Harry Winston Diamond Management Discusses Q2 2013 Results - Earnings Call Transcript

Harry Winston Diamond (HWD)

Q2 2013 Earnings Call

September 06, 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

James R. W. Pounds - Executive Vice President of Buying and Sourcing

Laura Kiernan - Director of Investor Relations

Analysts

Irene Nattel - RBC Capital Markets, LLC, Research Division

Oliver Chen - Citigroup Inc, Research Division

Brian MacArthur - UBS Investment Bank, Research Division

Des Kilalea - RBC Capital Markets, LLC, Research Division

Edward Sterck - BMO Capital Markets Canada

Presentation

Operator

Ladies and gentlemen, and welcome to the Harry Winston Diamond Corporation's Fiscal Year 2013 Second Quarter Conference Call. My name is Stephanie, and I will be your conference coordinator for 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, and EBITDA does not have standardized meaning according to GAAP, and Harry Winston defines it as sales minus cost of sales and selling, general and administrative expenses. Please see press release and MD&A we filed yesterday for further information about this non-GAAP measure.

I would now like to turn the representation 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 management discussion of the results of the second quarter of our financial year 2013. I am joined on the call by Frédéric de Narp, our President of the Luxury Brand division; and Cyrille Baudet, the Group Chief Financial Officer. I've also got a couple of other management people in the room in order to handle questions -- more technical questions when we finish this discussion.

In summary then, this quarter's seen our Luxury Brand business continue to supplement higher value but lower margin high ticket sales with more repeatable transactions, as our marketing efforts in bridal and access jewelry and watches deliver an increased volume of higher margin sales. This has resulted in a significantly improved gross margin in that segment of the company.

We've also recently released the life-of-mine plan for the Diavik Mine, which projects a value of around $1 billion for our 40% interest in the reserve and the resource space. The mine continues to successfully transition to underground mining, with the last of the open pit ore from the 418 open pit being mined in this third quarter. The efforts of the mine then are now focused on cost reduction efficiencies, and these are proving to be already successful early on.

Although retail diamond demand has remained robust, de-stocking in the processing chain for various reasons, which we'll discuss later, has depressed demand and, therefore, prices for rough diamonds. We have, therefore, elected to hold some approximately $65 million worth of stock of selected items. In anticipation of improved pricing later in the year, which is a common feature of the diamond year anyway, the latter part is always stronger than the period right out to the European holidays and as we enter both the Jewish and the Indian holiday seasons.

I'm now going to hand the call over to Cyrille Baudet to explain the financial results in more detail. Cyrille will be followed by Frédéric, who will discuss the Luxury Brand business. I am going to come back to discuss the Mining segments and close. Over to you, Cyrille.

Cyrille Baudet

Thank you, Bob, and good morning, everyone. Before I begin speaking about our results, I'd like to tell you about 2 announcements that we've recently made. First, we released the updated mine plan indicating an estimated net asset value of more than $1 billion based on reserves and resources, including A-21 for Harry Winston shares of the Diavik Diamond Mine. And second, the Luxury Brand segment refinanced senior secured revolving credit facility by entering into a new secured 5-year credit agreement with the consortium of banks for $260 million.

Now on to the results. Our consolidated sales for the second quarter were $176 million, with $61 million from the Mining segment and $115 million from the Luxury Brand segment. The decision by the company in the second quarter to hold back from sale of the broad range of rough diamond because of market condition plus the fact that the second quarter of the prior year included low margin, high-value transaction that was not replicated in the current year result in the current year, resulted in a decrease of 20% in the headline sales number from the comparable quarter of the prior year at actual recent [ph] rates and a decrease of 11% at constant currency rates. Bob will speak to the rough diamond sales results and Frédéric will comment on the Luxury Brand sales results.

However, our consolidated gross margin in Q2 were $72.2 million, which is consistent with the prior year quarter. As a percentage of sale, margin was 40.8%, an increase of 830 basis points. The Mining segment generated sales of $61.5 million with gross margin of $23.9 million, compared to sales of $89.6 million and a gross margin of $24.5 million. The Mining segment sold 0.43 million carats at an average price per carat of $142, compared to 0.57 million carats at an average price per carat of $157. The 24% decrease in volume sold and the 10% decrease in the company's achieved average rough diamond prices impacted this quarter. The Mining segment is holding 0.7 million carats of rough diamond inventory, with an estimated current market value of $90 million at July 31 and -- of which $65 million represents inventory available for sale. The rest being in the process of sorting.

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