Ladies and gentlemen, good day and welcome to Vaibhav Global Limited's earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. If you need assistance during the conference call, please signal an operator by pressing star then zero on your telephone. Please note that this conference is being recorded. I'll now hand the conference over to Mr. Nishit Shah of CDR India. Thank you, and over to you, Mr. Shah.
Thank you. Good evening, everyone, and thanks for joining us on Vaibhav Global's Q2 FY 2023 earnings conference call. Today I have first Mr. Sunil Agrawal, Managing Director, Mr. Vineet Ganeriwala, President, Shop LC, Mr. Nitin Panwad, Group CFO, and Mr. Prashant Saraswat, Head, Investor Relations. We begin the call with a brief opening remarks from Mr. Sunil Agrawal on the business operations, key initiatives, and a broader outlook. Followed by a discussion on the financial performance by Mr. Vineet Ganeriwala. The management will open the forum for an interactive Q&A session. Before we begin, I'd like to point out that certain statements made or discussed on this call may be forward-looking in nature and must be viewed in conjunction with the risks and uncertainties being stated. A detailed statement and explanation of these risks is included in the earlier presentation, which have been shared with you earlier.
The company does not intend to update these forward-looking statements publicly. I invite Mr. Sunil Agrawal to make the opening remarks. Thank you, and over to you, sir.
Thank you, Nit. I welcome you all to Vaibhav Global's Q2 FY 2023 earnings call. I hope you have reviewed the results as well as the presentation that provides details on the business and the environment we are operating in. Before we start results discussions, I take this opportunity to announce that upon the recommendation of Nomination and Remuneration Committee, the board has elevated Vineet Ganeriwala as President of Shop LC US. Vineet has demonstrated keen business acumen, strategic approach, and leadership skills since he joined VGL early 2020 as our group CFO. Vineet has over two decades of rich experience across diverse industries and multiple geographies. Further, the board has now elevated Nitin Panwad as group CFO in place of Vineet. Nitin is chartered accountant by training and a finance leader at VGL Group for the last 11 years.
He has worked across diverse portfolios and multiple geographies. He is an excellent business partner providing valuable strategic input to support growth and profitability. He has successfully led various transformation initiatives in process improvement, cost efficiencies, margin improvements, et cetera. He played a pivotal role in setting up of our German subsidiary and was serving as deputy group CFO of the company before this promotion. I am confident that these changes will further strengthen the management bandwidth of VGL. Let me now take you through the operational performance of the quarter. Sales for the quarter were INR 646 crores, up 1.8% from INR 635 crores in the second quarter of last year. This performance is encouraging versus pre-COVID level of Q2 FY 2020 with a growth of 33%. This performance in backdrop of current high inflationary environment in western economies.
Consumer is also spending larger share of their disposable income on experiences rather than product, having stayed indoors during COVID years. In Q2, our gross margin continues to remain healthy at 69.9%. We continue to successfully balance our product cost pressures while maintaining our differentiated value proposition. EBITDA for the quarter has been 88.1% compared to 10% of last quarter and 11.4% of Q2 FY 2022. Our judicious investments in Germany, new OTA homes and digital marketing have short-term EBITDA impact. These investments are building blocks which will result in significant operating leverage on the medium and long term. In spite of these investments, our margins have bottomed out in Q1 and have started seeing a sequential improvement and are expected to continue to improve in H2.
During the quarter, our Germany business has grown exponentially, crossing monthly revenue of more than EUR 1 million in recent months. In Germany, we recently started live and interactive shopping on our website and are seeing good customer traction. We intend to increase this coverage going forward if the trends remain positive. At Shop LC, the previous channel upgradation continues to give positive results in terms of new customer acquisition. New TV customization rate was -17% in February 2022, and is now +49%.
Can you go back a slide? Thank you.
Apologies for getting disconnected. I don't know how much you heard, but I'll repeat last couple of lines. New TV customer acquisition rate was negative 17% in February 2022 in U.S. and is now positive 49% in September 2022. We expect that the current trend will continue to benefit GFC with market-leading growth in the long run. Overall performance in U.K. is positive, except momentary impacts of Queen's demise and political changes. In U.S. also, the macroeconomic environment continues to impact the customer sentiment. Current revenue growth is not a true reflection of potential of U.S. and U.K. markets for us. However, we continue to gain market share owing to our low-cost vertical business model. Our fully integrated supply chain spanning across 30 countries is our moat. We manufacture majority of our jewelry products, allowing bulk sourcing and therefore strong margins.
