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

Right. Hello, everyone, again. This is Ahmed Moataz from EFG Hermes, and welcome to L'azurde Third Quarter of 2020 Results Conference Call. From the company, we have Mr. Selim, the CEO; and then Mr. Ayman, CFO; and then Osama, the IR manager. We'll start with a brief presentation, and then we'll move on to Q&A. Selim, please go ahead.

Thank you, Ahmed, for the introduction. This is Selim Chidiac, the CEO of L'azurde. We will share with you today the results for Q3 2020. And we'll be elaborating on our plans forward to continue developing and growing the L'azurde Company. There's a standard disclaimer. The information contained in this document can be changed at any time. Please do not rely on it to make any investment decision. As is standard, I assume you're all well aware of such disclaimers, and I will move on to the presentation. I will start with a short summary. Then I'll be elaborating on the company business model evolution, how we are evolving, growing and developing the L'azurde Company. I will elaborate on the results and then I will share with you finally last, but not least, our priorities moving forward. So in Q3, we had a strong and fast recovery of revenues, which grew by 91% versus the second quarter of 2020. Q3 revenues in KSA, our wholesale business selling gold jewelry by weight, and the gold souks grew by 8%. The Egypt wholesale business grew by -- the Egypt wholesale business expanded by 121%. KSA retail grew by 74%, and Egypt retail business grew by 171%. We had a net loss of SAR 18.8 million in the third quarter. This was lower than the net loss of SAR 66 million in the second quarter. Just for the record, this significant loss in Q2 was due to a one-off event of SAR 35 million in Q2, where we had a recall -- a one-off recall of heavy weight products in the gold souks in Saudi Arabia, because with the gold price increase and the latest consumer trends evolution, we decided to have a one-off return. We had a positive operation cash flow of SAR 12.7 million in Q3 despite the loss. And you will see later on, we are very much focused on cash flow generation in the company, and we have a good record of positive operational cash flow. This was done by reducing our working capital, which you will also see later on in the presentation. We increased our collection of receivables in the wholesale business. And we had higher sales in the retail channel. The L'azurde Company is going through a significant transformation, where we are moving from selling traditionally gold jewelry by weight in the gold souks to selling gold jewelry by piece in the malls and the souks and on e-commerce. We believe we have very strong assets, a very strong team, and our 40-year history and legacy gives us all the capabilities required to transform the company. The whole management team and myself are very excited about this transformation, and I will tell you about a few things which we are doing in the coming slides. So the company used to be, a couple of years ago, a mono-brand company, selling gold jewelry by weight. Today, as we speak, we have the TOUS jewelry business, which we acquired 2 years ago. We are the franchisee for TOUS. It's a global brand with 800 stores around the world. This is a great acquisition for us. It's a brand with a very strong potential. We launched Miss L' fashion jewelry of gold classic products sold in Saudi Arabia and Egypt, and I will tell you more about the fast development of Miss L'. Our L'azurde retail business is doing very well, you will see that. Kenaz, it's a brand we launched 3 years ago selling affordable diamond jewelry across kiosks in Saudi Arabia, doing well as well. And our latest innovation, L'azurde [ In Style ], selling for the first time gold jewelry by piece in the gold souks, and this line has started with very promising results a couple of weeks ago. You will see here the diversification and the expansion of our revenues and how we are doing that. So in the wholesale business, we have launched for the first time miss L', selling gold jewelry by piece as a wholesale business in malls. We did not do this in the past. Also, very recently, we started with [ In Style ], selling gold by piece in the gold souks. So we differentiate the channels with different brands between modern trade and gold souks. In the