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

Hello, everyone. This is Hatem Alaa from EFG Hermes, and welcome to L'azurde's First Quarter 2021 Results Conference Call. I'm pleased to have on the call today, Selim Chidiac, the company's CEO; Ayman Gamil, CFO; and Osama Soltan, Investor Relations Manager. I'll hand over the call now to management for the presentation, and then we'll open the floor for Q&A. [Operator Instructions] Gentlemen, please go ahead.

Thank you, Hatem. Hello, good afternoon. Welcome to L'azurde's Q1 2021 results conference call. This is Selim Chidiac, CEO of L'azurde. We have with us Ayman Gamil, our Chief Financial Officer; and Osama Soltan, who is handling Investors Relations. So before we get started, I wanted to be aware of the disclaimer -- standard disclaimer. Please do not use anything you hear in this presentation to make trading decisions being buying, selling or other L'azurde stocks. Treat this information as confidential and don't forget that you're aware of the disclaimer. I will start with a short summary about Q1 results. We'll then elaborate on the company business model. We'll go through the results for Q1, and we'll tell you about our plans moving forward. So we had a very strong Q1 '21, with operating revenues growing by 21.4% versus last year. Growth occurred across all channels and all geographies, i.e., Saudi Arabia and Egypt. We grew top line by 21%, while reducing our operating expenses by 2.5%. At the same time, we had a material reduction of financing costs by 22% versus Q1 '21 thanks to the significant reduction of gold working capital and deleveraging of our gold loan facilities. The net income of SAR 10.2 million compares to a loss of SAR 1.6 million last year. Last but not least, we had a solid operating cash flow amounting to SAR 15.5 million. As you will see later on in the presentation, we always had a laser focus on cash flow. All the quarters over the last 2 years had positive cash flows despite the very special losses, which we had in '19 and '20. Those were the only years where the company occurred losses because of exceptional market situations and transformation which led to the company today being in a much stronger position than it was prior to COVID-19. If we zoom in on our Q1 revenues, we see that wholesale Saudi Arabia grew by 8.6%, KSA retail grew by 2.4%, while Egypt wholesale jumped by 28% versus last year and Egypt retail by 62%. Why do we have this growth of 62% in Egypt retail which is the highest growth we see here for several reasons. Number one, as you have seen or you may have seen over the past couple of quarters, all our presentation, we have a very solid retail business in Egypt. We decided this year to invest much more in marketing and visual merchandising, which raised traffic and conversion. Number two, the new Miss L' line, which was launched 18 months ago, drove new type of consumers into L'azurde stores who bought not just Miss L', which was a new affordable fashion jewelry line, but also diamond jewelry. And very importantly, the third reason for this growth in retail is e-commerce. When we launched e-commerce, we're all wondering what will happen to the sale in the stores, even though e-commerce had a very positive contribution and reached 9% of our retail revenues in Q1. While we grew e-commerce, at the same time, we developed our sales in the stores. So we saw growth in online sales in parallel to -- sorry, sales and brick-and-mortar stores. And that's a great trend for us for the future where we're developing our omnichannel strategies to maximize sales between the stores and online. So all the initiative, which started 2 years ago since the acquisition of TOUS to the launch of Miss L', launch of Instyle, launch of e-commerce had transformed the company and positioned it in a much better situation to grow over the coming quarters and years. If we compare the Q1 2021 net income, this was not only higher than last year at a loss of minus SAR 1.6 million. It was also close to the Q1 net income we had in 2019, which was SAR 12 million, and also, it was higher than Q1 2018, which was at SAR 9 million. So it's really a much healthier situation for the company today. We are in a much stronger position than before COVID-19 because we worked very hard with the team to leverage the crisis, accelerate change and accelerate transformation. Retail is a solid contributor, representing 42% of our revenues. Recall that originally, the company was always a wholesaler in the past. Five years ago, we launched retail and while retail represents 42%, we continue growing and developing the wholesale business. So we foresee in the future being strong player in both channels, wholesale and retail, and we can do that because we have a very different set of products sold in gold souks in wholesale versus a modern trade in retail. We have in Q1 the lowest working capital number of days at 161 days, great piece of work done by the team. The new affordable fashion jewelry, which we launched 18 months ago, represented already 18% of our revenues. Those are only 2 lines developed in-house, which are L'azurde Instyle and Miss L'. Our e-commerce, which was launched a year ago, on April 1, 2020, when all the stores were closed, we are forced overnight to roll up our sleeves and launch e-commerce. And in the course of 1 year, we have been very, I would say, agile, very quick at launching a new business, learning from the mistakes, adjusting and growing rapidly to reach 9%. 