Our vertically integrated supply chain has worked favorably for us. Besides cost, our vertical model also helps reduce delivery time and offers great storytelling opportunities to our retail units.
The management line is connected. Can we proceed, sir?
Yes, sir. Apologies again. I'm now connected from my mobile, so hopefully should be fine now. Our fully integrated supply chain spanning 30 countries is our moat. We manufacture majority of our jewelry products, allowing bulk sourcing and therefore strong margins. Our vertically integrated supply chain has worked favorably for us. Besides cost, our vertical model also helps reduce delivery time and offers great storytelling opportunities to our retail units. Further, our 4Rs framework is widening reach, new customer acquisition, customer retention, and repeat purchase. They link to our three-year support. The reach of our TV network by end of Q2 FY 2023 was approximately 135 million TV homes. This is 22% higher year-over-year. We reach TV homes through cable, satellite, telco networks, and over-the-air antenna, also called OTA platforms.
Our products are also available on digital channels, including proprietary websites, smartphone apps, OTT platforms, and marketplaces. Our sustained investments on OTAs and digital channels is leading to increased new customer acquisition. Our unique customer base is at 500,000. New customer acquisition on GMV stands at INR 2.2 lakh, which is higher by 9.8% year-over-year, and significantly higher by 16.3% over Q2 of FY 2021. On the sustainability aspect, we are glad to announce that two of our office buildings in U.S. have received LEED Gold certification. This certification reaffirms our focus on efficient operation and recognizes our efforts towards sustainability. Another important aspect of sustainability efforts is our mid-day meal program, Zero Hunger Schools. Recently we crossed a milestone of 59 million meals with a run rate of approximately 51,000 meals donated every single school day.
We continue to closely monitor the macro environment and business trends. I believe that we have capability, team, and experience to effectively manage growth in this environment. Despite near-term uncertainties, we believe that the long-term demand remains strong, and we are well-prepared to leverage our competitive advantage. Our outlook for the year and the mid-term resilience impact is we expect to deliver 2%-4% growth in this fiscal year and maintain revenue growth in the succeeding years. Further, the Board of Directors of your company has declared an interim dividend of INR 1.5 per share for the quarter. We look forward to maintaining a balance between growth, investment, and quarterly payouts to generate sustainable value for our shareholders. Over to you, Nitin.
Right. First of all, let me thank VGL Group for this opportunity being offered to me. My journey as Group CFO has been great and enterprising, and I would like to thank all my colleagues who shared this journey with me and supported me. I now look forward to the new challenges and opportunities that this position of President of Shop LC will offer. I would also like to congratulate Nitin Panwad for being appointed as Group CFO of Vaibhav Global. Nitin Panwad has been a core asset of our company since the last 11 years and has great business acumen. I'm sure that he will continue to deliver in this role of Group CFO as well. Over to you, Nitin Panwad, to say a few words.
Thank you, Vineet and Sunil, for your kind words. First of all, I would like to congratulate Vineet for well-deserved elevation as President of Shop LC. I have worked with Vineet since joining the company and would like to say that he's a good business acumen and good team leader. I'm sure that he will once again demonstrate performance and lead Shop LC to market-leading growth. Further, I would like to thank VGL Group and the boards for showing their faith upon me and promoting me to this position of Group CFO. This position carries challenges as well as opportunities, and I'll do my best to meet the expectations of the new role. Back to you, Vineet. Thanks.
Thanks, Sunil. Let me now start with the discussion on quarterly financial performance. As has been mentioned earlier, demand outlook is muted with recession fears impacting consumer sentiment. Overall revenues of INR 66 billion crores, a growth of 1.8% year-on-year. As against the pre-COVID period of FY 2020, growth is stronger at 33%, resulting in a healthy CAGR of 10%. In local currency terms, excluding U.S., revenue declined by 6.4% year-on-year, impacted by this comparison and a very high base of last year. In U.K., our investments on upgrading regional channel positioning has really contributed favorably. However, due to the bad weather of Q in U.K., there was an impact on this quarter's revenue which resulted in flat growth for U.K. Germany continues to perform better and is evolving much stronger.
