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Renaissance Corporation Ltd

Tuesday 13th November 2007

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Jenny Ruth talks to Renaissance Corp managing director Paul Johnston, in this Sharechat investor interview.
Renaissance Corp markets and distributes Apple products in New Zealand as well as representing other brands including Palm, NEC and Canon, building upmarket computers, providing IT services to the education sector and does transactional web-site development through its Conduit division. Last month, shareholders approved the $6 million purchase of Natcoll, a private tertiary provider of creative digital design technology courses with campuses in Auckland, Wellington and Christchurch. That follows its $3.5 million purchase of MagnumMac in June, the largest of the 42 Apple resellers in New Zealand. In August, the company reported a 53% fall to $1.2 million in first-half net profit and warned that profit before tax for the full year is expected to be between $5 million and $5.5 million, down from $8.7 million the previous year.

Sharechat: Why do you think there was such a small take-up of the dividend reinvestment plan?

Renaissance Corp managing director Paul Johnston: If you look at the plan, it was just launched three weeks prior to the dividend record date and shareholders really had quite a short period to consider the offer. We think there will be a higher take up in the next dividend. There were 20% of shareholders participating in the offer and we were quite pleased, given the short notice.

SC: Why did the company pay out so much more in dividends than it earned in the first half?

Finance director Clive Lewis: It doesn't cost the company in cashflow terms. With the first-half/second-half earnings profile of the company, we declare the dividend having reviewed the trading in the prior half. What will happen is there will be a dividend larger relative to the profitability in the first half than in the second half. It's historic. It's the way it's always been done.

SC: How is product availability now?

PJ: It's still tight, but we've seen some signs of easing across some product ranges. We've still got a very, very healthy - healthy is one word to describe it - back order situation. It's nice to have a back order situation but not to the point where you can't catch up. At the half year, we believed we had got into the situation that we had lost two months.

SC: Was the problem primarily with Apple products?

PJ: Yes.

SC: What is causing the availability problems?

PJ: If you look at the quite exceptional results Apple posted at their last quarterly review, we believe worldwide demand is the major reason behind the shortage. The growth in the company has been quite exceptional. To put things into perspective - it's something we often forget - the level of business we're now doing in that product range is so far greater than it was a few years ago. You have to look at it in terms of relativity. We're not seeing a reduction in product going through, we're seeing a significant lift in product going through. We just need an awful lot more, that's all.

SC: Will you be able to access enough stock to meet demand through Christmas?

PJ: We certainly hope so. We're doing our very best. We're working very closely with Apple to try and get enough product. We're hoping we will be able to take care of most of the back log.

SC: What are your expectations for the Christmas selling period? Isn't retail a bit soft at the moment?

PJ: It is. Our expectations for Christmas are pretty reasonable. We're seeing a healthy order flow coming through for this quarter. What we're doing is focusing on getting enough stock into the channel in time so that the retailer gets it too and so that the end users get the product in time for gifts. It's pointless getting the stock too late in a quarter so it sits on a retailer's shelves. (If it gets there in time) everybody benefits then because we've had a good quarter and the retailer's had a good quarter and the consumer's been able to get the product they're looking for.

SC: How do you see your Apple business developing? Particularly now Apple has its own online store here?

PJ: We're seeing good growth in all areas of the Apple business. I would expect that to continue. Worldwide, Apple are growing rapidly. They're just absolutely shooting ahead. Every quarter they seem to exceed analysts' expectations. As they grow, they have to change the business model. They can't keep doing things the way they used to. You mentioned the online store and the change to the pricing model. That's part and parcel of Apple having to change it's business worldwide. It's the evolution of the business. It's something we have to work in with Apple, if and when they make changes. We've shown in the past that we're pretty good at changing the business model to suit the companies we're dealing with.

SC: How are the other brands you represent performing? Are there any stand-outs?