retail, we have TOUS onboard in Saudi Arabia with 27 locations. And Miss L', which was launched 18 months ago, has so far 7 locations with a plan to expand this further in the next 12 to 18 months. E-commerce is a business, which we started in April as soon as COVID-19 hit us. We are very pleased with the e-commerce development. E-commerce represents today for Miss L', because the main business on e-comm today is Miss L'. It represents already, after just 7 months, 15% of the Miss L' sales. That is a great promising development. And we'll be launching soon on e-comm the sale of L'azurde products, TOUS and a few other brands as well. You can see here the very quick recovery of our revenues after the lockdown was over. So from June till September, this is the evolution of our revenues and across Saudi Arabia and Egypt. This is an important slide showing you how we, as management, are innovating and launching new initiatives to grow our top line. The most important thing for us in the transformation is to grow our top line, which will -- should or later transform into higher profits. So in 2019 -- in Q3 2019, our new lines, which are TOUS, Miss L', [ In Style ] and e-comm represented SAR 20 million, which were 18% of our revenues. In Q3 2020, those new lines represent 27% of our revenues. And this is a major development versus Q2 where they represented only $14 million. So our base business is affected because of changing consumer trends. And thanks to our new initiatives and new businesses, we are able to grow and defend our top line, and the pace of growth of those new initiatives is very promising. You can see here the share of business for different lines, which we have between Q3 '19 and Q3 2020. Miss L', which was launched 18 months ago, represents already in Q3 2020 15% of the revenues, while it represented only 12% a year ago. And this is just the beginning of a new brand, which is just 1 year old. You can imagine what we can do over the coming years once we fully scale and develop this very promising line. We did not only grow Miss L' online, we also grew Miss L' across all our physical stores. You can see here the difference between January-September 2019 sales and January-September 2020. It's almost like a startup curve of revenue growth, tripling from SAR 8 million to SAR 25 million. At the same time this year, our e-comm sales, and again, e-comm was launched only 7 months ago in April as soon as COVID hit us, e-comm sales represent already SAR 3.5 million, almost 60% of our Miss L' sales. If we do the same share of revenues across all our businesses, this can be a significant development for us. This was a slide, which we showed in the past at earlier investor presentation. We mentioned the launch of Miss L' a couple of quarters ago, and you can see how we are delivering and succeeding initiatives, which we have communicated in the past. This is the trend of growth of Miss L', total sales in the company. We had a weaker shape of recovery following COVID-19. July was a very strong start. August was a bit slower because of the summer and the vacations. And now we are again recovering in gold. After the Miss L' success in malls and modern trade, we are now innovating with, I would say, a similar concept in the gold souks, where for the first time, we, as leaders in the segment, are launching line of jewelry, classic and fashion products, sold by piece for the first time with dedicated point-of-sale material. It's a kind of shop-in-shop concept, which we'll be further developing in the gold souks across our 1,500 retailers between Saudi Arabia and Egypt. We know those -- this market extremely well since more than 30 years. We have a very strong understanding, very strong presence. And for the first time, there is a line, which is well branded, well supported, not present because a wide variety of gold products, which someone can see in the gold souks. Retailers have a very good appreciation of this new line. This was launched a couple of weeks ago, and we're doing our best efforts to have a similar success for this line over the coming quarters. Next to wholesale transformation and new lines. We're also growing our retail business. You can see here our successful retail business in Egypt delivering in Q3 a very strong growth versus past quarters with revenues at SAR 24 million. Historically, we