Renaissance Global Ltd

NSE:RGL

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good day and welcome to Renaissance Global Limited earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Jenny Rose from CDR, India. Thank you and over to you, ma'am.

[Jenny Rose Kunnappally;CDR India]

Good afternoon, everyone. And thank you for joining us on Renaissance Global's Q1 FY '23 earnings conference call. We have with us today, Mr. Sumit Shah, Chairman and Global CEO, and Hitesh Shah, Managing Director of the company. We would like to begin the call with brief opening remarks from the management following which we will 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, maybe forward-looking in nature. And a disclaimer to this effect has been included in the results presentations shared with you earlier. I would now like to invite Mr. Sumit to make his opening remarks. Over to you, sir.

[Sumit Shah, executive]

Thank you. Thank you, Jenny. Good day, 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 ended June 30, 2022. I will initiate this -- 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 take you through our financial performance, and then we'll open the forum to the question-and-answer session.

We have delivered a healthy top line performance during the quarter despite a challenging macro environment in our key global markets. Our total [Technical Difficulty] year-over-year. Our branded jewelry segment continues to report healthy growth. In Q1 FY '23 revenues in this segment grew by 36% year-over-year, supported by a steady flow of orders from our retail partners and growth in revenues from our direct to consumer business.

Our direct to consumer business grew by 63% year-over-year, and is currently running at an annual rate of INR 204 crores compared to an actual sale of INR 124 crores reported during financial year '22.

I'm pleased to share that the integration of 4 Mine acquisition is progressing well. The acquisition is strengthening our foothold in the engagement ring and wedding band business as well as in the fast-growing lab-grown diamond space. Overall, our focus is on increasing customization of our jewelry products across our D2C websites as it allows the customers a choice of selection, creates product differentiation, help improve operating margins as well as reduces investment in working capital. We look forward to strengthening this segment going forward.

While the demand environment remained steady during the quarter, we witnessed some nonlinearities with regards to increased inflationary pressures in key raw materials. These had a bearing on our margin performance during the quarter. Although we do remain cautious, these challenges -- of these challenges in the fiscal, we expect them to be largely transitory in nature. Overall, our EBITDA margins for Q1 FY '23 came in at 7.3%.

To summarize, we believe we have delivered a resilient performance despite macro challenges. Looking ahead, given the intensifying inflation trend, we anticipate global consumption for discretionary products to be muted in the near future. However, on a long-term basis, we are optimistic about our growth prospects and the potential in our international markets such as U.S., Europe and U.K. We are working on several growth opportunities in the international branded jewelry market, such as completing the integration of 4 Mine Inc. and setting up a path of achieving scale and meaningful profitability and successfully launching the NFL collection across retail stores and online channels during the 2022 holiday season. We believe we are well positioned to tap on these opportunities given our partnerships with well-known brands, our significant experience in product conceptualization, our design skills and solid distribution network.

Overall, I look forward to delivering healthy and sustainable growth going ahead. On that note, I'd like to hand over the call to Mr. Hitesh Shah to discuss our financial performance during the quarter. Over to you, Hitesh.

[Hitesh Shah, executive]

Thank you, Sumit. Good afternoon, everyone. In Q1 of FY '23, we registered a stable performance, primarily on the back of improved offtake in our branded jewelry category and contribution from the direct-to-consumer business. Our total income stood at INR 575 crores compared to INR 220 crores in Q1 of FY '22, registering a growth of 37%. Our branded jewelry sales grew by 36% year-over-year, of which growth in our B2B segment was 25%. Direct-to-consumer business posted revenues of INR 41 crores in Q1 of FY '23 compared to INR 25 crores in Q1 of FY '22, growing by 63% year-over-year. Based on this quarter's contribution to annual sales, we estimate our annual revenue run rate to be INR 204 crores in FY '23 as compared to actual FY '22 revenues of INR 124 crores in the D2C segment.

In terms of geographical distribution of sales, in Q1 FY '23, contribution from North America stood at 62%, followed by Middle East at 20%, and the balance came in from other geographies. During the quarter, revenue share of studded jewelry stood at 90%, of which 24% was contributed by the branded jewelry business. Of the total branded jewelry business sales, 67% was sold through the B2B channel and 33% was direct to consumer.

