RENAISSANCE GLOBAL LTD (RGL) Q2 FY23 Earnings Concall Transcript

RENAISSANCE GLOBAL LTD (NSE:RGL) Q2 FY23 Earnings Concall dated Nov. 11, 2022

Corporate Participants:

Anoop Poojari — CDR India

Sumit Shah — Chairman and Global CEO

Hitesh Shah — Managing Director

Analysts:

Devanshu Bansal — Emkay Global — Analyst

Pavan Kumar — Ratnatraya Capital — Analyst

Umang Shah — India Bridge Capital — Analyst

Chirag Vekaria — Budharani Group — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Renaissance Global Limited Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded.

I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you and over to you.

Anoop Poojari — CDR India

Thank you. Good afternoon, everyone, and thank you for joining us on Renaissance Global’s Q2 and H1 FY23 earnings conference call. We have with us today 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 will have the forum opened 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 presentation shared with you earlier.

I would now like to invite Sumit to make his opening remarks.

Sumit Shah — Chairman and Global CEO

Good afternoon, everyone. Thank you for joining us on our earnings conference call for Q2, and H1 FY23. I would like to begin the call by providing you with a quick overview of the company’s operational and business highlights for the period under review. After that, Hitesh will take you through the financial performance, following which we will open the forum for question and answer session.

We have reported a relatively stable performance during the first half of the year, despite macroeconomic challenges and inflationary pressures in our key markets, the U.S. and Europe. The performance was supported by our higher margin branded jewelry business and healthy growth in our direct-to-consumer business. While we did witness pressure on input prices, we were able to partially mitigate the effort by effectively implementing price hikes.

Our key strategic growth area continues to remain our branded business where we have partnered with global iconic brands through the licensing model. We have a growing portfolio of own and licensed brands in this market area and we distribute them through the B2B and direct-to-consumer distribution platforms. The contribution from our branded business has increased over the past three years going from just 2% in FY18 to 22% in H1 FY23. Looking ahead, our long-term goal is to significantly increase our branded jewelry sales by 3x over the next three, four years.

In a key development in our branded jewelry segment, we partnered with Signet jewelers to be the exclusive retail partner for our official National Football League NFL license to True Fans fine jewelry collection. The officially licensed NFL jewelry will be available exclusively at Kay Jewelers and Zales stores in select markets and online in the U.S.

We also recently announced a strategic licensing agreement with NFL with Netflix to provide branded fine jewelry designed around highly popular Netflix shows such as Stranger Things, Squid Games, Witcher and Queen’s Gambit. These developments are in sync with our strategic approach to accelerate the growth of our branded jewelry business. We’ve been able to build and grow our branded jewelry business model in important international markets like the U.S., Canada and UK on the back of our win-win collaborations with well-known brands such as Disney, Star Walls, Hallmark and recently added the NFL and Netflix.

Within the branded new segment, we’re very excited about our high potential direct-to-consumer business. Our direct-to-consumer business continues to grow at a robust rate. Direct-to-consumer business accounted for 8.5% of our total revenue in H1 ’23 and we anticipate to improve the contribution to 11% during the current financial year. During H1 FY23, the contribution from the direct-to-consumer segment to the branded segments stood at 38% from just 24% in the corresponding year. We currently run seven direct-to-consumer websites and are pleased to share that these channels have received excellent consumer responds with sales to over 8.5 million customers. The revenue from repeat customers stood at 16%, integration of FMI is progressing well and we’ve been able to achieve break even in H1 FY23 and we expect this to contribute to profitability going forward.

Further, I’m glad to share that Renaissance was conferred Out of the Box Store Design for IRASVA during the period. In the long-term, we expect IRASVA as a brand to open select outlets across India through an omnichannel approach by offering fine jewelry in a space between load, daily price jewelry and heavy bridal jewelry.

