Watches of Switzerland Group PLC (WOSG) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Watches of Switzerland Group acquisition of Roberto Coin Inc. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Brian Duffy, CEO of Watches of Switzerland Group to begin. Brian, please go ahead.

Thank you, Nadia, and good morning, everyone. Thanks for joining our call. We made a very exciting announcement this morning of the acquisition of Roberto Coin Inc. We now have a presentation for you to give you more color and background on this acquisition. This is something that we've been working on for more than a year. It was in our LRP that we presented to you as a strong growth possibility. And I'm delighted now -- we're all delighted now to close on this deal and add Roberto Coin Inc. to our group in the U.S. So I'm joined for this presentation by David Hurley, President of Watches of Switzerland Group, North America and Anders Romberg, our CFO. And at the end of the presentation, we 3 will be happy to take your questions. So today, we announced the acquisition, Roberto Coin Inc. for a consideration of $130 million. This gives our group the distribution rights for the brand in perpetuity in North America, covering obviously U.S., Canada, Central America, Mainland Mexico and the Caribbean. This accelerates the Watches of Switzerland Group's strategy of growing presence in the luxury branded jewelry sector. The U.S. is the #1 luxury jewelry market globally with an addressable market, we calculate this $66 billion. Roberto Coin is a sixth brand in the U.S. as measured in retail sales equivalent. We plan growth for the brand, both with our existing partners and within our group. Growth in our group and DTC will come at the combined retail and wholesale margins, which will obviously be very attractive. The deal is immediately attractive, has been margin-enhancing, EPS accretive and has very good prospects of return on capital. As we presented to you last November with our LRP, the luxury jewelry market in the U.S. is the clear #1 globally measured per capita. The global market for precious jewelry is moving inexorably towards a branded product from non-branded. The attractions of branded jewelry to us and others in the category are higher average selling prices, higher frequency of purchase and what is a collectible sector with brand loyalty, higher in increasing consumer self-purchasing. In terms of distribution, more exclusivity, more selectivity on distribution, therefore less promotional. And with the collectability of the product, the category is less cyclical. We are and have been for many years underrepresented in this attractive category and that's what we plan to correct. We have a strong heritage and in-house expertise in jewelry and we see great potential to grow through a multiple of initiatives. The first and most significant this acquisition of Roberto Coin Inc. that we're announcing today. We also have our new concept flagship multi-brand jewelry store that put opening in Manchester in the next year. We're expanding space in all of our store developments, providing the opportunity to properly present jewelry brands supported with great hospitality facilities and a fantastic client service. We have added or expanded distribution for great new brands in our stores, De Beers, David Yurman, Philippe, Messika, FRED, Repossi, Pomellato and others and also expanded the presentation of some of these brands online. Roberto Coin is an amazing individual, honestly, and it's been a really great pleasure to get to know him over these months. He's a creative to the force, combining imagination, artistry vision and a really fantastic energy. The brand of Roberto Coin was founded in Vicenza, which is close to both Venice and Verona and part of the Veneto region in Italy. It's one of the global centers for jewelry production, and in fact, in the city more than 10% of the population work in the jewelry sector. There is a skill there for jewelry. There's a renowned museum for jewelry. And importantly, this is also the home of the largest Italian jewelry fair Vicenzaoro, which this year is celebrating 70th anniversary. The success of the Roberto Coin brand is due fundamentally to the exquisite product that they design and produce and has a wonderful combination of fabulous design but also quality and value. A piece of magic from Roberto himself is the signature Ruby inside every product, discretely worn next to the skin. Roberto's inspiration for the Ruby was based on the Egyptian pharaohs that believe that Ruby's been worn promoted long-life health and happiness. The brand has strong awareness and great image in America, thoughtfully and consistently developed through advertising, celebrity endorsement, great events and high-quality distribution. The brand is a major player in the U.S. market, and as this chart shows our estimate of the market share at retail value for the major players, Roberto Coin would be the sixth largest brand in the U.S. on this basis. The brand positioning from a pricing standpoint would be more expensive than our Tiffany, for example, comparable more to Cartier, Pomellato and Messika with a strong characteristic of contemporary product design. In addition to the main product range, Roberto Coin designs and produces beautiful high-end exquisite pieces. Sales for the Roberto Coin brand in the North American markets have grown strongly at 12.7% CAGR 2019 through '23. This year, both sell-in and sellout year-to-date 2024, a very good growth of high single-digit outperforming the overall market. Calendar '22 sales did benefit from some store restocking following COVID lockdown impacted production backlogs in 2021. The Roberto Coin business in America is very, very well managed under the leadership of Peter Webster, who's been the President of the business for 38 (sic) [ 28 ] years. We are delighted that Peter will remain in his role as well as strong long-tenured management team in operations, finance and commercial. The business will be operated independently at other center in New York, and Peter and his team will work with the Watches of Switzerland teams to accelerate growth plans through accessing our resources and retail expertise, CRM, digital marketing and other areas. I'll now pass over to Anders.