had a heavy gold working capital usage because of selling large volumes of gold by weight. You can see here our effort and results at reducing our gold loans with the banks and reducing our total gold working capital. We will continue working on this, I would say, deleveraging and more efficient way of growing our business. This will lead to: number one, better leverage or lower leverage, let's say it this way; and number two, lower financing costs. I spoke earlier about the cash flow. You can see how in Q2 this year, we delivered SAR 18.5 million of positive cash flow, and we continued in Q3 with SAR 12.7 million. So historically, over the last quarters, we have a record of positive operational cash flow. And this was extremely important for us, especially in the environment and the crisis, which we are going through with COVID-19 and the various challenges existing in the market. This is our P&L for Q3 2020. You can see our revenues at SAR 93.7 million, 14.3% behind last year. Our gross profit margin got hit because of fixed cost in manufacturing. So as we have lower volume, our margin gets hit. We are working on optimizing and improving this gross margin back to the past levels. Our operating loss came at breakeven. We could reduce our selling and marketing expenses by 30.4%. Our G&A was up because of a one-off event last year in Q3 of last year. Our finance costs for Q3 2020 are 4.3% higher than last year because of the higher gold price. However, with the reduction -- the material reduction of the working capital, which you saw in previous slides, our financing costs will be lower over the coming quarters. This leads us to a net income of minus SAR 18.8 million for the quarter and minus SAR 86.6 million year-to-date, knowing we have a SAR 35 million one-off this year, which happened in Q2. This is a very difficult net income to look at for us as a management team. I have been the CEO for the last 10 years. We, as a management team -- this is the same management team, which grew the company up to SAR 100 million in 2016. Since then, there has been many events leading to where we are today. I can tell you, we are very focused, very committed to turning around the company and bringing back the profitability over the coming quarters very soon. We have a very strong Board and very strong assets and a stable management team, which will successfully turn around the company. That's why we are very optimistic and confident about the future. So what are we doing to deliver better profits, better results? Number one, we'll be continuing the fast development of Miss L'. You saw what we did in 1 year, and we'll be scaling this at hopefully a faster pace over the coming quarter to all our distribution channels. Number two, we'll continue growing our retail business in Egypt through new points of sale and better assortment. The core wholesale business selling gold by weight, this is an important business for us. We are working on growing it and making it more efficient and more profitable. So working capital reduction, as you saw earlier and more cost efficiencies. We'll be growing our e-comm business and delivering on e-comm a similar performance and results for all the brands, which we have, not just Miss L' as we did so far. TOUS is a great brand, which we acquired 2 years ago. TOUS has a 10-year history in Saudi Arabia, but 100-year history across the world. We believe it's a brand with a major potential for growth in the future. And we'll be -- we are committed to making it a household name in Saudi Arabia as we did with L'azurde last year over the years. We will be leveraging our gold souks' strong knowledge and presence since more than 30 years to not only sell gold by weight, but also sell gold by piece through the new [ In Style ] product line. This is a new line, which was launched recently, and we are very focused on scaling up and delivering a much bigger contribution from this new line L'azurde [ In Style ] in the gold souks. Last but not least, we remain very focused on the cash. We have very strong relationships with the banks in Saudi Arabia since many years. And this is a very important part of our business on which we are extremely focused, and we have very strong presence and relationship with the banks. Thank you very much for your attention. And now we will open the floor for the Q&A session.