9%, by the way, to give you a perspective, is quite a decent figure because the jewelry industry -- if we look at the U.S. and Europe, in the jewelry industry, e-commerce represents between 12% to 15% than I would say, more mature markets than the region where we are. So therefore, 9% after 1 year shows a great potential to grow more in the future. And last but not least, our laser focus on cash flow. So that's the company evolution from pure wholesaler selling gold by weight to adding our L'azurde mono-brand retail shop selling jewelry by piece. And now where we have a mix of businesses with Kenaz, the 4-year old diamond value brand selling jewelry and kiosks in Saudi Arabia, next to TOUS, which is a 100-year-old franchise selling in 800 stores around the world which we bought -- and we bought this business 2 years ago for Saudi Arabia, and we are very bullish about the potential of TOUS to Miss L' and Instyle, which are our in-house brands. Here, we can see the diversification of our business model between by channel and by brand. So on the left-hand side, you can see in green, Instyle the new business. So we said L'azurde affordable fashion jewelry by piece in a network which we master since more than 30 years, where we have 1,300 customers. And so far, we only went to 220 customers. And those customers are very much appreciating what we are doing because we are bringing modern jewelry, modern brands and consumers' requirements into the gold souks. We have Miss L' selling across 50 point of sale in the wholesale network, but also in our own shops and kiosks in Saudi Arabia, where we have today, 10 locations. We are piloting the Miss L' concept, and we plan to later on expand this network further. And we see TOUS, it's a 2-year old business where we have 29 locations. On the right-hand side, e-commerce where, today, we are selling L'azurde, Miss L' and Kenaz. However, we did not yet launch TOUS online, which will be done in Q3 '21. Therefore, you can imagine the potential where our biggest retail business today is TOUS, and this business did not yet start selling online with us. It is selling online in Europe, but not with L'azurde in Saudi Arabia, and this will be launched in Q3 '21. Here, you see our Q1 revenues at SAR 139 million, where, what we call, the new businesses represented SAR 38 million. What are those new businesses? It's TOUS e-commerce, Instyle and Miss L'. Whatever did not exist 2 years ago or was very small at that time at SAR 22 million, almost doubling to SAR 38 million. Our base business, the wholesale and L'azurde retail and Kenaz, represented SAR 101 million, which is almost 30% below the same base in Q1 2019. Here, we see the revenues by channel where retail represents 42% versus 39% 2 years ago, traditional wholesale at 52% and the new wholesale business selling jewelry by piece where we sell mainly, L'azurde Instyle, affordable fashion jewelry priced from SAR 500 to SAR 1,500, which is a segment we enter for the very first time ever. This segment represents 6% of our revenues. Here, we can see the evolution of Miss L' and Instyle, which represents -- reached SAR 25 million, 18% of our revenues in Q1 this year. Here, we can see our e-commerce business. When we sold SAR 100,000 a year ago, we were very pleased and very excited. And today, we did SAR 5.2 million, and this is just the beginning. It's just the top of the iceberg for a very promising business. And e-comm, by the way, is profitable for us. There are many companies which are making major investments to establish e-comm. We decided to grow slowly but truly where we acted like true entrepreneurs, where we tested the platform, we started selling. We got learnings, consumer feedback, and then we started investing gradually, and that's why today, e-comm is profitable. You can see here our lowest working capital number of days at 161 days in Q1 '21, and we used 4.2 tons of gold jewelry as a working capital. This compares to 7.6 tons of gold jewelry. These are old loans from banks. So you can imagine, we did this see SAR 10.2 million of profit, SAR 10.2, versus SAR 12 million net income in Q1 '19, while we had doubled the tonnage of gold. So it's really a truly amazing piece of work done by the team, where you can see last year, quarter-after-quarter, continuous reduction and deleveraging of the company. This is the picture of our gold loans, which peaked at SAR 1.3 billion a year ago, and now we are at SAR 875 million of gold loans. And our financing cost at 9.5%, well below previous years. It's not because of the gold price or lower interest rates with banks. That's not happening. It's because