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

Ladies and gentlemen, welcome to the L'azurde Q1 '20 Results Call. My name is Adam, and I'll be the coordinator for today's call. [Operator Instructions] I will now hand over to your host for the conference today, which is Nada. Nada, please go ahead.

Thank you, Adam. Hi, everyone. This is Nada Amin from EFG Hermes. Thank you for taking the time to dial in to today's call. We also appreciate the management's time. From L'azurde's management team today on the call, we have Mr. Selim Chidiac, who is the CEO; Mr. Ayman Gamil, the company's CFO; as well as Osama Sultan, the company's IR manager. The team will begin with the presentation, and then they'll open the floor to Q&A. Mr. Selim, please go ahead.

Thank you, Nada. Thank you all for joining us. This is Selim Chidiac. I will take you through our results for Q1 2020. I will go through the deck, which has been shared by Osama Sultan. It has also been posted on our website. So please on Slide 2. I note down that you had the disclaimer, and you're well aware of what's communicated on that slide. So the agenda for today will be a short summary of the results and the direction for the company. We will then elaborate on the evolution of the company business model and the transformation of the company. We will then go through the results by country and by channel, and then we'll give you the direction forward at the end. So Q1 revenues on Slide #4. Q1 revenues were 25% below last year. If you look at Q1 2020, we have started the year very well with Jan-Feb revenues ahead of last year. However, obviously in March, we got very much affected by COVID-19. In Jan-Feb, our revenues came at plus 2% versus last year, and this is a reflection of several initiatives, which we are launching to transform the company and move from the traditional gold by weight business into a more efficient business model, complementing the gold by weight business. And if we look at March -- in March, our revenues were down by 35% versus last year. In Saudi Arabia, there was a full shutdown. And in Egypt at that time, there was a partial closure of the shops with the reduction of opening hours. In Egypt, our retail revenues increased by 9.7% in Q1 mainly due to the launch of the new line called Miss L', with dedicated point-of-sale across Egyptian malls, and this 9.7% growth was still affected by the reduction of the working hours. In KSA, our retail revenues decreased by 31.6% due to the shutdown since mid-March in Saudi Arabia. And knowing that March is a major key consumption period for jewelry with the Mother's Day celebration, one of the biggest occasions in the year. Our wholesale channel was very much affected by COVID-19. In Saudi, our revenues were down by 46% almost as of last year. And in Egypt, the decline was by 7%. Also this performance was affected by the fast increase of the gold price. Our Q1 OpEx were reduced by 12% versus last year. Just to remind you, as soon as COVID-19 started, we did set up special task force to review all our health, hygiene, security measures and safety measures, but also addressing proactively many cost elements and cash protection measures, and that's why we succeeded in stopping our OpEx for Q1. We end up with a net loss for Q1 at minus SAR 1.6 million versus the SAR 12 million profit the same quarter last year. COVID-19 is a serious challenge for our industry and our company. We are very focused on protecting our staff and our customers in the stores. And on the other hand, we are very focused, obviously, on cash forecast and on growing our e-commerce and launching new business lines, which I will talk about in a moment. Even though short term, there are several challenges, we are a 40-year-old company. We have gone through many challenges as a company, plus us, as a management team, the last 10 years, and we believe strongly we will come out stronger out of this situation with promising initiatives for 2021 and promising results more importantly for 2021. So we are accelerating the transformation of the business of the company. First of all, we expand into retail across Saudi and Egypt to diversify our revenues, and you will see the evolution and the development in retail. We have launched successfully a new brand, Miss L', which has a significant growth potential in the future. This is a line of fashion jewelry sold by piece at a much more efficient working capital than our traditional business, and it's growing rapidly. We have expanded into travel retail in Saudi Arabia, selling gold and diamond jewelry. The acquisition of TOUS was a great addition to the company in terms of diversification, new retail business and significant additional know-how to the company. And the last couple of months, we successfully launched our e-commerce and our digital transformation. And we can say, we have been working day and night on that, and we are satisfied with what has been achieved. And we see a significant potential moving forward. We believe we will weather the short-term challenges, and we will grow over the midterm. We have a strong brand, we have a major market know-how and we have new product lines much better adapted to the market today than in the past. We are leveraging all the know-how from the global, fast-growing fashion jewelry trend to launch products, which we never launched in the past, much lighter, at more affordable prices, at very decent margin and with low working capital. We are growing with some mono brand retail shops. But at the same time, we are expanding with third-party retailers in malls, and those retailers are very much appreciating the line which we have. And this can help us to grow in malls in a very efficient way. And last but not least, you will be seeing, over the coming quarters, an optimization of the working capital, which started well and is well