On the profitability front, EBITDA stood at INR 42 crores in Q1 FY '23. We continue to witness cost pressures on account of global inflation and raw materials and supply chain constraints. Furthermore, the ongoing geopolitical conflict has intensified supply chain bottlenecks. Despite the macroeconomic challenges, we managed to deliver an EBITDA margin of 7.3%. During the quarter, profit after tax improved to INR 24.2 crores versus INR 23.8 crores in the corresponding period last year, registering a marginal growth of 2%.

Lastly, in terms of our balance sheet, our net debt to equity ratio stands at a healthy 0.34 as of June 2022. Our total net debt stands at INR 318 crores and our cash and bank balances and current investments were INR 209 crores.

To conclude, we have reported a steady and resilient all round performance during the quarter ended June 30, 2022. As we look ahead, our growth initiatives will help support accelerated growth in the medium to longer term. 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]

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

[Unknown]

Congratulations on a good set of numbers. My first question was, could you please throw some light on the demand situation for the 2022 upcoming festive season?

[Sumit Shah, executive]

Sure. So I expect the consumer is definitely facing a little bit of pressure due to inflation. And I think that we're seeing more pressure on the sort of lower income consumer as compared to the middle and higher income consumers because gas prices are a higher part of their total income. So the demand environment is definitely a little bit muted and weak. We are, however, focused on differentiation through our brands and to try and maintain a steady performance. But there is definitely softness in demand. And we'll have to see closer to the key holiday Christmas season, how things pan out. But the last 3 or 4 months have definitely been soft.

[Unknown]

And the next question would be that, how is lab-grown segment doing for us? Lab-grown diamonds.

[Sumit Shah, executive]

Yes. So I think that we are very encouraged by the growth in lab grown. I mean it's in single-digit percentages as far as our total revenues are concerned, but it's growing very rapidly. And our expectation would be that in the next 3 to 4 years, lab-grown diamonds will be a significant part of our overall revenue. I mean, we believe that the consumer acceptability of lab-grown diamonds has been well established in Western markets. And we are seeing millennial customers, especially buying engagement rings, are not averse to buying lab-grown diamonds. So I think that this could be a huge growth opportunity for the company, especially with the acquisition of 4 Mine Inc., and our model of personalization that we offer for engagement rings through that platform.

[Unknown]

And if you could just throw some light on how the current RM situation is [indiscernible] we've seen about 5% gross margin pressure as compared to last year. So how is the current RM situation?

[Sumit Shah, executive]

Yes. So I think that largely, I think the price increases in diamonds that happened at the back half of the last calendar year and the beginning of the year have largely stabilized now. We've stopped seeing increases in the raw material situation. And we've now pretty much passed on most of those cost increases to customers. So we should see gross margin normalize over the next 2 quarters going forward as we -- it took some time for us to renegotiate prices with customers and pass this on.

[Unknown]

And the next question would be that we were -- even though we've seen gross margin pressure, we've kind of covered up in our employee benefit expenses as well as other expenses. So you are seeing such a big growth in the top line. Our other expenses have grown only 12%. So could you just throw some light on how we've been able to do that? And is it like -- what percentage is linked to our sales and how we've been able to not lose a lot of our operating margins?

[Sumit Shah, executive]

Yes. So I think that we've tried to be cautious in the -- on the expense side as we do see some softness in demand. Some of the top line growth that we're seeing now is due to the fact that during COVID retailers drew down on inventory. And while we are seeing retail sales, we are being cautious on sort of expenses and trying to sort of maintain them at a level where we feel comfortable.

[Unknown]

But last year, if there was a lot of inventory stocking by retailers. So wouldn’t we already have a high base, and we've grown despite that. So how could you explain that?

[Sumit Shah, executive]

So I think what happened is that last year was a lot of sales were very strong, but retailers, I think, bought less than they sold. It still resulted in strong sales for us. I think that inventories are now getting normalized. They're still probably below pre-COVID levels. And I think the retailers are sort of trying to build inventories now back to levels that they feel comfortable. So I think some of the top line performance that we've seen in this quarter is on account of retailers buying inventory. And I think inventory levels are higher at the end of this quarter than they were at the beginning of the year, but definitely still below pre-COVID levels.

[Unknown]

Well, is -- there's kind of softness in demand and it's kind of muted and weak, then how come retailers are stocking up so much?

[Sumit Shah, executive]

So I think the softness in demand, I would say, was primarily in April, May, June, when we were comparing against last year's U.S. government stimulus checks. I think that we saw some stabilization in July in year-over-year numbers. And even in August, the trends are looking sort of slightly better than they were in April, May, June. I think the comparisons were very, very difficult in April, May, June because the year-over-year base itself was a little bit unfair due to the government -- U.S. government stimulus checks sent out last year in those 2 months.