These are unprecedented and difficult times, but we are rapidly adjusting our offering to changing consumer demand, and the same is reflected in improved revenue numbers month-on-month, which you can see in our results presentation. Our TV revenue stands at INR 15.7 crores, and digital revenue at INR 63 crores. The numbers are up by 51% and 51% year-on-year respectively. However, on comparing against pre-COVID period of quarter two FY 2020, the growth is decreasing at 67% and 57% respectively. Our OTA reach continues to grow. We have added few key cable markets to our distribution portfolio during the quarter. All these sustained efforts have resulted in an additional 10 million households in the US across OTA and cable TV platforms.
Actually, our investments on expanding omni-channel distribution have resulted in 59% of the new customer acquisitions happening on digital platforms during this quarter. This omni-channel distribution model promotes and encourages customers to transact on both TV as well as digital platforms, which gives them a unique shopping experience and a cross-selling potential to us. Omni-channel customer tends to be more sticky and have a significantly higher lifetime value than customers who buy only on TV or only on digital. I would like to highlight that Budget Pay sales, which allows customers to purchase on EMI basis, continues to grow and currently is contributing 39% of the total retail sales. This feature enables purchase easier and makes it convenient, thus driving better customer engagement. The non-jewelry segment comprising of fashion accessories, lifestyle products, beauty products, apparel and home products constitutes 27% of our total retail revenue.
This non-jewelry segment has enabled us to take higher wallet share out of the same household. EBITDA margin for the quarter was 8.1%. As committed earlier, we aim to achieve double-digit EBITDA margins in the medium term. There is continued focus on cost optimization across the board and improved productivity and operational excellence. Our EBITDA margin have seen sequential improvement, thanks to better revenue delivery and cost rebase initiatives from the previous months back. Operating profit after tax for the quarter is INR 33 crore as against INR 22 crore of last year. Operating cash flows and free cash flows were at INR 37 crore and INR 62 crore respectively, which is driven year-on-year improved cash generation due to effects coming to normal levels alongside efficient capital allocation and focus on costs.
On a TTM basis, ROE and ROCE were at 13% and 18% respectively. These return ratios suggest effect of conscious investments on affiliates, digital marketing, German operations, and broader economic environment. Through our stringent execution, we remain committed and are confident to deliver strong returns for our stakeholders in the medium to long term. We continue to create value and are pleased to announce that the board of directors approved second interim dividend of the fiscal year, that is, INR 1.50 per equity share. In the current macro environment, we are intensifying our efforts on driving growth through disciplined execution of our value offering, digital-led customer-centric content. This is enabling balancing our near-term responses to broader economic environment. We believe we have huge opportunities ahead of us and have required technological management and financial bandwidth. We are confident to successfully navigate current environment.
Sunil mentioned that we have seen a visible sequential improvement during the last few months, with revenue trends improving month-over-month. We firmly believe that this challenging phase will be behind us soon. Considering the current macro environment, we expect to deliver 2%-4% top-line growth for this year with 8%-9% EBITDA margin for this financial year. Our medium-term outlook remains intact, and we expect to deliver mid-teens revenue growth in subsequent years with operating leverage. With this, I hand it over to the moderator.
Ladies and gentlemen, we will now begin the question and answer session. Participants who wish to ask a question, kindly press star one on your touch-tone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, kindly press star one to ask a question. The first question is from the line of Pritesh Chheda from Lucky Investment Managers. Thank you, Pritesh.
Yeah, hi. So I have two questions. One, you know, it's quite surprising that your realizations are now about $35 a piece, which is a 20% higher number, yet the gross margins are lower, so if you could just explain that phenomenon. We used to be at 65% type range, so any comment there on the gross margin. You have given your comments on margin. That is the first question. My second question is, sir, at EUR 1 million Germany operations per month, what is the EBITDA burn in Germany so that we can understand ex of Germany, you know, what kind of margins are now happening on your more stabilized US and UK office?
Sure. Hi, Pritesh.
Hi.
