Harry Winston Diamond Management Discusses Q1 2013 Results - Earnings Call Transcript

Harry Winston Diamond (HWD)

Q1 2013 Earnings Call

June 07, 2012 8:30 am ET

Executives

Robert A. Gannicott - Chairman and Chief Executive Officer

Cyrille Baudet - Group Chief Financial Officer

Frederic de Narp - Chief Executive Officer of Harry Winston Inc and President of Harry Winston Inc

Laura Kiernan - Director of Investor Relations

Analysts

Irene Nattel - RBC Capital Markets, LLC, Research Division

Oliver Chen - Citigroup Inc, Research Division

John Hughes - Desjardins Securities Inc., Research Division

Brian MacArthur - UBS Investment Bank, Research Division

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Harry Winston Diamond Corporation's Fiscal Year 2013 First Quarter Conference Call. My name is Janeda, and I will be your conference coordinator today. [Operator Instructions] 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 filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov.

During today's call, we will also be discussing certain non-GAAP financial measures such as EBITDA. EBITDA does not have a standardized meaning according to GAAP, and Harry Winston defines it as sale minus cost of sales in selling, general and administrative expenses. Please see the press release and the MD&A we filed yesterday for further information about this non-GAAP measure. I would now like to turn the presentation over to your host for today's call, your Chairman and CEO, Mr. Robert Gannicott. Please proceed.

Robert A. Gannicott

Good morning, everyone, and welcome to the Harry Winston first quarter earnings call. We are of course are pleased to be able to present these results of our first quarter this year. As compared to the equivalent quarter the prior year, we've sold more of our various products for rough diamonds, jewelry, watches, improved our operating margins and delivered a strongly improved operating profit. We're in different locations with this call. I'm in a rather echo-ey room in Yellowknife, in the Northwest Territories in Canada. Our CFO, Cyrille Baudet, and the President and Chief Executive of our luxury brand division are both together in New York.

So we're going to begin the call with a report from Cyrille on the financial highlights and then that will be followed by Frédéric who will discuss the luxury brand business, and then I'm going to come back on the call after that to deal with the mining and rough diamond business, and then we'll take your questions and then we'll finally close. So start the proceedings then, Cyrille, over to you.

Cyrille Baudet

Thank you, Bob, and good morning, everyone. Bob and Frédéric will discuss our segment results for the quarter and the outlook in detail. I'd like to speak about our consolidated results for the same period. Our consolidated sales for the quarter were $192 million with $89 million from the mining segment and $103 million from the luxury brand segments. This represents an increase of 34% from the comparable quarter of the prior year both at actual exchange rate and constant rate with higher sales in both segments.

Our consolidated gross margin in Q1 were 31.8%, an increase of 510 basis points from the comparable quarter of the prior year of 33% -- 38.1%, sorry, 38.1%. The mining and luxury brand segments both generated higher gross margins.

Mining gross margin as a percentage of sales over the first quarter was 21.2% versus 13.9% in the comparable prior-year period. Gross margin for mining benefited from 116% increase in volume of carats sold which is around 1 million carat partially offset by a 34% lower achieved averaged price per carat, down 34% to $88 a carat.

This results from the inclusion of this quarter of lower-priced diamonds originally held over from the company's decision to hold inventory at October 31, 2011. Had we sold only the last production sheet for the quarter, the estimated achieved price would have been about $125 per carat based on the price achieved in the last tail of the quarter.

The luxury brand segment gross margin as a percentage of sale was 52.6% versus 47.5% in the comparable prior-year period. The 510 basis points of improvement in the quarter was driven primarily by increased sales of higher margin access and core products. The first quarter of the prior year included a $5.2 million high value transaction but was not repeated in the current quarter. Consolidated G&A expenses increased 28% to $54.7 million in the first fiscal quarter of 2013 versus $42.8 million in the prior-year period. SG&A for the mining segment decreased $2.1 million in the quarter primarily due to executive severance incurred last year that we didn't repeat this year.

In the luxury brand segment, SG&A increased by $12.6 million in the first quarter or 36% versus last year. The increase was primarily due to higher advertising, marketing and selling expenses, including the opening of the new flagship salon in Shanghai, China. The SG&A spending is supporting our long-term growth strategy of expansion of our distribution network, the introduction of new jewelry and watch products and our brand building initiatives. The prior-year period included a recovery of interest premium amounting to $2 million that didn't happen again this year.

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