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

Hello, everyone. This is Abdelmeged from EFG Hermes. I would like to welcome you all to L'azurde Second Quarter of 2025 Earnings Call. I am pleased to have on the call from the management of L'azurde, Mr. Adnan Al-Khalaf, CEO; Mr. Ihab Ibrahim, Deputy CEO; Mr. Ayman Gamil, CFO; and Mr. Taghreed Qablawi, Governance and Investor Relations Manager. We will start with a short presentation from the management, then we'll open the floor for the Q&A session. [Operator Instructions] Management, you now have the floor. Please go ahead.

[Foreign Language] Good morning, good afternoon, everyone. We'd like to thank you to join us today for this call. I think we missed and as of the having this active engagement with our investor community. And this is one of the things that we want to assure you that one of our key priority and the existing as of the Board of Direct and existing L'azurde executive management not just to join you during good days, which is coming in the coming quarters, but also any challenge that we might face in such quarters. So we want you to know that this is a practice we want to have in the coming quarters. The second [indiscernible] we concluded H1. It was [indiscernible] H1 since 2017 even with the challenge that we do have [indiscernible] Council saying with the highest gold price [indiscernible] happens in H1 2025. The demand of the gold decreased by 5% to 10% in different markets. But in our case, we achieved the best sales figures along with the growth of 50% growth in -- the growth [indiscernible] which confirm the business model of first of all customers [indiscernible] we are producing the majority still having the leadership position within the gold market especially in Saudi and in Egypt and we think we still have the opportunity to grow across the region. I think there is some [Foreign Language]. We achieved 50% growth with SAR 1.3 billion sales and our retails also the same the highest since 2017. This message confirm the company feasibility and ability to grow and to assure business whether is working or [indiscernible] we have this trust of whatever challenges we might have in this time and maybe in the short term that will be [indiscernible] then once we have over it, we do believe that we will enjoy with results. We faced in H1 some historical challenges related to some of the balance confirmation with our sales agents and some of our customers. And this is ongoing. But to assure that we have the right governance, we did what we agreed with the external auditor as a provision to ensure that we are covered during the same period for the disputes that we do have. It's still not the final numbers, but we do believe there will be updates might be shared in the coming quarter, which will I give [Foreign Language]. Also, in English, net worth of our [indiscernible] which is the retail and e-commerce still grow. We are achieving good numbers within since few quarters or maybe a few years. And this objective is reducing the risk that we do have from our wholesale channel, which we saw some facts of that in this quarter and in this H1. Also, we would like to add that if we take off or the one-off cases, we maintain excellent top line growth and [indiscernible] net profits [indiscernible] and we promise you as our management to our shareholders that we keep our efforts on this balance confirmation with our stakeholders and in continuing the efficiency that we are doing within our working capacity. To jump into some details, I want Mr. Ayman or [indiscernible] to take you through some numbers as we do prepare before opening the Q&A.

So thank you, Mr. Adnan for the overview. I will give you a more detailed review of H1 results. So as Mr. Adnan said, we had one of the best of the higher performance in terms of total revenue with almost SAR 7.4 billion [indiscernible] revenue, which represents 32.4% increase or within same half of last year. If we exclude the goal tariffs from the revenue to arrive to the operating revenues, which we believe better represent the performance of the group. So again one of the halves of the years from 2017 with strong SAR 78 million of revenue, which represents an increase of 11.4% compared to the same half of last year. This great achievement, as Adnan said, despite the spike in the gold price in H1 and the overall contraction of demand on gold in Saudi Arabia. To go in more details by channel, group revenue from retail channel grew by 17%. And this was -- this growth was due to growth in the same stores and due to the opening of 13 new stores in KSA and Egypt in the past 12 months. On a gross profit level, again, we have achieved 8% growth versus last year with SAR 170 million of gross profit, which reflects that we -- despite everything, we are growing our top line without compromising our margins. So we're still keeping our margins growing them. However, because of some one-off losses despite all the great performance, we have achieved a loss in the first half of the year amounting to SAR 22 million. Adnan has already mentioned some reasons. I will give you more details. So we have 2 losses, one loss due to some dispute with customers over balance confirmation and we have made full provision for this, although we expect that we will most likely collect a big part of this disputed balances, but we wanted to be conservative and we built the enough provisions. We have also some discrepancies with the salesman custodies and we have taken all the legal measures, and we have provided 100% of these losses despite the fact that we have insurance coverage, which was not recorded as a revenue to offset this loss because as being conservative, we will record the revenue from insurance during the period when it's actually received. If we exclude these one-off losses and compare rest of same half of the year of the last year, we will be slightly higher than last year. So SAR 9.6 million of net income, excluding the one-off versus 9.2 million of the same half last year.