To conclude, while the near-term outlook remains challenging, we continue to focus our efforts on growing our branded business to achieve better margins and higher return on capital employed over the medium term. Given the current macroeconomic realities in mind, our revenue for FY23 is expected to decrease by 2% to 10% for the year for a range between INR1,970 crores to INR2,150 crores and our profit after tax is expected to be in the range of INR85 crores to INR100 crores. The ties up with iconic global brands would empower us to grow into the next generation of jewelry customers. This along with our direct-to-consumer business should enable us to create significant value for all stakeholders in the future in a capital efficient manner.

I would like to now hand the call over to Mr. Hitesh Shah to discuss our financial performance. Over to you, Hitesh.

Hitesh Shah — Managing Director

Thank you so much. Good afternoon, everyone. In H1 of FY23, Renaissance delivered a stable performance driven by steady demand in our branded jewelry segment and an encouraging contribution from our direct-to-consumer business. While our total income during the quarter stood at INR242 crores compared to INR278 crores in Q2 of FY22. For H1 of FY23, our total income grew by 13% to INR1,017 crores as compared to INR897 crores in H1 of FY22. This growth was aided by improved contribution from direct-to-consumer business and the gold business.

On the profitability front, EBITDA came in at INR38 crores in Q2 of FY22 and in H1 of FY22 it stood at INR80 crores, translating into EBITDA margins of 8.6% and 7.9%, respectively. The branded jewelry business reported EBITDA margins of 13.3% and B2C businesses registered an EBITDA margin of 11.5%. While we are witnessing promising revenue growth post the acquisition of Four Mine Inc., the business attained breakeven during the end of H1 of FY23, thus affecting the overall EBITDA contribution from the direct-to-consumer business.

Our customer brand business too reported lower EBITDA on account of higher input costs and inflationary pressures. In Q2 of FY23, PAT stood at INR16 crores versus INR28 crores in the corresponding period end last year. While in H1 of FY23, PAT stood at INR40 crores against INR50 crores in H1 of FY22. On a trailing 12 month basis, we have reported a stable return on equity which stood at 10.3%. As a contribution from our branded segment increases further, we anticipate return on equities to increase notably going forward as the direct-to-consumer business requires significantly reduced working capital.

In terms of geographic distribution of sales, Q2 of FY23 contribution from North America stood at 54% followed by 28% from the Middle East and the balance came in from other geographies. In H1 of FY23, the contribution from North America stood at 59% followed by Middle East at 23% and the balance came in from other geographies.

Moving onto a segmental performance. In H1 of FY23, revenue share of standard jewelry stood at 88% of the standard revenue, branded jewelry business contributed 25%. Within the branded jewelry segment, B2B contributed to 62%, while 38% of sales was driven by direct-to-consumer sales. During Q2 of FY23, direct-to-consumer business posted revenues of INR44 crores compared to INR20 crores in Q2 of FY22, registering a growth of 115%. For H1 of FY23, the direct-to-consumer business revenue was up by 86% to INR85 crores as compared to INR45 crores in H1 of FY22. Based on the estimates of this quarter’s contribution to annual sales, the annual revenue run rate of the direct-to-consumer business is at INR210 crores for FY23 versus actual FY22 revenues of INR124 crores.

Lastly, in terms of our balance sheet. Our net debt to equity ratio stood at 0.41 in September ’22 as against 0.38 in September ’21. We have a healthy cash position with our cash and bank balances and current investments standing at INR192 crores.

On that note, I will now request the moderator to open the forum for any questions or suggestions that you may have. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] We have a first question from the line of Devanshu Bansal from Emkay Global. Please go ahead.

Devanshu Bansal — Emkay Global — Analyst

Hi Sumit. Thanks for taking my question. So wanted to understand the revenue decline in B2B segment. The slowdown is despite new launch of NFL as well as Netflix. So what are the reasons for about 25% declining revenues in the B2B segment of branded jewelry?