on track. On Slide 6, you can see the company evolution and transformation to a more efficient business with tools with the Miss L' line, L'azurde retail and our Kenaz diamond jewelry value brand in Saudi Arabia across shopping malls. On Slide 7, you can see the different business units. A couple of years ago, we had only the wholesale business in 18k, 21k. Step by step, we're growing our retail expansion with L'azurde retail shops, with TOUS, Kenaz and now the Miss L' business unit. And the Miss L' line is sold at our own current locations, plus at some key third-party retailers and malls. This is a line, which we sell only in malls and not in souks. On Slide 8, you can see one of the research, which we did when we looked at acquiring the TOUS business. And you can note on this slide, the fastest-growing segment in the jewelry industry is the affordable fashion jewelry business, and that's why we acquired TOUS. But also when we realized this, we said there are many implications for us as L'azurde given the legacy the brand has in 40 years, the association with celebrities, the awareness at 95% and above and the image and, therefore, we decided to launch the Miss L' line on Slide 9. Miss L' is a sub-brand by L'azurde. It represents already in Q1 8% of our revenues. That's a line which we launched early 2019. The sales for Q1 grew by 470% versus last year. So Miss L' is the fashion jewelry line with products starting from SAR 500 up to SAR 2,000 price points we never offered in the past. It's sold by piece. It's gold 18 carat, very differentiated to competition and very low working capital and, obviously, high potential for e-commerce. On Slide 10, you can see some pictures from our e-commerce platform, which is doing very well, and it shows very promising perspectives looking ahead. On Slide 11, you can see our revenues for Q1 2020 at SAR 114 million. Our retail business declined by 22% in Q1, while the wholesale business declined by 28%. So we see quarter after quarter, a higher share for the retail business. The wholesale is important, but we are focusing on making our wholesale a more efficient business by optimizing the working capital. You can look at the gross margin. So even though revenues declined by 32% in the retail, the gross margin declined only by 15% because we have a better margin. So our retail gross margin for Q1 came at SAR 23 million and the wholesale at SAR 48 million. On Slide 13, you can see the revenues by country, where you can see, Jan-Feb total at plus 2% and March down by 35%. And the wholesale -- the Saudi business is more affected because of the full shutdown, which happened in March. If you look at the channel breakdown for Jan-Feb versus March, on Slide 14, we can see the retail was growing by 11% in Jan-Feb. That declined in March, and the wholesale was declining by 3% in Jan-Feb. And then it declined much faster in March with the full shutdown. Slide 15 shows you initiatives, which we are very proud of across our own retail network. So we had a very good performance behind totally new product line because our KSA retail, our travel retail in Saudi Arabia, the Kenaz kiosk in Saudi and the Egypt retail and TOUS. So really, our own retail was doing very well in Jan-Feb before being impacted by the COVID-19. On Slide 16, we show you here the share of Miss L', and this is part of the transformation of the company to a much more efficient business model. And this line, hopefully, will continue growing. We're putting a lot of efforts behind it, and you will see better results over the coming quarters. On Slide 17, we can see the P&L for Q1. So with our revenues at SAR 114 million, minus 25%, our gross profit at SAR 70.6 million, our operating income at SAR 12.4 million, and we end up with a loss of SAR 1.6 million. The finance charges, we could not reduce them, and they are very much impacted by the gold price, which increased in Q1 versus last year. Looking ahead, we acknowledge that COVID-19 is a challenge for our industry and for the company. However, we're doing great efforts. And frankly, we are very satisfied with what happened so far in terms of safety measures, health measures to protect our staff and our customers. We have very good control of the cash. We're growing very well our e-commerce business. And we are launching other sub-brands from L'azurde. These are sub-brands, which will be sold on a by-piece business model versus by weight to help us grow in the future. We look at 2020 as a year where, obviously, like most companies around the world and the region, very high focus on cost and cash but, at the same time, positioning the company for what we call the post-COVID-19 world and making sure we position L'azurde year by end of 2020 in a great position to grow as of 2021, and this is why there are many new initiatives, which we're working on. We shared with you one of them today, Miss L', and there is much more coming up. In terms of cost and cash, obviously, we look at all the cost items in terms of -- in the P&L. All the cost lines have been reviewed very thoroughly. We look at shop brands, employee cost, customer marketing. We are fully leveraging, and we thank the government for their support. This is very appreciated, and this is helping us. Obviously, we closed and reduced significantly all CapEx expenses. At the same time, we work on growth lines for the future. So these are difficult times. We are very committed to turning around the company and delivering positive results in the future. So the management team is experienced. They know the industry. We are making many changes in the company at a relatively rapid pace, and we hope to prove this in the number, which we will be showing over the coming quarters and especially in 2021. Thank you very much. And now if you have questions, we are happy to answer them, myself or Ayman Gamil, our CFO.

