Renaissance Global Limited (532923) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Renaissance Global Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, Mr. Poojari.

Thank you. Good evening, everyone, and thank you for joining us on Renaissance Global's Q1 FY '22 Earnings Conference Call. We have with us today Mr. Sumit Shah, Vice Chairman; and Mr. Hitesh Shah, Managing Director of the company. We would like to begin the call with brief opening remarks from the management, following which we'll have the forum open for an interactive question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature and a disclaimer to this effect has been included in the results presentation shared with you earlier. I would now like to invite Sumit to make his openings remarks.

Good evening, everyone. On behalf of Renaissance Global, I extend a warm welcome to everyone to this earnings conference call. I trust you and your families are safe and healthy. I will begin the call by providing you a quick overview of the company's operational and business highlights for the quarter, following which Hitesh will take you through the financial performance. We are pleased to share that we have started the new fiscal year on a positive note with another quarter of consistent and solid performance. Improved recovery and further opening up of our key markets in the U.S. and Canada translated into healthy demand and consumption during the quarter. We are seeing wider vaccine coverage, improving macros and sentiments normalizing across the key geographies, which we believe will further strengthen demand momentum going forward. Our strategy is to grow our business to 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 decades-long opportunity for growth in this division. We are also investing in our own brands, Jewelili and Made For You to create value. We see these brands as a means of differentiation in a very large global opportunity. We believe that the branded division will help improve operating margins meaningfully for 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 24% of our total studded jewelry sales. Our strategy is to continue to grow the share of this business. The company is focused on branded jewelry through 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 would announce them at an appropriate time. We have now commenced operations in China by shipping our first order to LFX in Q1 '22. 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 accelerated during COVID provides long-term momentum for this division. Our direct-to-consumer business through our newly launched websites has grown -- has shown robust growth during the year. Our Q1 FY '22 direct-to-consumer revenues were INR 25 crores with an EBITDA margin of 18.1%. Based on our estimate of the quarter's contribution to annual sales, we are at an annual run rate of INR 125 crores. We expect the direct-to-consumer business margins to improve going forward to the 20% to 22% range. This INR 125 crore direct-to-consumer business has been built from 0 in a matter of 18 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. Consumer response has been very encouraging for the newly launched website of Hallmark Diamonds. Overall, we have delivered an encouraging set of results in the quarter. I have never been more optimistic about the opportunity we see in front of us. The branded jewelry segment and the direct-to-consumer division have opened up any growth opportunities for us across markets, and we look forward to delivering healthy performance with improved profitability 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 1 of FY '22 reported a total income of INR 419 crores against INR 189 crores during the corresponding quarter of the last financial year. This is a growth of 121% year-over-year. The performance was driven by increased offtake in our own branded jewelry segment, robust contribution from the direct-to-consumer business as well as a lower base in the corresponding quarter of last year. With effect from 1st April 2021, the company has renegotiated terms with most customers across its plain good division due to which the company is now recognizing only making charges as revenues for this business. This will meaningfully reduce the reported revenues of the gold division without impacting EBITDA of this division. On a like-to-like basis, our revenue growth would have stood at 138% against the reported growth of 121%. Our EBITDA stood at INR 41 crores, while our profit after tax stood at INR 24 crores. We expect profit after tax for FY '22 to grow between 18% to 22% over our FY '20 profit after tax, which would be approximately 130% to 140% growth as compared to FY '21 PAT. The company has managed to lower its net debt-to-equity levels to 0.25 in June 2021 from 0.45 as on June 2020. Cash and bank balances and current investments as on 30th June 2021 are at INR 256 crores. The company's trailing 12-month return on equity stands at 10.9%, while our trailing 12-month core return on equity stands at 13%. Our long-term goal is to be at 0 net debt over the next 3 years. In terms of geographic distribution of sales in Q1 of FY '22, U.S.A. contributed around 66% to overall revenues, with 17% coming from Middle East. In terms of product category, studded jewelry contributed to 93% of the revenue with the balance contribution coming from the plain gold jewelry segment. Thank you very much for your kind attention. Now the floor is open for Q&A.

[Operator Instructions] First question is from the line of Parag from Kingstone Capital (sic) [ Knightstone Capital ].