To all attendees on the call, if you wish to ask a question, you have 2 options. Either you can choose the Q&E system, which you'll find at the bottom right of your screen where you'll type in a question, management will read them and answer them verbally. Alternatively, the second option is to use the raise-hand function, which you'll also find on the bottom right of your screen, which will give us a signal that -- for us to unmute your mic and directly ask your question to the management. We'll you give it a minute, and then we'll resume. All right. We'll take our first questions from the line of [ Abra Aziz ].

[Foreign Language] Thank you, Selim, for being here, thank you for leading and guiding L'azurde in the previous years. I think currently, we are -- we all are facing critical times in terms of sales, in terms of revenue, in terms of optimizing the operations and operating costs and so on. So I believe since 2016, a decision has to be -- had to be made at that time to be -- to transform the brand, I mean, the house of brands to be more into e-commerce and online platform. Nevertheless, we still have time. And I think this should be on top of the priorities within the L'azurde management team. And in addition to that, I would like to emphasize more about the e-commerce channels that you are using. Are you only using the, I mean, company website to sell the items? Or you are, I mean, going into partnerships with other websites or, let's say, online stores, online fashion stores? And other questions also, if I may, but yes, let's get it one-by-one if the -- if we have time.

So thank you very much. To answer your question, so far, our e-commerce business consists only of selling Miss L' on our own platform. So we have 2 ways forward. Number one, selling on our own platforms, TOUS, L'azurde, Kenaz and [ In Style ]. And number two, as you rightly said, there is a big opportunity for us to expand on marketplaces. We are, at this moment, talking to several marketplaces. We started a small business with a few of them at a small scale, but there is a large opportunity for us to expand much more on marketplaces, and this will be done in 2021. Marketplaces, there are 2 kind of marketplaces. You have the Amazon, the Noon and the Souq. You also have the Fashion marketplaces like Namshi, OUNASS, Boutiqaat and others. So we are looking at both channels.

Yes, yes, yes. Perfect, perfect. So I believe -- yes, I believe you are in the right direction and -- in order to get the company into the right direction nowadays, where everything is connected through the Internet and everyone relies on the Internet. As we speak right now, we are having the meeting online through online platform. So this is extremely important. And I would say this is a critical milestone in L'azurde's lifetime where L'azurde has to cope with the market changes and market dynamics and consumer behaviors. Although there is a big chunk where the wholesale is important and as from the numbers you have just presented, I believe Egypt is doing very well, and it has to be capitalized. It has to be built on it, yes. Some experience has to be shown there, some benefits, some maybe programs. Those things will grab the attention of those wholesalers. And I think even the Saudi market is going to be -- last year, it was going to recover the Saudi market. Maybe it needs some time, but the consumer behavior has been changed. This is something needs to be taken into consideration. Everyone right now from the pandemic until now is ordering everything online. Maybe some small stuff if we compare the items that I have myself that I have bought from the Internet versus the items that I have went to the store to buy them, I can say 90% of the items I bought it over the Internet. I mean the behavior has been changed. The pandemic gives us an opportunity to search and to compare and even to buy and deliver. So why not.

Yes. Thank you for your comments. You are right. E-comm -- the pandemic has accelerated consumers' behavior in buying online. What was supposed to happen over the course of 3 to 5 years happened in 1 year. And we, as a company, are fully engaged in expanding our business as quickly as we can in this channel.

Thank you, Selim. You want to take the questions on the chart or you go on to continue the...

Please continue.

Sure. We'll take our next questions from the line of [ Mohamed El Mimi ].

Thank you. This is [ Mohamed El Mimi reporting from Arkam Investment ]. Thank you, Mr. Selim, for the presentation and thanks for the -- for Mr. [ Simon ] for the relocation. My question regarding the company, if it is planning to restructuring -- is going to make restructuring aiming to close some stores after focusing on the e-commerce? And what's the -- are you planning to open new stores this year? And how many stores do you have in KSA and Egypt? My second question about what's your assessment of the Egyptian market? And how much does this represent from the total revenue of Q3?

Sorry, what was the last question?

Your assessment of the Egyptian market? And how much does it represent from the total revenue for Q3?

Okay. So you asked a few questions. We, as a retailer, obviously continuously look at our network, and we continuously open shops and close shops, because yes, there is a change with online taking a bigger share of business, but also there are new malls coming up like Nakheel Dammam, like Jeddah Park coming up soon or Riyadh Park in Riyadh. And you have some outdated malls, which are attracting less traffic. So we continuously, by nature, look at our network. Do we plan to open some stores next year? The answer is yes. We would be opening a few stores, maybe at -- around 5 stores. And at the same time, we'll be closing some of them, because they are in locations which are not that attractive anymore. And at the same time, we are focusing a lot on growing our e-comm business. So we continuously track the share of e-comm and the performance of every single store. At the end, you want all the stores to be profitable. And when some stores' profitability becomes below our expectations and our return targets, then we will consider potential shutdown. We have in total today around 70 locations between shops and kiosks across Saudi Arabia and Egypt. And I can tell you that the large majority are profitable. And if not -- they're not profitable, we are currently considering shutting them down. And this will maybe -- maybe there are, I would say, 2 to 3 locations, which are currently being reviewed. Regarding Egypt, we have a presence since more than 20 years in Egypt. We have a very strong team there. We have 2 factories. The brand, L'azurde is extremely strong in Egypt with an awareness -- the brand awareness above 90%. We are by far the leading gold jewelry player there, thanks to continuous investments and high-quality production and product innovation and marketing with celebrities and others. Today, Egypt represents roughly 50% of our revenues. We, as a management team from Saudi Arabia regularly go at least once a month to Egypt. So we are very close to the team over there. And we will continue doing our best efforts to growing our business in Egypt and also in Saudi Arabia.

