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 Second Quarter 2022 Results Conference Call. I'm pleased to have from the company today, Selim Chidiac, CEO; Ayman Gamil, CFO; and Taghreed Qablawi, Investor Relations Manager. We'll start by a presentation from management, and then we'll open the floor for Q&A. [Operator Instructions] Selim, please go ahead.

Thank you, Hatem. So good afternoon. This is Selim Chidiac, CEO of L'azurde. We have with us Ayman Gamil, our CFO; and Taghreed Qablawi, leading our Investors Relations management. What we plan to do today is to share with you the results for Q2 and to give you an overall update about the company. We start with a very standard disclaimer, which is used at every quarter, the update, and they send that to most of you, so please treat this information with the utmost confidentiality as you don't base your decisions for trading on what you hear here. Don't rely on statements which can be made in this presentation and so on and so forth. So make sure you read it accurately and follow it while making decisions for investments. So I will start with an overall summary, then I will refresh your memory about the company business model. I will go through the results and the strategic directions for the company. So the company had a solid Q2 '22, with a net income at SAR 8.5 million, up 6.3% versus Q2 of last year. This also was supported by the lower financing costs and lower Zakat and income taxes. Our operating revenues for Q2 came in at SAR 117 million, a decrease of 3.6 million -- 3.6% versus last year, mainly due to the foreign exchange translation of Egyptian pound to Saudi riyal following the change of exchange rate in Egypt end of March '22. Since then, by the way, the company had multiple price increases. And we are, at this moment, quite comfortable with our prices in Saudi Arabian Riyals. In Q2, Saudi Arabia had a very strong performance. Our wholesale business grew by almost 18%. Our retail sales grew by 1%, but the gross margin, much more because we have been working on improving our gross margin percentage. In Egypt, if we exclude the impact of the exchange rate, our wholesale operating revenues would have declined by 4.3%, mainly in the April and May months. But in June and July, we had a very strong recovery, while retail revenues in Q2 in Egypt improved by almost 15% at 14.6%. Our gross margin continues to improve. We gained 1 percentage point, had a gross margin of 63% versus 62% last year. This again confirms the message which we give to investors on a regular basis, we are focused on profitable growth. We don't want to add top line just for the sake of growing our revenues. Our financing costs declined by 20.8% versus last year in Q2, mainly driven by working capital optimization. And if you look at our balance sheet and our overall working capital, we have done significant effort the last 2 years to improve the balance sheet, and we continue working on that area. If we combine Q1 and Q2 in H1, our group operating revenues increased by 3.3% versus last year. And our net income for H1 came in at SAR 22.2 million, up 22.3% versus last year, driven by higher revenues, a better gross margin and lower financing costs. Moving ahead, we continue working on the transformation of the company, which started the last 2 years, i.e., we want to have a larger retail business focused on L'azurde and Miss L' in Saudi Arabia and Egypt. We want to continue scaling our digital business, which is doing quite well and proves to have a much higher growth potential in the future. We are working a lot on expanding our fashion and affordable jewelry, building on global trends. And we want to continue improving all our financial KPIs, from working capital to profitability, cash flow contributions and all the financial ratios. Therefore, if we look at this slide, we can see year-to-date in Q2, our net income came in at SAR 22.2 million, a very strong H1. Our earnings per share are at SAR 0.39. Our total loans at SAR 714 million, significantly below what we had in the past, however, higher than '21 because we grew our top line and we sold more gold jewelry. We had a very decent operational cash flow at almost SAR 35 million, and our financing costs for Q2 came in at SAR 15 million. So -- and you can see here how we track thoroughly all the financial metrics and [Foreign Language] by the end of the year will show you a very good closing of '22. So our business model continues to evolve from historically a wholesaler. A couple of years ago or 5 years ago, we added the L'azurde monobrand retail shops. Today, we are focusing on retail and e-comm while protecting our core wholesale business. We're expanding as we speak with Miss L' and L'azurde retail on top of the 2 franchise business which we acquired a couple of years ago. That's an important slide showing you how we operate in the core wholesale business. So the key message here is the company does not own gold. We make money by selling great jewelry at great margins.

Everyone, please hold for a second. Thank you. [Technical Difficulty] Apologies for the inconvenience, everyone. We'll continue with the presentation. Ayman, please go ahead.

All right. So until Selim -- I'm sorry, I'm mute.

We can hear you, Ayman. Go ahead.