The increase in average selling price of $25 is the result of current business environment. We have lower eyeballs currently because people have gone out for experiences and there's more attraction of gold products. Like not heavy gold products, but gold products like 2 grams-5 grams kind of chains that people are picking up and that has increased our ASP currently. We believe that this is transient because of different seasonal environment. Second question was about the lower gross margin. We keep guidance of 60%+ gross margin, and we stay true to the guidance. Within that range between 60%-65%, it keeps on fluctuating depending on the product mix and the business environment.
The current business environment is a little bit subdued because of inflationary fears and some changes in U.K., the political change that the Queen's demise, and that led to some deterioration of margins. The third point was for Germany. The EUR 1 million run rate is achieved in recent months. Now, the gross margin-wise, Germany is ahead of U.S. and U.K., but EBITDA is negative. Now, sequentially, when compared to last year Q2 and this year's Q2, there's like it was slightly better in absolute euro terms. As we proceed to next quarter, the difference will continue to improve. The losses will continue to be lower than last year's same period. There will be some gain in terms of losses from Germany.
We expect H2 of next financial year to be profitable for Germany.
Can you quantify like $1 million, EUR 1 million revenue? What is the EBITDA burn?
We don't have EBITDA burn numbers. We don't have EBITDA burn, but approximately 400,000 a month currently is the burn rate. EUR 400,000 a month.
400,000
Yes. Sequentially it keep on going down as we assume more unique customer base. Also the longevity of customer improves the repeat purchase. We've already reached, I think 15 repeat purchase for an average customer in say 12 months, which is quite good, better than our earlier estimates.
Okay. Lastly, I haven't calculated it, but, you know, we, the margins in U.S. and U.K., at what run rate, those margins are running at combined?
Sorry, you mean gross margin?
No. EBITDA.
I don't have the specific number, but now this in our investor presentation, we've broken down U.K. as well as U.S. You would find that information currently.
Let's say at EUR 400,000. We have a INR 10 crore burn for 96%. 106. Very good. Basically, we would be at 13. We have a stable margin in U.S. and U.K. Is that assumption correct?
No. US and UK both have a suppressed margin because of the environment too. If it was just a stable margin as last year, then the Germany burn would not have been as impressive. We expect UK and US both to come back to improve margin next year. We will have leverage coming in from next financial year. This year, we are giving guidance of 8%-9%, which are including Germany burn.
H1 FY 2022 had Germany operations, or it did not have Germany operations?
FY 2022, we had very minuscule Germany operations. We started in May of 2021. There was a burn.
There was a burn last year.
Yeah. There was a substantial burn last year. This year, burn will be lower than last year. Next year will be yet lower. In H1, there will be a burn. In H2, we will be profitable, but for the full-year will be burn.
Okay. FY 2022 was a higher burn versus FY 2023. That's how it is, right?
Yes.
Okay. Cool. Thank you.
Thank you. Thank you. For speakers who wish to ask a question, kindly press star one. For questions, please press star one on your touchtone telephone. The next question is on the line of Nilesh Shah from Envision Capital Services Private Limited.
Thank you for the opportunity. Congratulations, Sunil, on a steady performance in an otherwise difficult environment, especially in terms of sequential improvement in margins and strong cash flow generation. Congratulations also, Vineet and Nitin, for the new opportunity that has arose. Sunil, my first question is around the volume decline that we are seeing in our TV business through the TV channel. You know, this year, this first half, we're seeing a 25% decline in volumes over the same period last year. Now, last year's base was not a high base. I mean, this is not a comparison to FY 2021, which of course was a high base. On the base of last year, it looks to be kind of slightly significantly higher volume decline.
I mean, apart from, of course, the general environment, consumer sentiment and those factors, but anything specific which is leading to such a sharp decline in volumes on the TV side?
Hi, Nilesh. Volume decline is a factor of the audience which we have at any given time. There are two factors. One is the people went out quite a bit during the year, especially for experiences. People were bound for a couple of years and the holidays or visits and outings has been quite compact. Second thing was the inflation fears and inflation and recession fears. In this current environment, we found people are buying more investment kind of products. Or let's say not really a real investment, but people perceive them to be investment. Gold products has been selling well. The gold chains, the gold rings and gold bracelets have been selling well. That led to a higher ASP and that therefore lower volume.