Great. Thanks, Selim. We'll take...

Sorry, there are 2 questions, maybe we take them now. And I would ask our CFO, Ayman Gamil, to take those questions. Maybe, Ayman, you can take the first 2 questions about the net income not being in sync with gold price and the other question about shareholders, L'azurde Holding, selling. Please, Ayman?

Yes. So I see questions from [ Abdullah ]. He is asking about the share price, why the company is selling its share. So we have to be clear that the company, I mean, L'azurde is not selling its share. The shareholders are selling their shares. And of course, there should be distinguishing between the company itself and shareholders. We have no control over our shareholders, and we cannot control the purchasing or the buying of the company's shares. It's a coincidence that the name of the -- one of the shareholders is the holding company, L'azurde Holding company. But this is just a name, has nothing to do with L'azurde's operation. However, we -- of course, we are in close contact with our shareholders, and we communicate with them regularly. And we understand that this situation is that the selling shareholder presented by the holding company is a private equity firm, represented by a consultant led by Investcorp. Being a private equity fund, it's normal for them to sell some shares, because this is the way they do business. They buy shares in companies, they improve them, they do IPO. And then later on, eventually, they have to sell part or a big part of their ownership. So this is what they are doing. It does not mean anything for the management, because the company reserve is being managed by independent management. As you can see, it's me and Selim and the rest of the team. We are members in the company, not the shareholders. Together with the Board of Directors, which also consist of many independent directors, we manage the company. We do not have related party transaction with the shareholders. We do not count on any aid or support from the shareholders. We do not foresee any impact from any of the shareholders selling the shares in the company. So I hope this is clear that selling shares in the company has no impact on its operation, financial position or the independence of the management. This is the shareholders on business, and they are free to do whatever they like. So this is for the first question. The second question is why there is -- the net income is not synchronized with the gold price. We tried to explain this in different occasions that we -- in L'azurde, we do not sell gold as a gold metal. We are selling jewelry, and the gold is like pass-through. So we borrow gold from banks, and we sell gold at the international market price without making any gain or loss from the gold price. Our revenue is coming from the labor service charge, not from the gold price as a metal. And the reason why we decided long time ago not to go into this business, if you go in selling gold as a metal, yes, in good times when gold price will go up, you can make substantial gains. But at the same time, as gold price will go down, you can make essential losses. We are in L'azurde not into this business. We are a jewelry company. Our business is producing fashionable products. And our income comes from the labor service charge, not from the gold value. And I hope you appreciate this.

Thank you, Ayman. I would like to add 2 more things on the first question. The L'azurde Holding shareholders, Investcorp -- led by Investcorp, had been a shareholder since 10 years and their fund is expiring as we speak. And that's why they have been selling some shares. So there's a technical reason where they have to sell their shares. This is number one. Number two, as Ayman said, since 10 years, we never had any shareholders having employees in the company. And today, on the Board, 6 out of 9 Board members are independent Board members and very well known, respectable, experienced board members with a strong track record. So -- and this was in place since the IPO by design to make sure we have an independent board member structure and independent management team. Ahmed, can you please move to the next question?

We'll take our next questions from the line of [indiscernible].

[Foreign Language]

[Foreign Language] And I will try to -- and for the English speakers, I will try very quickly, because as I said, the questions -- we had 3 questions here in Arabic, but all of them were already answered in English. So nothing to worry about. You have not missed anything. Thank you.

Thank you, Aiman. Ahmed, any more questions, please?