This is Parag from Knightstone Capital. Sumit, could you talk about the working capital of the 3 segments separately how much in the inventory and receivables for your plain gold business, your branded business and customer brand business?

Sure. So I think the working capital cycle varies a little bit by division. We haven't run the numbers in detail in terms of the inventory and receivables by division. But to give you a broad context, the plain gold jewelry division would have essentially a 15- to 20-day working capital cycle. So essentially, the working capital for that business is relatively small. I think the working capital cycle for the studded jewelry part again is divided into 2 parts. The direct-to-consumer business has obviously 0 receivables and lower working capital and inventory cycle because the gross margins are large. And even if we carry 3 to 4 months of inventory, it works out to between 15% to 20% of sales as working capital on the direct-to-consumer side. On the wholesale side, I would say, in general, the working capital cycle is better on the licensed brands and the branded jewelry as compared to the customer brands where there is lower rates of consignment and/or testing that is done by the retailers. So if I were to sort of tear the studded jewelry segment, obviously, the direct-to-consumer bit would have the best working capital cycle, followed by the licensed brands that are distributed through retailers and the highest working capital being for the customer brand segment.

And for customer brand segment, approximately how much should the receivables be and how much inventory be as generality?

So I would say that our receivables average are between 60 -- between 30 days to 90 days and with average being closer to 60. For the plain gold, it's -- plain gold would be 0 and -- plain gold would be sort of very short and direct-to-consumer would be 0, sorry.

[Operator Instructions] Next question is from the line of [ Kalpesh Parekh ] from JSN Financial.

I have one question particularly, sir, your really trust on branded jewelry segment. So what steps we are taking in this direction? How we can step up further more the contribution of branded jewelry? And maybe few years down the line, how much is our -- expecting branded jewelry as a percentage contribution?

So on the branded jewelry side, since we have healthier margins between 13% and 20%, I mean, the absolute endeavor of the company and the focus of the company is to grow the branded jewelry segment. This includes deeper penetration of current brands. If I were to tear the various brands that we have, Enchanted Disney Fine Jewelry, which is the oldest brand of the company, is the more mature brand with wider distribution to over 2,500 stores. The newer brands of the company, Disney Treasures and Hallmark have lower distribution through various retail stores. So our efforts really are on the wholesale side to increase penetration in the U.S. as well as internationally for the newer brands that we currently have. And the direct-to-consumer side also, we have a dedicated digital team, which has done a fantastic job of growing our direct-to-consumer revenue year-over-year, and we see that trend continue going forward. In addition to the existing brands, we have been having very meaningful conversations with newer potential brands that we plan to announce in the months to come, which would also provide additional impetus to our growth for the branded jewelry segment. So the company is fully aligned to growing the direct -- the branded segment to a larger percentage of the total. And I would say that medium- to long-term goal would be to have the branded jewelry to be at least 50% of the studded jewelry share and grow from there.

Hoping that. And then what is margin distribution there? We have already seen dramatic good improvement in this quarter. So what type of margin as an investor we should expect that we will do it in the next couple of years?

So I would say that broadly, as the mix changes, the margins will go up, right? Currently, we are sort of in the 10% range or so. So as we see the share of the branded jewelry segment go up, which is basically in that 13% to 20% range, I mean, we should be able to get to between 10% and 15% depending on the penetration of the branded jewelry segment.

And my second question was on the entry into Mainland China, basically. So like why China? And what type of opportunities you are utilizing in China? This will be branded segment, right?

Yes. So currently, our entry into China is through our brand Enchanted Disney Fine Jewelry. And there is obviously a great affinity for some iconic U.S. brands in China. We work with Disney to identify markets where the brand would be relevant. And based on the success that Disney saw in -- with the opening of their Disney World in Shanghai, we identified that as a key market. It is one of the largest jewelry markets in the world. So structurally, I think it's a very big opportunity. However, in China, we plan to stay focused on the branded jewelry segment and not sort of customer brands or generic product at all.

So Europe -- the incrementally, I think we will have a partnership or tie-up with this Chinese brand Lao Feng Xiang, LFX, or how it will be? We will use them as our channel partner or how we will try to leverage on this Chinese brand?

