Renaissance Global Limited (532923) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I am Nira, moderator for this conference. Welcome to the Q4 FY '21 Results Conference Call of Renaissance Global Limited organized by Dickenson World. [Operator Instructions] Please note, this conference is being recorded. I would now like to hand the floor to Ms. Pushpa Mani. Thank you, and over to you, ma'am.

Thank you, Nira. Good evening, everyone. I welcome you all to the Q4 and FY '21 earnings call of Renaissance Global Limited. We have with us Mr. Sumit Shah, Chairman; and Mr. Hitesh Shah, Managing Director. The discussion today may include some forward-looking statements and must be reviewed and considered in conjunction with the risks in the industry in general and our business in particular. During the Q&A session, I request all the participants to limit their questions to 2 per participant and join the queue again for a follow-up question. Now without taking much time, I will hand over the floor to Mr. Sumit Shah for opening remarks. Thank you, and over to you, sir.

Yes. Good evening, everyone. On behalf of Renaissance Global, I extend a warm welcome to everyone to this earnings conference call. I hope that every one of you and your families are staying safe and healthy. There's a sense of optimism with the vaccine rollout in the developed markets that comprise a large majority of our sales. We sincerely hope that the vaccine program accelerates in India as well as we go through this difficult time. Our strategy is to grow our business through licensed brands and our own brands globally. We plan to scale this division through distribution, through our retail partners and direct-to-consumer. Due to the structural shift within the jewelry industry towards brands, we see a decade-long opportunity for growth for this division. We are also investing in our own brands, Jewel Lilly and Made For You to create value. We see brands as a means of differentiation in a very large global opportunity. We believe that the branded division will help improve our operating margins meaningfully over the years to come. We plan to invest in this division, generating meaningful cash flow and growth for our shareholders. In the last quarter, branded jewelry accounted for 23% of our total studded jewelry revenue. Our strategy is to continue to grow the share of this business. The company is focused on branded jewelry through our exclusive licensing arrangements with Disney, Hallmark and our own brands. There are meaningful and significant discussions that are ongoing for new licenses that would support our growth for years to come. We will announce them at an appropriate time. We are delighted to announce our partnership with the second largest Chinese jewelry retailer, Lao Feng Xiang, LFX, for the Chinese market with the introduction of our highly successful Enchanted Disney Fine Jewelry collection. We have commenced operations in China by shipping our first order to LFX. Renaissance has planned an omnichannel approach for the Chinese market. We are very excited about the growth of our direct-to-consumer business, e-commerce adoption that accelerated during COVID provides long-term momentum for this division. Our direct-to-consumer business through our newly launched websites has shown robust growth during the year. Our Q4 '21 direct-to-consumer revenues were INR 23 crores with an EBITDA margin of 19%. Based on our estimate of the quarter's contribution to annual sales, we are at an annual run rate of INR 115 crores. We expect the direct-to-consumer business margins to improve going forward to the 20% to 22% range. This is a INR 115 crore in direct-to-consumer business built from zero, in a matter of 15 months. We started our first direct-to-consumer website in February of 2020. In May 2021, we launched our sixth direct-to-consumer website for hallmark diamonds. To summarize, this is a very exciting time at Renaissance Global. I have never been more optimistic about the opportunity we see in front of us. The branded division and the direct-to-consumer division have increased our addressable market and margin profile as a company. We look forward to executing to this plan in the years ahead. Now I'd like to turn the call over to Mr. Hitesh Shah to discuss our financial performance.

