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

[Audio Gap] We decided to recall goods amounting to SAR 35 million of -- sorry, the impact of the recall was SAR 35 million in Q2. The purpose of this recall was to make sure we have products at lower weight and lower ticket items in the market. At the same time, we wanted to reduce our working capital and reduce our financing costs. Without this one-off recall in Q2, our results would have been better by SAR 35 million. So our total revenues were down 63% in Q2 versus last year. KSA wholesale was the most affected with a decline of 72.7%. Egypt wholesale business declined by 59%. KSA retail by 68% and Egypt retail, our best-performing channel, declined by 23% in Q2. The net loss for the second quarter amounted to SAR 66.2 million versus a profit of SAR 12.2 million last year. Without the one-off recall of products in the Saudi wholesale market, the net loss would have been SAR 31 million. Very important to highlight. We have a positive operational cash flow. And our focus has been very much on cash flow given the current environment, and the company's cash situation is quite satisfactory and very strong. And we will show you later on the cash flow -- operational cash flow by quarter in Q2 itself, we generated SAR 18.5 million. This was thanks to the reduction of working capital by returning gold loans to the banks, plus a faster development of the retail sector versus the wholesale business. The company, L'azurde, is going through a major transformation. We have great history, over 40 years, we did come across many crises very successfully. We have a strong name, strong management team in the market, very good understanding of the market. So we're transforming the company from the gold jewelry wholesale business by weight to selling fashion jewelry by piece at higher gross margin in modern retail. The first indicators of this transformation are very promising, and we are putting our way to accelerate the transformation of this company, and we are very confident about the future of L'azurde through this transformation. The transformation started by acquiring TOUS 2 years ago, which gave us great insights about the fashion jewelry sector, plus it was a great brand to add to our portfolio, and we are very optimistic about the future of TOUS within L'azurde. Then the transformation continued with the L'azurde of Miss L', which I will show you some figures about the Miss L' developments. L'azurde retail results in Saudi Arabia this year are better than last year because we optimized the network. We have 4 shops versus a higher number in the past, 14 shops. And when you reduce number of shops, sales per shop increase, which makes it a more profitable business. At the same time, our L'azurde retail business in Egypt is doing very well, and we see a potential to grow it. We also have a small diamond jewelry value brand, Kenaz, profitable and giving us also great insight about the fashion jewelry segment. You can see here on the left-hand side, the traditional wholesale business with 18 caret and 21 carat, and down the right-hand side, the retail, which you know already we have, and then Miss L' going through sales at our own point-of-sale locations plus sales at third-party retailers in the gold -- sorry, in the malls, not in the gold souks. This is the expansion of the business model, which we shared already several quarters in the past over a year ago. And you can see that what we spoke about a year ago is really happening with the development of Miss L', where we sell fashion jewelry by piece at a high margin with very low working capital, and you will see later on also our e-commerce development. We are very satisfied with what we did in a very short period of time since COVID-19 hit us in March, and we see a great potential to developing e-commerce further. Miss L' revenues represent 13% of the total group revenues, which is a brand just launched a year ago, and the Q2 sales are at plus 196% versus last year. You see here a very nice V-shape recovery for Miss L' in June, and July and August trends are continuing in a similar manner. And this is why we are putting a lot of effort behind this line. You can see here, Jan-June sales in '19 versus '20 for this new line Miss L'. This is a like-for-like comparison, the same number of point of sale. We almost tripled our sales from last year to this year. And you can see e-comm over Jan-Jun, representing 10% of Miss L' sales already. In Q2, the share is 20% and growing very rapidly. This is the concept for the new Miss L' shop. We'll be piloting Miss L' shops in Saudi Arabia and Egypt in the very near future. We have developed this with a global branding retail agency in Paris. And we are very eager to see the development of Miss L' in Saudi and Egypt and potentially the region after doing this pilot test. E-comm business represented in Q2, 2.5% of total group sales and 20% of Miss L'. The key drivers were our success at driving traffic to the Miss L' platform, our strong conversion rate and the strong new supply chain. E-commerce for us started mid-March when the crisis of COVID-19 hit us, and we have been working day and night to put this together, and we are very pleased with the very fast set up, which we did. But frankly, what we see here is still the infancy of e-commerce for the L'azurde group. We have a much more bullish ambition to represent 5% of total group sales in the near future and to represent 25% of Miss L' sales. And more than that we have many things to do in terms of launching new products, enhancing the user experience and the branding on the platform. We are expanding our user base online and we have a lot of really foundation to do in terms of customer relationship management, loyalty programs and also putting other brands online as we speak. So we being the leader in the market in the jewelry sector, we are very optimistic about the growth of e-commerce. This shows you our group revenues split by country over H1. So we started relatively well the year at SAR 92 million of sales, slightly ahead of last year. Then we know all -- we all know what happened during March to May. And in June, you can see a very quick recovery for our group revenues versus last year. You can see here the share of retail and Miss L'. Miss L' is a retail business sold in modern trade in malls. We simply segmented separately to show you the share of this business. So in total, 54% of our revenues are coming from the retail business versus 44% a year ago, and this is growing at a much faster pace than the wholesale business. So for H1, the wholesale business has a higher share, obviously, but as we move forward, the share of retail and Miss L' will grow. We continue supporting our core wholesale business. This is a strong pillar, which we have, but while we maintain it and we make it more efficient and we transform it through working capital optimization, we are growing Miss L' and the retail sector. So I was talking about optimizing our gold wholesale business, where we sell jewelry by weight. You can see here our results at reducing our working capital from 6.7 tonnes end of March to 5.9 tonnes end of June, and over July and August we even returned more gold to the banks to have today an even lower working capital than what we had end of June. That's our P&L for Q2. On the left-hand side, you can see our revenues at SAR 49 million, minus 63% versus last year. Our gross profit at SAR 21 million with gross margin at 43%, affected by the lower volume. Our selling and marketing expenses, we reduced them by 31% in Q2 versus last year. Our G&A expenses were reduced by 23%. You can see here in the middle, SAR 34.7 million. This is the cost of returning gold jewelry at our wholesale customers in Saudi Arabia to reduce our financing costs and launch new products at lower ticket items. Our financing charges are 4% ahead of last year at SAR 13.9 million, driven by higher gold price. But as we move forward and we reduce significantly our gold loans, we are making our best effort to reduce our financing costs. And this leads us to a loss of SAR 66.2 million. This is obviously a very difficult P&L to look at. It's a very significant loss. However, we did that in discussion with the Board to make the right decision at transforming the company, optimizing our financing costs, reducing our working capital and investing more into growth initiatives like Miss L' and other upcoming initiatives. This shows you our operational cash flow, which has always been positive, except of Q4 of last year. And in Q2 this year, we delivered SAR 18.5 million. So our focus on cash is delivering results, and this will continue as we move forward. So our key priorities as a group are the following: number one, continue scaling rapidly Miss L', so our own retail point-of-sale through e-commerce and third-party retailers in modern trade, and there is a lot more to come behind this brand. We will expand our successful retail business in Egypt through new shops and a better assortment and a better gross margin, which we are working on, on a regular basis. We will optimize traditional wholesale business, selling jewelry by weight, by reducing the working capital and optimizing all the costs. We will scale fully our e-commerce through our own online platforms plus third-party marketplaces, which we are entering as we speak. We will fully develop TOUS. We are very proud to carry this brand, which we acquired 2 years ago. There is a long way to go to develop TOUS to its full potential in Saudi Arabia. At the moment, the environment is challenging for most players, but if we look at the mid to long term, this is a brand with a major potential, and we look forward to making it a household name as we did with L'azurde over the years. The traditional wholesale business by weight, this is a channel which we know very well. We have been in this market for more than 40 years. We know the customers, we know the consumers. And we will be launching new lines at higher margins and partnership with our customers in this sector, and this will help us make this channel much more profitable for the company. Last but not least, we'll continue focusing on the cash. Our cash position is strong, and we have very solid relationship with several banks in Saudi Arabia since many, many years. And those banks are really supporting and standing behind the company at this moment of transformation. So yes, the current situation is challenging. However, management is very focused on what has to be done. The Board is very involved in all the operations, working closely with us on all the strategic directions, which we have to pursue, and we look forward to transforming successfully this strong brand in the region. Thank you very much for joining the call today, and we are happy to answer any questions which you may have now.

