Renaissance Global Limited (532923) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Renaissance Global Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aakash Mehta. Thank you and over to you, sir.

Good evening. I welcome you all to the Q1 FY '21 earnings call of Renaissance Global Limited. We have with us Mr. Sumit Shah, Vice Chairman; Mr. Hitesh Shah, Managing Director. The discussion today may include some forward-looking statements and must be reviewed or considered in conjunction with the risks in the industry in general and our business in particular. Now I hand over the call to Mr. Sumit Shah. Over to you, sir.

Good evening, everyone. On behalf of Renaissance Global, I extend a warm welcome to everyone on the FY '21 Q1 earnings conference call. I hope that everyone is staying safe and healthy. For the benefit of audiences who are joining us for the first time, I'd like to give a quick overview of the company, following -- followed by a review of the financial performance during the quarter. Renaissance Global is a highly differentiated luxury lifestyle products company and the largest exporter of branded jewelry to many global retailers around the world. Our strategy over the last few years has been to grow our business through licensed brands and our brands globally. The company is focused on branded jewelry through its licensing agreement with Disney and Hallmark. The company owns a license for Enchanted Disney Fine Jewelry. Enchanted Disney Fine Jewelry uses the intellectual property of Disney Princess, which is a $3 billion-plus global brand. Our other leading brand, Hallmark, is a leading consumer brand with global reach in more than 100 countries. Going forward, our strategy is to grow our diamond jewelry sales in existing markets, which are the U.S., U.K. and Canada, and to capture market share for Hallmark, Disney, Enchanted Disney Fine Jewelry, Disney Treasures, which is a collection of iconic Disney characters, which is a newer brand that has been rolled out to 1,000 stores in North America. Hallmark Moments has also been rolled out to over 2,000 stores, and both these brands will contribute meaningfully to revenue in FY '21. We also plan to expand to new geographies, mainly China and the Middle East. We have set up subsidiary in China to focus on the Disney franchise. We've signed an agreement with Lao Feng Xiang, which is the second largest retailer in China, to distribute Enchanted Disney Fine Jewelry across mainland China. We plan to launch in China once the COVID-19 situation settles down. During FY '21, our direct-to-consumer business has shown promising growth of 213%. We launched enchantedfinejewelry.com and a new website, diamondsmadeforyou.com, which is a lab-grown diamonds brand, during the last 4 months. During the year, we also plan to launch Star Wars, Disney Jewels, Jewel Lilly and Hallmark Diamonds to further our direct-to-consumer play. The online direct-to-consumer business is a high-gross-margin business with gross margins between 55% and 60%, and we expect to grow our share of direct-to-consumer business through the websites that we've launched and plan to launch in the near future. We believe that the first half of FY '21 will be extremely soft and challenging due to the closure of retail stores in our primary markets and lower discretionary spends and an overhang of inventory. We expect things to normalize in the third quarter of FY '21 and fourth quarter of FY '21. The launch of Enchanted Disney Fine Jewelry in China has been delayed due to the current situation. We hope to launch the China business in the second half of FY '21, and our expansion plans for our IRASVA stores have also been delayed due to the pandemic. We plan to open 2 new IRASVA stores during the current financial year. With that, I'll turn over the call to Mr. Hitesh Shah for a discussion of the financial performance.

Thank you, Sumit. The company during the first quarter of FY '21 reported a total income of INR 189 crores against INR 598 crores during the last financial year. This is a de-growth of 68% year-over-year. The de-growth was on account of the lockdowns imposed worldwide due to the COVID-19 pandemic. In the current quarter, the studded jewelry business is trending at a 40% decline, while the gold jewelry business is still trending at a 70% decline. Our first quarter EBITDA loss is INR 11 crores against an EBITDA profit of INR 32 crores in Q1 FY '20. Our profit after tax stands at negative INR 18 crores. The company has managed to lower its net debt-to-equity levels from 0.60 in June '19 to 0.46 in June '20. Our long-term goal is also to maintain the net debt-to-equity ratio below 0.5. Due to disciplined working capital management, consolidated year-over-year net debt has reduced by over INR 65 crores, whereas our inventory levels are down by over INR 151 crores as compared to June '19. We maintained a strong liquidity position with cash and bank balances and short-term investments of INR 192 crores as of June '20. In terms of geographic distribution, U.S. contributed around 51% to our overall revenues during the quarter and 22% of the revenues were from the Middle East. For full year last year, FY '20, the breakup was U.S., 58%; and Middle East, 30%. In terms of the product category, studded jewelry contributed to 87% of the sales in the current quarter, whereas the balance came from plain gold jewelry segment. Thank you very much for your kind attention. Now the floor is open for Q&A.

