Renaissance Global Limited (532923) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Renaissance Global Limited earnings conference call. [Operator Instructions] I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you. And over to you, Mr. Poojari.

Thank you. Good afternoon, everyone, and thank you for joining us on Renaissance Global's Q3 and 9M FY '22 Earnings Conference Call. We have with us Mr. Sumit Shah, Chairman and Global CEO; 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 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 opening remarks.

Thank you. Good morning, everyone. On behalf of Renaissance Global, I extend a warm welcome and thank you all for joining us on our earnings conference call for the quarter and 9 months ended December 31, 2021. I will start off the call by taking you through a brief overview of the company's operational and business highlights for the period under review. Post that, Hitesh will give you a rundown of the financial performance, following which we will open the forum for a question-and-answer session. We're glad to report that we have delivered a robust performance during the quarter on the back of improving demand environment in our key global markets of North America, Europe and Asia. On the like-to-like basis, our total income in Q3 was higher by 26% year-over-year and profit after tax expanded by 29% year-over-year. While our 9-month like-to-like total income growth stood at 34% and profit after tax improved by 178%. The growth was primarily driven by strong contribution from our high-end branded jewelry segment, along with robust growth in our direct-to-consumer segment. Our global branded jewelry business is a key growth pillar of our business model. We have a growing portfolio of high potential licensed brands and own brands within this segment. Our association with globally recognized brands such as Hallmark, Disney and Star Wars has put us on a strong footing and enabled us to improve our presence across key international markets. We have been in advanced discussions to replicate our successful licensing model across other well-known brands. In line with this, we are pleased to share that we've signed a licensing agreement with one of North America's most popular sports league, the National Football League. Through this agreement, Renaissance and NFL will collaborate to design unique branded jewelry collection using NFL intellectual property. The NFL jewelry collection will include distinct pieces representing each of the 32 teams in the NFL, along with jewelry pieces for the Super Bowl and Pro Bowl matches. The collection will be premiered this holiday season at multiple retail locations such as department stores, specialty jewelry stores, league stores, mass market retailers and others across the United States. The jewelry collection will also be featured across e-commerce platforms such as the NFL team websites and other e-commerce retailers. This partnership, along with our existing strategic licensing agreements, augments our branded jewelry product portfolio. Over the last 3 years, we have improved the contribution from our branded jewelry segment from just 2% in FY '18 to 23% in 9 months FY '22. Looking forward, our strategic endeavor is to achieve 50% sales from branded jewelry segment over the next 3 or 4 years. Within the branded jewelry segment, direct-to-consumer business is another important growth lever for us. We have successfully developed and launched 6 online stores within a span of 15 months. We're happy to share that the monthly visitors on these websites have recorded almost 10 times growth since February of 2020, and we continue to register strong consumer traffic across these websites. We are constantly witnessing healthy business from repeat customers. In this quarter, the contribution from repeat customers stood at 17% as compared to 15% in Q2 FY '22 and an average of 6% in FY '21. The contribution from repeat customers continues to be on an improving trend, showcasing higher consumer stickiness and brand trust. In the coming months, we will be broadening our direct-to-consumer portfolio with the launch of new websites, and we'll be introducing a number of strategic initiatives to strengthen this model. Renaissance will be launching a brand under the D2C website for NFL in the coming months. Overall, we've delivered an encouraging performance during the quarter and 9 months. While there are ongoing concerns about the pandemic in some key global markets, we expect minimal short-term impact. We are currently witnessing certain inflationary pressures on our key raw material, most importantly, diamonds. This may have potential impact on our performance in Q4 FY '22. We expect this to -- this impact to be temporary as we will pass on some of these cost increases to our customers. I would like to highlight that Q4 FY '21 saw a spike in demand in our key markets, owing to the stimulus program by Western governments, hence would have a comparatively higher base. On the whole, these challenges are transient in nature, and we expect -- we remain excited about our future growth prospects and opportunities in the medium to long term. Our core competencies, such as partnerships with globally recognized brands, high exposure in product, high expertise in product conceptualization and design, advanced industry know-how and win-win partnerships with iconic brands positions us well to leverage on many growth opportunities in the high potential global branded jewelry space. Based on our strong performance for the quarter and financial year to date and in line with our dividend distribution policy, the Board has decided to declare an interim dividend of INR 5.5 per share. On that note, I would like to hand over the call to Mr. Hitesh Shah to discuss our financial performance during the quarter. Over to you, Hitesh.

Thank you, Sumit. Good afternoon, everyone. We have reported a solid performance during the quarter, supported by high demand in our branded jewelry segment as well as strong contribution from our direct-to-consumer business. In Q3 of FY '22, our total income stood at INR 775 crores compared to INR 741 crores in Q3 of FY '21, registering a growth of 4.5%. While for the 9 months ended December '21, total income grew by 14.3% to INR 1,672 crores compared to INR 1,463 crores in 9 months ended December '20. Our branded jewelry sales in Q3 grew by 30% year-over-year, of which our B2B segment marked a healthy growth of 20%. Direct-to-consumer business posted revenues of INR 49 crores in Q3 of FY '22 compared to INR 27 crores in Q3 of FY '21, growing by 78% year-over-year. In the 9 months of FY '22, our banded jewelry segment grew by 38%, of which B2B by 23% and D2C by 123%. Strong uptick in retail consumption and improved demand environment in our key markets on the back of a holiday and festive season boosted growth within the branded jewelry category during the period under review. Our D2C segment is also fast growing. According to our estimates of 9-month revenue contribution to annual sales, the annual revenue run rate for this segment now stands at INR 130 crores compared to actual FY '21 revenues of INR 65 crores, registering 2x growth. I would like to highlight that while revenues from our plain gold segment dropped by 66% and 60% year-over-year in Q3 and 9 months of FY '22, respectively, the volumes for the same improved by 84% and 172% year-over-year. This is largely because we are now recognizing only making charges as revenue for this business. While this will meaningfully reduce the reported revenues of the gold division, EBITDA performance remains unaffected. In terms of geographic distribution of sales in Q3 of FY '22, North America stood at 75%, followed by Middle East at 6% and other geographies at 19%. In 9 months of FY '22, contribution from North America was 74%, followed by Middle East at 7% and the balance coming in from other geographies. In Q3 FY '22 and 9 months of FY '22, revenue share of studded jewelry stood at 93%. Of the total studded jewelry revenues in Q3, branded jewelry business contributed 27% and of which the B2B segment contributed 75%, whereas D2C contributed 25% of the branded jewelry business. On the profitability front, EBITDA stood at INR 68.4 crores in Q3 FY '22. And in 9 months of FY '22, it stood at INR 163.6 crores, translating into EBITDA margins of 8.8% and 9.8%, respectively. Profitability was aided by improved contributions from our high margin areas of branded jewelry and direct-to-consumer business. In the 9 months of FY '22, branded jewelry business reported a 15.5% EBITDA margin, recording a year-over-year growth of 429 bps and the direct-to-consumer business registered 19.1% EBITDA margins, which was higher by 341 bps on a year-over-year basis. Our direct-to-consumer business is a high EBITDA margin business with margins ranging from 20% to 22%. With the growing share of direct-to-consumer revenues to total revenues, we believe our consolidated EBITDA margins will be on an increasing trend going forward. In Q3 of FY '22, profit after tax improved to INR 32.9 crores versus INR 25.4 crores in the corresponding period last year. While for 9 months of FY '22, profit after tax came in at INR 85 crores against INR 30.6 crores in the same period of last year, registering a robust increase of 178%. Lastly, in terms of our balance sheet, our net debt-to-equity ratio stands healthy at 0.33 in December 2021. Our total net debt stands at INR 305 crores, and our cash and bank balances and current investment stands healthy at INR 286 crores. To conclude, we have reported a solid overall performance during the quarter and the 9-month period. As one of the leading industry players, we operate a strong financial profile, and we remain confident of delivering improved performance going forward. On that note, I would now request the moderator to open the forum for any questions or suggestions that you may have. Thank you.

[Operator Instructions] The first question is from the line of Kaustubh Pawaskar from Sharekhan by BNP Paribas.

Congrats for good set of numbers. My question is on the margin trend. So for this quarter, we have seen our EBITDA margin at around 9.8%. And sequentially there is a dip because in Q2 we saw it at around 11%, though Y-o-Y there is a stark improvement on quarter on quarter there is a dip. Is it mainly because of the discount or the change in mix during the quarter?

Yes. So I think there are essentially 2 reasons for the dip in the margins in this quarter. One is we have seen an inflation in the prices of diamonds over the last 4 or 5 months, and there has been some element of commodity price increases that we've not yet passed on to customers fully. And I think during quarter 3, which is our largest selling season, there is usually a little bit of promotional activity, which affects our EBITDA margin. So I would say that it's a combination of these 2 factors, diamond price increases as well as some element of promotional selling.

So as you mentioned that you have already taken a price increase. So how do you look at quarter 4, whether this will -- this trend will improve or will it take some time considering the fact that in Q4, there are a couple of effects, one, because of the inflationary pressure and I think a third wave would also have impact on the sales. So considering that, would margins be under pressure in Q4? Or should we expect it to improve on [ quarter-on-quarter ] basis?

Yes. So I think our expectation would be that margins would continue to be under pressure like Q3 and Q4 as well. We've not seen a significant business impact because of the third wave. However, the year-over-year comparisons do become a little bit challenging because last year in Q4, the U.S. government sent out stimulus checks. And so we expect a little bit of moderation in sales growth, specifically in Q4 and some bit of pressure due to all diamond price increases not being passed on to customers. However, we are fairly confident getting back on track to our target EBITDA margins by Q1 of the next financial year.

I just wanted to understand on this strategic agreement with NFL. So more from the perspective of the operations, while getting into such agreements, do you have any targeted revenues in mind that -- from this particular agreement will be deriving this revenue stream -- number of revenues over the period of time?

Yes, so I think that there isn't a specific revenue target, but I think that we would generally sign agreements with brands where we think that the opportunity would be to at least create a $20 million in revenue brand over a 3- to 4-year time frame. So that would be our goal that if we feel that the target market was significant at least to get to that size, then that would be an endeavor sort of worth doing. Obviously, it's possible that it could be a lot larger, like Enchanted is almost a $50 million business for us, but it takes a few years to grow. So we expect the NFL to be meaningful, but I think it's a 3-year process to grow the business, the brand and the distribution.

And just one relate question, when you enter into such agreement, initially the agreement, margin value considering the fact that you have to do more on promotions and a little bit of inventory because the product is under development phase so anything -- so initially, does impact your margins.

Yes. You're absolutely right that in year 1, there would be some impact on margin because there's an upfront costs associated with developing the brand, the content and the marketing costs primarily. The inventory costs are not so significant because I think they scale up usually as revenues go up. But there is some upfront investments required in developing the marketing and branding content and the website, which would mean that in year 1, launching a new brand would have an impact on margins.

[Operator Instructions] The next question is from the line of Aakash Javeri from Perpetual Investment Advisors.

Congratulations on great numbers. So my question was more regarding the macroenvironment that we've had a great Q3 and even the industry has had a good -- a very good Q3. So for 2022, do you feel that we can see volume growth or the growth this year would be more with -- more pricing growth rather than volume growth because [ U.S. job ] data has been better than expected. So how is the current demand scenario looking and the expectation for the forthcoming year?

Yes. Thank you for your question. So I would say that our expectation would be for the demand environment to be slightly challenging in the next 4 months, especially when the comparisons are on a year-over-year basis because of the fact that there was the U.S. government stimulus checks. And I think this year, pricing growth will definitely be a key driver of sales growth. So while the U.S. consumer remains in good health, we expect business to be healthy. However, the next 4 months, the comparisons definitely do look challenging because of the year-over-year comparisons from last year.

[Operator Instructions] The next question is from the line of Shashank from Haitong International Securities.

Am I audible?

You are.

So I'm a bit new to the company. So I would like to get some clear understanding of the business model. So I see a large chunk of your revenues comes from the customer brand segment. And I wanted to know what the exact functioning of the segment? And how is it different from the branded jewelry segment?

Sure. So essentially, the customer brand segment is a segment where we design, manufacture and sell jewelry to large global retailers under their brand name. And the branded jewelry segment is a segment where we are the licensee or owner of the brand. And the product is sold under a licensed brand or our own brand, either direct to consumer or through retail partners?

Okay. Understood. And in terms of geography, geographical mix, I see in the other section, what type of countries are included -- what countries are included and what’s India share in that?

Yes. So it's primarily Europe and Asia is the other -- other segments and Europe being a large part of the other segment. India is a very small percentage of our revenues. We currently operate 3 stores in India. And predominantly for the current financial year, they've been largely closed due to COVID or relatively operating at lower capacity because we're a newer brand. So India is not a meaningful number in our total revenue, and the other segment is primarily Europe with a little bit of revenue coming from Asia.

Understood. Also, since you’ve told that you're trying to like expand to other geographies in the coming period in order to like boost your branded jewelry segment. So what are your plans on that?

So I think we don't expect the geographic mix to shift significantly. We see a large opportunity in the markets that we are currently operating primarily in the U.S. to increase penetration and grow our existing brands and grow our direct-to-consumer business. So I would expect that our geographic mix will not change dramatically in the years to come.

[Operator Instructions] The next question is from the line of Kaustubh Pawaskar from Sharekhan by BNP Paribas.

I just have a follow-up on the [ market environment ] you said that Q4 is -- would be a little bit subdued and it is going to be a transition phase. But how do you expect then in the next holiday season be like in FY '23, how the demand environment would be in FY '23 and ‘24 considering the overall revival in the global market? Like now things are looking to be better, mobility is improving, most of the countries are getting out of the COVID threat. So how do we expect the demand environment in the medium term? And whether you have to gain any shares in some of these markets.

Yes. So I would say that medium to long term, we are extremely optimistic and bullish about the demand environment as a lot of stores were shut and now with the stores reopening, people being able to go out again, we still have a significant exposure to physical retail. So overall, we are optimistic with the number of brands that we own and the distribution network that we have. Medium to long term, we are optimistic that we should be able to continue to grow the business significantly in the years to come. I think that a lot of the challenges that I'm describing are short term in nature and would be transient and focused around Q4. I would expect that holiday season for FY '22 to be relatively healthy and especially for us, given a lot of new brand launches, we expect to have strong momentum for next financial year?

So in that case sir, we have -- earlier we had targeted for EBITDA margin of close to 10% by FY '24. So that target still remain considering the fact that your D2C business contribution is improving, scales up well, branded jewelry business contribution is about 23% and we expect it to further improve and EBITDA margin of around 15%, 16%. So considering these factors, should we expect margins closer to 10% by FY '24?

Yes. Our goal really is to get our EBITDA margins above 10%. I mean our goal medium to long term would be for our EBITDA margins to be in the 10% to 12% range, especially as the contribution from the branded jewelry segment increases. So I would expect the next financial year and going forward margins to definitely be higher than 10%. So 9 months of the current year, we are at about 9.8%. Our expectation would be definitely to be greater than 10% for the next financial year.

[Operator Instructions] The next question is from the line of [ Gaurav Singh from Sarath Capital Management ].

So couple of questions. One, you did mention a couple of calls -- concalls back that you're working on the customized orders kind of business as well. So how -- what percentage of our business is coming from that right now in the quarter gone by?

Yes. So we did launch personalization on our Star Wars fine jewelry website and it's been operational for 2 months or so. And we are currently seeing about 4% to 5% contribution coming from the personalized segments. We planned during the current year to launch customized bridal on our Enchanted fine jewelry website where we will offer the consumer the choice to actually make a ring based on their preferences, choose a color of the metal, size of the diamond and various other optionalities. And we also plan to launch personalization on the Enchanted fine jewelry website. So we are very encouraged with -- although it's small, we're encouraged with the response of the customers through the personalization initiatives, and we expect that business to become a bigger business during the current calendar year.