And just to add to what Mr. Ayman stated [Foreign Language] We do remember as briefed before and of course that we are not exposed to the change in the gold prices when it comes to -- or the change that happen because our focus is through our 4 factories [indiscernible] in Saudi and to our [indiscernible] diamonds or stones that we are using into the products in addition to our retail operation. So next.. This is just summary updated about our existing channels that [Foreign Language] the direction is to optimize and have more efficiency within the wholesale and [indiscernible] the retail and e-commerce and we are catering specific products and line into each and into each markets. And this is confirmed with the above growth proportion of the direct channels, which is retail and e-commerce. H1 [indiscernible] H1 revenues more than 7 or 8 years since we listed the company. And the same had been that's one of the direct revenue coming from the retail and e-commerce and with very optimized working capital into the wholesale. Our strategy to continue the direct channels throughout the next few quarters. We had a slide [Foreign Language]. This is just to highlight of our e-commerce revenue compared to what we are spending. There is more depreciation happening here. If you notice there is some change in the numbers. The objective here is that we focus now on the e-commerce and the product mix and to ensure it's a profitable channel. In H1, since few quarters, which were in front of the profitable channels due to the ramp-up period and the depreciation happening to the platform and all the investments happened into the e-commerce. But from now on from this year, we are expecting the e-commerce to continue being first year as profitable channel, both with this optimization to the cost and product mix that we are selling through e-commerce channel. Would you like to comment, Mr. Ayman.

As you said, Adnan, we are performing very well in the e-com and most of our investments have been already made and fully depreciated. So we'll be starting seeing good growth in net income. Also, you can see here that Q2 2025, we achieved SAR 7.4 million of sales compared to the same quarter of last year 6.8 million. [Foreign Language]

So here also we are showing gross profit and as I mentioned before despite a lot challenge an award growing our top line, we are still maintaining a very high gross profit [indiscernible] And maybe this is good to mention in Saudi and in Egypt, our campaigns in H1, especially in Egypt and then I have [indiscernible] with us. Its first maybe season for us as a season where we didn't reach the same percentage of the discounts we used to give in our retail channel. The objective is the previous slide of ensuring that we are maintaining a gross profit. So we apply some discipline to ensure that we didn't compromise the top line or the bottom line or [Foreign Language].

Here we are showing that we have very low cash flow. We used before -- In '20 and '21, we used to have up to SAR 130 million of cash borrowing and then now we are talking about only SAR 24 million of cash flow. And this is of course, give the confidence about the operation and that we can still finance our operation from within. [Foreign Language]

Bearing in mind we opened the [indiscernible] stores, which we are still funding and we do believe our growth we don't think that we will need to grow the [indiscernible].

Again here also showing in cash flow from operation that you can see its very positive since 2019, we always have positive cash flow from operation and in H1, we are still in H1, we have already generated SAR 45 million and we still have 6 months to go.

We expect this year to have the high cash flow from operation. We saw that there is 6 months as you see its comparable to full previous years. [Foreign Language]

Mr. Adnan referred to that we have achieved the highest revenue despite the fact that we are at the same time reducing our working capital. So in 2019, we used to have 7.2 tonnes gold working capital in 2024, reduced it to 4.5. And this year, despite having record highest revenues ever with the lowest working capital and Adnan please explain more.

[Foreign Language] So in English this regarding match which we are working in as short term strategy on reducing the or having more efficiency on managing our existing working capital from gold by better utilization of that inventory through our design through our sales, enhancing the sales process, reducing the AR increasing the cash sales, going direct more than before, all of that helped to achieve the highest sales ever with lowest since 2017 or '18 because we couldn't go back more than this before this.