PJ: I don't thing there are any real stand-outs. We're doing very well with some of the networking products. That's not retail. They tend to be very high-end telecommunications products and some security products in business networks. Generally speaking, we're very satisfied. We've seen some very strong growth in the Canon business. That's been very pleasing for us - that was an agency we got last year. We've brought on NEC earlier this year. We've seen extremely good growth in that. That's coming off a low base, but that's going ahead of my expectations. Generally, I'm satisfied with the performance of the brands business. It's been a very tight business environment in the last few months. We know some of our competitors have been struggling. Given that, I thing we're doing OK.

SC: How is Txttunes performing in the US?

PJ: It's taken a lot longer than we had planned to get the agreements for contracts signed up. I can say frankly we've all learnt a huge amount about how the USA market works. We've had to deal with record labels' American lawyers. There's been a whole pile of people we've had to deal with and they've all got their different ways of working. We've had to learn all about that. What I can say is we're in the final stages of some contract negotiations and a number of areas are looking quite exciting. Because they're in the final stages of contract negotiations, I can't say much more, but watch this space.

SC: Has the Albany MagnumMac retail store opened yet?

PJ: Yes, it opened for business on time on 1 November at nine o'clock in the morning. We were working through to four in the morning that morning, making sure it was done right. I have to say it was a great effort for everybody involved in the project. There were lots of people working very long hours. We've had staff from Apple in Australia and the UK who came out to help with training the staff. It's looking superb. We've got another three locations we're looking at in Auckland. We're looking at premises in Wellington - potentially two in Wellington. We've got one or possible two in Christchurch. The key thing with those is getting the right location and that sometimes takes a bit of time.

SC: How is that business performing?

PJ: It's performing as to expectations. The problems that we've experienced getting in stock obviously's had an impact on the MagnumMac business, as it has in the rest of the business. We've been fairly busy with the new store opening but the rest of the business is performing to expectations.

SC: How is the Natcoll business performing?

PJ: Effectively we took over on 1 August and, year-to-date, it's on target.

SC: Is it proving a good fit with the existing Renaissance business?

PJ: We've just completed the sale. We wouldn't have made the acquisition if we didn't believe it was the right fit for the company. We know there are a number of areas of really good synergies between the organisations, given it's in the creative space and the creative market and we're very heavily involved in creative markets. We're seeing areas of growth we can drive through the Natcoll business. It's too early to show our hands at the moment. We're looking expansion for the Natcoll business and that will be both here in New Zealand and overseas.

SC: How is the rest of your education business performing?

PJ: As I mentioned before, we're seeing good growth in all areas of the education business. However, I have to say the lack of stock has had an impact on what we call the kindergarten to year 13 area. The profitability of the RED business has been hit as a result of the lack of stock. The reason that that sees a bigger impact is because it tends to be much more in the notebook range of products and that's the one we've had the biggest problems with. The tertiary business tends to be desk-top and we've had good availability of desk-tops.

SC: What about Conduit and Insite?

PJ: They're both going well. They continue to see growth in their business. We're very comfortable with how they're going. Insite acquired Ultra computers late last year. We're into our first full year now and that's been a very, very good acquisition for us.

SC: Has Insite gained any more high-profile clients?

PJ: There are one or two. Unfortunately, we have to wait for a year before we can tell anybody. The concentration of that product range is still at the high end, very, very high end graphics systems. We can't tell you for confidentiality reasons. You're talking very leading edge technology. We're just about to launch a new model R1, the all in one computer we build specifically for schools. It's a new up to date model. We're looking for good things from that in the near future.

SC: Are you looking at further acquisitions?

PJ: Yes.

SC: What is your view of how the shares have been trading?

PJ: I think the level of return from the dividend can make them look even more attractive. There are a number of factors behind the share price. We did give a reduced profit call earlier this year. People are probably feeling a bit uneasy about that. There's market uncertainty in the whole IT area in New Zealand. We've been fairly consistent in what we've said to the share market about the business. One aspect we mentioned in our (first-half) result is we do appreciate the fact that we've not been able traditionally to break out the individual areas of the business too much because of contractual arrangements. We've signaled that we intend to give more information because of the way that the business is now run. We will be able to give better ideas on segmentation at the end of the year. I think that might help to get some balance into views held by the people in the market place.


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