Sumit Shah — Chairman and Global CEO

Yeah, thanks for the question. So while the licensing arrangements for Netflix and NFL have been signed, we only delivered our initial test for the NFL in Q3. So the NFL launch is not in the numbers and same is the case with Netflix. Netflix, we’re in the process of creating the product and starting the process of marketing the product. And the NFL numbers should actually show up meaningfully only in Q4 of the current year as the initial launch is usually a test which is on a consignment basis. So we will see meaningful revenues coming from NFL or Netflix in Q4 of the current financial year.

Devanshu Bansal — Emkay Global — Analyst

Even for the core, if you see for Disney styles that we have. So I understand NFL et cetera does not contribute incrementally, but comparable decline is also worth 25%. So is this largely related to the macro situation in the U.S. or how should we see this?

Sumit Shah — Chairman and Global CEO

Yeah, so I think the right way to look at it would be on an H1 basis, because a lot of times there is shifting of orders and customers sort of ordering product a little bit earlier or later than required. So I would say that, Disney — because of the macroeconomic situation, the existing brands have not grown, they’ve remained relatively stable as shown in the 1.5% decline. We expect that demand should stabilize over the next two quarters, but definitely because of high inflation, the consumer in the U.S. is facing some pressures and because of which discretionary spends are one that would — that are likely to be affected.

Devanshu Bansal — Emkay Global — Analyst

And the PPT mentions that NFL, Netflix styles are currently being distributed to select retailers in the U.S. So when do we expect these styles to sell directly through our own online platform?

Sumit Shah — Chairman and Global CEO

Yeah, so we plan to — for the NFL, it’s going to be an exclusive relationship with Signet, where Signet will be the retail partner that will do most — will do the exclusive distribution. So currently there are no plans to launch an NFL website on our own. Netflix is something that we’re looking at launching in Q4 of this year.

Devanshu Bansal — Emkay Global — Analyst

Got it. And lastly, if you can call out the contribution of With Clarity within the B2C segment for this quarter?

Sumit Shah — Chairman and Global CEO

We have to just look at the numbers and get back to you. I don’t remember it off the top of my head, but I would say that there is there is a meaningful contribution of With Clarity here. However, I’d like to note that, when we acquired With Clarity, With Clarity was a loss making business. And in the current numbers, some of the declines in margins that you’re seeing are on account of losses due to Four Mine Inc. The business has now turned profitable and we saw a profitable month in October and we expect the current quarter to be profitable for the acquisition of Four Mine Inc. So, the numbers are meaningful to the total numbers and after acquiring the company we’ve been able to increase gross margins and increased revenue. And it has taken us about five or six months to make the company profitable and we expect to see profitability from the Four Mine Inc. in quarter three of this year.

Devanshu Bansal — Emkay Global — Analyst

Okay. And again, this last question from my end. For customer brands also, does that same challenges on the macro fronts extend the reason for about 23% decline for customer brands as well on a Y-o-Y basis?

Sumit Shah — Chairman and Global CEO

Yeah, so I think that what a lot of customers did is in the first half of this year, I think that because prices were going up, I think customers sort of preordered some inventory. So, it’s not directly proportionate to what we are seeing on the consumer front. While we mentioned on the earlier two conference calls, that inventory levels were low and customers ordered it, we were seeing healthy momentum. So what I would say that the right way to look at it would be sort of an on an H1 basis and there definitely has been some preordering by customers. However, there is definitely challenges on the macroeconomic front as jewelry falls into a discretionary category. We are seeing signs of stabilization though in customer demand as the months have progressed.

Devanshu Bansal — Emkay Global — Analyst

Okay. And major festive season would start in December, right, in U.S. unlike India where October and mid-November are also festive seasons?

Sumit Shah — Chairman and Global CEO

Yeah, certainly the next 45 days that will — that’s primarily the — it’s really thanksgiving to Christmas. So, November 15th onwards is when sales essentially pick up and become stronger. So the largest part of retail sales for jewelry happen during this period.

Devanshu Bansal — Emkay Global — Analyst

And how have been the B2B trends as in because those orders might have been coming to you earlier than the retail sales. So how have been those sales so far for Q3?