[Operator Instructions]

Just a question from my side, if you can just give us an update on consumer behavior pre and post the VAT increase from 5% to 15%.

So far, I have to say we did not see or feel the VAT impact. This may be due to the fact that many Saudis did not travel this summer. We had, I would say, strong July and August figures in the retail sector. So we can tell more about that when we can have an apple-to-apple comparison starting from September versus last year. Because when you compare July, August versus last year, it's difficult to compare, as this summer most of the people stayed in the car.

And what about it in June?

Excuse me?

In June?

June was a very strong month for us, and we saw strong June across the month and not really at the end of the month, like this could have happened for many, I would say, high-priced categories, like maybe car, electronics or luxury jewelry. For us, we had a very consistent June from the beginning till the end.

[Operator Instructions]

Maybe to clarify and elaborate a bit more about my comment on July, August, I'm talking about the retail sector. So the retail sector in the malls was positive. However, the VAT did very much impact the wholesale business and in gold jewelry by weight. So this value proposition for consumers where the lady is paying only for the labor service charge has been affected by the VAT. We are waiting to see how consumers will adjust to this new VAT level. A similar situation occurred in Jan 2018 when the VAT of 5% was introduced. And then consumers got used to it, but still the industry was affected. So here so far, the wholesale is affected, and we are doing our best efforts to innovate our product line and launch attractive propositions for consumers and for retailers at the right margin, and this is what we are doing at this moment. And we can tell more about those initiatives in the next 6 months.

We have a few questions that came through on the chat. The first question is from Mohamad Haidar from Arqaam. Thanks for the presentation. Can you explain what do you mean by going from traditional gold wholesale by weight to modern retailers selling fashion jewelry by piece? Are you going to close shops? Or that's about decreasing heavy weight gold on some shops?