of much less gold working capital in the system, as you saw in the previous slide. Importantly as well, we grew top line by 21%, while cutting our OpEx by 2.5% versus last year. Thus, our group net income for Q1 at SAR 10.2 million versus a loss last year, and very close to what we did in '18 and slightly behind '19. But this is, I would say, a much more interesting net income profile because you have much less leverage, you we have a great mix of retail and wholesale, you have injection here of affordable fashion jewelry, which is the fastest-growing segment of jewelry around the world, you have e-commerce, which you didn't have in the past. So this is really a company much better positioned for growing in the future. So if you look at this profile of SAR 10.2 million, and we factor in the upcoming rights issue, where we will increase our capital by 30%. As you may have seen CMA approved our SAR 145 million right issue, capital increase, which will be done by Q3 '21, this is a great transformation of the L'azurde company from many aspects. Cash flow, I mentioned earlier, SAR 15.5 million of positive operational cash flow. And you can see despite the first-time ever losses which we had in '19 and '20, which were very difficult tiers for us, and the first time in the company's history, we have losses. Despite that, we, as a management team, were very focused on positive cash flow. And this is what we achieved. So you can see behind the scenes, we are very much on effectively transforming the company, launching new businesses, innovating, launching e-commerce while protecting the cash money. This leads us to the full P&L of Q1 '21 with revenues at SAR 139 million, gross margin at 61%. Finance charges at 9.5% versus 12.2% last year. We come to a net profit before the Zakat and tax at SAR 16.4 million. Zakat slightly higher than last year because of higher profits and also income taxes higher than the past, mainly because of taxes we are paying in Egypt, and this leads to a 7.3% net income margin. The right issues, as I mentioned earlier, we will have an AGM on June 2, 2021 at 7:30 p.m., KSA. We expect to have a high attendance of shareholders. We need to have a 50% quorum at 7:30. At 8:30, if we don't have at least 25% quorum, the whole process, which you see here will be postponed by a month. 1 month later, even without quorum at the AGM, we can run the meeting and execute the rights issue. How will we use the SAR 145 million? We will use that, number one, to invest into growing conservatively, I have to say -- conservatively means we are very cautious at selecting locations at the right mall, the right city, at the right terms. Number two, we continue investing behind Miss L' and Instyle the fast-growing businesses, which you saw earlier. Then we will expand and scale our e-commerce business by investing more into the structure and the technology. There is a long way to go to have a beautiful omnichannel strategy where consumers almost don't differentiate anymore between buying in-store or buying online. There is a lot of -- there are a lot of opportunities in this area, and we want to spend more on technology here. And last but not least, we will also review our facilities with the banks to reduce them and reduce our financing costs to improve the company's profits. My last slide, before we open the floor for a Q&A session. So what are our priorities moving forward: number one, expanding Miss L', our fastest growing business; number two, continued growing L'azurde retail business in Egypt in a profitable way as we have been doing it over the last few years; number three, the core wholesale business of the company, where we sell gold by weight and traditional gold souks is becoming, I would say, less important in the total mix of revenues, but still very profitable and a great contributor of gross margin. Therefore, we continue supporting and growing this business while optimizing the working capital. We will leverage the distribution network we have since more than 30 years in the gold souks with 1,300 third-party retailers to sell L'azurde Instyle. L'azurde Instyle is a great way for us, the market leader, to transform the gold souks to innovate and bring a beautiful experience and shop-in-shop concept into gold souks. That's a very promising new business for us. We'll continue accelerating e-commerce, through more investments, product and structure. We'll develop TOUS in Saudi Arabia to its full potential. We have today 28 shops. We're launching e-comm, and we're very upbeat about the potential of TOUS, a very strategic and important business close to our heart. Very important, our cash flow, as I showed you earlier, we remain extremely focused on cash and very conservative in our approach in how we manage the company's resources. And obviously, we continue developing very strong relationships with many banks in Saudi Arabia. Thank you very much for joining us today and for your attention. I will now open the floor for a Q&A session or a discussion, depending on your comments and questions. Thank you.