[Operator Instructions] The first question is from the line of Siddharth Oberoi from Prudent Equity.

So I have you know broad question. This pandemic -- after this pandemic, so you had all these projections before that. Does all that stand? Or have they been derailed or you have changed course now?

Sure. Mr. Oberoi, thank you for your question. So we believe that the pandemic in general has probably delayed our plans slightly. We feel that the strategy that we had in place prior to COVID is still valid. However, what the pandemic has taught us is the importance of focusing on digital sales and the direct-to-consumer play within the company. So our plans prior to the pandemic do stand valid, probably would get delayed by a year or so with an increased focus on our direct-to-consumer business going forward.

Okay, sir. But this online website that you have launched, you said the response is very good. How scalable is this?

So I think that this is something that will have to obviously evolve. We've built digital capabilities as a company. We've invested in an in-house team to focus on the direct-to-consumer business. And I think what's unique about our company is because we have licenses for brands that are uniquely recognizable in western markets where we serve, we feel that the growth of these brands can be quite attractive. What number this stabilizes as a percentage of our overall revenue is something that will evolve over the next couple of years. The initial response, obviously, is encouraging, although very small and not a meaningful percentage of our overall revenue. But we're quite hopeful that by focusing on this segment, it can definitely help boost overall profitability of the company.

All right. And regarding this -- what is the position in the U.S. regarding the store openings, et cetera? Are you seeing some traction in sales there? Or is it as weak as Q1?

So once the stores have opened, we are quite encouraged with the sales results. You know that we are seeing green shoots in certain retail partners who are doing well. I think that there was some element of pent-up demand due to stores being shut for a few months. So I think overall, we would say that the results are, although early, are quite encouraging. And I think it is setting up -- us up for a reasonably good Q4 of the calendar year. I think that it's a little early to tell because the current months of summer are not really major months for jewelry buying. But once the stores have opened, the results are pretty encouraging.

All right. And is there any inventory loss that you would be taking in this year because of this, the pandemic?

No. No, there is nothing in particular, nothing out of the ordinary course of business. I think that there was some inventory write-offs that we took prior to all of this after the acquisition of Jay Gems. But since then, I think it's a normal course of business. And as you can see, our inventory has declined considerably to a much more manageable number. We don't expect to take any losses outside of the normal course of business because of the pandemic.

All right. And what is the gross debt right now? You said it has come down?

Just check.

So gross debt is INR 540 crores, and we have cash and short-term investments of INR 200 crores. So it's around -- net debt is INR 340 crores.

Yes. But okay, gross was INR 540 crores, which just got reduced you're saying?

Yes. So the...

It got reduced you're saying, yes.

Net debt is -- I mean, so like we have almost INR 100 crores of cash and cash equivalents. So, I mean, the net debt was reduced by INR 65 crores overall.

The next question is from the line of [ Mihir Desai ] from Desai Investments.

Sir, now we...

Excuse me, this is the operator. I'm sorry to interrupt. Mr. Desai, may we request you to use your handset, please?

Yes. Okay. Can you hear me now? Okay.

Yes. It's a little bit better.

Yes. So sir -- just a minute. Sorry. Sir, just my first question was that the outlook which you had given on debt-to-equity, long-term outlook of debt-to-equity, I think, 0.5, and your ROCE also improving to, I think, 18% -- ROE. So sir, just wanted your road map or something which -- the strategy which we had decided to achieve these targets, sir?

Sure. So I think the current net debt-to-equity is already below the number that we had targeted. So you know, we are currently at these levels already. I think that clearly, getting the ROE number will get pushed back by a year because of the current year profitability is going to be challenged. But we still maintain our long-term goal of hitting the return on equity number. And the net debt number, as I mentioned, we're already at the target, and we plan to continue to stay the course and lower it even further.