Most of our business traditionally consists of selling gold jewelry by weight to approximately 800 third-party retailers in gold souks. That's our traditional business, which has been affected, I would say, by global trends plus VAT at 15%, plus the gold price reaching $2,000 and COVID-19. So this business being affected, we are now launching fashion jewelry items, priced from SAR 500 to SAR 3,000 at a much higher margin in the malls through our own points of sale and through third-party retailers in malls. That's what I mean with the transformation. The ticket price item of SAR 500 to SAR 3,000, when we sell gold at 18K at those prices, we never, as a company, entered those price points. And now for the first time, we are entering it and launching fashion jewelry and you saw the chart of demand for Miss L'. And this is just the beginning of a brand with a much bigger potential for scaling it across Saudi, Egypt and the whole region.

We have a question from [indiscernible] from Aventicum. Can you please quantify the benefits that you'd expect from the exercise to streamline working capital?

I would say it's difficult to give a figure today. Ayman Gamil, our CFO, maybe can take this question. Would you like to elaborate, Ayman, on that?

Yes, Selim. As you said, it's difficult to quantify the impact of the working capital optimization on the financing cost because as we explained before, it's also linked to the gold price. When the gold price increases, which is, of course, out of our control, our financing costs increase despite our reduction in working capital. And this is why we have not seen significant or even reduction in the financing costs this year despite the great efforts we have made to reduce the working capital simply because the gold price has significantly increased. Hopefully, in the coming period as the gold price will stabilize and hopefully, our efforts, which are continuing to reduce our working capital further will materialize into lower financing costs.

[Operator Instructions] [Audio Gap] from [ Ashendra ] Pereira. As the company plans to lower wholesale revenue, can you also reduce the costs in this segment? This is the first question. The second question, are there plans to raise retail -- plans to raise retail sales mean higher expenses in this segment?

Ayman, would you like to take this question?

Yes, definitely. Of course, as we are growing faster in retail and expanding in retail and we are rationalizing our wholesale business and trying to optimize it. Of course, we are very aggressive in cost reduction. We are trying to maintain our infrastructure to be always ready to serve the wholesale market once it rebounds again. However, at the same time, we are -- we have to react to the new norms and new realities that the wholesale business is not as big as before. And accordingly, we have to significantly reduce our costs. So we are reviewing everything now. We started already reducing lots of elements in our cost of wholesale, and we are continuing very aggressively according to the market reaction. For the retail, of course, when you expand in retail, you have to incur some CapEx, and you have to incur some operating expenses. We are very, I would say, like, very careful about this. Each expansion, each point of sale to be opened has to go through lots of due diligence and lots of reviews and lots of approvals. We are, of course, from -- we have a history and great learning from our retail business that we've been doing since many years. We are now focusing on how to expand in a very efficient way. So we are reviewing locations, we are reviewing rents. We are renegotiating our rents very aggressively with mall operators where we enjoy a very good relationship with them. We are reducing our [Technical Difficulty]

I think we don't hear, Ayman. Ayman?

Okay. Yes, I answered, I see [ Ashendra ] are you continuing with your questions. So you have a question about the turnaround, would it be sufficient to turn the company to a profitable -- to profits? Of course, this is our main objective. Our main -- we are very much focused on turning the company back to profits and to decent profits. We have started -- we know our way, and we have started already our plans. Of course, it will take some time to materialize, but to be honest with you, the results are very promising. You have seen the Miss L' and how much it represents from our total revenues in only 1 year. We have other initiatives that we have not talked about a lot in this presentation, but we are really trying very hard to find new growth drivers that can really turn around back to the profit that it used to achieve before. It will take time, but the early signs are very promising and very fast.

There is a question from [ David Binsalamah ]. Is there plan to change the par value of the stock, given the increase in international gold prices?

The par -- changing the par value of the stock, I don't think we have any plans to do this. And we don't really think a link between the par value of the share price and the gold price, if I understand your question correctly.

If there are no more questions, [ Sam ], maybe I can make a closing statement.

Yes, please. There are no more questions at this point.

Regarding the last -- before last question on profitability, we, as a management team, took the company from 2010 low single-digit profitability to SAR 100 million in 2016. Unfortunately, since 2016 -- so we grew this company. We developed it. Since 2016, we had many issues starting with Egyptian pound devaluation, macroeconomic situation in Saudi Arabia and now what's hitting the market. We strongly believe that we have what it takes as a team and as a Board and as a company, with the assets we have since 40 years to turn this company around and make it profitable. This is our major objective. And we're working very hard to deliver it as soon as possible. We are looking at other opportunities in the market. We are leveraging all our knowhow and the expertise we can get in the market to really grow those new initiatives as quickly as possible. So we are here. We are committed to it, and we believe L'azurde will become in the near future, it will take some time, but it will get there, we'll become a very strong company, delivering solid profits and dividends, again, one day. Thank you very much.

Thank you, gentlemen, very much for the call, and thank you, everyone, for participating. Thank you.

Thank you.