Sumit Shah — Chairman and Global CEO

So, the sales have — on a year-over-year basis, our expectation is that will be slightly soft compared to year-over-year, but the trends are improving as compared to Q2.

Devanshu Bansal — Emkay Global — Analyst

Got it. Sumit thanks a lot for taking my questions. Really helpful. Thank you.

Operator

Thank you. We have our next question from the line of Pavan Kumar from Ratnatraya Capital. Please go ahead.

Pavan Kumar — Ratnatraya Capital — Analyst

Sir, I joined the call a bit late, but if you — sorry if you have already answered the question. But Four Mine Inc., I would like to understand the business better and also what do you think will be the impact, like what impact do you see of the business from the current recessionary scenario in U.S. versus other markets?

Sumit Shah — Chairman and Global CEO

Yeah, so I think that we’ve given sort of an outlook for the current year. I think due to the current inflationary pressures on the consumer, we’ve seen some softness in demand and we expect sales to be 2% to 10% lower than last year. This is based on our current best estimate of the outlook for this year. And Four Mine Inc. is primarily lab grown diamond direct-to-consumer business for us where we custom make engagement rings for consumers in the U.S. When we acquired the company, the company was sort of a loss making entity owned by venture capital firms. And after acquisition, we’ve managed to grow the revenue of the company by about 5x since the acquisition and turned it profitable. So we’re very excited about the opportunity with Four Mine Inc. and the fact that it’s a zero inventory model, which allows us to grow our business without a need for working capital which is a significant drag in our industry. So it’s a good business model where we make custom made engagement rings for consumers in the U.S. and focus primarily on lab grown diamonds.

Pavan Kumar — Ratnatraya Capital — Analyst

And B2B margins, do you think they will go back to 20% whether in this year or would it be difficult this year?

Sumit Shah — Chairman and Global CEO

Yeah, so I think our expectation is for them to stabilize somewhere between 15% and 20% in the current half. First half of the year, they’ve been lower because of the impact of the acquisition which was loss making on acquisition. We expect the margins to improve gradually and they should stabilize between 15% and 20% going forward.

Pavan Kumar — Ratnatraya Capital — Analyst

Okay, thank you sir for helping us.

Operator

Thank you. [Operator Instructions] We have our next question from the line of Umang Shah from India Bridge Capital. Please go ahead.

Umang Shah — India Bridge Capital — Analyst

Hi sir. Thank you for the opportunity. Sir what is the total number of SKUs that you would be looking to release for Netflix [Indecipherable]?

Sumit Shah — Chairman and Global CEO

So we haven’t finalized the total number of SKUs, but there’s about four or five shows. So our best estimate would be a couple of 100 SKUs that would be launched initially for Netflix.

Umang Shah — India Bridge Capital — Analyst

And sir what would be the total SKUs that we have in our 30 million franchises?

Sumit Shah — Chairman and Global CEO

In the branded business?

Umang Shah — India Bridge Capital — Analyst

Yeah.

Sumit Shah — Chairman and Global CEO

So I think that each brand in general would have between 300 and 500 SKUs. The major brands being Enchanted Disney fine jewelry, Star Wars. So I think we’ve got about four or five brands, each of the brands would have 300 to 400 SKUs that are meaningful and drive a majority of revenue.

Umang Shah — India Bridge Capital — Analyst

And sir do these SKUs have — like what is the shelf life that these SKUs have, how often do you have to replace them or how often do they stay in the market?

Sumit Shah — Chairman and Global CEO

So I think that depends on the category of the product. Usually, our businesses is divided between bridal and fashion. Bridal SKUs have a longer shelf life because engagement rings tend to be more classic and styling and tend to stay on longer. So the shelf life could be four to five years. For fashion, I would say, typically, it’s a two to three years would be — usually two years would be where it would — when it would be strong and third year the SKU would start to decline and that’s when we would have to replace the SKU.

Umang Shah — India Bridge Capital — Analyst

Right sir. This is very helpful. And sir what would be the current cost of debt on the INR70 crores of debt that we have right now?