So yes, LFX is basically the second largest retailer of jewelry China. We've got an exclusivity arrangement with them for a 3-year period, whereby all brick-and-mortar distribution will be done through their stores. In addition to distributing product through their retail stores, we will -- we are in the process of setting up our direct-to-consumer business in China as well. So it will be sort of a dual approach, whereby the distribution through retail stores will be done by LFX. And we will also be selling direct-to-consumer initially by listing our products through Tmall, which is a division of Alibaba.

[Operator Instructions] The next question is from the line of Amit Doshi from Care Portfolio Management Service.

So these tie-ups with Disney, Star Wars, they are currently part for branded jewelry segments or customer brands? I mean they are partner for them?

Yes, that's part of branded jewelry.

Branded jewelry, okay. So can you just tell what kind of proportion would be between this and our own brands?

Yes. So I think it would be about 80-20. 80% of it would be licensed brands and 20% would be our own brands.

Okay. And how does this arrangement works with this licensed brands as in terms of design, in terms of royalty, et cetera? How does it work if you can broadly share the things?

Sure, sure. So essentially, the licensing arrangement is obviously to utilize the intellectual property of these companies. There is sort of the designing, marketing and distribution of the product is done entirely by our team. The role that Disney or Hallmark would play in this process is they would ensure that the product that we are creating or the marketing that we are creating is -- does not infringe on their intellectual property in any way. So they sort of act as gatekeepers of their brand to ensure that the product that is being created and the marketing is in line with their IP. Other than that, all of the product design, all of the marketing and everything is done by our team.

Okay. Okay. So when you say that exclusive license means so, for example, if a particular character is taken, so no other manufacturer would be able to kind of design on those brands?

Yes. So currently, it's geographical. Our arrangement for fine jewelry with Disney in certain geographies is exclusive, but the brand Enchanted Fine Jewelry worldwide is only us. So there are certain geographies in the world where Disney may have given IP to certain other manufacturers as well. But we are sort of building on the brand of Enchanted Disney Fine Jewelry. And in the U.S., in fine jewelry space, it is an exclusive arrangement.

Okay. And in terms of royalty or -- because everything is done by you for designing, marketing, distribution, so how does that arrangement work?

So royalty is obviously something that we've not disclosed publicly. But our royalties are relatively competitive compared to what you'd see with any licensing arrangement globally. And I think the margins that we're sort of reporting for this segment is obviously after payment of any royalty to the license, the owners of the brand.

Fair enough. Fair enough. And so if you were to sell it, of course, the Disney jewelry, Disney branded or this Hallmark branded jewelry, of course, it would be far more easier for you. So in terms of EBITDA -- in terms of margins between these 2 segments, like your own brands versus the Disney brands, et cetera, so what could be a broad difference in terms of that margin profile?

So I think they would be similar. Our own brands as well as the license brands, the margins would be relatively similar in the branded jewelry segment.

Oh, okay, okay, okay. And then going forward, do you see this proportion remaining 80-20? Or what kind of proportion do you see?

So yes, I would say that broadly in the short term, I think that the licensed brands will be the larger share of the branded jewelry segment because I think that there is a significant opportunity to acquire new licenses. As you know, we have established ourselves as a go-to company in the U.S. market in order to build a brand. I mean for perspective, Enchanted Disney Fine Jewelry at retail is greater than a $200 million brand at retail. I mean, obviously, because we sell through retail partners, we recognize only 1/3 of that revenue because that's the wholesale price of the product. So having built a brand, which is over $200 million in a space of 4 or 5 years, there is significant advantages to us in terms of new licenses and new IP that we can sign. So we will definitely see the license part growing fast, and I would expect a proportion of 80-20 to remain going forward as well.

Right, right, right. And also, I think if the margin profile is similar, then why -- kind of after developing your own brand, I'm sure it will take probably 4 years to kind of make a mark in the segment.

Yes, yes. It's much more difficult to grow your own brand that you're absolutely right about. And with these brands, since the IP is -- intellectual property already exists and they are loved consumer brands, it's relatively easy to scale those businesses compared to our own brand.

Any specific additional kind of marketing spend compared to last year you would have or it's going to be like-to-like? I mean because we are expanding jewelry segments, so what kind of market then that we are targeting?