From the line, we have 2 questions from the chat. They come from [ Sandra Pereira from Falcon Holding ]. First one is I'm not sure if this was answered before. What plans the company has from the proceeds of the planned rights issue, given the retailers are not performing well? Is it a good time to expand?

Ayman, I will answer -- yes, I will answer this in English first. Then I will answer it in Arab. So [Foreign Language]. So answering in English, you have seen the announcement made, and I think it was very clear that the intention of the rights issue, actually, I can categorize it in 2 things. First, to reduce the leverage and reduce the financing charge on one side. The other side is for the expansion. And I see your expansion -- your question is mainly focusing on the expansion in retail and if it's the right time to expand in retail, considering the retail sector performance in general. As you know, a rights issue is a long-term decision, long-term investment. We believe that the retail will recover. We believe it will recover sooner or later. And we believe it will be sooner or in the medium term that retail will be -- will recover. And we need to be prepared for this. This is one thing. The other thing is we are already seeing very positive contribution from our retail segment. Actually, most of our losses are coming from the wholesale sector. Our retail business is doing fine, especially in Egypt, and one of the sites were showing significant growth in Egypt. There is also significant growth from Miss L' in retail. So I cannot say that retail, it's under pressure, but for L'azurde laser, it's doing very well and it's doing much better than the wholesale. And we are already seeing very positive results from the retail sector or the retail business of L'azurde, despite what's happening. And we believe that there is a big opportunity and this is where were we are going to spend part of our rights issue, but we are going to do it as we go. We are going to be very cautious. We only open locations, which we are sure we can make money in the near or medium future. So we are very careful about this. We understand all the challenges and the retail challenges, but our results are very encouraging so far. And we believe that retail will come back, and we'll be very cautious and selective in our expansion. [Foreign Language]

Another question is from [indiscernible] Remind us when -- by when Investcorp should exit their holding in the company. Does that mean they will not participate for the share of the rights issue?

Okay. So I think the question is holding -- holding is going to contribute in the rights issue or not. Of course, we cannot talk on behalf of our shareholders, and we cannot know their intention. But I will not be surprised if they not participate. And I don't their participation or not will influence with the rights issue. I think the company performance is -- and planned great, encouraging. Since the share price is encouraging, if they are going to participate or not, in my opinion, should not influence the decision of participating in the shareholder -- in the rights issue or not. But this is for the investors to decide. So [Foreign Language]

One final question on the chat at the time being comes from [ Abdullah ]. It's a follow-up on the holding company. So should we assume that the holding company will sell all of its shares?

We don't know. I'd simply say, we don't know. We are -- we cannot talk on their behalf. We don't know their plans. They have been investors since 10 years. Their fund is coming to term. And once again, we have an independent board, an independent management team, like many companies, and we are moving ahead with our very strong growth plans for L'azurde in the coming future. And I think the company will -- is on the right track of a solid performance in the future. [Foreign Language]

Okay. [Foreign Language]

One more question in the chat comes from [ Mohamed Dara from Falcon ]. What is the estimated market share of imported gold from Turkey and Saudi Arabia? Have you seen gain in market share, given the boycott of Turkish products?

We cannot yet judge. The boycott has been recent, and there are stocks of products in the marketplace already. And we know the market share of total imported products that we cannot really talk about specific Turkish product plans. So the impact -- I don't think the impact will be material at this moment. If it gets material in the future, we can talk about it when it happens.

[Foreign Language]

Ahmed, I think we are done, no?

Yes. To everyone we'll just give it 1 minute. [ Operator Instructions ]

So as there are no more questions, I thank you very much for your participation today. Thank you for the high number of attendees. Thank you for all your questions and interest in L'azurde. And I can once again reassure you that we are working very hard and we are very committed to transforming successfully L'azurde. We have some early promising signs, and hopefully, you will see much more in the coming quarters. Thank you very much.

Thank you. This concludes today's call. Have a good day, everyone.