Thanks, Brian. So we closed this transaction on May 8, after having worked on it over the past 12 months. It's a great step forward in executing on our ambitions in the luxury jewelry category, which we told you about when we had our Capital Market Day back in November. The total purchase price was USD 130 million, of which USD 10 million is deferred consideration continuing on future profitability. The consideration is also subject to working capital adjustments. The transaction is financed via a new $115 million term loan, and this will take our leverage to about 0.8% on adjusted EBITDA or 0.6% on a pro forma basis, a very comfortable level of leverage, providing flexibility for additional growth investments. The business has operated at an EBIT margin of around 20% over the past few years. Total sales in the year ended January -- sorry, December 31 of '22 was $146 million and profit of $30 million before tax. In unaudited numbers for '23 was $138.7 million and profit before tax of $30.2 million. As you heard from Brian, sellout data in this year shows high single digits, which is very positive. The gross assets at December '22 was $87.9 million and assets are predominantly made up of working capital. This transaction will be margin and EPS accretive for the group from the acquisition date. With that, I will now hand over to David Hurley.

Thanks, Anders. So we're really excited in this opportunity to build upon the fantastic work done by Peter, Roberto and their teams and now partner with them ongoing. You'll see on Slide 21, the key pillars of growth, and I'll bring you through these over the next few slides. So Roberto Coin is underpenetrated in the U.S. in its own retail and franchise or partner retail. We're already working with the same consultants that supported our U.S. growth to date, and we'll leverage the great landlord relationships we already have. We know the locations we want to be in, and we'll be signing our first retail location to it. Our focus will start with the best malls where we already have presence and long-term experience. The mono-brand format is already a success in multiple territories, in particular, in the Middle East. We believe the Roberto Coin store design, coupled with our experience in building and retailing in the U.S. will be a willing -- winning formula for both us and for our wholesale partners. In terms of e-commerce, we look to bring our expertise in online retail, both for robertocoin.com and for the wholesale partners, some of whom already have a great online business. If you don't know it, this forthcoming Sunday is Mother's Day here in the U.S. and yesterday was robertocoin.com's record day of shipments direct to customers, but there's a huge amount of potential to grow this over the next few years. We'll look to elevate Roberto Coin's presence also with our wholesale partners as well as within the Watches of Switzerland Group store portfolio through impactful shop-in-shop designs. Lenox in Atlanta, honestly, is the perfect example of elevating within our own footprint. We're converting the current Mayors store to a Rolex boutique to open up later on this year and opposite that we're building a brand-new Mayors showroom with Roberto Coin as one of the key brands. The paybacks for both the mono-brand at 2 years and shop-in-shops at 1.5 years are compelling and are based on all of the analysis of both opportunities and obviously, the experience that we've had to date in the U.S. In terms of high-end business, Roberto Coin already has a growing high-end collection business. We believe there's further opportunities to grow that. Obviously, with the mono-brands itself, which will allow us to show the whole breadth of the Roberto Coin collection and VIP events both for the Watches of Switzerland Group and partner clients here in North America, Mexico and the Caribbean as well as special invents in Vicenza and Venice for our VVIP clients. This will all be supported by increased marketing behind the brand itself, and we're looking forward to launching a new campaign for the holiday season and increasing co-op with our key brand partners. All of this will look to replicate for the markets outside of the United States with significant opportunity also in Canada, Mexico and the Caribbean. All 3 markets have a lot of room to grow. And with that, I'll pass it back to Brian.