[Unknown]

And my last question would be that, how does the outlook for FY '24 look? Like, FY '23, you said, the way it is going to be for the rest of the year, but how do we see outlook for FY '24?

[Sumit Shah, executive]

So I -- longer term, we are extremely optimistic about the prospects with our strategy that we've laid out. I think that clearly we've got a few growth drivers in terms of the license brands, some of the new licenses that we've acquired and even growth in existing licenses. Even the acquisition of 4 Mine Inc. and the customization that we offer, we're seeing incredible growth in the 4 Mine Inc. segment, which caters to some of this personalized engagement ring space. So I would say that as demand stabilizes in the U.S., we're very optimistic about our growth prospects. Clearly, because of the strategy that we've laid out of differentiation. Now as you would understand, the U.S. market is, itself is, very, very large, and we have a very small market share. So I think that with the right strategy in place, there is significant room to grow from here on.

[Unknown]

And just one last follow-up, which I -- shall be my last from my side. We said that last April, May, June, because of the stimulus checks, we saw very high demand as retailers stocking up a lot. So that would mean that Q1 FY '22 for us would be as such very good, where we delivered about INR 409 crores of top line. And this year, we are seeing -- and this year we've grown 40% over that. And the 40% growth over that has come due to, what exact reason?

[Sumit Shah, executive]

So last year, retail sales were very strong. Retailers did -- there is a little bit of a lag, right, between them, the sales of the retailers and them buying from us. So what I'm trying to explain to you is that last year, retailers experienced extremely strong sales. They did not buy adequately during the last year to catch up to a lot of the demand because they were cautious. And I think that inventory levels at retailers were probably at the end of last calendar year, where maybe 30%, 40%, 50% below levels that they should be for an appropriate level of sales. So I think there is some amount of catching up that retailers are doing during the current calendar year to get their inventory levels to a more normalized number. So I think that the -- a clear reflection of the, sort of, demand environment is actually seen only in the D2C segment because that's us selling finally to the consumer. A large part of the other sales are sales to retailers, which may not, in timing, sync exactly with retail demand that the retailers are experiencing.

[Operator]

The next question is from the line of Siddharth Oberoi from Prudent Equity.

[Siddharth Oberoi, analyst]

My question is on capital allocation. In your annual report, I see you have investments in [ AIAS ] and you have gone into stocks for the first time with the position of INR 70 crore or something. So what is the rationale for this?

[Sumit Shah, executive]

So I think that some of the money that is lying in our overseas subsidiaries, we've sort of, at the Board level, decided to have some amount of money allocated in long-term investments, where the company can make some money. Interest rates overseas are almost at 0, and the cash on the books was not delivering any returns. So there will be some moderate amount of investments that the company plans to make in the future and use some of this money for acquisitions as we've done in the past.

[Siddharth Oberoi, analyst]

No. But right now, you have INR 700 crores of gross loans and debt equity on a gross basis is 0.8 to 1, so it's like reaching 1:1 level.

[Sumit Shah, executive]

Gross debt is INR 550 crores, right?

[Siddharth Oberoi, analyst]

All right. So what is the logic of this? Wouldn’t it -- better that you pay off the loans or reduce the debt?

[Sumit Shah, executive]

We have done. We've repaid about $4 million of debt in this quarter. And I think that we had elevated some of these cash levels during COVID, and we plan to reduce debt as well, meaningfully, going forward.

[Siddharth Oberoi, analyst]

Yes. But who is vetting this? Have you tied up with some professional or -- because what I see is that from the level that you have invested is the entire portfolio is down by 15% as of now, 15%, 16% and it has to go up by 20% just to breakeven?

[Sumit Shah, executive]

We've set up an Investment Advisory Committee and we've allocated some amount of capital that would be put on some long-term investments. And I'm happy to discuss them with you off-line and show you the plan of how we plan to use this money and allocate some of the capital towards some long-term investments.

[Siddharth Oberoi, analyst]

And another question is on the Bangladesh investments. This has actually been written off totally. Have you exited that country?

[Sumit Shah, executive]

That's right. That's right. So we shut down our Bangladesh manufacturing facilities a couple of years ago, and it has been written off completely. It was difficult to manage manufacturing in Bangladesh because we were the only jewelry manufacturing factory there. So some of the regulations were not permitting us to operate in a manner that would be required. So we've made a decision to shut it down. I think the manufacturing facility is actually shut down about 2 or 3 years ago and we've written off the investment completely.

