L'azurde Company for Jewelry (4011.SR) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the L'azurde's Full Year 2019 Results Conference Call. For your information, today's conference is being recorded. I would now like to hand the conference over to your host for today, Nada Amin of EFG Hermes. Please go ahead.

Thank you. Good day, everyone, and thank you for taking the time to dive into today's call. It's our pleasure to host L'azurde's full year 2019 results call. And from the company's management today, we have on the line, Mr. Selim Chidiac, the company's CEO; Mr. Ayman Gamil, the company's CFO; as well as Mr. Osama Sultan, the company's Investor Relations Manager. They'll begin with a presentation, and then we'll move on to Q&A. Mr. Selim, please go ahead.

Thank you, Nada. Good afternoon. This is Selim Chidiac, CEO of L'azurde. We also have on the line, Ayman Gamil, our CFO; and Osama Sultan, our Head of Investor Relations. The purpose of today's call is to take you through the results for the year 2019. I will take you through the presentation, which was circulated by Nada earlier. So if we go to Slide 2, please go through the disclaimer and read very thoroughly. I assume you're all aware of such disclaimer before making any action regarding further investments or decisions about buying or selling the stock of L'azurde or issuing forecast. The agenda for today's call will be a short summary of the results. We will then dig into the results for the year 2019. I'll give you an update about our business model, and then a quick recap of the latest initiatives relating to COVID-19 guidance. On Slide #4, overall, 2019 was a challenging year in Saudi Arabia and, in particular, for L'azurde. The gold price' quick increase and the fluctuation of the gold price did trigger a certain delay from consumers and our retail customers in terms of buying gold jewelry. We noticed in 2019 the highest gold price since 7 years, and this did affect demand on the market. We used to import approximately 30% of the Saudi jewelry from Egypt, thanks to a free trade agreement between both countries. This agreement was somehow put on hold, and therefore, we had to quickly build up and reinforce our production capacity in Saudi Arabia, where we now produce 100% of all Saudi jewelry in the Saudi market in our Riyadh factory. We also decided strategically to reduce exports to some markets like UAE and Iraq in order to control our working capital and reduce AR risk, and this did help the company. TOUS was a great acquisition for the company. We are very satisfied with this acquisition, which allowed the company to enter for the first time the fastest-growing segment of affordable fashion jewelry. It did raise our top line. It did bring us a lot of know-how and new capabilities in the company, which we are leveraging to develop other lines and on these [Audio Gap] weights jewelry markets by taking back from our retailers for the first time ever some gold jewelry at heavy weight to replace it by lower weight jewelry. We did this by design. It was our own decision in order to make sure consumers have the right product given the quick gold price increase, which we -- we have never done this before. This was a conscious decision in order to make sure by the end of the year 2019, we have very much the right product, the right design at the right prices in the markets. We established much stronger foundation for the TOUS brand, where we invested in marketing more than in the past. We established a very strong team of Saudi ladies running all our shops. We invested also in back-office operations, and we have a very strong relationship with the franchise of TOUS in Spain. This cost us some money because this was the first year where we wanted to make sure there's a perfect integration of this new acquisition in the company. We did well in Egypt through our wholesale business and our retail operations, which both grew more than double-digit versus prior year. For L'azurde retail diamond jewelry operation in Saudi Arabia, we used to have 15 shops 3 years ago. We scaled down the network to 4 shops today over the last 2 years, as those shops did not offer a very attractive return on investment for investors. Because of this reduction of the network, we took a difficult decision to take provisions on the diamond jewelry inventory for the Saudi diamond jewelry stock in order to prepare the company for better profits in the future. This business was not very profitable in the past, and therefore, after many discussions with the Board, we took a difficult decision to make provisions, but this, again, better positioned the company for future profit growth in the future. We launched a beautiful line called Miss L' where for the first time we sell gold jewelry by piece at high gross margin, above 60%, under the L'azurde umbrella, and the molds in the modern plates instead of selling gold by weight in the souks. And I will talk more about this line a bit later on. That's a very promising line which can step-change the profile and the profitability of the company. Last but not least, in 2019, we're very much focused on cash more than profits. The cash flow from operation in 2019 was better than 2018 despite all challenges. On Slide 5, you can see that our revenues and gross profits were up by 18% versus prior year. Egypt grew well with a growth of 19% in the wholesale and 47% at the retail, where we grew through like-for-like and for new shops. In Saudi Arabia, the wholesale business did not do well because of the rapid gold price increase and volatility, so we took some returns from our wholesale customers in Saudi Arabia. If we take out the impact of those one-off returns, our Saudi business would have grown by 28%. KSA retail revenues grew by 59%, mainly due to the consolidation of TOUS plus growth at -- through the Miss L' line launch in Saudi, and at the Kenaz retail kiosks. The exceptional items amounted to SAR 22 million in 2019. We have provisioned for retail diamond jewelries inventory of SAR 17.8 million. The one-off item related to the closure of some shops amounts to SAR 5.2 million. We paid extra end-of-service benefits because we laid off several employees in October of 2019, and this cost us SAR 2.2 million. The amortization of the TOUS franchise cost us SAR 1.5 million. And then we had special one-off income of SAR 4.6 million. The 2019 net income before exceptional items and sales return amounted to SAR 23 million. After factoring the exceptional items and the cost of wholesale returns, we end up with a net income loss of SAR 17.5 million. Once again, I would like to emphasize that this is a decision taken by... [Technical Difficulty]

