Renaissance Global Limited (532923) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Renaissance Global Q2 and H1 FY '21 Earnings Conference Call hosted by Dickenson World IR. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Akash Mehta. Thank you, and over to you, sir.

Good afternoon, everyone. I welcome you all to the Q2 and for FY '21 Earnings Call of Renaissance Global Limited. We have with us Mr. Sumit Shah, Vice Chairman; and Mr. Hitesh Shah, Managing Director. The discussion today may include some forward-looking statements and must be reviewed or considered in conjunction with the risk in the industry and in general and business in particular. Now I hand over the call to Sumit Shah for the opening remarks. Over to you, sir.

Good afternoon, everyone. On behalf of Renaissance Global, I extend a warm welcome to everyone to this earnings conference call. For the benefit of the audiences who are joining the earnings call for the first time, I'd like to give a quick overview of the company followed with a financial review -- follow the review of the financial performance of the company during the quarter. After this, we shall take questions from the participants. Renaissance Global is a highly differentiated luxury lifestyle products company and is the largest export of jewelry to many global retailers around the world. Our strategy to grow our business through licensed brands and own brands. In Q2 FY '21, branded jewelry contributed 20% of our studded jewelry revenues. The company is focused on branded jewelry through our exclusive licensing arrangements for Enchanted Disney Fine Jewelry, Disney Treasures Fine Jewelry, Star Wars Fine Jewelry and Hallmark. In addition to the licensed brands, we also have our own brands, which is Made for You, Lab Grown Diamonds and jewelry for the U.S. markets and IRASVA for the Indian markets. In this quarter, Disney Treasures, a collection of iconic characters of Disney has been successfully rolled out to 1,000 stores in North America. Hallmark Moments has also been rolled out to over 2,000 stores and should contribute meaningfully to revenues in FY '21. The company has also launched its in-house brand under IRASVA in the Indian market. After the success of its first flagship store, we have opened 2 new stores in Mumbai during the current financial year. Our newly launched Lab Grown, our diamond jewelry brand Made for You has also shown some promising response to our customers in the U.S. We plan to expand the Disney franchise in Mainland, china. We signed an agreement with LFX, the second largest jewelry retailer in China to distribute Enchanted Disney Fine Jewelry across Mainland China. The launch of this brand was delayed due to the pandemic, but is now currently scheduled for fourth quarter of the current financial year. We are also most excited about the growth of our direct-to-consumer business. Our direct-to-consumer business through our newly launched website has shown robust growth during the year. Our Q2 FY '21, B2C revenues were INR 9 crores versus INR 5.7 crores in Q1 FY '21, growth of 55% quarter-over-quarter. During Q2, we launched the Jewelry Direct-to-Consumer website for our customers. Further, we also launched Star Wars Fine Jewelry on November 5, 2020, which is in Q3 of the current year, and we are very encouraged by the consumer response. Our direct-to-consumer plans also include launch of Disney Jewels and Hallmark. The online B2C business is a high gross margin business with gross margins between 55% and 60%. We expect to grow the share of our direct-to-consumer business through all of our websites that we have launched and plan to launch in the near future. With that, I turn over to Mr. Hitesh Shah for discussion of our financial performance.

Thank you, Sumit. And good afternoon to everyone. The company during the second quarter of FY '21 reported a total income of INR 532 crores, against INR 563 crores during the same quarter of FY '20, which is a degrowth of 6% year-over-year. The degrowth was lower-than-expected on account of pent-up demand and onetime conversions. We expect revenues in the second half of FY '21 to be 20% lower as compared to H2 of FY '20. Our Q2 FY '21 EBITDA is flat at INR 44 crores. Our profit after tax stands at INR 23 crores. Now looking at our H1 performance. For H1 FY '21, our total income is down 38% at INR 722 crores versus INR 1,162 crores in H1 of FY '20. However, our gross margins have improved 60 bps in H1 FY '21 against H1 of FY '20. H1 FY '21 EBITDA stands at INR 33 crores versus INR 75 crores registered in H1 of FY '20, which is a de-growth of 57%. Our profit after tax stands at INR 5 crores against a profit after tax of INR 39 crores in the first half of FY '20. The company has managed to lower its net debt-to-equity levels to 0.51 in September 2020 against 0.71 in September 2019. Our long-term goal is 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 INR 83 crores, while our inventory levels have reduced by INR 463 crores. We maintain a strong liquidity position with cash, bank balances and short-term investments of INR 211 crores as of September 2020. Further, company's trailing 12 months return on equity stands at 7.9%, which was 13.5% for the year ended March '20. In terms of geographic bifurcation, USA contributed around 63% to our overall revenue during Q2 of FY '21, with 22% coming from Middle East. For H1, the breakup was U.S. contributed 60% and the Middle East was 22%. In the products category, studded jewelry contributed 83% to the overall revenue during this quarter, while the balance came from the Premium Gold segment. For the H1, the studded jewelry contribution was 84% while Premium Gold was 16%. Thank you very much for your kind attention. Now the floor is open for question and answers.

