better product efficiency and enhanced cost control, thus creating a virtuous cycle in which our supply partner can focus their attention and energy solely on continuous improvement of product quality and we can enjoy benefits of improved quality in a cost effective way. In addition, our efficient supply chain system together with our ability to offer frequently refreshed products, therefore, balance the faster product innovation with healthy inventory level and to make us more competitive among peers. We can further leverage this efficient supply chain into our new initiatives. Secondly, we have accumulated the in-depth retail know how from our operational experience and a deep consumer insight. We placed strong emphasis on optimizing every key aspect of the store operation using such know how to create a treasure hunting shopping experience. The standardized layout, decoration, lighting, more in the price of products and the friendly staff in our store contribute a welcome environment for our store visitors. And there we also find the store easy to navigate due to our optimized product arrangement and the display. We have done this so well that most of the people that visit our stores are going to be impressed by the difference between us and peers. And we believe the same will apply to our newly opened top toy stores. Thirdly, our SLI business model enables us to form a win win partnership with our retail partners because it aligned their interest on both sides and creates mutual benefits. By leveraging our SLI model, ministore has quickly expanded the store network in a prime location with a consistent brand image and the consumer experience. Having the support from our strong partner network makes it easy for us to enter the other sector of the retail industry. Our 4th key strength lies in digitalization. Retail industry is a closed loop of merchandise flow, information flow and the cash flow. The key to success lies in whether or not this free flow can be well controlled and that highlights the importance of the strong IT system. For example, our supply partner are able to access our SCM system to monitor real time sales figure so that they can make a quick and effective decisions in procurement and production. Our smart store system enable us to track consumer profile, install behavioral patterns and the product sales trends and using algorithm rhythm to customize store level inventory mix. In line with this IT advantage, our system also enable us to pay our retail partner with daily revenue sharing in China, which is extremely attractive for partners. As with other core strength, our digital capability can also be leveraged into our new initiative. To conclude, our core strength creates a patent flywheel effect. Using this flywheel, the momentum of our satisfied customers drive more referrals and repurchase. The momentum of our suppliers successfully drives our sustainability and the momentum of our satisfied retail partner enable us to expand our store network on the global front. That is why we have been successful in Minidou in the past. More importantly, these are all replicable by ourselves into other sector, but hard for others to copy. Let me share with you some of our first move of access strategy. Firstly, we plan to strengthen our core minigold business by expanding store network, not only in China, but also in overseas markets. For China, we estimate a net addition of 5 100 stores in calendar year 2021. In particular, we see strong demand in low tier cities and the high returns for our partner compared to more mature markets in high tier cities. We are excited about the huge potential and believe we are pursuing the right strategy over there. For overseas market, we believe there is incredible long term value there. Before the outbreak of COVID-nineteen, Miniso has accumulated abandoned localized experience from team building, product verification, clearance to market research by entering over 80 countries and areas. With that solid foundation, it will be easy to replicate the hundreds of new stores and achieve rapid growth in this market. However, we also recognize that such operations may experience the challenge caused by COVID-nineteen in the near term. We and the overseas partners had agreed that our major task should be destocking and reduce operational risk in the next few quarters. At the same time, we will closely monitor the development of the pandemic and adjust our store expansion plans accordingly and dynamically. Secondly, we plan to invest in our new growth initiative, which will help us to accelerate our progress along the path to become a global leading new retail platform. Take top away as an example. We observed a structural imbalance between the supply and the demand side of the art toy market. And that means a great opportunity. Our first step to meet the diverse demand of younger people is to leverage our strong supply chain to provide 8 categories of products. In the near future, we plan to launch more co branding products by sharing Minisource IP library. We