[Operator Instructions] We have our first question is from [indiscernible] at FALCOM Financial Management.

Just first, I would like to ask a question. After the government in Saudi Arabia lifted the lockdown and -- but shared this before the [indiscernible]. Can you give us color how was the demand after the lockdown? How do you see the recovery in the demand? This is the first question.

We do see recovery in demand post lockdown opening, and we will be elaborating on this in our Q2 results.

Yes. If you can tell us about the Miss L' brand. How -- what's your marketing strategy and the target you expect in the short term and medium term?

So with Miss L', we are targeting the affordable fashion jewelry segment, which is, today, dominated mainly by international brands selling products with -- non-gold products, mainly with steel and silver. And we believe we can offer a great proposition to consumers, great design at very affordable prices with gold. Ladies, women in the Arab world are very attracted to gold. Gold offers a great value. And therefore, the traction, which we see with Miss L', is consumers who are very attracted to global fashion trends, but still they would prefer to buy something in gold versus a non-precious material. The potential is very significant. This line has been over delivering our expectation and surprising us very positively. We're putting a lot of effort behind it. I cannot give specific figures today. We have to get all the foundations right in terms of product assortment, branding, distribution. We are surrounded with great advisers from around the world who are helping us, really, in securing that we win with this line.

Okay, okay. If you can say about the Miss L', what is your strategy in terms of -- would you sell to retail shops or through your -- other third parties or through your retail shops?

So far, we are selling it at our own L'azurde shops, and the 20 locations we have at the airports, 7 locations in Saudi, at our Kenaz kiosks and on e-commerce, plus at some third-party retailers in the malls, not in the souks. Miss L' is a fashion jewelry line with international standards, which should be in the mall, not in the souks. So the distribution will be a mix of own shops plus third-party retailers. Would we one day open Miss L' shops? Maybe. Too early to say at this moment. So far, we're giving this line a high share of space and visual merchandising in our existing locations, and we are seeing a great return.

Yes. If we see now in Saudi there is pressure on the purchasing power from consumers through -- but as well as some of the selected cuts by private sector as well as public sector. How -- what's your strategy to combat -- to deal with the situation of lower purchasing power?

Good question. This is why we launched Miss L'. Miss L' is also in gold jewelry starting at SAR 475 going up to SAR 2,000. This is the first time we, as L'azurde, offer gold jewelry at this price range. Additionally, most of our products started above SAR 2,000. So we're entering a fast-growing segment with jewelry starting at SAR 500 in gold up to SAR 2,000 with a very decent gross margin because of the -- which you can offer because of the large manufacturing volume, which we have in the company.

[Operator Instructions] Okay. It looks like we have no further questions at this time.

Okay. Thank you very much for joining us today, and we look forward to updating you at the next upcoming quarters.

Thank you, gentlemen, for your time. It's much appreciated.

Thank you, Nada.

Ladies and gentlemen, that does conclude today's call. Thank you for joining, and you may now disconnect your lines.