So this would work on advanced payment or upfront payment and then you deliver within a specific period?

That's right.

And what would be the delivery time line for it, I mean, in each order?

Usually 2 weeks.

2 weeks. Okay. And you're launching new licenses now. So what impact does that have on your working capital considering that will require many more SKUs, now you have 32 teams in NFL. So it would require that many number of SKUs. So does that increase your working capital requirements?

So in general, our branded jewelry segment is less working capital intensive as compared to the customer brand segment and especially D2C is significantly less working capital intensive than the other businesses. So while, obviously, growth does come with its required set of working capital, I would say that the working capital intensity of the business will go down in the years to come. And the requirement of working capital will be lower as a percentage of sales as we -- as the product shifts towards the branded jewelry segment.

And what EBITDA margin do we do on our nonbranded side of business?

So the nonbranded side of the business, 9 months is 8.3% and the branded jewelry is 15.5%.

Right. So as the branded becomes more like 50%, you get to a level of around 12% to 13%.

That's right.

And then since you said that 50% would be in 3, 4 years, 50% would be branded. What percentage of branded do you assume would be D2C at that point in time?

So I think within that also, we would target a 50-50 mix between wholesale and direct-to-consumer because the direct-to-consumer is growing significantly faster than the B2B segment.

Okay. So in that case, the branded business’ margins would, in fact, increase by 17% or so since your D2C is 22%. Then shouldn’t your EBITDA margins get pulled to around 14% then at that time line?

So I think that the direct-to-consumer business is -- there's a bit of push and pull within there, as we go along the margins of the D2C business should go up, given that our customer acquisition costs are a little bit elevated now since it's a new business. So one of the things that will expand the margins of the D2C business would be the lowering of customer acquisition costs as the number of repeat customers increases. However, we may also get into newer categories within the D2C space, which may fundamentally have slightly lower gross margins. So as we get into more bridal and higher AOV products, the gross margins may be a little bit lower. But I think structurally, you are right that depending on the penetration of D2C within the branded jewelry space, there is a potential for margins to be higher because of the mix shift towards the branded jewelry segment.

Okay. And in our non-D2C business, which is through the large retailers. So are you only operating for the large retailers? Or are we also trying to get to the mom-and-pop route as well, which would typically be higher margin? Do we have any share in that side of things in the U.S.?

We do not have distribution among the small retailers. Generally, our customers would be 100 stores and above.

Any plans to get into that segment because you were speaking to one of your peers [indiscernible] they seem to be doing pretty well in that and their margins are also higher in that?

We don't have any plans to have distribution in the independent dealer space.

Okay. And since you've spoken about price inflation on the raw material front, especially diamonds, any plans to get into something like a lab grown or at least for a part of your sourcing, which could help control a lot of your -- because you are scaling up your business there, if you have significant part of your raw materials in-house, it will help you.

Yes. So we currently do sell lab grown diamonds. It's a small business for us, and it's definitely a focus area and one which we are trying to grow.

And what percentage of your diamonds that you would include in your jewelry will be lab grown? I mean just…

Currently under 5%.

Under 5%, any target towards that?

Nothing specific. I think it's a little bit -- it's a newer business for us. I think during the course of this year, we'll know how that business evolves. I mean it's definitely a very fast-growing area of the market and one which we want to get focused on. So I think that we have to see how it plays out during the course of this year, and we hope to increase percentage share of that business going forward.

[Operator Instructions] As there are no further questions, I now hand the conference over to the management for closing comments.

Thank you, everyone. I hope we've been able to answer all your questions. Should you need any further clarifications about the company, please feel free to contact our Investor Relations or the CDR Team. We thank you for your valuable support and thank you again for joining us.

Thank you very much. On behalf of Renaissance Global Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.

Thank you.