So this is the final slide. It has the numbers that you have already seen. So just quickly, gold revenue is 39% growth, operating revenue 11.4. Gross profit 8% growth. Selling and marketing only 2% increase. [indiscernible] admin cost savings are 10% below last year. There is an increase in financing charge despite the reduction in working capital, but this is due to the increase in gold price. Other expenses, SAR 25.3 million. This is the one-off losses we've talked about. Finally, we reached a net income or a net loss of SAR 12.5 million compared to a net income of SAR 32 million in the last year. But excluding the one-offs, we are SAR 9.6 million, which is slightly higher than last year of SAR 9.2 million.

Lets go for Q&A.

[Operator Instructions] We have received a few questions in the chat box. So we'll take the first one. It says, what are the volumes in tonnage or kilograms for H1 2025 versus H1 2024 and Q2 versus Q1 2025? And what is the split between Saudi and foreign markets? And what is the impact of EGP currency exposure?

Okay. So I will give you some numbers. So in H1 2025, we've sold 4.1 tonnes versus 5.1 in last year. And this is very obvious because of the increase in gold price. So we have a very slight decrease in volume, but we have compensated with higher price. Egypt and Saudi, they represent almost 50% each, and we are growing in both markets. What else, please, if you can remind me with the rest of the question?

Yes. The final part was about the impact of EGP currency exposure.

Yes. This is a very typical question we've been always asked what usually happen? First of all, the Egyptian currency is very stable since 2 years and actually, it's appreciating against U.S. dollar. So on the contrary of people -- some people believe that the currency is declining actually during the last 2 years, it's either stable or appreciating against U.S. dollar, number one. Number two, there is a huge availability of foreign currency in the Egyptian banks and all banks are financing all imports and exports. So Egypt has no problem about the availability of dollar. In terms of performance and the impact of EGP fluctuation on our performance, when there is a devaluation in Russian pound, which happened like 2 years ago, we in L'azurde as any other company in Egypt, we increased our prices to match with the devaluation and inflation. But obviously, when there is a big devaluation, we cannot increase our prices immediately with the same magnitude of the devaluation. So for example, we had a devaluation, let's say, of 50% we cannot immediately increase our prices to 50%. Actually, theoretically, you can but in order to maintain our market share, we increased our revenue gradually. So we have experienced some decline in our revenue in Egypt because of devaluation. This is a fact. However, we are gradually bridging the gap and the currency to reach the exactly same price in Saudi that we have used to achieve before the devaluation. We usually -- it takes us like 2 years in doing this. We have almost covered maybe 75% of the devaluation by the price increase and is preparing for another price increase to totally bridge the gap and go back to the same levels of before the devaluation. So overall, with the currency stable now, we don't see any negative impact and all the outlooks are very positive about Egypt and about the Egyptian.

Thank you. We will be taking the next question from the chat. I'll read it in Arabic and then translate it to English. It says [Foreign Language]. It's about acquisitions of international brands or agencies for medium to high-value products.

[Interpreted] Yes, I would answer in both language. Yes, we are open for all opportunities. We think it's fit with our value chain. We do have, as you know, that we do have excellent capability within the industry when it comes to our factories, it comes to our logistics and access to customers and suppliers. So we do believe there is opportunity there and we are hoping for either acquisition or having some rights within the region for unconventional or regional brands and we are having this as one of our ideas or objective, if it comes with right price and right supplies and the right time. [Foreign Language] yes, but with right cost.

We will take one question from the line of Mohammed. Mohammed, we can't hear you.

Yes, you hear me now.

Yes, please go ahead.

[Foreign Language]. Just to summery Mr. Mohammed had frustration from share price at the last 40 years and dividends and he mentioned that [indiscernible] suppose to return to Dubai more and some of the GCC versions as direct and we confirm this is one of our key strategic [indiscernible] for current and coming days of going direct and expanding the NGCC and calculated the growth plan and we are still having office in gold market in Dubai and we are still having our online business there but we will grow it with traditional presence of the direct shops retails channels with NGCC. We will see and we are evaluating in our Board to start with Kuwait or with Emirates and we will keep you informed in each quarter of our progress in channel.

Thank you, management. We will be taking the next question from the chat. [Foreign Language]. It's about guidance for 02-08-2025 and 1Q '26.