If we were to stay at a lower price point as Vineet mentioned, our revenue growth would have been more impacted. In order to meet the revenue numbers and what the customer pull was, we went with high ASP and that led to lower volume. The 35 ASP which you saw last quarter is not a long-term steady state business plan. We'll come back to trade around $30 ASP in longer term once we are beyond the inflation environment and recessionary fear environment and the steady state of consumer behavior is back to normal.
Subsequent to that, I mean, you don't think that the volume decline that we have seen, the significant volume decline is like the start of a structural downtrend in terms of TV as a medium essentially kind of going out of vogue. You don't think this is anything like that. This is more like kind of just a temporary blip for the reasons which you outlined.
Absolutely. It is transient, and we are seeing this across U.S. YouTube. It's not that YouTube has little bit less impact because we acquired quite a lot of new customers because of new channel position. Otherwise, from the older channel distribution, it's similar shapes. It is the transient current environment.
My second question is around our private label strategy. We have a very interesting slide in your presentation on the private label strategy. I mean, you can just kind of elaborate a bit in terms of what your thought process is. What I was more keen to know is that that slide showcases several brands and what is the thought process? Do we intend to have you know such a large number of brands of our own? Obviously each brand will require some kind of investment which might accelerate going forward and that impact margins. I know it's still early days for that. What are your thoughts on that? Does it make sense to have like one umbrella brand like say the way you have say a Zara which sells everything under Zara?
You think that having multiple brands in our private label kind of strategy is that a better way forward?
Yeah, very good question, Nilesh. We have a process in the company that a collection with certain attributes and the price point of discipline and the brand personality is designed by our branding team, and then we take that to the customer. The minimum requirement for that is each brand should achieve at least $1 million sales within a year. Otherwise it won't be, it will be discontinued. The benefit of this is that customer engaged with the brand and customer purchase with the brand. We're seeing the brand performance and margins has been better than the normal non-branded products. To your point, we do have umbrella brands like Shop LC and TJC, and customers do associate with the umbrella brand and the high repeat purchase is mainly with umbrella brands.
Product brand does improve further, customer engagement and purchase. That has been our experience, but we always are so closely looking at the data and refining the strategy where it needs to be. We believe we want to improve the in-house brands further and the third-party brands to keep that 3% minimum.
Great. Thank you so much, and good luck to the team.
Thank you.
Thank you. Participants, if you wish to ask a question, kindly press star one on your touch-tone telephone. The next question is from the line of Sachin Kasera from Svan Investment. Can we proceed?
Hi, good evening. My question was on the gross margin. In the slide number 31, you have highlighted that you just reached a 3% decline in gross margin of product due to different price transitions. Can you comment how are you looking at it in the coming quarters, both the aspects of product mix and price transition, and can we see some improvement in gross margins anywhere?
Yeah. Thanks for the question, Sachin. We constantly guide for 60%+ margin, because the consumer pool for particular products at any given time is not 100% definite. For example, last quarter consumer has been selling a lot of gold product, and there is slightly lower margin, not by much, but slightly lower margin. If you are able to sell more $10 products, you get the higher margin. That depends on the pool and our guidance will stay at 60%+ margin for coming three years. Other than that, we're unable to give specific guidance.
No, I'm talking of specific guidance. I'm just understanding this impact of product mix and different price transitions that we have seen this quarter. Will the impact reduce, and do you see some price transition happening and product mix improving as we go into the direction? Or do you think that the reversing environment this will remain there for some time?
Yeah. Part of the reason for very high gross margin last year was essentials. We sold quite a bit of masks and other essential products, which had high gross margin. Also this year, there were some costs increased as shipping price increased, but we could not pass on to the customer. We can't predict whether we will be able to increase margin from this level depending on where the macro environment will be. Our guidance is there 60%+.
Sure. The second one was on this other thing that you mentioned about affiliate marketing design cost. Have you seen this? The number that we are seeing this quarter is a peak number, and hence as the revenue grows, will you see some leverage on this affiliate? Or as the A&A keep increasing, we tend to see this affiliate marketing design cost, hence we'll continue expecting lower revenue numbers.