Thanks, David. Thanks, Anders. So in summary, this does accelerate our strategy of been good or penetrated in the growing luxury branded jewelry sector. This is the exclusive distribution rights for the best market in the world, U.S., Canada, Central America and the Caribbean. There is a significant expansion opportunity in this sector for us. The growth that we do within our group will be a combined retail and wholesale margin and the deal is clearly financially attractive from an accretion standpoint and return on capital. And the last thing that I would say is this is the most kind of complementary combination of resources we're looking at here. It's a fabulous product. It's a fabulous brand. And with Peter and the team, there's a great organization running a great business in the U.S. and that we want to maintain and support the great momentum that they have. We then will be bringing additive resources in terms of retail, CRM and all the things that we've mentioned. We have a great infrastructure building in the U.S. We're now over $800 million in the U.S., which is pretty amazing in a 5-year period. And with that growth, we have built a great infrastructure and obviously, we can really use the structure to complement this deal. We've executed deals very well and acquisitions and integrations very well, and it's a great credit to David and his team in the U.S. to continue to do that and I have no doubt that this is going to be a great cultural combination and a great business partnership. And finally, just to say that David and the team in getting this deal done a lot of hard work, but something that's really worth it. So with that, we'll pass over to your questions.

[Operator Instructions] Our first question goes to Akshay Gupta of HSBC.

The first question would be on the growth prospects that we can expect for this plan. As you said, the U.S. market can grow 20%, 25% CAGR over the long term. So how can we think about this brand? And secondly, on the margin front, how do you feel about the current level of margins? Do you think there are some synergies to come? Or on the flip side, do you think you need to invest more in the retail network? And the final question would be on the finance cost. Like what are the finance costs incurred to the deal, like what is the interest cost?

Yes. So if I understood everything correctly, there we think there's great growth prospects. And we obviously, we outlined in our long-range plan where we expected the growth to come from both here and the U.K. market, but the biggest growth contributors that we are looking at, obviously, are coming from the U.S. So certainly a higher level of growth coming from the U.S. We've had a fantastic track record of growing in the U.S., both from acquisition and developing our business. 40% of our sales in the U.S. came from acquisition, the balances, what we've done with those acquisitions or new businesses that we've developed there. We said we made our market announcements back in February that we still are committed to our long-range plan goals, and we still are. This is an important part of this. It's a deal that we thought the really good possibility of happening. It was included in our long-range plan and delighted about executing it now. So we feel good about our growth prospects in the U.S. Margin, this is as we've shown, it's margin accretive, the jewelry category is attractive from a margin standpoint generally. But obviously, in this case, getting the combined margins of retail and wholesale make it particularly attractive already from a margin standpoint. Finance, Anders?

In terms of interest cost on this, it's in line with our existing RCF. It's a term loan on the basis of 12 plus 6 plus 6. So it's a 2-year deal that we made and the average interest rates on our existing facility is about 7%.

The next question goes to Kate Calvert of Investec.

A couple from me. First question is, what does this mean to your acquisition strategy in the U.S. going forward? Should we expect more jewelry brand sort of distributor acquisitions? Or would you still prefer to focus on growing the Watches of Switzerland brand? And my second question very much is a technical one. Do you envisage the acquisition having a material impact on working capital? And the third question is how many sort of stand-alone mono stores do you envisage over the 5-year plan for the brands, the Roberto Coin brand.