Operator, it seems as though we're losing Mr. Selim's line.

Sorry.

I think your line may be -- the network may not be very good, but please continue.

So if we go to Slide #6 regarding the group consolidated income statement for the year 2019 with revenues at SAR 481.2 million, those revenues do not include the gold value, that's what we call operational revenues. The gross profit is at SAR 288 million, gross margin of 59.8%, almost flat versus prior year. We come to an operating income of SAR 66 million. Finance charges came in at SAR 51 million, well above last year because of the gold price increase. We end up with a net income before returns and exceptional items of SAR 23 million, and net income after considering the returns and exceptional items of minus SAR 17.5 million. On Slide #7, you can see very clearly the bridge between the 2019 net income before one-offs and the filed reported net income of minus SAR 17.5 million. You can see the gold returns one-off item costing us SAR 18.5 million; the retail provisions for the inventory at SAR 17.8 million; the retail shops closure, SAR 5.2 million; amortization of TOUS franchise, SAR 1.5 million; employees layoff costs, SAR 2.2 million; and the shutdown of the exports from Egypt to Saudi Arabia, SAR 2.3 million. We had a one-off gain, thanks to the EGP strengths in 2019, and we had other one-off positive income of SAR 2.3 million. On Slide #8, we can see the operating revenues by country. Saudi Arabia is up 16% versus prior year at SAR 257 million, and Egypt at SAR 209 million, up 26%. Export was down because of the shutdown, by design of several export markets to reduce our AR exposure. Export here was mainly exposure to Kuwait and Bahrain and Oman. On Slide #9, we can see our operating expenses bridge from 2018 to 2019. The operating expenses of the new business of TOUS cost of SAR 33.5 million. We invested more marketing in 2019 with celebrities endorsement, which did help with revenues growth. We invested SAR 7 million. We had additional variable selling costs related to top line growth at SAR 9.5 million, and the Egypt retail expansion with new shops cost us SAR 3.3 million. On the other hand, we started in Q4 the cost reduction program, which helped us save SAR 5.7 million. On Slide #10, you can see the revenues and the gross profit profile of the group split between wholesale and retail. So our retail gross margin in 2019 amounted to SAR 97 million, representing 33.7% of the total gross margin versus 18% prior year. So you can see the gradual evolution of the company from a pure wholesaler to a mix of wholesale and retail. And year after year, we diversify and reshape the profile of the company to become more balanced between the traditional wholesale business and the new retail operations. On Slide #11, you can see the cash flow 2018, 2019 where we end up -- we closed the year with cash closing balance at SAR 53.5 million. And most importantly, in the middle of the slide, you can see cash from operations at SAR 23 million in 2019 versus minus SAR 1.8 million prior year. A lot of focus has been to cash in 2019, and this continued as we speak today. On Slide #12, you can see the wholesale business model of the company that has been explained at earlier presentations. Simply, the key message here is the company does not own any gold. All the gold which we have is borrowed from lenders. So when you look at our balance sheet, you can see our liabilities in terms of gold loans, and those liabilities equal the assets which we have in terms of finished goods and account receivables. On Slide #13, you can see how we are developing and driving diversification of the company from a mono-brand wholesale company L'azurde in the past to a house of brand with a mix between wholesale and retail. So gold wholesale business remains our core business. TOUS is our biggest retail business, then come the new line, Miss L', which I will talk about in 2 slides. Then we have the L'azurde retail business, primarily in Egypt, much bigger than what we have in Saudi Arabia. And then we have the Kenaz diamond jewelry value brand with 15 kiosks in Saudi Arabia. On Slide #14, you can see the different business units. The wholesale business in Saudi and Egypt was 18-carat and 20-carat -- 21-carat gold jewelry. Then we have the retail business with 16 locations in Egypt doing very well, 4 locations in Saudi Arabia doing well as well now, post the shutdown of the nonprofitable locations. We have 26 locations for TOUS in Saudi. Travel retail, we have 6 locations. And Kenaz, we have 16 locations. On Slide #15, you can see here the development with the new Miss L' line. When we acquired TOUS, we invested quite some time, effort and money in doing due diligence, and we did a full commercial business about the fastest-growing