[Operator Instructions] The first question is from the line of [ Shruti Shah ], an individual investor.

Sir, I just wanted you to elaborate a bit on IRASVA brand that you have mentioned in the opening comments that we have started with our 1 flagship store, and now we have opened 2 more stores in Mumbai. So I mean, what is plan for this particular brand? And how many stores are we planning to launch in this current year? And I mean, apart from Mumbai, which other cities we would be targeting at?

Sure. So the plan for India is a little bit fluid currently because India has just opened from the lockdown. We... [Technical Difficulty]

The question is a connected as we have offline for the management speakers. Please stay connected while we reconnect them. Apologies for the delay. We have the line connected for the management speakers now. Sir, just one moment, we are just unmuting the line for the question now. [ Ms. Shah ], you may please go ahead.

Yes. Sorry about that. Line got disconnected. Yes, for IRASVA, I think currently, we've opened 2 more stores, and we haven't yet formulated plans for further growth as we want to see the impact of coronavirus on sales as well as how sales stabilize. So I would say that we would evaluate sales in the current quarter and in the next quarter. And the expand -- further expansion plans will only be decided by the end of the current financial year. So currently, we don't have any plans for any more store expansions for the current financial year.

But sir, we must be having a plan for next 3 to 4 years, like we must have made some estimates. So I mean for -- I mean, we -- I totally understand that we cannot give a figure for it -- I mean we cannot decide for this current year. But for next 4 to 5 years, what are the plans?

So as I said I think that there has been a lot of disruption in India, especially on the physical retail side. Our original plans were to open about 30 stores. We haven't made any changes to the plan. But again, we have to see the impact on sales and see how things turn up and then finalize our plans. So I think the long-term plans, we had spelled out earlier. We haven't reevaluated those plans. We're waiting and watching to see normalization of sales post-COVID and in the months to come, and we'll finalize our plans as things progress.

Okay, sir. Sir, secondly, I just wanted to understand on direct-to-customer segment. As you have mentioned that we have [indiscernible]. I mean, so what kind of what kind of customers that we are seeing, the customer demand on this front? And do you think that -- is it just because of the current situation that the sales we are seeing higher -- we are witnessing higher demand and this trend will continue going forward? Or you believe once the things are better, people will start, again, move to brick and mortar?

So it's a little early to tell what consumer behavior will be in a world after there is a vaccine and things go back to normal. But it is our belief that there are -- there is a lot of digital acceleration that has happened and consumer habits have changed. I think once people have discovered the convenience of shopping online, I think a lot of these habits will continue. There's no doubt that there's been an acceleration in shift to online shopping due to the coronavirus, but for our company it's sort of a structural decision to have a healthy percentage of revenues, which are direct-to-consumer. Having the licensed brands with us gives us a big advantage to acquire customers. So currently, there's 4 websites, which are live, and I encourage all of you to visit the website, and please give us your feedback and any experiences. Enchanted Disney Fine Jewelry is currently shipping in the U.S. and in most countries globally. Star Wars Jewelry is primarily a U.S. centric brand. And our 2 own brands, Made for You, which is a lab grown diamond brand and Jewelry, which is our in-house diamond jewelry brand are all live. And we extremely excited about the customer response from these. We will continue to invest behind these brands and grow the direct-to-consumer part of the business.

Okay. So, sir, what percentage are we targeting in next 2 to 3 years?

So we'd like the branded business, as we've said before, to be 50% of our business. And our hope is that the direct-to-consumer business, our first milestone would be to cross 10% and then look at growing our share beyond that.

Okay, sir. Sir, on the -- I mean, sales geographical split part, I mean, currently, I understand that 60% is contributed by U.S. and around 20%, 22% is from the Middle East. So are we looking at new market, are we -- I mean, in next 2 years, do we see a change in this split?

Yes. So we expect the business in China to grow meaningfully. I think that our initial launch with LFX in Q4 of the current year will give us a lot of data points around customer acceptance of our product. So we would expect China to be a significant growth area in the years to come.

Next question is from the line of [ Milder Desai ] from Desai Investments.

Sir, my first question would be on value [indiscernible]. So you have mentioned in your presentation in the -- the inventory levels have come down. But if you see on a month-on-month period, sir, or a quarterly basis, the inventory has slightly come up. So is this because of the season? Or were we not able to sell? So just want your view on this, sir.