will also have Topois own IP product development and operation. It may take some time, but worthwhile. All in all, we will leverage Minidou's core strength to increase our offering as much as possible, while reducing our dependence on any single category. Today, we have opened 9 top toy stores in 5 different cities in China. Although still early, we have seen encouraging preliminary results and received the possible feedback from our stakeholders. Thirdly, we also we are also focused on omni channel strategy. In this quarter, online tech account about 7% of our Minisode revenue and there is plenty of room to grow in the next few years. And we plan to follow a more sustainable rate of development in our online initiative rather than burning money to juice up our GMV, which is a common practice for e commerce player. Our target is to provide customers with a more convenient, accessible and personalized shopping experience with our omni channel thread, especially for those customers who are used to shopping online. Based on this idea, Toutoy launched its official online store and the vending machine network at the very beginning, which made a good deployment to offline store. To conclude, we are able to achieve we were able to achieve past success because of our core competitive strategy. Those core strengths have laid a solid foundation for our access strategy, which has put a higher demand on our operational ability and agility. And we will continue to build a highly competitive team by creating opportunities for employee to grow and develop internally and attracting more talents to join us. Thank you. This concludes the remarks on this year. And as the CFO of Minisource, I will now provide a financial review for the quarter. I will start my remarks with a review of the December quarter results and then provide some additional color regarding the March quarter. Please note that for operating expense, I will be referring to our non IFRS IFRS measures, which have exclude share based compensation expense. Revenue was RMB2.3 billion for the December quarter, around the midpoint of our guidance and represent a decline of 18% year over year. In comparison, our revenue showed a significant sign of improvement from the previous quarter, due to which revenue declined by 31% year over year. This same trend was also reflect in our revenue from overseas market in which revenue showed a decline of 51% year over year as compared to a decline of 71% year over year in the previous quarter. Revenue from domestic market was flat year over year. Sequentially, our revenue increased by 11% with overseas revenue increased by 32% and the domestic revenue 7%. The sequential increase of revenue is also due to 4% growth in store count and a 7% growth in revenue per minute of store in this quarter. Our ability to achieve sequential revenue growth further demonstrated the effectiveness of our expansion strategy in low tier cities and the business recovery of both domestic and overseas operations. Gross profit was RMB643 1,000,000 representing a decrease of 28% year over year and an increase of 23% quarter over quarter. In addition, gross margin was 28% in the December quarter compared to 31.6% a year ago and 25.2% a quarter ago. Such fluctuation in our gross margin was primarily due to the fluctuation in revenue contribution from international operation, which typically has a higher gross margin than that of our domestic operations. During this quarter, revenue from our overseas operations accounted for 20% of our total revenue as compared to 34% a year ago and 15% a quarter ago. Selling and distribution expense was RMB306 1,000,000 compared to RMB317 1,000,000 a year ago and RMB230 1,000,000 a quarter ago. The quarter over quarter increase was primarily attributed to an increased logistic expense, which was in line with the recovery of the company sales during the December quarter as well as the increase in marketing expense as we continue to strengthen brand recognition for Miniso and Top Boy. G and A expense was RMB160 1,000,000, generally flat year over year and quarter over quarter. Other net loss was RMB55 1,000,000 compared to other net income of RMB24 1,000,000 a year ago and other net loss of RMB16 1,000,000 a quarter ago. Other net loss was mainly comprised of RMB67 1,000,000 in net foreign exchange loss, which was in line with the appreciation of renminbi against the U. S. Dollar in December quarter. Now turning to our profitability. Operating profit was RMB54 1,000,000 compared to RMB330 1,000,000 a year ago and operating loss of RMB2 1,000,000 a quarter ago. The year over year decrease in operating profit was due to a revenue decline in overseas operating caused by the negative impact of COVID-nineteen in the period despite our fixed cost and expense remained stable. Nevertheless, we are pleased to see an excellent improvement in our operating profit on a sequential basis. Adjusted net profit was RMB84 1,000,000 compared to RMB390 1,000,000 a year ago and RMB102 1,000,000 a quarter ago. As mentioned earlier, our