segment of affordable fashion jewelry, and that's where we got the idea to go and develop a new line under L'azurde of affordable gold 18-carat jewelry. This line differentiates itself from competition in terms of the material. It's gold. It's not silver. It's not metal or steel like other companies do. We sell gold at high gross margin of 60% and above, and it requires a very low working capital and very high ROI. We started with this line approximately 1 year ago, and this proves to be a very profitable and high potential line. On Slide #16, you can see the difference between our traditional business model and the expansion of the company with the new Miss L' business. Traditionally, we used to sell gold by weight in the souks. Now we are in the malls, we sell Miss L' by piece, not by weight, very low working capital versus relatively higher working capital for gold by weight jewelry. And obviously, Miss L' is sold through our e-commerce platform and third-party marketplaces. On Slide 17, you can see the brand segmentation and the difference between L'azurde. L'azurde is a sophisticated, elegant brand for key occasions like special wedding celebrations, special parties, and the price range goes from SAR 4,000 up to SAR 100,000. While Miss L' is a youth line, trendy, affordable, you can use it on a daily basis, and the price range goes from SAR 500 to SAR 5,000. This is a completely new segment for us, and we are very excited to enter it through Miss L'. The distribution from Miss L' follows 2 strategies: number one, our own product distribution through some kiosks so far and some vending machines at key locations. And then on the other hand, we have distribution through third-party modern retailers and malls, and most of those third-party retailers like Ontime, Paris Gallery and others are carrying jewelry for the very first time, and they take us because of the brand image we have and the margin which we give them. And this is a very high potential business for us. And the third channel, obviously, is e-commerce, where we sell Miss L' through our own Miss L' platform and third-party marketplaces. On Slide 19, in terms of update, I would like to tell you that today, 9 banks classify L'azurde as Shariaa-compliant. We still have to finalize the process with Al-Rajhi Bank. Also, we have intelligent rating classifying L'azurde as Shariaa, and we have to finalize the process with Standard & Poor's. Last but not least, what's happening at L'azurde today with COVID-19. We have established, obviously, an emergency response team, working day and night to make sure that we can win and succeed through this crisis. So in terms of employees' health and safety, we have implemented from day 1 very strict hygiene and safety education programs across all our factories, shops and offices. We obviously follow all the government regulations, and we have doctors actually in our company in Saudi Arabia. And in Egypt, our own company doctor, which we always have by the way, to take care of all the classmen which we have in the company. They are giving educations to our employees. We don't have any case, not for our employees nor for their families. And we did split our back-office functions between different offices, and some of them are working from home through all the tools required to work virtually from home. Our retail shops in Saudi Arabia are closed as per government regulation. And in Egypt, the shops are open, but they close at night now because of the curfew in place. Our KSA wholesale customers selling gold jewelry have also closed their shops, in line with the government regulation. We launched Miss L' e-commerce platform. It's doing quite well, and it shows a promising future. And as we are launching as we speak, few other e-commerce platform for other brands. On the financial front, obviously, we took very early many actions to protect the cash. We obviously stopped hiring since early March. We stopped all the CapEx. We have a very tight cash management in place with daily review of the cash. And we are working, as we speak, on different scenarios for the P&L forecast. We're doing some stress tests, and we will be taking more actions over the coming days. We have a thorough communication plan in place to our employees, customers, consumers and all our stakeholders, and this has been very well executed. And the emergency response team is working on a daily basis on those plans. We, at L'azurde, we are 40 years old. We have seen many crisis and difficult times in the past. We know that this one is more challenging than what happened in the past, however, we are here and we are confident that the company will come up in a strong position once the crisis is over. Thank you very much for your attention. And we are now available for any questions. Thank you.