As you cannot say guidance, but our normal performance is in the best days ever when it comes to the top line growth and the gross profit and if we see the profitability. So for us, we do believe L'azurde is capable to meet the challenge and overcome the challenge of H2. If it's the challenge related to the demand and growth price and competition. We don't believe and we will continue the momentum in that space but in that space, bun in the other space which is related to one offs or sudden issues related to the AR or other facts we cannot anticipate is it going to be positive or negative, are we going to conclude with some of the customers of insurance on the collection of what happened in each one or not this early to be assumed with us [indiscernible] operation from the core business. We expect same moment or [indiscernible] in H2. [Foreign Language]

The next question says, why did finance charges go up in 2025, while you stated that borrowing was, I think, down in 2025?

Okay. So as I explained briefly, we pay interest on the quantity of gold borrowed multiplied by the gold price. So despite the fact that we have reduced our borrowing in quantity, the increase in gold price has increased our [indiscernible] there was also [Foreign Language]

There was a question earlier also about the dividend policy. It's about whether the company is planning to pay out dividends in the future.

We used to have dividends in the past, but just in 2024, we saw the L'’azurde general assembly so that we are not recommending to go with it. So our progress -- within the dividend, we don't think there is a change happening in H1, but we will decide by end of the year, if we will continue or to postpone it for another year. This will depend on the final results and the assessments will happen at the end of the year. But there is no change in the policy so far.

There is also a question that says, what is the company doing to increase volumes and not rely on gold price increase to support increase in revenues?

I will answer this because I should have clarified this when I mentioned about the volumes. When we talk about volumes, talking only about wholesale business. So we have wholesale business, we have retail and e-com. So normally when the gold increase or volume decrease, but on the other hand we have increased our volume and revenue [indiscernible] channel and the e-com, this is one thing. The other thing is as we always explain to all our investors and analysts that we have 2 -- we have total revenue which [indiscernible] good price, which we achieved over 30% or 32% growth and we have the line which is operating revenue, which excludes the gold price. And this also we have achieved as significant growth. So even if it's exclusive gold price the company has already achieved higher revenue than previous [indiscernible]. So it's clear for us, we never rely on gold price to achieve our targets or to increase our revenue, we increase our revenue either by volume as the gold price is reasonable and the wholesale business is doing well or we compensated with much higher growth in the retail channel and e-com and then can you...

Yes, to complement [indiscernible]. In our direct channel especially the retail and e-commerce, there is contribution in the product mix from the net gold products and in many cases it's reached 50%, which is -- net dividends when gold prices and at the same time having secured margin and different segmentation. So yes, we are increasing the volume of net gold projects, especially in our direct channels. So we are working in that and it's much a lot of growing more than anytime before as you saw in our slides.

Thank you. I'll read the next question in Arabic and translate it. [Foreign Language]. It's about why you didn't use reserves or retained earnings instead of the provision.

[Foreign Language]

[Foreign Language]

Cautious about the time we can't take additional questions [indiscernible] short answer? There are too many calls happening this day for our investors.

Okay. We can take one question and yes, we can keep the answers brief. [Foreign Language].

Okay. I think we've gone through most questions. If management wants to elaborate on any more questions, please do so. If not, then it's already time to end today's call.

If you allow me with the closing statement, I just want to thank you if you were always with us in our journey in the past few years. And also, I want to thank our attendees in this session for joining with short notice. And I want to assure you that we do believe that our engagement with you is one of our key priority for the coming period. And to make clarification, we did a change of the new Board last year after many years of having a previous Board leadership through this group representatives and now having the change management of the previous CEO who managed the company thankfully for 16 years or more the same with some of the executives within Saudi. And now we are -- within this transition period and didn't come over with the cost of the sales or the market share because of the governance and the right compliance level of the company and its relation with its customers. And now we are seeing the results without impacting our market share when it comes to Saudi or in Egypt. Also Mr. Ihab, we have appointed as acting CEO in Q4 last year and he's with us now as Deputy CEO with experience within the company as executive for more than 20 years. The same with Mr. Ayman with 10 to 15 years managing the whole financials and attending many critical milestone for the company, for the listing or increasing the share [indiscernible] and me who joined the company just in the last few months. I just want to share from this that we are in a transition period, but it's not fully change management not calculated enhanced business model and enhancing our strategy throughout the coming period. [Foreign Language] Thank you, management. Thank you, participants. This concludes today's call.