[Operator Instructions] We have a question from the line of Ali Nasser.

This is Ali from Vergent Asset Management in London. I'm new to the company. So some of these questions might be a little bit really simple. But just curious, how are you positioned vis-à-vis the consumer environment, be it on the VAT side, be it on the impact that maybe COVID has had on the expat population, et cetera? Can you just kind of paint the picture of how the company is positioned on the retail and the e-commerce side vis-à-vis that environment?

Thank you for your question. Yes, thank you. Of course, I cannot deny that it's a very challenging environment, the increase in VAT up to 15%, COVID-19 impact, preceding powers in the Saudi market under pressure. And this is why we've been very busy during last year in building foundations and finding new growth avenues for the company. And this is why we came with Miss L', an affordable jewelry sold by piece in the modern trade and e-comm. And Instyle also selling jewelry by piece in a very affordable price in the wholesale market and in e-comm. So we were aware of all these challenges, and we've been very busy trying to find new growth pillars to accommodate and face all these challenges from increasing prices from VAT and decreasing purchasing power and competition from other central categories for the Saudi market. And as we can see all here together that the work we've done during last year really has really showed us a great results. Now we see contribution of e-comm up to 9% from our retail. We see that Miss L' contributing significantly, Instyle and so on. So we've been aware of all these challenges. And we've been working hard to accommodate them and to offer the Saudi consumer, not only in Saudi and in Egypt as well, a derived product in an price with the minimum impact due to COVID-19 and the VAT increase. The environment continue to be very challenging. We are examining this trend, growth avenues, and we are continuing to develop our new initiatives. Thank you very much.

Thanks, Ayman. Second question is just on margins. When I look at the margins here, I think it's around 14% on a gross basis. I realize maybe you earn higher on retail, but you mentioned in your comments that actually wholesale gives you a nice margin opportunity. So if I compare that 14% to other jewelry retailers we follow in the world, they tend to be in the 30% plus, right, up to 65%, 70% in some cases. So why is it so low? And does wholesale actually add or a drag on your GP?

Yes. A good question. Maybe because you are new to our investment calls, but I'm very happy to answer your question. From accounting point of view, we include the gold metal value in our revenue and our cost. Also as a business model or operational revenue for us in L'azurde, we don't actually consider gold as revenue because it's like passed through to our wholesale customers. Our real revenue is the labor service charge. When we add the gold value to our revenue, of course, it increased our revenue, but it decreased on gross margin. So it artificially increased our revenue, but in leisure way which is what... This is what is required according to accounting that you have to include the gold value. But for us, as I said, this is not a real revenue. When you include the gold value, of course, the gross margin will be lower. However, as we said, wholesale continues to be a very high gross margin if we exclude the gold value, and this is representative revenue for us. And this is why we write in our commentary that we show our total revenue but we write a disclaimer that please -- readers, please, we don't consider gold as real revenue, and our represented revenue is the labor sales charge without the gold value and when we calculate the gross margin, based on this formula, it will be actually about 70%.

Okay. Okay. So the underlying margin of the business, if you break it down between retail, wholesale, is it around the 70%?

60%. In the gold wholesale, we can be up to 70% because if we exclude the gold value. In the retail, because we sell by piece, so we include gold and diamond. So we make gross margin up to 50%. So overall, I think we can be in the region of 60%.

Very clear. Very clear. Last one for me is just on occasional buying weddings, things like that, that may be in a normalized environment would have been a big pull in Saudi. Did you see the fact that people maybe weren't able to have their weddings on time. Did that impact demand? Or is that not really a big pull factor?

As I said, we've been -- and we anticipated all these changes to the increase in gold prices, COVID-19. We knew that there will be some restrictions in wedding. Some people will delay their weddings and so on. And this is why we've been diversifying our business. We still, of course, rely on wholesale, but we've been searching for different growth drivers. This is why we've been relying more on retail. The good thing about retail and why we always like to grow our retail business, it's consistent with a consistent demand across the year. Of course, it's clinged to some occasion, but it's not concentrated like wholesale. Wholesale Season, as you rightly said, is more into like wedding season and big occasion. While the retail has a more consistent and well spread demand across the year, and this is why we've been focusing on retail and focusing on also small items like small ticket items that people are buying for gifting, for casual wear, for every day where, and we are no longer relying heavily on the wholesale and the wedding season.

But that's a good point. As Ayman commented on the consumer aspect which we see across our industry and others, too many weddings have been postponed and did not happened. But at the same time, consumers who are spending more on products to treat themselves during COVID-19, and that's why small jewelry products at SAR 1,000, SAR 2,000 were going very well. It's similar to, for example, formal fashion categories less in demand because people are going less out versus affordable fast fashion accessories and items. However, now with the market opening and summer coming up and weddings coming up, I think we'll see potentially a demand and uptake for the wedding season.

Okay. Which is -- just to clarify, Selim, is -- that goes through the wholesale channel for you, not the retail channel?

Wedding is primarily in the wholesale, but single pieces, gifting items are happening in retail and in the wholesale.

Okay. That's great. Sorry, I said last one, but maybe another one. When did you guys join the company? Are you the new management team? Or is this the management team that's been in place since the beginning?

I've been trying to reinvent myself the last 10 years. I've been here for 10 years.

10 years. okay.

And Ayman has been for 5 years, and the company is 40 years old.

[Operator Instructions]

I like the question on management. So just to clarify, this is the management team, which took the company to SAR 105 million net income when we did the IPO. And unfortunately, we had a kind of perfect storm post the IPO, and that the same management team now turning around the company a second time to position it better for the upcoming years.

We have a question from Mohammed Hadhrami.

I have a question, if you can give us an idea about the competitive landscape, how do you see the competition? Is there a consolidation in the market? And do you think there is the opportunity for you to do any acquisitions in the retail business?

Overall, the jewelry industry is quite fragmented. If you look at globally, there are a lot of small players, and there is little consolidation happening. So that's why you can see ourselves launching multiple brands, subcollections under L'azurde in order to maximize our market share in Saudi Arabia and Egypt. If we look at both channels, retial and wholesale, we are by far, say, the leading player, and our competition consists, I would say, of small players but with some opportunities for acquisitions. That's why we acquired TOUS, a couple of years ago. Looking at the market today, we are not very much focusing on M&A. We are more focused on growing new lines and new businesses from within the company. However, if there is anything attractive out there in the market, the right brand, the right business at the right price, obviously, will be considering this. But today, the brand L'azurde has a 95% brand awareness in Saudi Arabia and Egypt. It's by far the #1 brand, and it has still a lot of room for going through line extensions, e-commerce and new channels.

But as a trend over the last few quarters, how is your market share is trending now?

Our market share has been growing, especially during COVID-19, where we saw a lot of pressure on small competitors who struggled to reinvent themselves and turn around the situation during COVID-19. So our market share was estimated today to be at around 25% versus maybe 20% prior to COVID.

Okay. Okay. Is there any regulation from the government or custom duties that impact the gold business or the retail business? Anything from government that could support or impact -- negatively impact company?

I think Saudi Arabia overall is quite an open market for importation. The duties are only at 5%. However, when you sell gold by weight, which is a very valuable offering for consumers, paying 5% of import duties can be -- can make your product quite expensive. Therefore, in this very important high-value segment for consumers, the industry relies more on local manufacturers. In retail, when you sell by piece, at 50% to 60% gross margin, you can easily import from anywhere in the world.

Okay. But recently there is nothing like -- for example, on the import of gold or something that could help the company?

No. Not really.

Let me add what can really help the company is, as we all hear that the government is thinking about reduction. Of course, we don't know when this will happen. But if this will happen, there will be a material impact -- positive impact on the company. And I think not only on L'azurde, many other players, but especially L'azurde because of the high-value of the gold, which right now is subject to VAT. So any reduction in VAT, we believe, might -- I don't want to give an absolute assurance. We believe that there might be a big upside on demand, especially on [indiscernible] by weight in case VAT decreases from its current level.