Operator, are there any questions on the line?

[Operator Instructions] It appears we have no questions at this time.

Okay. Thank you very much. Nada?

Okay. Maybe I can just ask one quick question. Just on e-commerce, are you seeing good activity on the e-commerce front? Or are you starting to see just a more timid consumer behavior played out across the e-commerce platform as well?

We are seeing very fast growth in the e-commerce platform, especially since the malls closed. And we're working hard to cope with the demand. And that is the case neither for us and for most e-commerce players. Whoever I talk to see very high demand for e-commerce.

That's very helpful. Operator, just confirming we don't have any more questions on the line?

We do have a question from Alowi Ali of Morgan Stanley.

I have 2 questions. One is a follow-up to Nada's question on e-commerce. How much does it represent now in terms of payout? And how much was it before in 2019? That's the first question. And the second question, assuming this prolongs more than a quarter or 2, what cost initiatives that can L'azurde take to reduce costs and preserve the cash, as you said?

I will start with the first question. In e-commerce, e-commerce is new for us. We started it a few weeks ago only. So it's a very small base at this stage, but growing very rapidly. Regarding cost-saving initiatives, we did stop so far, since March 1 actually, all discretionary spending. We stopped all marketing spending not directly related to e-commerce and online sales. And we're currently reviewing all our organization, and we'll be taking decisions over the coming days and weeks on what to do with the headcount. Obviously, having the shops closed and continuing to pay salaries is challenging. We'll be closely monitoring what support the government will give us, and then we will review the regulation and take additional measures as we speak. However, our problem is common to most retailers, if not all of them in Saudi Arabia, where the shops closed and us having to pay salaries. In terms of cash -- e-commerce today is the only revenue stream. You are right. We started this a couple of weeks ago, and we're adding more platforms as we speak. In terms of cash, we do have cash on hand, and we can very well weather the storm, and we can go on for several months with very low or even no revenues. We have no cash issue.

And then in terms of Egypt, what percent are you -- because you just mentioned that Egypt is still open, right, during the day?

Egypt is open during the day. Egypt represents roughly 40% to 45% of our revenues. We continue selling and operating in Egypt. As we speak, you're right, however, we see slowly but surely a certain slowdown. And we are expecting to see similar measures being taken in Egypt to what was done in Saudi Arabia. Hopefully, it will not happen. But if that happen, we're ready to act and do whatever the government will ask us to do.

And last question from my side. In terms of the banks, discussion with banks, do you have anything to share with us?

We went last week and we met all the lenders where we presented our results 2019 before announcing them to the public. We have been, the last 10 years, going every quarter to the bank, whether a good quarter or a bad quarter. And I have to say that all of the lenders were very supportive and appreciative of the transparency we have and the explanation we did. They acknowledge the difficult decisions taken by the Board in 2019 to take 2 major actions in terms of returning gold in the wholesale market, number one. And number two, taking provisions for L'azurde. However, they took those measures because this was the right to do for the company, and assuming that the lenders and the banks will understand. And we are very pleased to see that the banks stood behind us and are fully supporting us. Ayman, do you want to add something? Maybe our CFO would like to add the perspective on the banks. Ayman Gamil?

Yes. Actually we've been -- as Selim said, we've been pleasantly surprised by the positive and understanding attitude of all banks we met, and we are also very happy with how understanding they are with the current situation and how much they are ready to support us. All banks, they are very understanding. They are not -- they really understand the situation. And they are very much ready to support us in this difficult time of the year.

Great. In terms of the landlord, did you guys have discussions with them in terms of to freeze the rent or provide discounts or...

Yes, we are in touch with them. We already received one confirmation from one landlord saying they will take out the rent for 1 month. We saw several landlords in the UAE issuing rent relief to retailers, and we expect the landlord and the more operators in Saudi Arabia to do something similar. So between the landlords' support, between the government already announced support fund of SAR 50 billion, and I'm sure there will be more government support, we expect that this will help the company and obviously, all the retailers.

[Operator Instructions] It appears we have no other questions at this time.

I would like to thank Nada and the EFG Hermes team for their support in conducting this call. Thank you all for attending our call today. And we will share with you our Q1 results when they are ready. Thank you very much.

Thank you very much for your time. Have a good day, everyone.

Thank you, Nada. Bye-bye.

Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.