Sumit Shah — Chairman and Global CEO

So our cost of debt is usually — is basically linked to the Fed funds rate or LIBOR. And obviously that’s moving dynamically, but for historical context, it would be between 5% and 6%. And obviously we expect it to go up depending on where the Fed Funds rates settles.

Umang Shah — India Bridge Capital — Analyst

Right. And sir did Forex movements benefit us at all in the first half of this year? And what could be the Forex gain, total?

Sumit Shah — Chairman and Global CEO

So we don’t really have — we’re naturally hedged with our foreign exchange because our receivables inventory and payables are all in U.S. dollars. The movement in forex basically either increases or reduces our cost of manufacturing. So, I would say that, it’s not really meaningful because largely our balance sheet is U.S. dollar driven.

Umang Shah — India Bridge Capital — Analyst

Got it. I think you’ve answered the set of questions I have. If I have anything more, I’ll get back in the queue. Thank you.

Operator

Thank you. [Operator Instructions] As there are no further questions, I would now like to hand the conference over to management for closing comments. Over — sir I’m sorry there is one question, should I take it?

Sumit Shah — Chairman and Global CEO

Yes please go ahead.

Operator

It is from the line of Devanshu Bansal from Emkay Global. Please go ahead.

Devanshu Bansal — Emkay Global — Analyst

Yeah hi Sumit. Thanks for the follow-up opportunity. I just wanted to check on again the margin trajectory that you have mentioned, so if you could elaborate the margins that we expect for this year across segments as well as over the next few years how should we see the margin improvement across segments?

Sumit Shah — Chairman and Global CEO

Yeah. So I think largely margins have been impacted on two fronts. I think in the first quarter of the financial year, they were impacted by Diamond prices which took some time for us to pass on to our customers. And current quarter, obviously, there was a little bit of operational deleverage while we’ve finished passing on all of the input cost increases to our customers. So our expectation would be that as sales stabilized, we would return to sort of the margin numbers that we were able to attain last year by segment and then grow the overall operating profit of the company as we expect the share of the higher margin businesses to go up. So I think that some of the margin declines are temporary and related to input cost pressures as well as some operational deleverage. And our goal is really to bring them — each of the margins for the segments to bring them back to historical numbers and grow the total operating profit margin of the company as business exchanges.

Devanshu Bansal — Emkay Global — Analyst

Got it sir. Thank you. That’s it from my end.

Operator

Thank you. We have our next question on the line of Chirag Vekaria from Budharani Group. Please go ahead.

Chirag Vekaria — Budharani Group — Analyst

Sir just wanted to understand on the debt. By the year-end, how would debt be looking on our books, any thoughts there?

Sumit Shah — Chairman and Global CEO

So I think that we’re in the process of — so our outlook for the future is that we have a range of assets that we feel can allow our company to grow meaningfully in the next two, three years. As you’ve seen, we’ve used some of the cash flow generated for acquisitions in the past. We currently have no acquisitions planned for the next two to three years. So we plan to use some of the cash on the books to pay down debt. So there will be some repayments gradually as the season ends because debt tends to be — since its working capital, it tends to be a little bit elevated during the season. You’ll see this coming down meaningfully by March, since we received a lot of our receivables from customers at the end of the season. And since we don’t have any acquisitions planned, we can pay down debt numbers meaningfully over time. I don’t have a specific number in sort of at-hand for 31st March, but I think over the next two to three years, we will see the gross debt number come down meaningfully.

Chirag Vekaria — Budharani Group — Analyst

Okay sir. Thank you.

Operator

Thank you. [Operator Instructions] There are no further questions sir. I hand over the call to management for closing comments.

Sumit Shah — Chairman and Global CEO

Thank you. I hope that we’ve been able to answer all your questions. Should you need any further clarifications or if you’d like to know more about the company, please feel free to contact our Investor Relations. Thank you for joining us today.

Hitesh Shah — Managing Director

Thank you.

Operator

[Operator Closing Remarks].