Thank you, Sumit. Good evening, everyone. The company during quarter 4 of FY '21 reported a total income of INR 584 crores, against INR 453 crores during the corresponding quarter of the last financial year. That is a growth of 29% year-over-year. Our EBITDA grew by 32% to INR 34 crores, while our profit after tax stands at INR 16 crores, growing by 66% year-over-year. For the full year FY '21, our total income is down 18% at INR 2,048 crores versus INR 2,510 crores last year. The FY '21 EBITDA stands at INR 116 crores versus INR 171 crores for last year, a decline of 32%. Our profit after tax before discontinued operations stands at INR 46 crores against a PAT of INR 92 crores in the last year, down around 50%. We expect profit after tax for FY '22 to grow between 18% to 22% over our FY '20 profit after tax and more than 100% as compared to FY '21 PAT. The company has managed to lower its net debt-to-equity levels to 0.29 in March 2021 from 0.52 as on March 2020. Cash and bank balances and current investments as on March 31, 2021 are at INR 245 crores. The company's FY '21 return equity stands at 6%, which is due to the impact of COVID-19. It was 13.5% for the year ended March 31, 2020. Our long-term goal is return on equity greater than 15% and to be at 0 net debt over the next 3 years. In terms of geographic distribution of sales, in Q4 FY '21. USA contributed around 49% to overall revenues, with 35% coming in from the Middle East. For the full year FY '21, the breakup was U.S. 59%, and Middle East, 27%. In terms of product category, studded jewelry contributed 66% to the overall revenue during the quarter, with a balanced contribution coming in from the plain gold jewelry segment. For the full year, studded jewelry contributed 77% to the overall revenues. 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 [ Suddith Vega ] from [indiscernible] [ Securities ].

Congratulation on a good set of numbers, sir. And very strong guidance of 18% to 20% growth in -- from the FY '20 level base. So congratulations for that, sir? Hello. Am I [ on already ] ?

Yes, you are, sir. Please proceed now.

Sir, my question is from where this optimism is coming from? Because still, the world is under the kind of COVID impact. Of course, the developed countries have come out of it slowly. But I just want to know the demand outlook for the current first quarter as well as current year, has the -- any effect of COVID is still there? And my second question is, how is the response in China for our Disney Fine Jewelery, just -- we have launched over there? So these are the 2 questions.

Thank you for your questions. So I'll start with the first question on our source of optimism. So in general, what we've seen during COVID is that as people have been unable to travel, the spending on goods has probably increased, and there is -- there has been a disproportionate increase of share for certain product categories. In the U.S. and Europe, there has been an increase in wallet share for our category, in our opinion. And the current momentum that we see with our retailers, as we monitor sales on a weekly basis as well as our direct-to-consumer websites, we are currently seeing strong momentum to our sales numbers, which gives us optimism for the year ahead. However, the world is still dealing with uncertainty due to COVID. And if there is any meaningful or significant lockdowns in the Western markets during the course of this year, our guidance may have to change. But currently, based on the vaccine rollout as well as the momentum that we're seeing with our customers, we feel reasonably confident for our outlook. And in terms of China, it's a little early to tell because we actually shipped only a few weeks ago, so I think this product is still getting placed in stores, and the retailer is beginning the marketing program. So I think we will be able to give you a lot better visibility on the next earnings call. It's a little bit early to tell on the China front.

And sir, one more question is will that growth in the D2C segment and our own branded jewelries growth, will that help in our margin for the year going up significantly in FY '22?

Yes. That's right, sir. I think that the branded division and the D2C segment is definitely margin accretive and will help increase margins in the current year.

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

My first question would be around -- sir, I just wondered if you like see our H2 revenue mix, then the customer brands -- the business from customer brands and [ Verigold ] has increased like in a decent or, say, a robust number. But I just wanted to understand, sir, what is your outlook for our branded [ Jewel Lilly ] jewelry and direct-to-customer jewelery because the EBITDA margin over there is quite lucrative compared to other business?

Sure. So we think that the branded jewelry segment as well as the direct-to-consumer business will definitely grow faster than company average. And that's where we see a lot of customer interest in. So the focus of the company as well as the entire management team is to grow the share of these 2 divisions. And we expect in the current year, both the branded as well as the direct-to-consumer business, to grow meaningfully faster than the company average.

Okay. So that will also kick in our EBITDA margin going forward?

That's right, sir.

Okay. Understood. Now, sir, coming to a question on free cash flow, sir. So if we see the free cash has been significantly improved from [ obviously, the past. ] Say FY '17, if we compare it to now, it has been a positive cash flow. And going forward, do we expect this cash flow to sustain? Because if -- like, do we see some investing activities happening over here? Or how should we look at it?