Yes. Thanks, Kate. I'll take 1 and 3, and Anders can comment on working capital. I mean this was included in our strategy for growth. And when we talked about the LRP, you'll recall that we did have ambitions within -- growth ambitions within the jewelry sector, and this pretty much was what those ambitions were about in addition to the other initiatives that we mentioned earlier of what we're doing in Manchester and so on. So our acquisition strategy hasn't changed. I mean our focus has been on watch and jewelry retailers, taking us further into both the watch market and jewelry market in the U.S. This opportunity came along from having got to know this brand through successfully retailing the brand, getting to know the organization and just seeing how successful and well positioned it was in the market. And from that came discussions that eventually led to this deal that we're getting announced today something else of that nature, what happened out there, then obviously, we'd look at it seriously. We think it's a great deal. It's in our realized. We know these products very well. We know the category very well. We know the U.S. market very well. So we think it's a great complement to what we're doing. And we really do want to be bigger in jewelry as we've expressed, and this is a perfect way to do it. But all our plans and focus on developing a representation in watch and jewelry retail remains the same focus as it was before. In terms of number of stores, we're not ready to say that yet. We're doing big starter home. Obviously, there's only so much that we could do until the deal was finalized which is what we're announcing today. We've done some homework in advance of it while it's being discrete with our property consultants. So we've done a bit of look at the market. As David mentioned, the obvious areas that we would look at where we're already present with some kind of an infrastructure and store presence. But we'll update you on that as time goes on. But it will be a mixture of stores that we will choose to open and own, and it will also then look to work with the great partners that are out there are some fantastic independent dealers. They're doing a great business that really know our territories very, very well, and we'll look to work with them. We obviously know about the dynamics and financials and everything a bit more of brands since it's been a very successful development for us in the U.S. Working capital, Anders?

In terms of working capital, obviously, the category itself turns a little bit slower than the watch category where we have the super high demand pieces that obviously helps that turn level. So turn is expected to be about 1 to 1.5 turns on this business. So in terms of working capital, obviously, it's adding to it. And as I mentioned, the asset base that we acquired is predominantly working capital, which was about $88 million.

The next question goes to Louise Singlehurst of Goldman Sachs.

A couple of follow-ups. I think wonder whether David can share with us just a little bit more about the brand. You've obviously got quite a wide range of like price points in the brand. But is there a particular sweet spot in terms of the bestsellers like the core kind of offer, there's obviously a broad range within there. So that would be very helpful. And then if you could talk to us about the customer data that you have today on the U.S., presumably that's quite light, given it's mainly wholesale. And then my last question was just with regards to -- I think, just as a follow-up really to Kate's point, on the strategic growth and the M&A ambitions. Is this a sign -- it's taking to be a little bit longer. I know in the past, we've spoken about the watch consolidation across distributors. And I just wonder if that's still very much front and center or whether that's just a little bit further down the line, if that's still an opportunity.

Okay. So I guess the core price range for Roberto Coin in the kind of $3,000 to $4,000 range and they have got a significant amount of core product and core collections, Venetian Princess, Love In Verona these really fantastic collections, and they add to it every year with either add-ons to those core collections or new collections itself. And I think one of the real strengths of the brand is just the endless creativity of Roberto and his family and their team in terms of just the amount of designs that they're able to create. So I think it really gives them a differentiation to a lot of other brands. So that's the kind of core price point but they go up to whatever level you want to go up to in terms of price point and really successful in terms of their high-end collection. So as I said in the presentation, we know there's significantly more that they can do in that area, particularly when we open up stores and expand spaces with our wholesale partners. In terms of customer data, limited customer data at the moment. They obviously have the customer data for the stores that they have currently, but that's a very small part of the business, really great sell-through data and obviously, we have that and Brian was able to speak to what that performance has been and obviously, the positive performance this year. In terms of M&A and further growth in the U.S. or in the North American market, genuinely we are really confident in our ability to be able to acquire further businesses. I still believe that the consolidation is going to happen. Some of these deals take time. As we said, we've been working on this one. I've certainly been working on this for the last 18 months, but it's not the only thing that we're working on. And we're confident in the numbers that we provided for the long-range plan in terms of the acquisitions, we're going to be able to execute.