Yeah. Last two quarters, we were kind of fortunate to get opportunities to get into some additional markets. Now, these typically these markets take anywhere from 1 year- 2 years to really mature. Mature means where our affiliate costs are at our steady-state level. These two quarters were pretty good for us in terms of getting new distribution. Now, in new distribution, we always make an effort to have more distribution. We still have a lot of runway in terms of us to get additional distribution in U.S. For example, full power OTA, we are only in 4 million homes compared to total almost 21 million available. There's still a lot of runway in front of us. Cable homes, we still have about 15 million more cable homes to get into.
If we get the opportunity, we'll get into them. We don't really have a visibility of determining that we will be able to jump into them because they have more specialty now. Whenever we can get the specialty, if its channel is vacated by another player, we have offer for it and we are able to take at a fair price that we are happy with, we'll jump on it. For your model, you should take the current investment we are making into our affiliate as constant in dollar terms, not in the revenue percentage, but in dollar terms. If we are able to get more distribution, but we don't give specific guidance for that.
Our guidance this quarter, the full-year for H2 is 6%-9% of current number for the full-year.
Sure. My last question was in this cost save of 6% that we are seeing in slide number 32, which mentions around three areas. Is five to seven million dollar savings basically part of this 2.6%, or these are the additional program if they're gonna run or on top of the 2.6% benefit that we have seen in your presentation.
I'll take that, Sunil. Yes, this 2.6%, which you're seeing the bridge, so there's some part of the cost savings are already started kicking in and that's driving this.
within that when you are making $5 million-$7 million from a, like, almost half a million dollars in Q2, or would you say this a larger benefit which is $2.6 million, or
A larger benefit would come in H2. These savings started flowing in partly from Q1 and now maturing month on month. In terms of weightage, a higher weightage will be in H2. Having said that, when we agreed the EBITDA margin guidance for the full-year, this is obviously factored in from keeping that in mind.
Sure. Lastly, in case of Germany, you mentioned that the gross margins are better than U.S. and U.K. Any reason? Is this, like, the nature of each market and this should sustain as we grow there and become a much larger entity? Is it that initially because the base is lower here because of certain product mix changes, you know, gross margins in Germany are better than U.S. and U.K.?
In Germany, the reason for higher gross margin is because shipping revenue is lower and also the return shipping, customers don't hesitate to want to return. Whereas in U.S., U.K., customer pays for return shipping. Because of the structure of the market, we tend to have higher gross margin. When we launch, we expect the consumer to be able to, you know, comfortably pay the high margin that we are seeing. That will help us to become profitable one year sooner than we originally expected.
Sure. Just to reiterate what you are saying, in case of Germany, gross margins are higher, but we may end up incurring higher on the logistics cost. That is in case of U.S. and U.K., gross margin is lower, but then the logistics cost should also be lower and at EBITDA it may not be that much of a difference, is that correct?
There is some dilution because of this higher logistics cost. In net-net, the overall margin is better than we originally expected. Therefore, the accelerating time has been driven by one year.
If I got you said the current run in Germany is approximately EUR 400,000. It's a revenue of approximately one million EUR.
Right. That was the current last two months run rate. Going forward. For this current quarter, it was about INR 12 crore for last quarter, which is lower than INR 400,000. Next current quarter it will be lower than that.
Sure. There's one slide on the initial unit you gave a month-on-month trend. Will you be able to give us some comment on how the October month has gone? Like, have you shown that versus September there's a 50% recovery from August, September to October? Will you be able to comment anything on how the October-September trend is? Again, because of the network effect, we are seeing October is 50%-60%.
October is still not completed and we don't really have data, but we are fairly confident of our guidance. To get to 24% guidance, it has to be positive trend, and we are seeing that.
Sure. Great. Thanks a lot.
Sure. Thank you.
Thank you. Participants who wish to ask a question, can you press star one? As there are no further questions, I would now like to hand the conference over to the management for closing comments.
I want to thank all the participants for your time and great questions. I also want to thank you for your support to Vaibhav in past years. If you have any further questions, you know, please feel free to reach Prashant or myself at Vaibhav or Mitra at CDR India, and we'll be happy to answer your questions. Thank you once again.
Thank you. On behalf of Vaibhav Global Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.