So I would say that there is not any meaningful capital expenditure planned going forward. So we would expect to see healthy cash flow generation for the company. And because of that confidence, we've also announced our dividend policy going forward, where we'll be paying out between 15% and 25% of the consolidated profits of the company to shareholders. So I would say that we expect working capital cycle to remain stable or improve gradually as the direct-to-consumer business becomes more important because that has a better working capital cycle. And since our business is working capital intensive, which really is the main driver of cash flow generation, we expect free cash flow generation to be relatively healthy going forward.

The next question is from the line of [ Geeta Mehta ] from LIC Securities.

Yes. So my question regarding the gold price volatility. I wanted to understand that as gold prices are quite volatile, due to which there are inventory gains and losses. So how do you mitigate the impact of such volatile prices? And what is the fluctuation impact on the bottom line?

Sure. Hitesh, you want to take that?

Yes. So we pretty much get -- purchase orders from customers based on the market rate of gold. And we hedge the requirement in the futures market as per the orders and reverse the hedge when the deliveries of gold is taken. So pretty much, we do not have any significant impact on account of gold price fluctuations or even the inventory held by us is pretty much on a loan basis from the bullion dealers or the banks. So essentially, there would not even be any significant inventory gains or losses.

Okay. And my other question is that, as you can see, the employee expenses have fallen down by 23% year-on-year during the quarter and 27% in the full year. So what are the reasons for such great reductions?

So I think during COVID there, we did sort of rationalize our workforce and look at what is required on an ongoing basis. So I think that there is -- we did take some pay-cuts across the employee base, and there was some rationalization of workforce. So I would say a combination of these 2 factors has resulted in employee cost reduction.

The next question is from the line of [ Kirti Ghosh ] from Sequent Investments.

You have guided for an ROE target of 15%. Could you give some color as to what are you doing to achieve the same? And when do you to achieve this target? Also, my second question is other financial assets have increased sharply during the year. And what are these assets? And why such a sharp price?

Thank you for your question. So in terms of return on equity, our expectation would be that we should be higher than 15% in the course of the next 2 to 3 years. And then your question of investments. I think most of the investments are either cash or short-term investments in liquid funds. So I think there has been working capital rationalization due to which we've generated significant amount of free cash flow, which has led to an increase in financial assets. All of them are either cash or short-term investments in liquid funds.

The next question is from the line of Rajesh Kumar from Capital Portfolio Advisors.

Good afternoon, sir. So my first question is regarding the U.S., what is your position of U.S. market in terms of the sales and the store [ load ]? Are you seeing some traction in sales there? So like because we know that like U.S. has been one of the worst affected markets initially during the COVID time. So as the vaccination has progressed, are you seeing some traction from that front?

Yes. Thanks for your question. So yes, I think U.S. is our largest market in terms of the revenue share and I think U.S. has been very aggressive with the vaccine rollout due to which there is -- I would say that all of our customer stores are fully opened and probably transacting at higher than pre-COVID levels. So I would say that in the U.S. there has been significant return to normalcy, to people visiting stores or buying online. And I think one of the benefits that we've seen during COVID is digital adoption, whereby customers have gotten accustomed to buying online. So even when we distribute through our retail partners, we are seeing a greater percentage of their sales to online channels as compared to pre pandemic.

Okay. Sir, my next question is, during the full year, your EBITDA margin has fallen to 5.6% versus 6.8% in the previous year. So what could be the possible reason to explain the same? Because as you explained earlier, you have reduced the [ things like ] cost. So still now the EBITDA margins have fallen. And if you can also help us by giving some color on what could be the possible EBITDA margin going forward in the financial year '22 and FY '23? And what could be the long-term EBITDA margin you have in the mind, so once things normalize? So what is the trajectory you are looking at, which would be the stable kind of EBITDA margin, which we would be aiming for? So be happy to share it like if you can give some guidance on that.

I think -- so yes, for the past year, obviously, the impact on the EBITDA margins has largely been an impact of COVID. I think in the quarter 1 of the financial year, largely our manufacturing units were completely shut down. And we had significant losses in quarter 1. Quarter 2 and quarter 3 saw some normalcy returning, but we were still trending below year-over-year sales number. So largely, the reduction in EBITDA margins has been due to operating deleverage due to the shutdown in quarter 1 and lower sales numbers in quarter 2 and quarter 3. We, at this point, based on the information that we have available, see a lot of the operating deleverage behind us. And we would definitely see meaningful improvement in operating margins going forward. I think at this point, disclosing or discussing long-term EBITDA margins would be a little bit difficult because it depends on the growth of the higher-margin divisions as they play out. Over the course of the next few years. But our endeavor as a company would be to meaningfully increase EBITDA margins over FY '20 numbers going forward.

So I'm not looking at an absolute range. I know the situation is quite volatile. If you can just give some kind of color and [ assess ] like if the COVID situation like goes away, things are normal. Then what could be the normal range of broad range, not looking at like from a specific number to hold the management responsible for that. Like what could be a normal operating rate for our business, which is at a stable [ level ]?

Yes. So I think that in our presentation, we've given EBITDA margins by division for -- 7% for our customer brands, about 12% and 20% kind of range. So I think that, that's essentially what you're looking at for the diamond jewelry segment. The plain gold jewelry business is largely passed through, which actually drags down our overall EBITDA margins. I would say that our diamond jewelry EBITDA margins are in the 10% to 12% range -- sorry, 8% to 10% range today. I would say that we would see meaningful improvement in our diamond jewelry EBITDA margins. That's what we would sort of focus on broadly, and that's where the highest scope is for improvement in margins.

The next question is from the line of [ Rebab Kachoria ] from VG Capital.

I wanted to know what could be, sir, over a long term period, like 5, 10 years -- 5 years maybe the size of the D2C and the branded jewelery markets, that can [ mean D2C ] market?

Sure. So I would say the addressable market, obviously, is very large. And I think that a lot of the growth will depend on us executing to this large opportunity set. We are fortunate to have arrangements with some of the most loved brands globally, Disney as well as, to a lesser extent, Hallmark. We are currently in discussions for significant additional meaningful licenses in the future. So I think a lot of it will depend on how we execute to the plan. Just to give you a perspective, I think, broadly, the U.S. diamond jewelry industry is somewhere in the region of $40 billion. I think the largest e-commerce player today would be about 1.5 -- $1.3 billion to $1.5 billion, which is Signet. And there is quite a few players in the direct-to-consumer space who would be in the $200 million to $700 million range. So I would say that the opportunity is large. Obviously, for us, it's a 1-year-old business. And we are focusing on this business to grow it. Would be difficult to sort of look 5 years out and where it could be, but the opportunity set in the addressable market is relatively large and we are laser-focused on growing this part of our business.

Got that. Sir, our target would be to like reach $100 million or something like that? And within that, I wanted to know, how do we sell this online, sir? Is it only through our own site? If it is only our own site, how are they publicized? And secondly, do we also sell-through marketplaces like Amazon and [ STN ], on these kind of sites?

Yes. So about 90% of the sales are through our own websites and about 10% is through marketplaces. And we -- the advertising is generally through paid search on Google as well as Google shopping and on various social media platforms. We also have a PR agency that sort of works on talking about our product placement as well as getting free traffic to our website. So it's a combination of social media, Google search, shopping and various other means. So just to give you a perspective, we're currently investing between 20% and 30% of sales on advertising. So that sort of gives you the scope of what we're spending on advertising as a percentage of the direct-to-consumer sales in order to grow that business.

Okay. And the marketplaces ratio, can it improve? And Signet and all these other companies, do they do similar numbers, particularly through marketplaces? Or is it any different?

So I would say that the retailers such as Signet, generally tend to sell-through their own channels and not so much to the marketplaces. We've not been as focused on growing the marketplaces segment because our own website is more strategic from 2 aspects. One, it's more profitable and two, is we own the customer, which means that we have the ability to sell the customer again, we have data on who the customer is and have the ability to sell to the customer again. So our preference would be to grow share of sales on our website because longer-term customer acquisition costs will decline meaningfully due to this.

Got that. And what is the current customer acquisition cost per customer?

Yes. So as I mentioned, it's between 20% and 30% of sales, depending on the website.

The next question is from the line of Disha Shah from Global Securities Finance.

Sir, I just wanted to know that our Q4 sales and profits are down significant sequentially. So can you share the reason for the same?

Yes. So Disha, I think the way to look at it would be annually because Q3 is a very important quarter for us because of seasonality and due to Christmas and Thanksgiving, since we're primarily selling in the U.S. and in Europe. A large majority of the diamond jewelry sales happen for the Thanksgiving to Christmas time period. And I think, historically, this would be in line with our trend of how our sales tend to be. And this would be true of any consumer products that are sold in the U.S. and Europe.

Okay. And my second question is regarding that, what impact our business has seen due to the compulsory hallmarking?

So again, we are not operating meaningfully in India. We don't have any sort of -- we have very limited sales exposure in India. In the U.S. or in Europe, there has been no significant change in regulation in the past year.

Next question is from the line of [ Shweta Shah ] from Samata Capital Private Limited.

I have a couple of questions. So my first question is on the advertisement cost which has increased sharply during the quarter and year. So can you explain the reason for the same and also give some guidance on advertisement cost for the year FY '22?

Sure. So we did not have a direct-to-consumer business in the last financial year because all of our jewelry was sold through our retail distribution partners. As I mentioned to -- earlier on the call, we are currently spending between 20% and 30% of the direct-to-consumer sales on advertising, and we plan to continue to do that as we still see an opportunity to make 20% EBITDA margins on direct-to-consumer after making that kind of investment on advertising. So that would be a good guide in terms of advertising expenses, between 20% and 30% of direct-to-consumer sales.

Okay. And my second question is with regards to the Enchanted Fine Jewelry Collection, which is expanding into China. So what is the visibility and growth outlook for this segment?

Yes. So I think that since we just shipped under a month ago, I think that currently, it's a test program happening in a couple of hundred stores. I think a lot will depend on the success of this test program and how it does. I think that we'll be able to give a lot more visibility on this in the next quarter's earnings call because currently, we don't have too much information.

The next question is from the line of [ Nikhil ] Jain, an individual Investor.

Yes. I just wanted to understand, so all the work that we actually do for manufacturing of our items, is it done in India? Or is it like part of it is done overseas also?

Yes. The gold division, all of the manufacturing happens in the Middle East. So the Gold Jewelry is actually made in Dubai and sold in the Middle East. For the Diamond Jewelry division, I would say that about 80% to 90% of the manufacturing happens in India, and the rest is outsourced to China and Thailand.

Okay. My second question is that, let's say, what is the geographical strait for the diamond jewelry? So you have -- so the gold jewelry is such that we do it in Dubai and sell it in the Middle East. But for the diamond jewelry, what is the largest -- I think the largest proportion is coming from the U.S., but what may be the state for some other countries or continents, let's say, for example, Europe?

Yes. So if you remove 30% of the sales, the balance is split between 90-10 percent between U.S. and rest of the world? I mean, so there's I think 10% in rest of the world, which is all diamond jewelry. So we only sell gold jewelry in the Middle East, and the rest is U.S. and Europe. We don't sell any plain gold jewelry in the U.S. or Europe.

Okay. Fair. Sure. So one more question that I had was that we have mentioned that we are now having 6 websites for 6 different collections that we are having. And I think we are promoting them on the [ channel ] of their individual brand names and other things. Have you, let's say, kind of considered or do you think it is -- it can be useful to have an umbrella kind of a brand against which there are, let's say, maybe 6 or maybe even more licensees coming in? So there is an umbrella plan on RGL and then there is all of these brands that are available, right?

So yes, that's a great insight. And that's something that we have been debating and discussing internally as well. So that's definitely something that would be a worthwhile exercise for us to do. I think that currently, we are focused on -- we have one more website to launch, which is Disney Jewels, which is all of the non princess, iconic characters that we plan to launch during the course of this year. I think once we are done with that, there definitely has been discussions about an umbrella website, but we haven't really made any firm decision on that. But I think you bring up a good point, and that's a very meaningful discussion for us to have and something to execute in the future.

[Operator Instructions] The next question is from the line of Rajesh Kumar from Capital Portfolio Advisors.

Sir, during the last year, in financial year '21, so what has been the CapEx? And what are your CapEx plans for FY '22 and FY '23? And I also wanted to know, like, is this business capital intensive? Or what is the kind of the terms you can get like business can expand with a small incremental CapEx? If you can throw some color to that, that will help a lot.

Yes. Hitesh, you have the capital expenditure numbers? Or should we get back to...