The next question goes to Alison Lygo of Deutsche Numis.

The first one is just on the wholesale channel. I suppose, interested in your perspective in terms of the way the brand is being merchandised across the market at the moment and perhaps off the back of that, how you will look to sort of manage the wholesale distribution as you kind of grow your own stores and enhance the positioning as you were talking about. And then the second one is just on kind of the jewelry and the brand more widely over there. So obviously, jewelry has been hit a bit harder from the overall slowdown in demand that we've seen across markets. The numbers you provided looks like revenue the brand has held up decently. Just wondering if you can give some color in terms of how that performing versus the other brands you have in the U.S. stores? And maybe linked to that, how you think about what's underpinning the health or kind of the appeal of the brand as we look forward.

Thanks, Alison. I mean, I think the interesting thing about this business is it's really developed such a major presence in the U.S. through wholesale distribution, 400 points of sale really high-quality distribution, the best of the independents, the best of the department store. So the brand is very well positioned in terms of adjacencies and kind of store quality and client appeal and so on. But obviously, there is the opportunity of complementing that with mono-brand and by elevating in-store presentation, and we plan to be helpful and complementary in both of them. But our priority is to support Peter and the team maintaining the momentum that they have now in managing that business and really helping develop it with the wholesale partners. And then we complement that with what we can add to it in retail both owned and franchised. They are outperforming the market and have done for the last few years. And as David said, it's just because they make absolutely beautiful, wearable product, some of the trends that sit on the self-purchasing trend definitely suits the trend towards jewelry is more is a daywear rather than the special evening wear, which again is a trend that's going on in fashion. And if you like, all are positive ones in terms of the direction for the brand overall, but they just make just beautiful contemporary precious product that clearly appeals to the market and allows them to outperform. Overall, I think it's just seems -- so therefore we see the big opportunity as one of just enhancing the brand presentation, enhancing marketing through investing and marketing and enhancing the digital representation both in terms of communication, social media, and online. So I see it all being very much complementary to what is already a great business built with great partners in wholesale.

And it's performing very well within our existing network. So I think that was the last question you had. So in our own stores, obviously, we have Roberto Coin as one of our brands and is performing really well. So it's outperforming the balance of what we see.

The next question goes to Rogerio Fujimori of Stifel.

My question is for Anders. I was hoping you could elaborate on the shape of Roberto Coin P&L with regards to gross margin and OpEx as a percentage of sales versus the group actually because we know Tiffany used to have a gross margin, the low 60s and OpEx to sales in the low 40s, but Tiffany is the DTC business and Roberto Coin is the wholesale business. So is it fair to assume growing gross margin more in 50s and OpEx to sales at around 30% of sales. Any color would be helpful.

Sure. So Roberto Coin Inc. is obviously wholesale. And the overhead structure has been fantastically well managed in this business. So essentially, the margin that you get at wholesale is predominantly what you understand. Then you have some marketing costs and you have a bit of co-marketing together with partners where you contribute. So fundamentally, overheads as a percentage is in the low -- sort of the mid-teens sort of thing. So that's where you would get it. So it's about 10%, including the marketing component.

Got it. And marketing mobilizing in line with what we hear from the brand jewelry players?

Yes. Honestly, Rogerio, we're not going to get into the detail of the P&L. The numbers that we've presented here the sales numbers and the EBIT or pretax profit are what we're disclosing at this point. As a wholesale business, so it's a bit of a different model, the dynamics will change with the introduction of retail over time. But it's just a wonderfully run business consistently good profitability, really good returns on investment. And at this point, we really don't have any more detail to disclose.

Congratulations.

[Operator Instructions] And the next question goes to James Grzinic of Jefferies.

Brian, I just had a quick question for you. In terms of how you envisage your ability to perhaps feed back to Roberto Coin thoughts on design assortment. Do you think you'll be able to influence perhaps how assortment developed specifically for the U.S. given your expertise in the U.S. market and how the distribution will change through time of the brand. Curious to hear your thoughts on that.