Yes. So for us, essentially, this is entirely due to seasonality. If you look at our historical numbers, September is always a period when inventory tends to be elevated because we're getting ready for shipping. Q3 is our largest quarter of the year. So October, November, December is when we ship most of the product to our customers, and there's a lot of build-up of inventory during this period. So historically, usually, you'll see a peak in September. In 2018, December was a peak because we made an acquisition at that time. But if one were to just seasonally adjust and look back, it's usually September when things are -- where inventory is at the highest level because it's right before the Christmas shipping season for us.

Okay. Sure, sir. And sir, and 1 question -- 1 follow-up question. The first question, sir, is regarding the like bricks and mortar business. But now, sir, looking at the current scenario and looking at how the consumer is behaving on the digital end, also for higher ticket sizes, don't you think that the strategy for digitization should be revisited by you? And concentrated more over there rather than bricks and mortar going forward?

Which is what we mentioned that we launched our direct-to-consumer business on the digital side only in the last quarter. In the first quarter, we did about INR 5 crores of sales. And this quarter we have done about INR 9 crores of sales. We continue to invest behind our digital marketing channels. We are quite hopeful of a good Q3 as well. So it's definitely a focus area for our company because there's a consumer trend towards shopping online as well as margins for the company are far higher when we're making sales to customers -- to consumers directly.

Got it, got it. That's where I was coming from, sir. And also, sir, lastly, when you mentioned regarding your long-term targets on debt-to-equity and achievable ROE levels. Sir, when we say long term, so just wanted to know the time line of these?

So we're currently -- our debt-to-equity level is at 0.5%. So we feel very comfortable to sort of beat and improve on our target. I think our return on equity also, I think, prior to the pandemic, we were at 13.5%. Our hope and expectation was to cross 15% in the current year. However, given what's happened, I would say that it's been pushed back a year. But our goal definitely would be that in FY '22 to be able to cross 15% return on equity and to be below 0.5 debt to equity, 0.5 debt-to-equity for the current year is also achievable.

Okay. Understood. And sir, lastly, wondering regarding, sir, Disney and Hallmark, both brands are we selling under direct-to-customer platform?

So we currently have 2 Disney brands, Enchanted Disney Fine Jewelry. So that website is live. It's on enchanteddisneyfinejewelry.com, it's -- the URL is on our presentation and starwarsfinejewelry.com is also live. And we have 2 own brands, which are live. Hallmark is something which is targeted for the next financial year. We've just launched 4 platforms in the current year and plan to work on Disney Jewels as well as Hallmark for the next financial year.

The next question is from the line of [ Pankaj Garg ], a retail investor.

Sir, first of all, congratulations for the fantastic set of numbers. I have 2 queries. The first is on the debt to equity, as you mentioned, you're planning to keep it below 0.5. Sir, my question is, are there future plans company has to make the company debt free? And the follow-up question is on the dividend policy, if company has in the near future plans to share some profits with the shareholders in the form of dividends?

So in terms of debt to equity, I mean, I think that clearly, the long-term goal for the company would be at some point to be at a net debt 0. I don't envisage when that will happen. It's probably a few years away. With regards to our dividend policy, I think it's something which would -- should be discussed once our debt levels are lower than where we are today. So no near-term plans for dividends. And clearly as the company continues to generate cash and the cash accumulates on the balance sheet, the net debt number would continue to go down.

Next question is from the line of Siddharth Oberoi from Prudent Equity.

I wanted to know about the overall demand scenario. It is written in the transcripts that this is a pent-up demand. So what is the situation right now in probably October, November, et cetera?

Yes. So what we are seeing is that our customers are being extremely cautious about ordering inventory and increasing their liability, so to speak, by increasing inventory. So there are really 2 stories going on. While we have the ability to monitor sales at the retail level, we are seeing extremely strong activity at the retail level where most retailers that are selling our product are probably flat year-over-year or, in certain cases, slightly above, not for the year, but for the last 2 months for September and October, things have normalized. However, retailers are being extremely cautious about buying inventory. So that inventory levels from a year ago are significantly lower. So while retail throughput of the product is very strong, customers are being cautious about buying inventory from us. So I would say that for the current quarter also, we will see some year-over-year decline. However, if the trend continues, there should be a lot of strength that we would see either in Q4 or in FY '22 because customers will have low levels of inventory with strong sales. So I would say that in Q3, we would expect to sell less than what we did 1 year ago. But the final customer demand scenario looks quite encouraging where things have normalized to pre-COVID levels.

So it's not in FY '21, but can growth be expected then in, let's say FY '22?