adjusted net profit in December quarter include a net foreign exchange loss of RMB67 1,000,000. Excluding this onetime effect of foreign exchange loss, adjusted net profit was around RMB150 1,000,000 in December quarter and increased by 25% quarter over quarter. And we expect our margin level will normalize over the coming quarters as the pandemic abates. Basic and diluted earnings from continued operations per ADS were RMB0.08 compared to a loss of RMB0.8 a year ago and a loss of RMB7 a quarter ago. Adjusted basic and diluted earnings per ADS were RMB0.28 compared to RMB1.52 a year ago and RMB0.4 a quarter ago. Turning to our balance sheet. As of December 31, 2020, combined balance of company's cash, cash equivalents and the restricted cash was RMB6.8 billion compared to RMB3 1,000,000,000 as of September 2020. This increase was primarily due to proceeds we received from our IPO and the cash flow generated from the operation. Turnover of inventories and the trade receivable remained flat sequentially, considering the sequential recovery of revenue and the store expansion. This is a strong proof of our effective working capital management. Looking ahead into March quarter of 2021, we expect our total revenue to between RMB2.2 billion and RMB2.4 billion, which represents an increase of 35 percent to 47% year over year. As we continue to operate in a time of significant uncertainty, specifically in regard to the severity and the duration of COVID-nineteen and especially in the context of overseas markets, this forecast only reflects our current and the preliminary views on the market and the operation condition, which is subject to change. Finally, I would like to reiterate that we remain proud of our team's consistent execution and the commitment to going above and beyond in the service of our customers. Such perseverance in the face of uncertainty has enabled us to remain on track despite the unexpected and challenging environment. Going forward, our financial strategy will be to remain disciplined in our budget, cost controls and allocation of capital as we focus on the consistent delivery of solid financial performance. Moreover, we will not become complacent and we will continue to invest strategically for future growth. These initiatives may affect individual financial metrics. In short term, we firmly believe that such effort will continue meaningful to minimize the tables and the long term growth. Looking ahead, we are highly confident in the strength of our underlying business model and remain steadfast in our commitment to solidifying our leadership at home and expanding our market share abroad and delivering long term shareholder value. This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you. Thank you. We will now begin the question and answer Today's first question comes from Michelle Cheng with Goldman Sachs. Please go ahead. Hi. Thank you, management, for taking my questions. Sorry, should I ask questions in English or in Mandarin? Yes, sure. Yes, sure. I have three questions here. So firstly, you mentioned about these new retail strategy. And can you elaborate a little more regarding like what categories or what target customer or geography you are going to explore in the first stage in addition to Top Toy? And my second question is regarding the overseas expansion. So it sounds that you tend to be a little bit cautious on the short term trend. So can you give us some highlights about the guidance for this year again? And which area did you see the do you see the biggest risk for the overseas expansions as of now? And my third question is about Pop Toy. So since we just mentioned that we have nice stores in 5 cities, so do you have any more concrete plans for the expansion for this year? And how should we think about Hi, Michelle. Would you please transfer yourself before we answer your question? Thank you very much. Ms. Li Okay. Hi, Keqiao. Thank you for your question. For your first question is on the strategy about our X strategy. First, as Mr. Ye showed, for X, top toys, our first initiative in X strategy, and there will be more initiatives to follow. But at this moment, Kapto is definitely the most important one and we all focus our resource to deposit into our 2nd curve, I think. And as Ms. Stephen Zhang shared, during the past 7 to 8 years, Minsto has leveraged its 4 strengths, core competitive strengths to develop into a global non recurring retail retailers. As we mentioned in our prepared remarks, we have in our supply chain management and retail know how and our ability in digital capabilities and our enterprise business model. All these cost streams that we can leverage to build our future success for our X strategy initiatives. Although it's still early, so we can now only think about the toys. Because such as we have extended our category offering from 7 to 8, we have included the sculpture category because we think it's very important and it's very potential. In terms of our pricing strategy for Doctor. Choi, it will be much higher than this. So absolutely not even the