I wouldn't dare for a second to think that I could add anything to the creativity of Roberto and his team, which is what has driven this business instinctively. There'll be some areas that we will contribute. We obviously -- we do a great deal of analytics on merchandising. We track attributes, we track trends, and we find it's always a really nice complement to end strengths and so on to actually see trends that are happening out there and analyze them. So we do have great systems there that we'll look to see if we can provide any full of information that might be looked upon. As David mentioned earlier, too, the beautiful high-end products that Roberto does is just gorgeous, is exquisite product. And we really think there's great potential. Our database, our marketing, they do great events already. But of course, we have our distribution or concentrations of strength with a VIP clients, and we'll really look to involve these clients and access these clients and really help, I think, develop a better deserved further penetration of the high-end business. But the great thing of this business is it really doesn't need any help whatsoever, not that we can give it in any event for product design, which is the ultimate strength of this brand.

Understood. And just as a follow-up, I guess, how much of the sales mix currently of the business specifically would be high end, really hitting those higher price points?

Honestly, relatively small, great events that are done, but it's very much personalized the VIP selling, but it's exactly what our mono-brand space really helps you do is really present the whole collection and to be a bit more speculative on the product that you can present, so it's an area that we really hope to have a really positive impact, which, in addition to good incremental business at high price points. So it's clearly very good for the brand for it to be known. Many core products that you see worn by celebrities at the Oscars or the Golden Globes or whatever other kind of products that we hope to certainly develop more VIP following in the brand loyalty.

The next question goes to Piral Dadhania of RBC.

So my first question is just on the overall M&A market dynamics at the moment. Could you just give us some flavor as to how competitive this process was and whether you had -- whether there were other players interested in making this acquisition? And as it relates to the other discussions you're having more broadly across the market, any color you could give on what the sort of the dynamics might look like from the perspective of -- the prospective buyers or sellers. That's my first question. And then my second question just relates to your broader strategy as it relates to acquisitions. Is there a scenario in which you could potentially move into acquiring small- to medium-sized brands, perhaps in the jewelry space or even in the watch space. This is sort of like -- it feels like a halfway stepping stone towards exclusive distribution rates in certain markets. Could you just help us understand whether that's further upstream acquisitions maybe on the cards on a medium- to longer-term basis?

Yes, the dynamics on this acquisition, we would comment on the competitive situation or I'd simply say that as discussions went on, we could really sense and feel a real mutual compatibility, which I think was very, very important to Roberto and his family. They are hugely interested clearly in the brand and developing the brand and growing it in a very important market for them in the U.S. And I think it became clear that, that's something that very convincingly bring to the party and that became a real priority and something very important on their sites. And -- but it does take time and it took building relationships and confidence. And again, David did a fantastic job of doing that, and we got ourselves about where we are now. So delighted about the deal and delighted about the compatibility. We're not changing strategy per se in the U.S. We are more interested in luxury jewelry as we've made very clear, might that lead -- may the announcement here today lead to something come along that we don't know, who knows. We look at -- obviously, we need to see there are situations in which we can really enhance value and get good returns for our business and our shareholders. We're very confident that we can in this case. And if anything else came along of that nature, obviously, we look at it. We are leading players in the world of luxury watches and an increasingly important player in the world of luxury jewelry. And these categories are very interesting to us. The U.S. market has been a revelation to us. We've learned a lot. We've developed a lot. We've done a lot. We can really see huge potential there. So yes, I mean who knows it's not -- nothing we're working on right now in that category. This deal has taken a lot of time and attention. These other things that David alluded to earlier, more in line with what we've done in the past that we continue to work on, and we'll look forward to updating the market as and when things happen.

It appears we have no further questions. I'll now hand back to Brian for any closing comments.

Thanks Nadia. And thanks David and Anders for the presentation, and thank you all for joining the call, and thanks finally to Roberto and Peter and the team that we've been dealing with and got to know. We really look forward to working with them. We think this is going to be great for both organizations. And again, thanks for joining the call.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.