[Operator]

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

[Kaustubh Pawaskar, analyst]

Yes. My question is again on the demand side. As you mentioned that the current environment is not prudent enough for -- from the demand perspective. So can you share some of your past experiences like in such a recessionary scenario, how much time it takes for demand to stabilize and recovery to happen? So I believe that this festive season would be kind of muted for us. And maybe we should look more into FY '24 point -- from the order booking or festive season point of view. Is it a right understanding?

[Sumit Shah, executive]

Yes. So I would agree with you. The last time there was some demand weakness really on a major scale was really 2008, 2009. During that time frame, we had introduced a few new brands, which really took off, and helped us kind of continue to grow despite softness in demand. So I think that the way to sort of counter some of the softness in demand is to come up with innovative products that allow you to continue to grow. We're sort of attempting to do that. However, I think that your assessment would be accurate that the current year's festive season, which would be primarily for us, Thanksgiving to Christmas should be a little bit muted compared to a year ago. And I think that as interest [Technical Difficulty] stabilizes, we should see recovery in demand right?

[Kaustubh Pawaskar, analyst]

And when the recovery would be there or I would believe that the D2C part of the business will continue to do well for you because I guess that would not have any significant impact other than what we could see on B2C or B2B part of your business. And I guess that was not something in 2008 and '09 for you. So D2C part of the business would continue to do well for you. Is it a right understanding?

[Sumit Shah, executive]

Yes. I mean I think that our direct-to-consumer business at a run rate of around INR 200 crores, which is a little bit less than $30 million is a very small business. So I think that, that business has significant runway for growth. And I think that because of the small base, I don't see that segment being impacted by the softness in demand. I think the softness in demand will be on the more customer brands' side, which is a more mature business. The direct-to-consumer and hopefully, the branded B2B should continue to do well during the current year.

[Kaustubh Pawaskar, analyst]

And one last one on the margin front. So as you mentioned that current inflationary environment, and I assume that because of the muted demand and sales, we believe that margin pressure might continue for a few more quarters. So our earlier aspiration was to achieve around 9% to 10% kind of margins by FY 2024. So still that target remains -- or we should expect margin to hover around 7% to 8% in the medium term? And once the scale of D2C increases substantially, then you expect your margins to be better of close to 9% to 10%?

[Sumit Shah, executive]

Yes, we were able to deliver 9% margins last year. And I think, for sure, our aspiration would be to be higher than 9% margins in FY '24. I think the current year, while gross margins will probably recover in Q3 and Q4. We may see some deleverage of sales, sales growth remains muted. But in FY '24, definitely, we expect to surpass a 9% margin EBITDA margins.

[Kaustubh Pawaskar, analyst]

And one last question. Since now I've seen that your working capital on books have also gone a bit and considering the current [indiscernible] in performance and operating performance, the cash flows for the company, would you be able to generate cash flows and will -- and what will be your target in terms of debt reduction? Because I believe that for next 2 years, at least, we won't be able to reduce a substantial portion of debt on books, which was the case for last 2 years, where we have seen a debt coming down substantially because of the improvement in the cash flows. So for '23-'24, should we expect debt levels to be -- to remain same at the current level?

[Sumit Shah, executive]

So I think in the current financial year, we've had some significant investments that we've made. We've just invested in a 50,000 square foot fulfillment center and fulfillment design and office in New York City. We're in the process of moving that. It's a 50,000 square foot facility, where we've invested around $5 million in capital expenditure to set up this facility. In addition to that, we've also acquired 4 Mine Inc., in quarter 4 of the last financial year. And we have the last payment, a significant part of the last payment for the acquisition of Jay Gems.

So I think we've had either capital expenditure or payments for purchases that we've done of around INR 100 crores this year. Going forward, in the next financial year, we don't envisage any additional acquisitions. So we will continue to generate cash flow and look at our working capital very thoughtfully. So any cash flow generated should be used or will bring down the net debt. So our anticipation is that during the current year, debt reduction will be small because of these investments that we've done in the acquisition as well as our fulfillment center. But going forward, we don't anticipate any significant investments in capital expenditure and debt levels should go down with cash flows.