Okay. So I asked this question just to know that, sir, because of the pandemic which we are seeing. Do you feel that the debt requirement will increase for us like the working capital requirement or something of that, sir?

That's not what our -- what we're seeing currently. I think that due to the pandemic, what we have internally reviewed and gone through, we feel that -- we want to continue the path of better working capital management for a company like us. The debt is primarily working capital. And I think there's -- we continue to drive efficiencies through the working capital to try and squeeze the working capital a little bit. So we don't see any need for any change in long-term debt or greater requirement of debt long term.

Understood, sir. And I just wanted to get your sense on demand, sir. Like in percentage terms, if you could gauge the demand which was pre-COVID and which you are currently experiencing, sir.

Yes. So I think as Mr. Hitesh mentioned in his opening remarks, currently we are seeing our sales at 40% levels below 1 year ago. And that's for the diamond jewelry segment. And for the gold jewelry segment, which is primarily in the Middle East, it's 70% below last year's levels because I think a lot of the Middle East business is dependent on tourism, which I think will take a while to recover. So we expect the diamond jewelry sales to recover before the gold jewelry sales. And at retail, however, we are seeing slightly better trends than that. I think the customers are being cautious about placing orders for inventory. So our sales to retailers are 40% below, but we are seeing better level of sales for the retailer of our goods which we are holding.

Okay. Understood. Sir, my next question would be on the Star Trek, which you had mentioned -- Star Wars, I think, the new design, which we are going into, sir. So sir, can you throw some light on this, like why only this where we want to expand or, like, we did for the Disney Frozen. So what is your thought process behind this? And if you can throw something in numbers regarding the thought process behind this.

Sure. So I think we've had a relationship with Disney through the acquisition of Jay Gems, which we did in August 2018. The initial license was for the Disney princesses, which has grown into a meaningful business for our company. Because of the success of the Disney princesses, Disney has given us a licensing rights for the iconic Disney characters, which is sold under the brand Disney Treasures at a major retailer in the U.S. So all of these iconic characters now, through our direct-to-consumer play, will be launched through a website called Disney Jewels. And in addition to that, since they also own the Star Wars franchise, there is also starwarsfinejewelry.com, which we plan to launch in the next quarter. So I think we are trying to leverage our relationship with Disney by launching 3 brands, Enchanted Disney Fine Jewelry, which is existing, Disney Treasures and Disney Jewels, which would be the iconic Disney characters, and then the Star Wars franchise. And in order of importance, Enchanted will always remain the largest brand. Disney Treasures and Jewels would be the second largest brand in our expectation. And Star Wars is a niche area and would probably be the smaller brand among the Disney franchise. This is in addition, obviously, to the Hallmark license that we have, which is completely separate.

Okay. Sure, sir. Last question from my end, sir. That -- sir, we are seeing increase in gold prices. So due to this increase in gold price, do you think that the demand for gold jewelry will shy away, sir, like, people would shy away from buying this -- the jewelry, gold jewelry?

Yes. So I think the experience we've seen in the past is that when there is volatility, there is a shortfall in demand. I think that when prices do stabilize, we see demand returning to normalcy. I think volatility is definitely a deterrent for people to buy. However, on the diamond jewelry side, while it does make it more difficult to price product because things do become more expensive, there is less of an impact because gold is maybe 20% to 30% of the value of the product in the diamond jewelry space. So while for us diamond jewelry is a major contributor to the bottom line, we don't see too much demand impact there. Although when there is volatility, there definitely is some impact to demand more so on the gold jewelry side than on the diamond jewelry side.

The next question is from the line of [ Devendra Pandey ] from [ DP ] Financial Services.

Sir my first question is on the lab-grown diamonds. I saw in your presentation that you have launched a separate website for that. So how is that business shaping up? And where are we manufacturing those diamonds?

So we've been selling lab-grown diamonds for about 9 months or so. So we launched the Made for You brand at a major retailer in the U.S. last year for the holiday season, and we are pretty encouraged by the results, after which we decided to launch the direct-to-consumer play for Made for Your lab-grown diamonds. So far, it's a relatively new business. And on the direct-to-consumer side, a little early to estimate how well it's doing. The manufacturing side, we don't manufacture lab-grown diamonds ourselves. I think they are HPHT diamonds, which are grown mainly in China and cut and polished in India. And we buy the diamonds in the open market and manufacture the jewelry in India.

Okay. So are we doing like a trading business for these lab-grown diamonds?

No. We don't do trading business because diamonds are a raw material for us. We buy loose diamonds. We manufacture the jewelry and sell the jewelry to retailers in the U.S. So we -- it's a -- lab grown diamonds are a raw material which are utilized in the manufacturing of jewelry.

Okay. But then are they subject to the fluctuations in the prices?

I mean I think that since they're -- it's a newer technology. Diamond prices have been falling for the last year or so. Lab-grown diamond, while they've been stable for the last year or so, we haven't seen as much volatility in the recent past with lab-grown diamond prices. Hitesh, do you want to add anything to that?

No, I think so. I mean the lab-grown prices are already at the lower end and there's a pretty significant labor component in the cost of the diamonds. And hence, after the initial drop from, let's say, a few years ago, I think things are quite stable over the past 12 months. And even recently post the pandemic, we haven't seen any major change in the prices.

Okay. Okay. And are we selling these diamonds directly to the customers or just to the retailers? Or is it a mix of both?

So primarily, the sale is through retail partners. We've launched a direct-to-consumer website recently, which is not yet a meaningful part of our business. enchantedfinejewelry.com, which we launched about 4 months ago, has become a slightly larger part of our direct-to-consumer business. diamondsmadeforyou.com, which we've just launched, is not yet very meaningful.

Okay. Okay, okay. And do we sell the same products on the direct-to-consumer platform as well as to the retailer?

I think there is some overlap in the product, but we try to keep the assortment exclusive so as to protect the retailer and their margins.

Okay. Okay, okay. And sir, my last question will be on your China expansion plans. So given the current geopolitical tensions, are we going to face any new issues for the expansion over there?

Well currently, talks have been ongoing with them. We've had -- we are currently trying to a conduct test in the fourth quarter -- in the third quarter of the current financial year with them and talks are ongoing. We -- I think the challenge that we're currently facing is really more related to the pandemic than to any geopolitical tensions. I think it will be a slow expansion because of the physical difficulty in getting there and meeting the retailer. So I think any plan that we had for expansion would definitely slow down a little bit because the pace of launching a new brand is slightly more difficult given the current environment. We, however, do not currently see any geopolitical reasons due to which we would face any slowdown or delays.

Okay. And sir, if I may, I would like to ask one more question. So do we sell Disney and Hallmark, both brands, in the direct-to-sale -- consumer platform?

Currently only Disney. The plan is to sell Hallmark as well. The digital platform is yet sort of in the planning phase. And in the current financial year, we will launch Hallmark direct-to-consumer play as well.

[Operator Instructions] The next question is from the line of [ Keegan Fernandez ] from [ Queen Capital ].

I have 2 questions. So first is right now, what is the proportion of direct-to-consumer sales when compared to the overall sales?

I think we've -- in the presentation, we have the total numbers of the direct-to-consumer play. Hitesh, do you have the slide handy?

Yes.

If you could just direct me to the page number, I think that'll be it.

It's currently single -- it's single digits.

Okay.

I will say that probably between -- it's under 10% of sales since we only launched in the current quarter. The business has grown well. I think we did in June around INR 2.5 crores in sales on the direct-to-consumer side, which has been less, so it's...

It's roughly INR 6 crores for the quarter. So it is roughly 3.5% for the quarter, so...

Right. So this includes online channel as well, correct?

This is -- actually, see, we sell online through the retailers as well, which is off the retailers' websites. This does not include those sales. This is Renaissance Global selling directly to the consumer. This does not include any sales that will be made through macys.com or walmart.com or any other platforms. This is Renaissance Global's direct relationship with the final consumer in the U.S.

Okay. That helps. Great. So I think we are seeing the good customer gains of the...

Excuse me.

Yes.

This is the operator. Sir, your voice is breaking.

Sorry.

Mr. [ Fernandez ], we can't hear you. Your voice is breaking.

Yes. Is it better now?

Yes. It is. Thank you.

Yes. Sorry. So I have another question as to how are we looking at the U.S. market segment going ahead. I believe compared to India, of course, a lot of retail activity has resumed there. Even stores are opening. So compared to pre-COVID levels of, say, January, February, where are we standing there?

Yes. So I think as we mentioned in the prepared remarks, the U.S. and other markets where we sell diamond jewelry, we are currently seeing our sales at about 60% of what we did 1 year ago. However, retailers are doing slightly better than that. I think their sales are probably 20% below 1 year ago levels. However, because they have higher inventory since they were shut for a couple of months, they are being cautious about buying from us. If the current trend of sales continues, we expect to -- sales to pick up a little bit. However, our Middle East business, as I mentioned, which is reliant primarily on tourism has been hit a lot more and that business is trending at 70% below 1 year levels. As a contributor to our bottom line, the gold business is far less important because it's a far lower EBITDA margin business. The diamond jewelry business is more meaningful. I think those -- that's currently -- we are currently seeing sales at about 40% below last year's levels and retailers are doing slightly better than that.

Okay. So one more last question from my side. I -- just taking this from the previous question on this call. We are setting up more -- we are setting up for more sales in China. And will we -- going ahead, will we look at expanding further in China and sort of put expansion plans in U.S. on hold? Because considering the macro situation, I believe China may do much better than U.S. as overall market over the next few years. And the Disney character -- sorry, Disney merchandise deals which you have, those are very mature in the U.S. already, whereas they'll still be a novelty and first-time experience in China. So is there a possibility -- will we prioritize that over the U.S. market? And if we do so, do we make better margins there? Or how will that play out?

So, I mean, sir, it's a little early to make that decision. I think it will all be data dependent and dependent on how the sales volumes are, how the uptick is. I mean we've been in the U.S. market now for over 20 years, and we have -- our teams have a deep understanding of what the U.S., Canadian and the U.K. consumer requires. Building that level of understanding for China will definitely take some time, so I would say it's a little bit premature to change focus completely. I would say that it will be a gradual approach and a very data-dependent approach based on how the business progresses, how our relationship evolves with the retail partner as well as the direct-to-consumer sales that we may undertake. So I would say that a year from now, we will be in a much better position to make a decision on how the business is and how the growth will be for the China market.

Sure, sir. I believe you are in a great and sort of enviable position now because while major companies are trying to move away from China, the Chinese market is a consumer for you rather than a supplier. So maybe that can work to our advantage. Best of luck for upcoming quarters.

[Operator Instructions] The next question is from the line of [ Mihir Desai ] from Desai Investments.

Sir, just a follow-up question on what I had asked earlier, sir. Sir, just wanted to ask on expansion of IRASVA. Like just wanted to know that how we are looking at it, the regions where you want to expand. And how many stores are you looking at expanding, sir?

So [ Mihir ], I think currently, clearly, the Indian retail business has definitely been hit a lot harder than the U.S. because the lockdown has been pretty severe in India, and IRASVA was really at a nascent stage when we were looking at expanding it. So prior to the lockdown, we had signed up a couple of locations that were actually expected to come live. We still have plans to open 2 more stores in the current financial year. I think we'll have to see how demand evolves. We have started the store that we had in Mumbai, and we are seeing sales at 40% -- 30% to 40% of what they were prepandemic. So I think it will be a wait-and-watch strategy for IRASVA to see how consumer demand revives in India and we'll take a measured approach to expansion. I think the recovery, at least from our perspective, probably because we are more established in the U.S. market, has been a lot quicker. I think with IRASVA, I think maybe over the next couple of quarters, we will have more clarity on demand environment because we are primarily in diamond jewelry. And we have seen a softness in demand since we've opened up. So we have to wait and watch and see how the business recovers.

Correct. Understood, sir. Sir, and going forward, like if the rental yields also -- due to pandemic, there is an anticipation that rental yields should come down. So even this can benefit us for our new expansion of stores, sir?

I think that currently, the stores that we had signed up, we are negotiating with the malls for lower rental yields. Those deals haven't been finalized yet, but while we -- one could see some reduction in absolute amount, but I think it's all relative to sales. The sales are also at 50% to 60% of prepandemic levels, then I think as a percentage of sales, you don't benefit much. So I think, again, I think it's a little early to judge demand in India because India has not really seen opening of stores yet as much as we've seen in the U.S. So a little bit early to make a decision on the India side of the business.

Understood, sir. My last question would be on the U.S. front, sir. Sir, as we have seen, the unemployment rate rising at U.S. So sir, definitely, this may somewhere or the other affect the demand for us also. So at your end, like what is your view? Or -- and how are you prepared to mitigate these kind of challenges which we face, sir?

So we've taken significant costs out of the system. We've reduced our workforce significantly during the pandemic. Management and senior employees have taken some pay cuts as well. So we are preparing by controlling our costs and trying to become a little bit leaner as an organization to prepare for lower demand structure. And I think then one will have to see whether demand stabilizes. So far, I think because of the government's stimulus checks that have been given out, plus the $600 a week of federal unemployment benefits that ran through July, I think the overall U.S. consumer has been relatively healthy. With those extra stimulus checks running out in August, we haven't yet seen what the impact of that will be. But as an organization, what we can do is prepare through a lower cost structure and being leaner as an organization to prepare for a lower demand environment and wait for demand to recover before we make further plans.

[Operator Instructions] The next question is from the line of [ Ashish Shah ] from [ Business Match ].

Sumit, just 2 questions to you, both from long-term perspective. Any change in consumer behavior that you have seen or noticed this pre-COVID and post COVID in terms of either ticket size, frequency of purchase or anything else?

So I think that it does seem like there is far more inclination for the consumer to interact digitally. Most of our customers have reported a significant increase in digital sales relative to overall sales. And we've seen that in our small way in our direct-to-consumer initiatives. So we feel that the interaction with the customer will definitely be far more digital going forward as compared to where it was before. I think if executed well, this augurs well for our strategy to build a more robust direct-to-consumer play. Other than that, in terms of price points, we haven't seen any change in consumer behavior other than the willingness to interact digitally with retailers as well as brands.

Okay. And something related to that, Sumit. As we head into Q3, the big seasonal quarter for us, any sense of visibility that you are having right now? Like how is that shaping up? Not necessarily in number terms but in general.

So I think so far, what we've seen is that there has been some pent-up demand because of which the last few weeks' retail numbers have been very strong. But again, this remains very volatile and uncertain. One doesn't know how long the strength in consumer demand will last. In -- all through the late half of June and July, retail sales of our products that we have visibility on have been relatively good. So we are cautiously optimistic. But again, I think one has to weigh in the end of the government stimulus in the U.S. to see what impact that has on demand.

Sure. Sumit, just slight more elaboration on your digital strategy, if you could. Like you had phenomenal sales in the first quarter, albeit on a very, very low base. But very encouraging that in first quarter, you had about INR 6 crores of revenue. So over the next, let's say, couple of years, you're saying that most important learning has been digital. So what's in your mind over the next 2 to 3 years? Do you have any target in mind where you would want to see digital as a percentage of sales? Or what's your strategy to further increase on this space?

So I think that given the fact that we currently have licenses with 2 large companies, I think our strategy would definitely build -- to build a flywheel around all of the licensed brands and grow the digital side of the business. We continue to look for additional licensing opportunities, and we're close to signing up one more additional license with one more brand. So I think that our goal would really be to build an ecosystem in the direct-to-consumer space and build relationships with consumers directly. What the penetration of our direct-to-consumer and digital sales will be as a percentage of our total, again, see, we're only one quarter into it, so a little bit early to say. But I think that over the course of this year and by next year, we definitely will have a better idea in terms of the penetration and what growth we're able to see.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to Mr. Sumit Shah for closing comments.

Thank you, everyone, for joining us on the Q1 conference call today. We hope to see everyone on the next conference call. Thank you and stay safe.

Thank you. Bye-bye.

Thank you.

Thank you very much, sir. Ladies and gentlemen, on behalf of Renaissance Global Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.