Harry Winston CEO Discusses F3Q2011 Results – Earnings Call Transcript

Harry Winston CEO Discusses F3Q2011 Results â¿¿ Earnings Call Transcript
By Seeking Alpha ,

Harry Winston Diamond Corp. (HWD)

F3Q2011 Earnings Call Transcript

December 10, 2010 8:30 am ET

Executives

Bob Gannicott – Chairman & CEO

Alan Mayne – CFO

Frederic de Narp – CEO & President, Harry Winston Inc.

Analysts

Des Kilalea – Royal Bank of Canada

Edward Sterck – BMO

Brian MacArthur – UBS

Irene Nattel – RBC Capital Markets

David Christie – Scotia Capital

John Hughes – Desjardins

Paul Checchin [ph]

Presentation

Operator

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Good day ladies and gentlemen and welcome to the Harry Winston Diamond Corporation fiscal year 2010 third quarter conference call. My name is Laura and I will be your conference coordinator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of today’s conference. As a reminder, this conference is being recorded for replay purposes.

Please note that we will be making some forward-looking comments today. Various factors and assumptions were applied in deriving these comments and actual results could differ materially. The principal factors and assumptions that were applied and risks that could cause our results to differ materially from our current expectations are detailed in our OSC and SEC filings.

I would now like to turn the representation over to your host for today’s conference, your Chairman and CEO, Mr. Robert Gannicott. Please proceed.

Bob Gannicott

Thank you. Good morning, everyone, and welcome to the Harry Winston earnings call for the third quarter of our financial year 2011. I’m Bob Gannicott, Chairman and Chief Executive Officer, and I’m joined on the call by Frederic de Narp, the Chief Executive of our luxury brand, and Alan Mayne, the Group Chief Financial Officer.

Although, measured against the quarter last year, the reflected temporary rough diamond production suspension and stalled retail sales, especially in the U.S., this third quarter reflects robust recovery in both jewelry demand and the rough diamond demand that this industry is inevitably linked to it. The engine of this recovery is being fueled by the Far East, as Chinese citizens become consumers, not only at home, but also in the luxury shopping districts of the developed world.

I’m now going to turn the call over to Alan, who’ll discuss the financial results in some detail. He’ll then be followed by Frederic, who will present our luxury brand business. I am then going to return to discuss the Diavik mine and our rough diamond business before closing our part of the call and inviting your questions.

Alan Mayne

Thank you, Bob and good morning. As Bob mentioned in his opening remarks, the company’s consolidated results for the third quarter reflected the continuing impact of the recovery in the global economy. Consolidated sales increased almost 90% from the comparable quarter last year and the company reported earnings from operations of $13.7 million compared to a loss from operations of $4.9 million.

Our foreign currency exposure has a material influence on our reported earnings. During the third quarter ended October 31, 2010, the Canadian dollar strengthened against the U.S. dollar. This resulted in a net $3 million foreign exchange loss in the quarter, compared to a net $1.6 million foreign exchange gain in the same period last year.

Taking into account, this foreign exchange loss, our interest expenses, other income and tax expense, we recorded net income attributable to shareholders of $3.9 million or $0.05 a share, compared to a net loss attributable to shareholders of $200,000 or zero earnings per share in the third quarter last year.

Now let me spend a few minutes on the financial review of our business segments. As highlighted in our results release yesterday, rough diamond sales for the quarter increased considerably in the same period last year resulting primarily from the substantial increase in the volume of carats sold.

You may recall that the volume of carats sold in the third quarter last year was unusually low as a result of the summer production shutdown. This increase in sales resulted in a significant improvement in gross margin and earnings from operations.

Revenue at Harry Winston, Inc. increased to $80.2 million from $54 million in the comparable quarter the prior year. This 48% increase in revenue led to earnings from operations of $5.4 million compared to the loss from operations of $0.5 million in the third quarter last year.

During the financial crisis, management significantly reduced the discretionary SG&A expenses at Harry Winston. In line with the improvement in the global economy and the financial results of the business, management will be increasing the amount of advertising, marketing, and promotional investments in the Harry Winston brand. This reinvestment in the brand as well as higher variable expenses resulting from higher sale were significant components of the increase in SG&A expenses in the quarter.

I would now like to turn the call over to Frederic to discuss the luxury brand business in more detail.

Frederic de Narp

Thank you, Alan and good morning everyone. The retail segment maintained its positive momentum from the first half of the year with sales of $18 million during the third quarter. This represents an increase of 48% over the prior year comparable quarter.

We experienced increases in sales across all geographic regions. Demand for heritage brands like Harry Winston continues to strengthen globally. Chinese consumers traveling abroad have been an important factor fueling the demand for luxury retail products.

In the U.S. market, the company recorded sales of $23 million during the quarter, which was 76% above the comparable quarter of the prior year. The U.S. market has shown a considerable improvement as consumers are showing an increasing willingness to spend on new jewelry products and we are also seeing watch wholesale accounts begin to replenish their inventory.

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