All right. So until Selim join us, I will continue with the presentation. So in this slide, we are showing the new initiatives that the company has started back 2 years back with Miss L', Instyle and e-commerce. So here, you can see the increasing contribution of these new initiatives, which go to the group additional net income. So our base business, which is the traditional wholesale and retail business, the new business is Miss L', Instyle, [ Cruise ] and e-com. And you can see that in Q2 2022, the contribution of the new business is 35%, while the base business is 65%. And I really like this slide because it shows how the management can bring new business to the company and how we can grow the company using new ideas, new launches and new initiatives. The contribution of the new initiatives in Q1 was 27%, while in Q2, it grew to up to 35%. Here, we are also showing the transformation of the group. You can see that in Q2 2022, the traditional wholesale business is representing 50% of our total revenue. The modern wholesale, which is Instyle, where we sell gold jewelry per piece, not by weight, in the traditional gold market. Our retail business is representing 38%, and our e-com, which we have started after COVID, is now representing 6% of our total revenue of the group. Here, one slide about the e-com to see the quick development of our key e-com platform. Actually, it's one of our main focus areas. We are investing here really in technology and people in e-com. And as you can see, we are growing steadily our revenue from e-com, reaching SAR 7.4 million and SAR 7.2 million by the end of Q2 2022. While growing our top line and e-com and new initiatives and everything we are doing, we are focusing very much on our gross margin. And as you can see that our gross margin is very, very healthy. By the end of Q2, we reached 63%. And by June -- month of June, separately, alone -- stand alone we reached 64% gross margin, which is very healthy. So in spite of what's happening and everything, despite some pressure from the exchange rate and everything, we are still defending and growing our gross margin. I will continue. Here, we are showing the major improvement in our cash flow and our cash position. Previously, in 2020, we used to have like over SAR 430 million of cash borrowing. By the end of Q1, we reached even 0. And now we are having only SAR 15 million as cash borrowing. This is a clear indication of the great improvement in the company performance and the balance sheet to be able to settle all our cash facilities. Here, we are showing the gold loans. We used to have like 7.6 tonnes of gold borrowing from banks. Now we are having less than 5 tonnes. So the good thing about this chart is it's linking the working capital of the gold loans together with the profitability of the company. So here, we have reduced our gold loans from 7.6 to 4.7, 4.9. While we have improved our profitability, this red line is our quarterly net income. So you see that we are reducing our borrowing while we are increasing our profitability. This is one aspect. The other thing here is year before. We used to have high volatility in our net income between quarters. And now, we are having more stable quarterly performance of net income. And the reason behind this is that we are reducing our reliance on wholesale business, which by design, has high volatility and high seasonality. Now we are focusing on retail and e-com, which they have more stable net income across the year. So reducing working capital, reducing loans while growing our net income in a more stable way than before. Financing costs as a result, of course, of reducing our cash debt, reducing our gold loans. We significantly reduced our financing costs from almost SAR 1.5 million a month -- a quarter to less than SAR 4 million recently. Net income turnaround. As you can see, and as I said before, positive net income since the start of last year and more stable with less volatility. Cash flow, despite everything in the good time and bad times in having profits or losses, whatever, we always focus on our cash flow, and we make sure that we have a positive cash flow from operations. Last year, we made SAR 78 million of cash from operations. And this year until June '22, we achieved almost SAR 35 million of positive operating cash flow. This is our P&L for the first half. So operating revenue grew by 3.3%. Gross profit grew by 8%, which is higher than the growth in operating revenues, showing the improvement in the gross margin. Selling and marketing expense grew by 16% due to expansion and so on. Financing costs, 17.5% less. Net profit before Zakat and tax, 15% growth. And finally, net income, 22.3% higher than last year. I will let Selim who will join us back to comment on the key strategic priorities. Selim?

Okay. Sorry for that. There was a technical problem on my laptop. So our key priorities: number one, we continue expanding the development of Miss L', which is our latest affordable fashion jewelry brand, which proves to have great potential. We're expanding it through monobrand retail stores, e-commerce and third-party retailers. We're opening more L'azurde stores in Saudi Arabia and Egypt, but mainly in Saudi Arabia, where you would see over the coming months many new stores. We currently have a very low base of 3 stores only. And again, as we expand the retail network, we are very picky about the choice of the city, the mall, the location of the mall and the commercial terms. We continue developing the volume and the profitability of our core wholesale business. We are also leveraging our presence in the gold souks to sell by piece not only by weight, which will help improve the profitability and enhance the balance sheet of the company. We are expanding our digital business through new products, more investments and a team and technology, and early 2023, we should be launching a much stronger e-com platform. We are a major partner for TOUS, the global franchise brands. We're getting great support from them in many areas, marketing new products and specific support for Saudi Arabia. Therefore, we are quite bullish about the development of TOUS in Saudi. And last but not least, we continue focusing on net positive cash flow and the improvement of all our financial metrics and to also continue paying dividends to shareholders as we did recently. Thank you very much for your attention. We now open the floor for a Q&A session. And again, apologies for the technical issues.

[Operator Instructions]

Maybe everything was so clear, Hatem, so there are no questions.

Looks like it, yes. There are no questions, so I'll hand it over to you. My pleasure.

So thank you very much for organizing the call, Hatem. Thank you all for joining us. And you can rest assured that the L'azurde, the entire L'azurde team and myself are doing our best efforts to continue improving the company's performance. We have very bullish goals, together with the Board, for the coming 3 years. We have a very aggressive ambition and hopefully, we can continue delivering and showing the market some positive surprises over the coming quarters. Thank you very much, and we will catch up soon. And if you have any questions at any moment, please don't hesitate to reach out to Taghreed, and she'll be very pleased to answer your questions, comments, concerns. Thank you. Bye-bye.

Sure. Thank you, Mr. Selim. Thank you, Mr. Ayman. Thank you, everyone. Goodbye.

Thank you, everyone, and have a good rest of the day. Thank you. This concludes today's call.