Yes, absolutely.

Include overall FY '20 actually as FY '21 is actually a down year?

Yes. Contingent -- I would make that contingent on things being normalized with coronavirus. I mean, obviously, I would like to sort of -- I mean, what we are seeing now based on if things continue the same way for sure because it's very encouraging what we are seeing in terms of the demand scenario. As things -- if things do normalize in 6 months with the virus and the virus is under control, definitely, FY '22, we should see growth over FY '20.

Yes, okay. Also regarding the Chinese tariff that is getting postponed since the virus hit. So is there any terms and conditions -- are there any terms and conditions that have changed with the Chinese retailers?

No, nothing's changed. I think that currently, it's taking a little bit longer because we are unable to travel there. So a lot of communication is happening via sending samples and video conference and meeting meetings like this. Currently, a lot of things have been finalized, and the launch is expected in Q4 of the current year. We don't expect any further delays in the launch. I think, unfortunately, the launch was scheduled for March, April last year and it got delayed. But there has been a lot of pickup in activity, there is no change in any terms or anything of that sort, we've sort of picked up where we left, and we do expect to launch in Q4.

Sir, how would this work? For example, you supply certain jewelry, which probably [indiscernible] and then there will be large orders? Or is this a full-fledged launched in Q4?

No. It's not a full-fledged launch. They're planning to launch it in about 100 stores. And if it's successful over a 3-month time frame, then it goes to sort of a rollout to all of their couple of thousand locations. I'm not sure exactly how -- I think -- I believe it's between 2,000 and 4,000 stores.

Okay. All right. So also regarding this, the 2 stores that you have opened. So have you opened this because probably they were in the works and now the [ long-term ] is over? Or is it that it's a part of the strategy that you will probably expand more in at least the Mumbai region?

Yes, I think that it was definitely part of the strategy. Both the stores were already signed up before the lockdown. And some of the work had happened, some of the work started after. So these were obviously commitments made prior to the long term, and we've sort of gone ahead. I mean, the long-term plan is clearly to grow in India, but in a cautious manner, we don't want to [Technical Difficulty]

Yes, I can hear you.

Sumit, we can hear you.

No, sir, Mr. Shah has disconnected the line now it seems, I'm just reconnecting him again. We have the line reconnected for Mr. Sumit Shah.

Yes. So I think -- yes, so the plan is definitely to grow in a thoughtful manner without making losses so we'll continue to evaluate the profitability of the stores and grow gradually. I mean, our intention is not to make significant losses and expand for the sake of expanding. So it will be a thought out strategy, and the plan would be to invest in IRASVA long term.

Okay. And these are all rentals or have we bought the space?

No, rentals. [indiscernible].

Okay. Also, [indiscernible] this was regarding the online sales you've launched on the website, as of now what percentage sales comes from online?

So in this quarter, broadly, we've done INR 9 crores of sales online. These are all direct-to-consumer transactions. And I think our studded jewelry sales, I would say, it was somewhere around INR 400 crores, and total sales were INR 500 crores. So 2% of overall sales or about 3% of studded jewelry sales. So it's a small number. It's growing. I think it's significantly more profitable than the wholesale sales. I would say that the profitability factor is 55% to 60% gross profit. So meaningfully, even if we can get it to 10% of sales, that would have a very significant contribution to profit and even to the working capital cycle because money is received upfront from the customer and the turn on inventory, we can work on just-in-time inventory and keep inventory at a low number. So no, it's an attractive business, and we are very focused on the business. We have a digital team in-house that is sort of looking at growing this constantly. It's early days because it's only the second quarter that we launched a direct-to-consumer play. But we're very encouraged by the response so far. And we'd like to make this a meaningful part of our business along with the brand strategy going forward.

Okay. But what is the purpose of these different sites? I've gone through the website. So there are 4 different websites. One is Hallmark and one is [indiscernible] so is it that -- because we have these tie-ups with different people, so therefore, you have to launch different websites for each tie up?

Yes. So one of them is a Disney IP. So in order to tell the complete story of the Disney princesses, clearly, one has to have a separate identity. The Star Wars, again, same story, right? I mean, you have to tell the story of Star Wars, so Star Wars deserves its own website. [ Julilly ] really is going to be our marketplace with all of our brands. So [ Julilly ] currently has Enchanted on it. It has a lab grown diamond brands on it. It will also have Star Wars on it. So [ Julilly ] would be a platform to sell all diamond jewelry including all of the licensed brands and Hallmark. And Made for You is a lab grown diamond brand. We wanted it to have a separate identity because you don't want the customer to be confused between real diamonds and lab grown diamonds.