average ticket size, but also the average size for our product, it is about 2 to 5 times of that of millions or even higher to 10 times. In terms of target customers, absolutely, we need to our generation because they have they guys have so much strong abilities and willingness to consumer in this hot spot market. In terms of geography, in the 1st year of top tier, we were absolutely focused on tier volume to 2 cities. And there's no sense at the moment at least in 1 year, we are not going to penetrate into lower cities. But however, since Capteroi has adopted the omni channel strategy since day 1. So our fans and our target customers in the low ticket cities can still enjoy the stock experience. So to Okay. In terms of your second question on our growth expansion strategy, The pandemic has been going for some in the past several months. And I think that China has been the only reception globally. And especially in the past holiday season since December, these social gatherings seems to have to make the recovery of this market as hopeful as they make it unstable and fragile. From the perspective of our 7 more stores closed and the closed hours for the opening stores have been increased. In conclusion, we think that the pandemic it is early and hard to tell when the pandemic is completely over. And during the past few months, we have connected with our 8 partners globally. And we more agree that of any task at this moment or in the coming quarters should still be reduced operation risk and inventory destocking. Okay. But at the same time, we can still say that we are confident in our global expansion future because even in calendar 2020, the pandemic has hit offline tailors, but we have still at about 19 stores in this year. So we at this moment, we should currently expect that we will add 2 new stores in our overseas market in cashmere in 21. That is that said, it's about half of our in every business area as the countries we have business. To give you some colors on that, for example, 70 in Europe, 60 in Asia, and Canadian or Russian speaking countries and Canadian Middle East countries. So that's it. For your third question about the at this moment, we do not have nothing to share with you. Thank you. Thank you. And today's next question comes from Lucy Yu with Bank of America. Please go ahead. So the question is first on the GMV recovery. So in January, both China and overseas have been partially impacted by COVID-nineteen, as you just explained. So how has the things been developing in February so far? And the second question is on the store opening. So for China part, store expansion has been ahead of the expectation, especially in the second half of last year. So for 2021 calendar year, we guided for over 500 new stores. So in January February, how many stores have been opened so far? And will we revise up our full year guidance? Thank you. Okay. Thank you for your questions, Lucy. If you cannot hear me clearly, you can answer for any time. Okay. For the business recovery, I think the in this quarter, we have been we have observed worse recovery than the December quarter. As we've shared before, in the December quarter, the recovery rate was once reached 60% to 70%. So after entering 2020, the cashier to 60% and we expect this situation to continue worldwide. For your second question about the store expansion plan, and generally, we have maintained our previous guidance to open 500 new stores in China this year as we observe them and share in the prepared remarks. As we plan to enter the lower cities in China, and we have is strong. Our next question today comes from Wangzhi Song with CICC. Please go ahead. Welcome to management. This is Wang Hui Shen from 4 SBC. My first question is about Togtoy. I hope to know that how much extra selling or marketing expense will Togtoy bring in the whole year? And the next question is, some news mentioned about you hope to open our toy and some self-service store. Could you give me some color on these 2 new initiatives? Okay. We will wait. Thank you very much for your question. For your first question, the Toxtoist setting expense margin. Our target for TopToe is to capture the generation, the mindshare and their desktop. So in the 1st year, we think that it's necessary to spend some marketing dollars. We currently expect to spend no less than RMB50 1,000,000 in marketing dollars in cash and we won for top target. It will also include our budget in advertisements and our advanced operation and participation in excavations. And so This is not this target will be adjusted dynamically based on the development of the toys? And for your second question about the SSD, DTC, unmanned storage, Hello, everyone. This is the operator. Thank you for holding. I've joined the speaker line back to the conference. I'm showing no questions at this time. So I'd like to turn the conference back over to the management team for any final remarks. Okay. Thank you very much for joining us today. We'll see you next quarter. Bye. Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.