[Operator]

[Operator Instructions] The next question is from the line of [ Ashish Shah from Business Match. ]

[Unknown Analyst]

Congratulations on a good set of numbers. Just a few questions. Just on the growth, you mentioned that it looks like the second half will be slightly soft. In your segmental business, actually, the gold segment also had a sharp jump this quarter. So I was wondering anything to read into it? Or it was just part of the course.

[Sumit Shah, executive]

I think the gold segment last year was impacted by COVID because the Middle East was impacted. I don't think that there is anything significant to read into that. I think the gold business, which is primarily in the Middle East has been very robust. Demand environment there has not been affected at all because with oil prices where they are, Middle East is definitely impacted by that. So we are not seeing any softness in demand there and that business should do well. But as you know, it's a relatively small segment. So it won't affect the profitability of the company significantly.

[Unknown Analyst]

The other thing on your strategy of growth, you mentioned a very important thing like customization. So you see that customization happening across all your D2C products in this year or?

[Sumit Shah, executive]

Yes. So on the 4 Mine Inc., side, the business is entirely customization and personalization. So the lab-grown engagement business is a 0 inventory model, whereby we're customizing and personalizing engagement rings for customers. Because of the success of what we are seeing there, we are rolling out customization initiatives across Enchanted Disney Fine Jewelry this year, where we will allow customers to create their engagement rings based on their configuration and then take it to other websites, but it will be primarily restricted to 2 properties; 4 Mine Inc. as well as Enchanted Disney Fine Jewelry.

[Unknown Analyst]

The other thing on -- it looks like that this quarter, we benefited from some operating leverage because gross margins compressed a bit in that sense. So just one thought on that, on the advertising cost, they've actually gone up a bit over the last 2, 3 years. So do you have a number in mind that how do you map that versus sales or where do you see that stabilizing eventually?

[Sumit Shah, executive]

Yes. So I think advertising and promotions, our target is between 25% and 30% of direct-to-consumer sales is what we're investing in, in order to grow the business. So I think that it will be a direct correlation to the direct-to-consumer sales. And that's what we're investing in to sort of acquire customers and grow the customer base.

[Unknown Analyst]

And one last thing, Sumit, working capital. So you see that as we go ahead, you see that working capital ballparks are staying in and around these levels, which means largely over inventory?

[Sumit Shah, executive]

Yes, we don't see any meaningful increases in inventory going forward because a lot of our growth initiatives are around businesses that don't require the same level of working capital intensity as our traditional business. So the number of days of working capital will definitely improve going forward. And some of the newer growth businesses, as I said, are less working capital intensive than the customer brand segment. So we don't see any meaningful increases in inventory happening over the next 2 to 3 years.

[Operator]

[Operator Instructions] The next question is from the line of Rishubh Vasa from Almondz Global Securities.

[Rishubh Vasa;Almondz Global Securities;Analyst, analyst]

I would like to ask 2 questions, basically. First is regarding the contribution from the U.S. region. Like how much percent of total sales are we getting from the U.S. region? And also percentage of like, branded jewelry segment coming from the U.S.? And my second question would be, for our own brands, which geography is seeing traction? Could you throw some color on the business outlook over year for the own brands?

[Sumit Shah, executive]

So I think around -- depending on the year, between 65% and 70% of our sales come from the U.S. And on the branded jewelry side, I think about 90% of the sales are in the U.S. and also in our own brands. So I think that our international business is largely around customer brands and the plain gold business outside of the U.S. Most of the branded business is in the U.S.

[Rishubh Vasa;Almondz Global Securities;Analyst, analyst]

And regarding the own brands, basically, can you throw some color on the business outlook, like which geography is doing good for us? And what is our outlook going ahead?

[Sumit Shah, executive]

Yes. So our own brands as well as licensed brands, the majority of the business is, as I mentioned in the U.S. I think we've got a -- we have a retail business in India, IRASVA, but it's at a very nascent stage. The total sales of IRASVA are in the ballpark of INR 15 crores to INR 20 crores annually. So besides India, all of our own brands are in the U.S. and especially the new brand that we've acquired 4 Mine Inc., the brand is called, With Clarity. We see significant growth prospects for that brand going forward.

[Operator]

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

[Sumit Shah, executive]

Thank you. I hope we've been able to answer all your questions. Should you feel the need for any more clarifications and like to know more about the company, please feel free to contact our Investor Relations team. Thank you for your support and your time, and we hope to see you in the next conference call. Thank you.

[Hitesh Shah, executive]

Thank you.

[Operator]

Ladies and gentlemen, on behalf of Renaissance Global Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines.