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

Hello, everyone. Apologies for the delay. This is Ahmed Moataz from EFG Hermes. And welcome to L'azurde's Third Quarter of 2021 Results Conference Call. I'm pleased to be joined by Selim Chidiac, the Chief Executive Officer; Ayman Gamil, the Chief Financial Officer; and [indiscernible], the Investor Relations Manager, who, as usual, will start with a brief presentation, and then we'll open the floor for Q&A. Gentlemen?

Thank you very much. So thank you for joining us today at our Q3 results conference call. This is Selim Chidiac and Ayman Gamil and [indiscernible] are here with me today. So we start with our usual disclaimer. I assume you're all comfortable with this, you are used to it. So please don't use any information, which we are sharing here for making decisions, operating, investing or selling, and please treat this with confidentiality. So we'll start with a short summary about Q3, then I will elaborate on the company transformation and specifically the results for Q3 and YTD and our priorities moving forward. So we pursue our successful transition. After a very solid Q1 and Q2, we continue by having a very positive Q3 in this year. And this really follows the transformation undertaken by the company the last 2 years since we embarked on the affordable fashion jewelry segment with TOUS acquisition plus other initiatives, which I will talk about now. So our revenues -- our operational revenues were higher by 38.5% this quarter versus last year. And the nice thing is that growth occurred across all channels and all geographies. In Q3, we had a profit of SAR 7.8 million for Q3 '21 versus a loss of SAR 18.8 million last year. And if we go back in history, this was the highest Q3 net income since 5 years for the company. And year-to-date, we have a profit of SAR 26 million, very nice evolution, transformation from where we came from the last 2 years, which were difficult for us. You can see here the growth of operational revenues occurring in our 2 main geographies, Saudi Arabia and Egypt, and in the 2 channels, Wholesale and Retail. So very nice growth across the 2 channels and the 2 geographies and e-com for Q3 2021, it represented 5% almost of our revenues and 12% of our Retail revenues. So the transformation of the company started in 2018 with the TOUS acquisition, but also worked a lot on the optimization of our working capital and to reduce the gold working capital and also we did a rights issue in June 2021. This has significantly reduced our financing costs, which were at SAR 6.5 million in Q3, half of what we spent last year, and this was the lowest financing cost in the quarter for the company since 10 years. And this shows you that we have set the company on a much lower debt level, which promises and supports the future profitability of the company. Our operational cash flow was also very strong. We generated SAR 30 million of operational cash flow for this quarter and year-to-date, we delivered 64.3%. As I always say in all the calls, we're very much focused as a management team on cash flow. Even in the period when we had losses the last 2 years, we always generated positive operational cash flow. This is a very nice chart, which actually summarizes in a very simple way, the performance of the company. So year-to-date, revenues at the top right-hand side of the chart of the table, SAR 390 million, SAR 26 million net income in 9 months, well above what we did the previous 3 years. Earnings per share, SAR 0.50 per gram -- sorry, SAR 0.50 per share. Debt-to-equity ratio, the lowest we have since 4 years at 2.2. Our total loans much lower than what we had before at SAR 884 million. Operational cash flow very high and the financing costs significantly lower than what we had in the past. So we are very pleased with this transformation, and we're doing our utmost to really pursue the momentum and build on that. So the company went through a significant evolution of the business model. Today, our business is roughly split 50-50 or 45-50 between Wholesale and Retail and 5% for e-com. So on the right-hand side, you can see the current main businesses we have, the Wholesale business by weight, TOUS, the only franchise business we have in the company in Saudi Arabia; Miss L', our affordable fashion jewelry sold in malls; L'azurde Retail, our own mono-brand shops, Kenaz and kiosks; and L'azurde Instyle, our new affordable fashion jewelry line sold; and the gold souks, where we're transforming our very well-established business since more than 30 years, selling gold by weight. We're transforming it to selling by piece in a much more profitable way and much less working capital demanding way than gold by weight. You can see here the 3 different channels, Wholesale on the left-hand side, we have by weight and by piece. In the middle, you can see our Retail business with all the locations we have for the company. And on the right-hand side, we just launched TOUS a couple of weeks ago, and now we're selling L'azurde Miss L', Kenaz and TOUS. E-commerce, I have to say, grew very rapidly for us. We launched it overnight in April 2020 when COVID-19 hit us with hardly any investment. Today, the growth is slowing down because we need to step back, and I will discuss about this a bit later on and make some investments in the tech to really uplift our tech capabilities in order to scale the business much more, and I will be discussing about this later on. You can see here the operational revenues for Q3 at SAR 130 million, with our base business, the previous business, which was Wholesale by weight, Retail and Kenaz, L'azurde Retail and Kenaz, representing 69% at the same level as what we did in Q3 '19. And the new business growing versus what we did in '19 and representing today 31%. So management is executing things differently. Management is focused on launching new product line at very attractive margin and with less working capital. You can see here a more detailed breakdown by channel, where you can see our traditional Wholesale representing 50% of the revenues more than Wholesale selling jewelry by piece and the souks representing 5% of the Group and 10% of the total -- sorry, 5% of the Group and 10% of Retail. You can see Retail representing 40% and e-commerce at 5%. Our affordable fashion jewelry lines, Miss L' and Instyle are growing and represent in Q3, 21% of our revenues. Those are relatively young lines, 2 years old only, and we're working now on scaling and developing them further. Specially our e-com business, which I was talking about earlier, the growth is slowing down. This is very normal because we very quickly achieved a very decent number. We went, we took an off-the-shelf existing technology, and we started selling products. We realize today the tech in place needs to be uplifted in order to offer a much better consumer experience on the platform. Sometime we have breakdown with the payment system. We have -- the system gets a bit slow. The presentation of product images is not great or it's not, I would say, state-of-the-art standard. And therefore, the next couple of months, we'll be investing to uplift our technology and grow much faster our e-com business. While we continue growing top line and adding new businesses, we are always very focused on the Group gross margin, which we maintain at 62% gross margin. I like this chart because it shows really the transformation of the company. When we had the Wholesale business in the past, when we relied much more on the Wholesale business and today, we had the hiccups between quarter. For example, you start in Q1, you load the market, when you're in a Wholesale business, you can load more in Q2, but that -- at the end of the year, this starts slowing down. Today, if we see on the right-hand side, those 3 quarters, there is more stability and predictability in the company's revenues because 50% is e-com and Retail. Still, there is some seasonality in our industry, but to a much lower extent than what we had in the past, and we are very pleased about that. You can see here the sustainable maintenance of our working capital efficiency was 4.2 tons of gold used in Q3. Frankly, we will not go much lower than that. We may even increase again because we want to start growing our revenues while maintaining the working cap -- the gold working capital in terms of efficiency and number of days. So of course, there will not be a major increase, slight increase, but the number of days of the working capital has to remain what we achieved today. You can see here a very nice chart how we reduced completely our cash loans. We are left with almost no cash loans. On hand, we closed Q3 with SAR 5 million. And we will -- we plan to remain with this low level of cash debt. This is another nice table, which shows you our total loans and the net income. So the loans went down, as you can see. And the message here on the right-hand side is at even lower loans level than the past with much less gold working capital, we are able to deliver very decent net income and relatively stable net income from quarter-to-quarter. So that's the message. Even as the company deleverages, the company delivers attractive profitability. And hopefully, we can maintain this low volatility between quarters and more predictability of revenues and gross margin and profitability in the future. It's work in progress for us to be able to, maybe one day, offer forecast to the markets. We're not yet there. You can see at the bottom of the slide, our debt-to-equity ratio going down to 2.2 in 2021. And this is the last slide about financing, showing you SAR 6.5 million of finance costs. This was a major cost item in our P&L in the past. And since we moved more to e-com, Retail and we launched affordable fashion jewelry for the first time ever in our history, we were successful at growing revenues and gross margin and at the same time, cutting the working capital, and this translates into the lowest financing cost for the company since 10 years in a quarter. That's our net income turnout picture. And if we look -- we go back to Q3 '16, so 5 years ago, this was the highest net income in Q3 since '16 until today and the highest quarterly operational cash flow since 2017 at SAR 30 million. And the nice thing you can see here since '19, there is somehow a consistent quarterly delivery of positive operational cash flow. And this was not always the case in the past to have sustainable, consistent, positive operational cash flow. This is our Q3 P&L, which I assume many of you have seen already because we announced the results more than a week ago. So our revenues at SAR 130 million, 38% versus last year; our gross profit at SAR 80 million, gross profit margin of 61.6%, our operating profit at SAR 24 million, our finance charges well below the past. We come to a net profit SAR 12.9 million, Zakat SAR 1.9 million and some income taxes because we're making more money. So we pay more taxes in Egypt, mainly, we come to a net profit of SAR 7.8 million and year-to-date, a net profit of SAR 26 million. My last slide before opening up the floor for questions. Number 1 priority for us is to continue growing Miss L', the affordable fashion jewelry through our own point-of-sale and e-commerce and third-party retailers. Number 2, we want to open more L'azurde Retail stores, especially in Saudi Arabia, where we have only 3 stores, and the stores are doing extremely well, as we speak. We want to continue supporting the Wholesale business with lower working capital and cost optimization. We want to transform the Wholesale from by-weight to by-piece with growing L'azurde Instyle selling by piece, and we can do that because of our distribution scale and the brand reputation, the brand power in the marketplace. We want to really scale our e com and here, we have a broad vision. We are really making a major transformation behind the scene even though someone can say that we achieved 5% of revenues today, but we have a much broader vision for e-com, and we have a significant roadmap the next 3 years to deliver a major platform, selling jewelry in the MENA region. We want to continue growing TOUS, which is a 2-year-old business with us. We just launched our e-com business for TOUS, and the TOUS team was last week here. They came from Spain to visit us. They are very satisfied with what they see us doing as the fifth largest franchisee for them here in Saudi Arabia, and we are optimistic about the future of TOUS. We will continue the focus on cash flow and continue maintaining strong relationship with the banks. And last but not least, we'll also maintain our cash borrowing as low as possible. We moved it from SAR 203 million on January 1 this year '21 to SAR 5 million today, the borrowing, and we'll continue to look very closely at this matter. So overall, a very good Q3 and year-to-date performance. We will do our best to continue the performance and to take L'azurde to much higher levels of profits in the coming years. Thank you very much, and we can open the floor now for Q&A session.

[Operator Instructions] We'll start with our first question from the line of Ashar Saleem from FALCOM.

Am I audible? Can you hear me?

Yes, you are.

Okay. This is Ashar from FALCOM Financial. And congratulations on the third consecutive...

We don't hear you well, can you please get closer?

Can you hear me now?

Better, yes.

Okay. I have a couple of questions. First of all is regarding e-commerce. Now your sales quarter-over-quarter have shown growth, but your e-commerce has remained flat. So is that an issue or a bottleneck with the infrastructure? I mean despite the spending on IT and e-commerce, is that one -- I mean, is there a bottleneck in your IT infrastructure? That's one. Secondly, for the gross margins, if I'm not mistaken, at 62% Group gross margins, we are roughly at where we want to be, right? I mean, do we have some more potential to grow from here onwards? Or this is like the best possible margins we can have going forward?

So 2 questions. I'll take the first one, and I will let Ayman Gamil answer the second one on the gross margin. E-com as a percentage of sales is flat or declining 0.2%, simply because shoppers are back in the stores, shoppers are back buying in our shops. And therefore, we saw a significant growth in our brick-and-mortar business. The e-com platform plan and we won't be doing much more in the future. But as you heard me saying earlier, yes, we are investing to step change the technology, which we have today. We started with, I would say, a very affordable, quite cheap tech 18 months ago just to get started. We saw the potential. And today, we're making the investment to really be able to scale and go to a much bigger revenues level on the e-com front. Ayman?

Yes. So to your question, Ashar, about the gross margin, and is it the final outcome, final objective where we want to be. Overall, we have -- our objective's always to continuously improve all our KPIs and gross margin is no exception. So we plan and we work on improving our gross margin year-on-year. However, of course, as you can understand, we have to make trade-off between improving the margins and growing the top line. So we have to find the right balance between improving our gross margin, which usually comes with higher prices and reducing higher price and reducing costs from one hand, and on the other hand, investing in the business and investing in growing the top line. We believe 62% is a very healthy level. But as I told you, we have always an objective of improving our gross margin year-on-year.

I just have a follow-up on that. I mean, obviously, the focus now is moving towards Retail more than Wholesale, right? So Retail is definitely very higher margin. So I mean, if things go as per plan, can we expect 2 years down the lane to have a gross margin of north of 75%, 80%? I mean, is that something that's possible with your size of business?

No, it's not possible. I'll be very clear because we're not selling silver. We are selling gold jewelry. And if you do a benchmark to listed companies globally like Signet or Chow Tai Fook, the largest company in China, with more than 2,000 stores -- actually 4,000 stores actually Chow Tai Fook, and 2,400 stores for Signet, they are between 50% and 55% gross margin. Pandora has a gross margin of 72%, and they sell mainly silver jewelry. Tiffany selling a big chunk of silver, 70% of Tiffany sales are silver products. They have a gross margin of 66%. So for us, no, we cannot aim -- we don't even aim to have 62% -- more than 62%. And as Ayman said, we wish, we try, but realistically, we cannot expect that. What matters to us is really growing top line at this correct gross margin percentage.

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

I just wanted to get -- just wanted to understand a little bit about your attitude to leverage. So you pretty much paid down your entire debt. And it comes from a very longer way. So do you believe that the appropriate leverage for a company like yours is to have -- is basically to be zero, to have no debt? Is that efficient in your view?

So let me explain a little bit very quickly our business model. L'azurde Company is very unique that we have -- most of our assets are in gold. And you can appreciate that we don't want to take any exposure or any position in gold. So we don't own gold in our balance sheet. We borrow all our gold needs from banks. And this translates to a fact that all our gold assets in our balance sheet should equal the borrowing from banks. So by design, in our business model, we have to have leverage because we don't want to take a position in gold. We don't want to own gold, then we are exposed to the price. So this is in the business model. And this is -- honestly, we internally in L'azurde, we don't believe that this is a real hedging, this is -- sorry, this is a real leverage. This is for us, hedging. We hedge our position in gold. So we can never have zero leverage rate, otherwise, we'll be offering to gold price fluctuation. But the question is how much is the right leverage rather than can we have zero leverage? We believe what we have now, in my personal opinion, already in the very low side, we still can grow our leverage a little bit higher in order to achieve higher returns. Right now, a very, very low level. I think we still have room for higher and investors should not be worried about that because, as I said, most or maybe 90% of our leverage is just as per design for hedging gold position.

And my second question is related to this in terms of your -- you've stabilized the business. You've got it to where you want to go. Now, presumably, the next couple of years is about growth. So how much -- I mean, what are your plans to really now make the business grow, and, I guess, grow the number of stores, whether that's through physical or through online, grow the revenues and obviously, see the operational leverage translate into profits because you've had 3 quarters of quarter-on-quarter profit decline, which is clearly not the direction you wanted to be going in? So could you just talk about your growth outlook for the next couple of years?

Obviously, this is the right priority for us now that we turned around the business, and we positioned the company in a much better way to grow the business. I think today, if you compare where we are versus '19, we have much stronger foundation to grow because we are a more diversified business with proven track record in Retail, Wholesale and e-com. The growth in the coming years will come #1 from Retail expansion with new stores, and there is room for us to open new stores in Saudi and Egypt. This is #1. Number 2, growth will come from e-com, B2C and e-com B2B as well. We're working now on marketplaces platforms for B2C and B2B. We have a major B2B business, which we can leverage online to generate more growth, and #3, we have a very significant Wholesale business by weight, which we can grow by selling more by-piece and sell by-weight. And this will be a significant generation of revenues and profits in the coming years. And last but not least, we acquired one franchise brand 2 years ago, TOUS. Unfortunately, COVID-19 hit us all after this acquisition. But the message was that the Board and the company are looking at turning L'azurde into a house of brand with multiple brands. So we could take other franchise brands onboard in the future.

Akbar, let me also add something because you mentioned one comment that our quarterly profits are going down this year. Actually, this is not exactly the way we look at our process. Actually, we see it in a totally different way. First, as Selim presented in the previous slide, I can see that our quarterly profits are very consistent, like [ 9, 8, 7 ], this is not a big variation. And if you compare this with the past, we used to have huge variation between quarters. So now I see that our profits are stable. I mean, compared to the same quarters of this year, of course, it's much higher than previous year. But between quarters, they are much more stable. The seasonality impact, of course, is less than before. So we see the company is going to the right direction. We don't consider that SAR 1 million net income less than the previous quarter is a sign of weaknesses or anything, especially that [indiscernible] and L'azurde usually, first quarters are much stronger than later quarters. But now you can see a much more consistency in profit.

We'll take a couple of questions from the chat. First one comes from Mohammed [indiscernible]. What is the budget for improving the e-commerce platform?

Let me get -- this is Selim. According to our plan for investment, I think we put aside an amount of SAR 6 million for e-com development.

Next question comes from Nada from FALCOM. What is the strongest season for Egypt? I mean, in which -- so she's asking which quarter is the strongest seasonality within the -- for Egypt's market.

I would say Q2 and Q3.

Last question in the chat so far comes from [indiscernible]. I'll read it out. Can you update us on the efforts of selling gold by piece? What percentage of sales or by-piece versus by-weight today compared to last year?

Ayman, you want to elaborate?

Yes. I think we showed the slide in our previous -- I don't have it in front of me now showing the contribution of Miss L' and L'azurde Instyle. Can you show it to us, Selim, please?

Yes, 21% of revenues.

Yes. And this is by the way -- yes, this is 21%...

In 2021, the jewelry sold -- affordable fashion jewelry sold by piece represent 21% of revenues versus last year, representing 15% of revenues.

Yes. This is one way of seeing it. Another way is you have to consider that all our Retail business is by piece. So we have these 2 Miss L' and Instyle gold jewelry, by piece, but we also have diamond jewelry, which is also sold by piece. So if you want to split the business between by-piece and by-weight, you can use the split between Wholesale and Retail. Wholesale will be mainly by weight although it include Instyle by piece, but you can see that the minimum is the Retail business, which accounts maybe like 50%.

Correct. There's a chart here. So by-weight, it's 50% versus by-piece 50%. Last year, by-weight represented -- or in Q1 this year, sorry, by-weight represented 53%.

We don't have questions in the chat, so we can take the follow-ups that Akbar had.

Just wanted to understand what your expectation is for the number of stores that you will have over the next year and then the year after, please?

We cannot disclose this figure at this moment, frankly. We're working on it. We have an aggressive ambition to expand and open, but we can't share those numbers at this moment, unfortunately.

Can you give ballpark like percentage growth, approximately, not in sales, but in number of stores?

15%, I would say, 15%, 20%.

Sure. And what is it that constrains your growth? If you're saying that there's so much potential and the market is ripe for your product at your price point, et cetera, what constraints -- why don't you grow faster?

Finding the right location at the right terms. That's a challenge because we are not compromising on finding the right mall, the right location in the mall, the right shop size and the right brand and commercial terms.

Right. And geographically, in terms of where your stores are, are you looking to expand into new parts of the kingdom?

We are looking to expand in main cities because currently, we have only one store in Jeddah, one in Riyadh and one in Oman. So we have significant opportunity to grow in the main cities, but also in secondary cities, which start to play a bigger role in the economy and the contribution.

Right. It just seems -- I mean, maybe apologies, maybe I'm missing something, but given how small your -- and how few stores you have right now, it would -- and given how many potential locations there are across just the main cities, it seems strange that you are unable to find -- you're unable to find set few locations where you can sell jewelries.

We have a long list of potential locations. We're currently finalizing the plan. You can be very assured we are eager to grow as quickly as possible. And there is a full focus on that. So hopefully we can surprise you in the market in a year's time with the speed of expansions.

At the moment, we don't have any further questions, nor in the chat, nor in the Raise Hand function.

Thank you very much. So thank you all for joining us. And thank you for your interest in L'azurde. And once again, you can rest assured that we're working hard to continue delivering the performance and surprising you on the market with good results. I wish you a nice evening, and we'll see you at the next investors call. Thank you.

Thank you Mr. Selim. Thank you, everyone.

Thank you. Thank you EFG team. Bye-bye.