The question on the group, which I don't understand.

Can I read it out for you, please so that all the participants can -- so we have 2 have questions from Eshendra Perera. The question is based on the earnings announcement, the revenue in the first quarter 2021 increased to SAR 551 million from SAR 103 million in the fourth quarter. Still at the gross profit level, it increased at a lower rate to SAR 84.6 million from SAR 43 million, which implies the gross margin declined quarter-on-quarter. What is the reason for this? The question is basically why the gross margin declined Q-on-Q.

Overall, I don't see the numbers in front of me now, but I can assure you is that our margins are maintained, if not increased. However, we have to also understand the impact of mix, the mix of channels and the mix of countries. And let me here elaborate more on the mix of channels. And as I explained before in previous questions, first, it depends on how you are talking about operational revenue or total revenue? Because if total revenue, this is distorted by the gold value. Assuming that you are talking about operational revenue here, we have to understand that because we don't include the gold value in our wholesale channel, so the wholesale channel gross margin is very high, as I said, up to 7%. While in the retail channel because we include the gold value and the diamond value, it appears to be lower, but still very profitable. So overall, what I can assure you is that our margins were maintained. And by the way, this is despite the new products we have launched at a lower ticket price, but even though that our products are at lower ticket price, still at a very high gross margin. This includes Miss L' and Instyle. Our retail business is doing very well with very good markets. So we did not see any erosion in our gross margin, except the impact of mix of countries, micro channels and so on. But we try very hard, and I think we've been very consistent in maintaining a healthy gross margin across all channels, across all countries, despite all the pressures we've seen from COVID-19, VAT and other things.

So we have questions from the line of Eshendra.

Just to follow-up on the question that I raised through the Q&A, I mean, is it correct that previous quarter, your revenue, it says is on the earnings announcement that you made because I didn't like check the financial statement, it says previous quarter that is fourth quarter 2020, your revenue was SAR 100 million, while it increased to SAR 551 million in first quarter 2021. If that is correct, like revenue has like increased -- it's like 5x, SAR 100 million became SAR 550 million, whereas gross profit only like doubled from 43% to 84.6%. So that's [ why ] I was like questioning that it looks like the gross margins have declined. This is based on the Tadawul announcement that you have made, where I'd say fourth quarter 2020 revenue was SAR 103 million, while first quarter 2021, the revenue is SAR 551 million, but gross profit only doubled.

Sorry, I was on mute. So again, as I explained, it's not in front of me now versus the previous quarter. But also the previous quarter was very exceptional to the company because of the return. So you have to consider that the impact of return might have distorted gross margin. Last year, let me give you a background, and this is why we made substantial losses last year. We have accepted a big return from the wholesale customers for the high ticket items and heavyweights that -- this is to make sure that we have the right product in the market and to reduce our working capital and the financing choice. I will be looking at the numbers. And for previous quarter and last year. And maybe I can drop you online and send you an e-mail.

Regarding your other question, we don't give any guidance at this moment.

As always, I always encourage participants and the readers to use operating revenue because, again, your reference to the SAR 550 million compared to SAR 100 million, this includes gold metal value. So again, I encourage you when you read our announcement, always focus on operating revenue because total revenue, it's not wrong. This is how the accounting standard telling us but we really don't spend much time analyzing this number because those value for us. We don't make any profits or loss on gold value. We just passed it through to our customers and then we collect gold. So we have 0 impact from the good price. If the gold price will increase our total revenue increase. This does not mean that the company is doing well. If the gold price would decrease, our total revenue will decrease, which again also does not mean that we're not doing well. So I encourage you, again, don't look at the total revenue with gold value, which is -- I think this was your question because the SAR 551.4 million versus SAR 100 million in the previous quarter, this is including the gold value. Okay. If you go to number two, you will see that the revenue without gold and comparing to the last year, we had SAR 140 million versus SAR 90 million.

There are no more questions at this stage.

Thank you very much, Hatem. Thank you all for joining us. We can assure you that the whole team and myself are doing our best efforts to continue growing L'azurde and delivering very strong results. All the best all of you. Eid Mubarak to you and your families, and have a nice rest of the day.

Thank you very much.